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News From NAMB: November 13, 2017

John Councilman
Nov 13, 2017

FHA Reports Show Slight Gain
FHA releases two important reports that tell us about the size and performance of its guarantee portfolio.  In the 3rd quarter, FHA endorsed 305,438 forward mortgages, for an annualized figure over 1.2 million; very respectable.  In FHA’s report to Congress, it shows that FHA was expecting 337,000 people to refinance out of their FHA loan by this time.   Instead, 761,000 left FHA this year so far.  Some people worry that those are the ones with the best credit scores and LTV.  They shouldn’t worry that much because FHA is till gaining people in the guarantee pool which is now up to nearly 8 million loans insured for a total of $1.15 trillion.  Defaults continue to fall.  FHA had predicted nearly 11,000 FHA borrowers would default but only 6,600 have so far.  The average FHA score has dipped from the 700s to 675.  HUD is waiting until after their annual audit is released to see if a cut to their premiums is possible.

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Mortgage Interest Deduction At $1 million in Senate Tax Bill
The House version of the tax reform bill cut the mortgage interest deduction to loans less than $500,000.  Bloomberg reports the Senate is maintaining its $1 million-dollar deduction limit in a nod to states with high mortgage costs such as California and, of course, Washington, DC.  The House bill continues to be under attack as a tax increase.  The NY Times says it will be a nice tax cut for about 68% of the middle class in 2018 but a tax hike for 45% of the middle class by 2026.  If 2nd home deductibility is cut, the effects could be dramatic for real estate, boat builders, and RV manufacturers.  In real estate alone, 12% of home purchases are vacation homes.  Both bodies are feverishly working on the plan while NAMB is holding firm on opposing any features that would tend to reduce homeownership.

Tax Revision Plan Will Make Fannie/Freddie Need Bailout
For most corporations, the new tax plan will be a windfall.  But, for Fannie Mae and Freddie Mac, it would be an accounting loss.   Currently, the GSEs count Deferred Tax Assets (DTAs) as a big part of their net worth.  How much these DTAs are worth depends on the corporate tax rate.  The higher the rate, the bigger the asset.  Since the GSEs will have no net worth starting in January, a big DTA loss will drive their net worth negative and would put them in bankruptcy receivership.  The only option to prevent that is for them to take a draw from Treasury.  Since they have been paying in far more to Treasury than the draw, it isn’t as big deal, but the publicity would not be good.

G-Fees May Be Illegal
G-Fees (Guarantee Fees) are the little add-ons that Fannie Mae and Freddie Mac tack on to mortgages that can be quite expensive.  They are designed to compensate for the risk of various loan characteristics.  But, we really don’t know if these fees are justified.  The GSEs’ regulator, FHFA, is required by law to “appropriately reflect the risk of loss, as well as the cost of capital allocated to similar assets held by other fully private regulated financial institutions.”  Not only are we uncertain if the g-fees accurately reflect the risk, it appears FHFA has never made public any study of its g-fees vs. private sector adjustments for the same factors.  The Temporary Payroll Tax Cut Continuation Act of 2011 requires the FHFA to report to Congress on how Fannie and Freddie’s g-fees “met the requirements” of the statute, something FHFA has not done. 
Fannie Mae Getting Deeper Into Construction Loans?
Fannie Mae didn’t like construction loans back in 2006, stopping a program they had in place at the time.   In 2012, Fannie dipped its toes back into the water with the Single-Close program.  Now, it appears Fannie wants to provide a program that will provide funds to make construction loans even easier.  Details are still skimpy on what they plan to do.  Construction loans always carry a level of uncertainty such as cost overruns and construction issues.  Some are warning Fannie is not prepared for such eventualities.

NAMB Issues Position Paper on GSE Reform
After listening to other groups form an opinion on GSE reform, NAMB believed the voice of mortgage originators should be heard.  After hearing from its membership, NAMB released a position paper that follows FHFA Director Mel Watt in a key area.  We believe the GSEs should be able to “accumulate capital in order to “buy time” so the legislative process can move forward at a reasonable and carefully deliberate pace in order to minimize unintended consequences.”  Sooner than later, the conservatorship should come to an end, the position paper posits.  NAMB believes there is a place for other players in a federally-guaranteed secondary market.

