Volker Rule’s Impact on Hedging Rate Locks; Potential HARP 2.0 Borrower Pool Defined


Money is
money, right? If Congress can place a “mortgage tax” in the form of higher
g-fees, and use the money to help cover a payroll tax waiver extension, can the
states use the mortgage servicer settlement money to pay for chalk in

How much
is $1 trillion?  One thousand million is a billion, and one thousand
billion is a trillion.  According to Business Week, outstanding student
in the United States is approaching $1 trillion-that is $3,333 per head
for our population of about 300,000,000.  Is this an example of living
beyond one’s means?  The Federal Reserve noted in a White Paper last month
that the current mortgage lending standards are holding back younger first-time
homebuyers.  Student debt has, for the first time in the US, surpassed
credit card debt, with recent university graduates carrying an average load of
over $25,000.  Even if recent graduates are able to secure a high-paying
job (no small feat in a time when unemployment for 29-34s is at 9%), a number
like that makes getting a loan difficult.  A young medical professional,
for example, may make upwards of $125,000 a year, but there’s a good chance he
or she will also be carrying over $100,000 of student debt.

The article points to the trend that the student debt issue is yet another
reason that record-low interest rates aren’t invigorating the housing
market.  First-time buyers make up a good proportion of demand, but
they’ve been disproportionately affected by tightening credit and mortgage conditions. 
The percentage of 29-34’s who obtained first-time mortgages between 2009-11 was
9%, just about half of what it was a decade previously.

My parrot broke his leg today so I
made him a little splint out of a couple of wooden matches, and his little face
lit up when he tried to walk. Unfortunately, I forgot to remove the sandpaper
from the bottom of his cage.

Speaking of unintended consequences…As if mortgage bankers and depositories
don’t have enough to worry about, the Volker Rule should not escape notice. Will rate locks be a thing of the past with
the Volker Rule?
In the broadest sense it prohibits banks using MBS to
hedge production. In an interview on CNBC last week, John Stumpf noted that the
way the rules are coming down, they are “very broad in their prohibitions
and very narrow in their permissions. Let me give you one example. When we make
someone a mortgage, we give them a free rate lock for 60 or 90 days, and if
rates go up, even if only by .250%, that’s thousands of dollars over the life
of a loan. If (The Volker Rule) gets implemented the wrong way we might not be
able to do that – we hedge that, we swap that, and we’d have to have such a
gigantic group of consultants, accountants, attorneys making sure that doesn’t
(go against the rules). Here is more.

And how about contemplating the consequences of having AMC contracts declared
null and void? Last week, the commentary noted that NAIHP issued a press
release regarding appraisal management companies. NAIHP discovered many AMC’s were operating without authority in
numerous states and failed to pay state income tax
. Most states won’t issue
a taxpayer I.D. number unless a business is registered. And as we all know, all
businesses are required to register with the appropriate authority in any state
(usually the Secretary of State), prior to conducting business – often displayed
in the lobby. I was contacted by an industry veteran who advised me that,
“Any business that fails to register in any state may find contracts they
signed in the normal course of business to be null and void. In the specific
case of an AMC, any monies collected from consumers while operating without
authority, would in all likelihood need to be refunded.” This could be a
huge quagmire for AMC’s, many of which are lender-owned.

What is the potential HARP 2.0
borrower pool?
as to the size of the market: From our HARP 2 workshops, although there are 6.7
million HARP eligible loans based on the May 31, 2009 cutoff date and
Fannie/Freddie requirement, when payment history and LTV requirements are
overlaid, the number of eligible loans drops to around 2.3 million. And, as the
interest rate distribution indicates, a meaningful proportion of these loans
are already at low or fairly low interest rates. So, assuming that 2 million
loans are refinanced under HARP 2, and average $150,000, HARP 2 represents
about $300 billion in incremental production over 2012-2013, about a 15%
increase in overall projected volume. Equally important, is that the profit
margins available to lenders for HARP 2 loans could be 2-3 times what the
normally realize, because of lower cost streamline processing and, in the case
of existing services, a captive base of borrowers. Thus, HARP 2 represents a big opportunity for the big aggregators but may not
trickle down to the smaller originators.
So the comment that ‘smaller
originators will be ideally positioned to pick up market share’ is questionable
unless the large aggregators agree to purchase HARP 2 loans from smaller
correspondents.  While we think they will, they may limit such purchases
to only their largest correspondents and possibly only those correspondents
with a direct to consumer channel.” Thanks to STRATMOR, Tranzact Information Services, and Financial Literacy Systems
(run by Garth Graham) for this input.

know that appraisals, equity, and underwriting/documentation are keeping a lid
on lending. But could mortgage rates go even lower? I doubt it, but then
there’s this story in the Wall Street Journal…Mortgage rates should be even
lower – the differential between the average MBS rate and the mortgage rates
quoted by banks is nearly 1%, much higher than normal.  If the normal
relationship between the two rates held, 30yr mortgage yields would be about 3.4%
versus the 3.9% now being quoted! Check out the story.

