Trends in Subprime Collateral and Homeownership; Ready for Fannie DU 9.0?


I’ll be standing in line Saturday in Austin, TX to enter the UT
football game. For something non-mortgage related, but interesting from a human
nature perspective, no one likes standing in lines. But there are experts on
them, and the psychology of standing there.

I have been contacted by a metropolitan bank, wishing to remain
confidential, looking for a mortgage originator with the ability to do private label
loan originations, and preferably servicing too, on its behalf. The
anticipated volume is $150-200 million per year, and very high standards of
policies and procedures are expected. Leads are 100% retail and generated
through bank branches and banking relationships. If you are the CEO of a
company who is interested in offering these services, please email me at rchrisman@robchrisman .com.

On the job front, American Capital Corporation is searching for Sales
Managers and LO’s in California, Oregon, Colorado, Washington and Hawaii.
They are also looking for Underwriters in Northern and Southern
California.  ACC has been around since 1994 and is a well-capitalized
privately held mortgage banker doing over $1 billion annually, offering a
“full product mix.” The company already does both retail and TPO
originations (wholesale is the ACBN channel) in California, New Mexico,
Colorado, Hawaii and Oregon, and will be soon expanding into Idaho, Tennessee,
Utah, and Montana.  The company has some other good bells whistles:
e-mail Allen Cravello at acravello@amcapmortgage .com
for more information or to send a resume.

Why are
investors snapping up bonds backed by subprime mortgages?
After all,
not that credit rating agency’ moves carry the same weight they used to, but SP
downgraded 187 AAA jumbo RMBS classes, noting higher re-defaults on previously
cured loans and longer timelines required to liquidate nonperforming mortgages.
These are pre-crisis jumbo residential mortgage-backed securities previously
rated AAA. “The downgrades were primarily driven by increased losses due
to an increase in our default and loss multiples at higher rating levels,”
SP said, and found higher re-defaults on previously cured loans and longer
timelines required to liquidate nonperforming mortgages. Some of those
subprime securities are well priced!

But property
values are not falling precipitously, so the collateral is safer
. In fact, CoreLogic
reported another strong month-over-month U.S. home price appreciation of over 16%
(non-seasonally adjusted annualized rate) for July 2012. And of course the
Case-Shiller Index, with its two-month lag, is showing improvement. CoreLogic
points out that “Non-distressed home prices grew at a pace of 22.9% annualized.
The YOY price growth through July was 3.8%, the biggest increase since August
2006. Year to date, CoreLogic shows home prices are up 8.1% through July, or
14.3% on an annualized basis.”

Realtors and analysts know that, especially in the Western U.S., two
major factors driving the strength in home price indices
have been the drop
in inventories and the decline in the share of distressed sales share relative
to expectations. Moreover, the increased use of short sales over REO sales as
the form distressed sale is providing further support to home prices. Have
prices bottomed? Perhaps, but enough smart folks think they have, and this has
helped alleviate fears of further “collateral damage” in subprime securities,
and is thus helping demand.

about home ownership in general – is it now in “stronger hands”?
The real
homeownership rate, defined as the percentage of households who own a home and
are not 90 days or more delinquent on their mortgage, has fallen to 62.1%, the
lowest level in nearly 50 years. (The Census Bureau’s 65.5% homeownership rate overstates
the real level of homeownership in the country since it counts all 3.8 million
homeowners who are 90-plus days delinquent on their mortgage as homeowners.) Historically,
the spread between the published and real homeownership rates has been slightly
below 1%, even in a strong economic environment there is always some level of
delinquency. But as we all know, the spread has widened from 1% to 3% due to
the economic downturn, and understaffing at the banks who cannot deal with the
huge inventory of delinquent mortgages and the complications of loan
modification or foreclosure with so many parties involved. We also have lenders
treading very cautiously, fearing fees, sanctions and even jail time (in
Nevada) for not properly documenting the foreclosure process, and still some
confusion from dealing with many Federal government attempts to intervene in
the process like HARP and HAMP.