Why NIV Loans Are Dangerous
NIV loans are making a comeback.  Lenders should consider what happened in this story.  This week, a Miami jury found Marco Laureti, a real estate broker and mortgage broker, conspired with 3 others to defraud Washington Mutual out of $20 million dollars.  It all centered around no-income verification loans.  Then, Laureti worked with the co-conspirators who operated a tile company and provided straw borrowers to pull off some unbelievable scams. One of the four skipped the country, which seems smart, since the other 3 face over 120 years in prison.

GSE Reform May Not Happen Soon
Despite all of the rhetoric that reform of Fannie and Freddie is a high priority, it seems no one in Congress or even the Oval Office is very optimistic about a change.  Mark Calabria, the chief economic adviser to Vice President Mike Pence, says other housing issues have a higher priority.  Speaking at the Urban Institute housing conference Calabria said, "Our recovery effort is not just getting people back into housing."  He went on to say Puerto Rico is nearly uninhabitable and the administration’s current push is for tax reform.

Firing Cordray Now Much More Difficult
Republicans believed that CFPB Director Richard Cordray violated the Hatch Act, a federal law that prohibits any political candidacy activity by a federal official.  In July, Bill O'Neill, an Ohio Supreme Court justice, said a mutual friend told him Cordray was going to run for governor.  That triggered an investigation by the U.S. Office of Special Counsel.  They just released a letter to Cordray absolving him of any wrongdoing.

GSE/FHA/VA Exemptions From QM Called Into Question
At the same Urban Institute housing conference, Calabria dropped a possible bombshell saying, “We are re-examining the uncertainty caused by the qualified mortgage rule."  The context was that the government favors the GSEs, FHA, and VA by allowing them to set higher qualifying ratios.  Calabria is not in favor of the GSEs receiving special treatment and is not particularly favorable toward the GSEs’ existence.  The Treasury Department report in June recommended that the CFPB should eliminate the exemption for the GSEs while allowing all market participants to have more flexible DTI ratios.  FHA came up in the discussion for having more than half its loans with DTIs above 43%.
Rate and Term Refinances Look Dim
Everyone is wondering what effect the Fed’s diminishing its purchase of mortgage-backed securities will have on rates.  It seems nearly universally believed that mortgage rates will top 5% in late 2018.  A study by the Urban Institute looked at the effect of higher rates on the refinance market.  They found that at 3.8% rate, 18% of mortgagors could benefit from a rate and term refinance.  If rates hit 5%, that figure drops to a mere 4%.  But refi won’t be the only loans to suffer.  The study states, “We would expect a substantial lock-in effect. That is, borrowers who have a 3.5 percent mortgage will be reluctant to simply buy a home with an extra bedroom if it means their mortgage rates will increase to 4.5 or 5.0 percent.”

New Leaf Shutters Most Its Operation
New Leaf, a smaller wholesale lender, just cut 20 people, apparently a large portion of its staff.  The explanation given to Housing Wire was that its owner, Bill Dallas, could finalize a secret mortgage lender acquisition he was reportedly chasing.  New Leaf was only doing about $40 million a month and the company Dallas is trying to acquire is producing $250 million a month.  Dallas told the reporter he was just right-sizing the company for the current market.

Capital One Exits Mortgage Business
Capital One announced it is totally closing its mortgage business, laying off 1,100 employees.  As the business tightens, profits in the mortgage industry are becoming smaller and smaller.  Capital One told one reporter, “We can choose to be profitable or competitive but not both.”  Capitial One was the 12th largest bank mortgage originator.

Freddie Mac Opens Learning Center
Everyone knows that 20 hours of initial education is hardly enough for someone to be a loan originator.  Often, training courses are expensive.  Many originators rely on mortgage insurance companies for education, which is usually offered for free.  Now, Freddie Mac is offering a comprehensive lineup of education programs that appear to be free to Freddie lenders and TPOs.

Largest Debt Settlement Company Sued By CFPB
The Consumer Financial Protection Bureau (CFPB) has filed a lawsuit against Freedom Debt Relief, the nation’s largest debt-settlement services provider, and its co-CEO Andrew Housser, claiming they deceived consumers.   The CFPB states, “Freedom deceived consumers about its clout with creditors that it knows do not negotiate with debt-settlement companies, made some customers negotiate on their own, and misled consumers about its fees and their accounts.”   The CFPB wants refunds, civil penalties, and an injunction.

