Refi Plan for Gon-government Loans? Chalk Another One up for MERS

In last
night’s speech President Obama asked for creation of special unit of federal
prosecutors to further investigate mortgage lending practices that led to the
housing crisis. “This new unit will hold accountable those who broke the
law, speed assistance to homeowners, and help turn the page on an era of
recklessness that hurt so many Americans.” Soon afterward I received this
note: “I guess former Senator Dodd, Barney Frank, Bill Clinton, and Andrew
Cuomo had better assemble good teams of attorneys. I don’t remember who ran the
FDIC for the last 8 years but Shelia Bair and Alan Greenspan might need one
too!” Obviously the government’s housing
ownership push to artificial levels a decade ago is well remembered.

there were two quotes that caught the
interest of those in our business
. The first was, “…..responsible
homeowners shouldn’t have to sit and wait for the housing market to hit bottom
to get some relief. That’s why I’m sending this Congress a plan that gives
every responsible homeowner the chance to save about $3,000 a year on their
mortgage, by refinancing at historically low interest rates. No more red tape.
No more runaround from the banks. A small
fee on the largest financial institutions
will ensure that it won’t add to
the deficit, and will give banks that were rescued by taxpayers a chance to
repay a deficit of trust. Let’s never forget: millions of Americans who work
hard and play by the rules every day deserve a government and a financial
system that do the same.” Obviously any type of grand refinance scheme
hurts the price of premium (above par) MBS’s.

Long on rhetoric
and short on details, as one would expect from any SOTU speech, the best
article so far is from the WSJ.  The reporter speculates the government will
use FHA/FN/FH to refi loans they don’t already guarantee
.  But what’s the cost if the government isn’t
assuming some losses?  And the mechanics
of entering the private mortgage market make one’s head spin. Any new
legislation is going to have a very tough time clearing congress ahead of the
election – I would put the odds near zero. Here is the article.

The second
quote was directly at money center
commercial banks
. “I will not go back to the days when Wall Street was
allowed to play by its own set of rules. The new rules we passed restore what
should be any financial system’s core purpose: Getting funding to entrepreneurs
with the best ideas, and getting loans to responsible families who want to buy
a home, start a business, or send a kid to college. So if you’re a big bank or
financial institution, you are no longer allowed to make risky bets with your
customers’ deposits. You’re required to write out a “living will”
that details exactly how you’ll pay the bills if you fail – because the rest of us aren’t bailing you out ever
. And if you’re a mortgage lender or a payday lender or a credit card
company, the days of signing people up for products they can’t afford with
confusing forms and deceptive practices are over. Today, American consumers
finally have a watchdog in Richard Cordray with one job: To look out for them.
We will also establish a Financial Crimes Unit of highly trained investigators
to crack down on large-scale fraud and protect people’s investments. Some
financial firms violate major anti-fraud laws because there’s no real penalty
for being a repeat offender…So pass legislation that makes the penalties for
fraud count.”

I lose track of the MERS lawsuits around the country, at various stages of
appeal, with attorneys on both sides doing very well for themselves. I did
notice, however, that Mortgage
Electronic Registration Systems had a nice victory yesterday
as the U.S.
Court of Appeals for the 11th Judicial Circuit validated its rights to assign a
security deed and/or foreclose on secured property.  The decision upheld
the decision of the U.S. District Court for the Northern District of Georgia in
Smith V. Saxon Mortgage. The plaintiff in the original case had contested the
foreclosure of her home on the grounds that: The assignment of the security
deed was invalid because MERS, as nominee of a defunct lender could not assign
the documents of its own volition, and that the “splitting” of the
mortgage and the note rendered the mortgage null and void and therefore notices
of foreclosure were invalid as not coming from a secured creditor. In the
original District Court opinion in March 2011, the judge pointed to the
standard language in the Georgia security deed signed by all borrowers at
closing which grants MERS the power to act on behalf of the current and future
owners of the loan. “Unless the instrument creating the power specifically
provides to the contrary . . . an assignee thereof . . . may exercise any power
therein contained,” she wrote. “The Security Deed…transfers rights to
MERS, and MERS’ assigns may exercise any power contained therein.”