But a recent survey of 20,000 consumers conducted by John Burns Real
Estate Consulting, and many surveys by others, confirms that the American dream
of homeownership is still strong. And, believe it or not, time goes fast, so in
states where the foreclosure process has moved more smoothly than others (such
as Arizona and Texas), foreclosed homeowners are returning as homebuyers after
the three-year waiting period required by most mortgage programs.

Remember that the application of Basel to banks will significantly
increase the risk weighting for mortgages designed for first time homebuyers

that won’t help. Declining home ownership can constrain economic growth and
mortgage lending, including declines in some home equity portfolios. On the
positive side, it should create long-term growth opportunities in apartment,
credit card, and auto lending – but not many of those folks read this

What about young folks – where are graduates taking their underwater
basket-weaving degrees?
Though they’re in deeper debt than ever before, new
college graduates still need to live somewhere.  Conventional wisdom holds
that these bright young minds flock to centers of influence like New York,
Boston, and San Francisco, all known for being “cool” cities with high
concentrations of “smart” people. Census data from 2000-2010 suggests
otherwise, however: Las Vegas, of all places, recorded growth of 122,304 recent
graduates, which represents a staggering 78.4% increase. Rounding out the
top five metropolitan areas playing host to new graduates were Riverside-San
Bernardino, CA; Raleigh-Durham, NC; Austin, TX; and Charlotte, NC-hardly
perceived to be hotbeds of commerce and culture.  In contrast, New York
ranked 38th in terms of new graduate growth, while San Francisco ranked 48th,
just above Detroit.

It’s no secret that it can be cripplingly expensive to live in one of US’s
major urban centers, especially for recent graduates in a weakened
economy.  This demographic is more likely to settle down in places they
can actually afford to live, and companies looking for skilled labor are
realizing that their recruiting options are no longer limited to the primary
coastal cities and Chicago.  As an added bonus, it’s cheaper for companies
to operate in second- or third-tier cities with less expensive commercial real
estate.  As recent graduates’ and companies’ presence in these cities
grows, they tend to develop culturally, making them more enticing places to
live and further fuelling growth.

From a regional perspective, the Sun Belt cities have experienced the
greatest development, with metropolitan areas like San Antonio, Orlando,
Nashville, and Phoenix all recording recent grad-growth of over 40%.  Rust
Belt cities like Cleveland, Buffalo, and Detroit, despite the attraction of low
living costs, all recorded growth of 20% and under, nearly 10% below the
national average.  New graduates, it would appear, are as averse to
northern winters as the rest of the aging population.

about some recent Fannie Mae and Fannie-related updates?

Fannie Mae announced a week or so ago that 22 of its servicers had
produced results in its Servicer Total Achievement and Rewards (STAR) Program
for the first half of 2012 that put them at or above the median levels for
others in their peer group. STAR was created in 2011 to establish servicing
standards and recognize Fannie Mae servicers in their overall performance,
customer service, and foreclosure prevention efforts.  The program
measures servicers across key operational and performance areas relative to
their peers and acknowledges their achievement through star designations. Servicers
are divided into three peer group based on the size of their servicing
portfolio and their performance is measured against other servicers in their
peer group. Nineteen servicers achieved Three Star status for their performance
in 2011. In announcing the results Fannie Mae made special mention of Fifth
Third Bank’s
performance which came closest of the servicers enrolled in
the program to reaching the fourth star for its 2011 performance.

Wendy Barnett with DataQuick reports that, “Fannie Mae has no bulletin
to be found, but has been notifying clients in person and by phone that Custom
DU (CDU) will no longer accept new submissions after September 30, 2012 and
resubmissions after December 31, 2012.  This was a tool that used the DU engine
to also provide decisioning on non-Fannie Mae loans. DataQuick has been
providing a solution for several lenders, with our Mindbox – Art Enterprise
component framework for Pre-Qualification, Product, Pricing and Automated
Underwriting.  Your readers can contact me at wbarnett@dataquick .com.