Another Credit Repair Company Shut Down
Every few months we find another credit repair company gets shut down, but it seems like a lot of consumers lose millions before it happens.  The “testimonials” and TV ads seem so good it is little wonder people get sucked in.  The Alabama Attorney General announced it shut down Scott’s Credit Repair, issuing a mere $5,000 fine and no consumer reimbursement.  The owners are prohibited from owning any kind of business in Alabama.  The question is whether they will simply open up in another state.  One would think that if states were serious about getting rid of the bad actors they would audit or monitor them more frequently.

Flood Insurance Bill Being Formed in House
The National Flood Insurance Program expires on December 8th.  It received a temporary renewal in October and a $16 billion-dollar cash infusion.  But, the program is still about $25 billion in the hole.  Two prominent Republicans, Jeb Hensarling and Steve Scalise, say they have reached an agreement on reauthorizing the program.  No details are available yet, but they claim, “The bill we support will begin to make the flood insurance program more stable and sustainable.”  It is not certain if this modification of H.R. 2874, the 21st Century Flood Reform Act, that has not yet passed the Financial Services Committee, or a new bill.

If CFPB Structure is Unconstitutional, Suit Says So is FHFA
Late last year, the DC Court of Appeals ruled that the CFPB’s structure is unconstitutional.  Now, that case is being reheard by the full appeals court.  Taking the cue, some GSE shareholders filed suit in Minnesota court claiming the FHFA is unconstitutional because, like the CFPB, it is a fully independent agency with a single Director that does not answer to either the President or Congress.  The latest activity in the case is a motion to dismiss by FHFA.

Financial Assessment Improving Performance of HECMs
In mid-2015 HUD instituted a Financial Assessment requirement for its HECM reverse mortgage program.  A New York City firm released an analysis this week showing that loans originated after July 2015 were performing better than those originated before borrowers had to show they could pay taxes and insurance and still have enough to live on.  Pre-FA loans had a 2.3% default rate which has dropped to 0.6%.   Perhaps HUD’s instituting new principal limit factors and premiums that went into effect on October 2nd wasn’t necessary.  The good news is that HECMs had been dragging down the Mutual Mortgage Insurance Fund and preventing a cut in the forward mortgage premiums.

Even Lower-Income Renters Can Buy
For those who are worried that continued Fed rate hikes will drive mortgage rates higher than 5%, there are experts who reassure us that is not the case.  For example, First American’s Mark Fleming believes the pressures on long-term rates are eased when the Fed raises rates because it tends to slow the economy.  He runs a scenario for a renter making just $37,000, well below the median income in the U.S. of about $57,000.   At 4%, the renter can afford $213,000.  With taxes, insurance, and MI, that puts them at 50% with no other debt.  He then claims that the same renter can still have a $190,000 mortgage at 5%.  These are very optimistic projections considering they don’t even consider condo fees, but it does point out that even lower-income renters can often buy houses.

USDA Seeking Input On Software Interface
The USDA Rural Development program is working on an interface to loan origination software that will go into effect in 2020.  It will be based on MISMO 3.4.  The agency is trying to determine what software its clients use.  They are particularly interested in making certain proprietary software will interface.  You can participate in their survey.

Rate Outlook
Another Fed Governor has decided to the leave.  New York Fed President William Dudley will leave the board in mid-2018, prior to when his term ends in 2019.  Dudley is cut from similar cloth to Janet Yellen, preferring slow, steady Fed movement.  With Jerome Powell coming in as Fed Chair, perhaps Dudley feels the conservative bent will continue, although he has denied that.  Another theory is that he does not favor the deregulation that Powell is expected to implement.  The New York Fed is charged with reducing the Fed’s ownership of mortgage-backed securities.
This is a slow week for economic news.  The most watched data showed weekly jobless claims up slightly to 239,000 vs. the expected 231,000.  Tomorrow brings the University of Michigan Consumer Sentiment Survey.  That has been running at all-time highs so one must wonder if it can go higher.
We have seen a little bump upward in rates.  There is no clear reason.  Some speculate that people are concerned about the new Congressional tax plan that could increase the deficit. Veterans Day falls on Saturday this year and normally the bond market is closed the prior day.
Not this year. The MBS market will trade Friday so few mortgage people will have the day off.

John Councilman, CMC, CRMS of AMC Mortgage Corporation in Ft. Myers, Fla. is Past President of NAMB. He may be reached by phone at (239) 267-2400 or e-mail [email protected].

Nov 13, 2017