Jobs and
housing, housing and jobs – both are key indicators for the health of an
economy. Yesterday we learned that Existing Home Sales rose 4.3%. The increase
in sales has reduced the number of homes on the market to its lowest level
since April 2006. The median price fell 4.6 per cent in the month to $154,700,
down 2 per cent from the same month last year. Existing Home Sales numbers have
shown an impressive run recently, increasing in four out of five months. On a
year-ago basis, existing home sales are up 3.6% – but before the celebration
starts, remember that we’re seeing a lot of contract failures, and a good
portion of transactions continue to be distressed with all-cash sales making up
31% of total sales. Many investors are buying discounted properties in select
markets and renting them out, which certainly helps unsold inventory numbers: total
housing inventory fell 9.2 percent to 2.38 million, which represents a
6.2-month supply.

Housing affordability as measured by the National
Association of Realtors Housing Affordability Index (HAI) rose during the last
quarter of 2011 as housing prices continued to decline and interest rates stayed
at record lows. The national HAI reached a record high of 184.5 where the
base of 100 is defined as the point at which a median-income household has
enough income to qualify for a median-priced existing home with 20% down and
25% of the income devoted to mortgage payments. This index shows that prices
are down about 4% from a year ago – attributed in part to foreclosures and
short sales. Better affordability is certainly a good thing.

rates improved during the day, resulting in many intra-day price changes – and we
haven’t seen too much of that lately. We had a good old-fashioned “flight to
quality bid” that was related to Greece. The 10-yr closed at about 2.00% and MBS
tagged along for the ride by improving about .250 in price.

For today’s
excitement we have Initial Jobless Claims and the FHFA House Price Index for
December at 10AM EST, along with a $29 billion 7-yr T-note auction – the last
Treasury auction for a few weeks. Applications for jobless benefits were
unchanged in the week ended Feb. 18 at 351,000, the fewest since March 2008, per
the Labor Department. The number of people on unemployment benefit rolls
dropped to the lowest level since August 2008 – is everyone giving up the
search? Rates have moved slightly higher
on the news, as one would expect.

Englishman, a Scotsman, an Irishman, a Welshman, a Latvian, a Turk, a German,
an Indian, several Americans (including a southerner, a New Englander, and a
Californian, an Argentinean, a Dane, an Australian, a Slovakian, an Egyptian, a
Japanese, a Moroccan, a Frenchman, a New Zealander, a Spaniard, a Russian, a
Guatemalan, a Colombian, a Pakistani, a Malaysian, a Croatian, a Uzbek, a
Cypriot, a Pole, a Lithuanian, a Chinese, a Sri Lankan, a Lebanese, a Cayman
Islander, a Ugandan, a Vietnamese, a Korean, a Uruguayan, a Czech, an
Icelander, a  Mexican, a Finn, a Honduran, a Panamanian, an Andorran, an
Israeli, a Venezuelan, a Fijian, a Peruvian, an Estonian, a Brazilian, a
Portuguese, a Liechtensteiner, a Mongolian, a Hungarian, a Canadian, a
Moldovan, a Haitian, a Norfolk Islander, a Macedonian, a Bolivian, a Cook
Islander, a Tajikistani, a Samoan, an Armenian, a Aruban, an Albanian, a
Greenlander, a Micronesian, a Virgin Islander, a Georgian, a Bahaman, a
Belarusian, a Cuban, a Tongan, a Cambodian, a Qatari, an  Azerbaijani, a
Romanian, a Chilean, a Kyrgyzstani, a Jamaican, a  Filipino, a Ukrainian,
a Dutchman, a Ecuadorian, a Costa  Rican, a Swede, a Bulgarian, a Serb, a
Swiss, a Greek, a Belgian, a Singaporean, an Italian, a Norwegian and 47
Africans walk into a fine restaurant….
“I’m sorry,” says the maître d’, scrutinizing the group one by one
and barring their entrance, “you can’t come in here without a Thai.”

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at www.stratmorgroup.com. The current blog discusses
residential lending and mortgage programs around the world, part 2. 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 readers.

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