Fannie Mae plans to provide propriety feedback on appraisals submitted to the Uniform
Collateral Data Portal
that will address the quality of the data within the
appraisal as per Fannie policy and delivery requirements.  The feedback
will be available in the form of opt-in monthly reports beginning in October
2012 and via the UCDP as of January 2013.

Fannie has revised its policies on regarding the transfer of document
such that both the current and new document custodians must provide
at least 30 days’ written notice in cases where the servicer remains the
same.  Fitch, Inc. has been removed from the list of financial rating
firms that may be used to satisfy the document custodian’s eligibility requirements;
clients should use either IDC Financial Publishing or Kroll, the latter of
which was previously known as LACE.

Fannie Mae has relaxed its guidelines on custodial accounts such that servicers
are no longer required to provide the GSE with notification of a depository’s
ineligible status, ask for approval to hold custodial funds in a depository
that was previously ineligible, or request the implementation of a different
remedy for a depository that is currently ineligible.  Under the previous
policy, servicers were permitted to commingle TI escrow funds with all
remittance types in the same custodial accounts, but the updated policy allows
servicers to maintain multiple TI custodial accounts for the purposes of
depositing hazard insurance loss drafts, partial payments, and/or unapplied
funds.  Servicers should identify whether the custodial account is a
replacement for an existing account using the PI and TI Letter of
Authorization forms (Fannie Form 1013 and 1014), which have been updated
accordingly and can be found on

is set to release DU Version 9.0 over the weekend of October 20th.
As there is
a mix of changes that can be viewed as a negative or positive, but overall they
say approvals will be consistent with Version 8.3. Some of the highlights are
reportedly “Limited Review for Condominiums is going to be maxed at 80%
(currently at 90%), Retirement of Expanded Approvals (with the exception of DU
Refi Plus), Maximum LTV/CLTV for ARM Purchases and Rate/Term will be reduced
for 97% to 90%, All other ARM programs will receive a 10% reduction in the
maximum LTV/CLTV, Two-Unit Purchases INCREASED from 80 to 85%LTV, and Self
Employed Borrowers will be required to produce TWO years of 1040’s (currently
allows for 1 year). Put another way, Fannie Mae tightened some underwriting
standards based on performance data. In addition, the agency will end its
flexible FannieNeighbors program supporting underserved areas.

Fannie will be hosting a webinar on Version 9.0 of Desktop Underwriter
that will cover the updates to the system’s credit risk assessment and
eligibility requirements on October 20th.  Interested parties can register here.

Wednesday was a ho-hum day, which is fine. Investors are keenly
interested in the fact that residential MBS trading volumes are sliding lower,
as echoed by the MBA application figures. Perhaps refi’s are indeed slowing
down, and not being replaced with purchases? U.S. markets seemed to fret more
about today’s ECB monetary policy decision. The U.S. 10-yr closed at 1.60%.

It’s a whole new ballgame today, however. We’ve had the ECB announcement, and
the ADP numbers (+201k – stronger than expected) which are usually of
questionable validity for tomorrow’s official payroll numbers. (NFP is
projected at +125k with the unemployment rate unchanged at 8.3%.) We’ve also
had Initial Claims (377k down to 365k, lower than expected), while 10AM EST
offers up Non-Manufacturing ISM for August, projected little changed at 52.5
versus 52.6, and the Treasury’s announcement at 11AM EST of next week’s
auctions of 3’s, 10’s, and 30’s. In the early going rates are higher with
the 10-yr at 1.65% and MBS prices worse .125-.250.

The following list of phrases and their definitions might help you understand
the mysterious languages of science and medicine. These special phrases are
also applicable to anyone working on a Ph.D. dissertation or academic paper
anywhere. (Part 1 of 3)
“It has long been known” = I didn’t look up the original reference.
“A definite trend is evident” = These data are practically
“While it has not been possible to provide definite answers to the
questions” = An unsuccessful experiment, but I still hope to get it
“Three of the samples were chosen for detailed study” = The other
results didn’t make any sense.
“Typical results are shown” = This is the prettiest graph.
“These results will be in a subsequent report” = I might get around
to this sometime, if pushed/funded.
“In my experience” = once.
“In case after case” = twice.

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