Hey, when
was the last time a mortgage company went public? Residential mortgage loan servicer
Nationstar Mortgage Holdings named
Bank of America Merrill Lynch to underwrite its initial public offering. Last
May, the company, which is backed by private equity firm Fortress Investment
Group LLC, filed with the SEC to raise up to $400 million in an IPO and use the
proceeds from the offering to service acquisitions and for other general
corporate purposes. But in other Fortress news, Daniel Mudd (charged with
securities fraud during his Fannie Mae CEO reign) has resigned from the board
of Fortress.

Flagstar Bancorp came out with its earnings, and saw
its losses narrow to $45 million in the fourth quarter from $192 million a year
earlier, but worsen from the $14 million loss in the 3rd quarter. Flagstar has had 14 straight quarterly
. On the mortgage side, originations were up 11% to $10 billion from
$9 billion in the year-ago period, and originations for the entire year
increased to $27 billion from $26 billion in 2010. The company sold and
securitized $10.5 billion in loans during the quarter, up from $8.6 billion in
the year-ago period, but the gain-on-sale margin fell sharply to 1.02% from 1.53%.
Interest rate lock commitments (IRLCs), the primary driver of GOS revenues,
declined 14.5% to $11.2 billion from $13.1 billion. Charge-offs were down ($19
million in bad residential loans down from $360 million in the year-ago quarter).
Net servicing revenue increased 71.3% from the prior quarter to $29 million,
but the company’s reserve for probable losses on representations and warranties
rose to $69 million from $10 million a year ago.

The value
of servicing is indeed in a state of flux, but that doesn’t stop pools from being
bought and sold. The latest offering comes from MountainView Servicing Group: a $129 million portfolio of Ginnie
Mae mortgage servicing rights containing 566 loans that are 99% FHA fixed-rate
mortgages. Approximately 50% of the portfolio is retail origination and the
other half is through third-party brokers. The loans are 14 months seasoned and
spread between California (97%) and Illinois (3%). The weighted average
servicing fee is .396%. Bids are due next Tuesday – contact Troy Rusniak at for more information.

Over the last month, mortgage-backed
security prices have done better than Treasury prices, mostly because of supply
(mortgage banker selling of $1-2 billion per day) and demand (the Fed alone is
buying $1.2 billion per day) issues
. Could this relative price movement
change direction?  Sure – some broker-dealers believe that a sustained
selloff in the rates market that will take the 10-year Treasury to 2.5% or
above would be the most likely scenario in which MBS spreads would widen
significantly.  This is due to a number of factors, including a prediction
that, assuming a selloff is caused by improving fundamentals of the US economy,
the probability of Fed’s QE 3 involving agency MBS should diminish
significantly in a rates backup scenario.

On top of that, IF rates were to see that big of a move, it would mean that
volatility has increased – rarely a good thing for MBS’s. And when that happens,
“convexity hedging” related selling from servicers and originators would
probably lead to a sudden increase in the supply of agency MBS in this
scenario, resulting in even more selling. Lastly, domestic banks have been
providing a very strong bid for agency MBS over the past 5-6 months, and in a rates
backup scenario, their deposit growth is likely to be lower, meaning that banks
would be unlikely to grow their holdings until rates stabilize again. Simple!

Looking at
where things are now, yesterday rates barely budged (the 10-yr at 2.06%) and
MBS prices flat – it is really quiet out there. The 2-yr note auction went just
fine yesterday; today we have $35 billion in 5-yr notes to auction off. Later
today we’ll have the FOMC’s trifecta of its statement (12:30), economic
projections (2PM) and press conference (2:15). (There was one news item this
morning – the MBA’s weekly mortgage apps number for last week dropped 5%. Refinance
activity slipped 5.2%, and purchase apps dropped 5.4% – refi percentage stands
at about 81% of all apps. The four-week moving average for all mortgage applications
is still up 4.1%.) Currently rates are
still nearly unchanged, with the 10-yr sitting around 2.05% and MBS prices
perhaps a shade better

Yes, last
night was the State of the Union address, which is often high gratuitous
applause and low on substance. But politics is definitely in the news, and here
is a handy-dandy guide to figuring out which candidates most closely fits your
beliefs: Link

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at The current blog discusses
residential lending and mortgage programs around the world. If you have both
the time and inclination, make a comment on what I have written, or on
other comments so that folks can learn what’s going on out there from the other

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