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News From NAMB: October 26, 2017

John Councilman
Oct 26, 2017
The nine-year-old federal conservatorship of the government-sponsored enterprises (GSEs) needs to come to an end sooner than later, according to a policy position issued by NAMB

Top Story: MBA’s Stevens Announces His Retirement
Mortgage Bankers Association President and CEO David Stevens announced at the MBA Conference that he plans to retire effective September 30, 2018.  The announcement shocked conference attendees who have watched Stevens bring the association to its strongest financial position in its 104-year history.  Stevens has been battling cancer but says now that it is in remission, he wants to spend more time with his family.  David Motley, MBA’s president this year, believes the association is well-poised to take up where Stevens leaves off.

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Carson Says He is Addressing False Claims Issue
HUD Secretary Ben Carson is reassuring lenders that he is working on the False claims act issues.  “We are already addressing that problem; our staff, along with the DOJ staff. And we’re committed to getting that resolved, because it’s ridiculous, quite frankly,” Carson says.  Speaking to the MBA conference in Denver, Carson assured, “We have heard these concerns, and today I am very pleased to announce that HUD, in consultation with the Justice Department, is committed to reviewing and addressing these issues.  We have heard concerns on the part of some in the lender community about participating fully in our programs because of the undue risks they perceive from a lack of clarity in what we expect and exposure to outsized liability from immaterial errors.”  Carson is concerned that lenders have pulled back from FHA.  “We want every good lender.”  But, “We are not open for business to fraudsters, those without proper controls, or those who do not take their obligations in our market seriously. They will be found out and held accountable,” Carson continued.

Do Mortgage Companies Still Need Processors?
As Fannie Mae pushes forward with its Day 1 Certainty program, much of what a processor normally does will be done by Fannie Mae.  There will be no need for paystubs, bank statements, W-2s, and tax returns as service providers feed them into the system.  Perhaps the biggest breakthrough will be “Single Source Validation.”  Instead of having a company that does tax return verification and another that does bank verifications, one company will integrate with other providers to do it all.  It promises to be so simple that originators could simply start the process and let it run automatically.  It also virtually eliminates fraud.  This coincides with the CFPB’s data-sharing principles that just came out requiring banks to cooperate with data aggregators.  United Wholesale is promising to implement the process for brokers immediately when it fully rolls out in 2018.

Surprise! ARMs Are Outperforming Fixed-Rates
When one looks at the serious delinquency rate for ARMs vs. fixed-rate mortgages, one might automatically assume that ARMs are far more risky.  As of June 2017, the serious delinquency rates (90+ days late) for ARMs and FRMs were 5.2 and 1.8 percent, respectively.  What that statistic doesn’t tell you is more than 90 percent of the ARMs that were seriously delinquent in June 2017 were originated between 2003 and 2009.  The pattern was reversed beginning in 2010 as the riskiest ARM products, such as the option ARM and the interest-only ARM, largely vanished. The Ability-to-Repay and Qualified Mortgage (QM) standards have generally eliminated such risky products like negative amortization.  The QM regulation requires ARMs be underwritten to the greater of the note rate or fully-indexed interest rate.  This can be higher than fixed-rate loans, especially when quite a few lenders use an even more restrictive formula.
Now, ARMs have less than half the serious delinquency rate of fixed-rates.

Government Agencies Circle to Attack CFPB, Congress Intervenes
It is quite rare to see government regulators attack another federal regulator.  But, this is what happens when an agency is isolated from the administration and it appoints the other agency heads it wants.  First, it was OCC Comptroller Keith Noreika who attacked the CFPB’s arbitration rule.  Now, the Treasury Department has released an 18-page report that claims the rule will simply cost consumers $330 million dollars in legal fees that will be passed on to them.  The report charges, “The Bureau has identified no evidence indicating that firms that do not use arbitration clauses treat their customers better or have higher levels of compliance with the law.”  Now, the House and Senate have voted to nix the arbitration rule under the Congressional Review Act although it took Mike Pence to break the tie created when 2 Republicans broke ranks to support class-action suits.  The president’s signature is a foregone conclusion. 
NAMB Supports FHA Commissioner Pick
Brian Montgomery, former FHA Commissioner for a number of years, has been nominated by Donald Trump to be FHA Commissioner once again.  He will be facing Senate questioning today.  NAMB believes Montgomery would be an excellent FHA Commissioner, based on his previous tenure.  NAMB has written to the Senate Banking Committee in support of his nomination.  It would seem to be a shoe-in with Montgomery’s credentials.  But, nothing in DC can be taken for granted.  Some people are concerned that Montgomery worked as a consultant for many of the big banks after leaving HUD.  One suggestion is that he should recuse himself when one of those companies is involved.
Ditech Parent Filing for Chapter 11
Walter Investment Management Corporation, the parent of Ditech and Reverse Mortgage Solutions, has said it is filing for Chapter 11 bankruptcy protection.  Walter had bought the servicing rights to troubled loans from the big banks at what everyone believed were fire-sale prices.  Although many are pessimistic, if Walter were to liquidate, these toxic loans could go back on the balance sheet of the banks who sold them, so we may see a very generous Chapter 11 plan.  Ditech and Reverse Mortgage Solutions, will continue their ordinary operations. Walter says it has "ample liquidity to support its businesses and the costs of the restructuring."  The reorganization is expected to be completed by Jan. 31. 
Freddie Eases a Few Guidelines
Freddie Mac has joined Fannie Mae in relaxing the requirements for student loans.  Loans in repayment can use .5% of the balance rather than being forced to confirm the actual payment when it is not on the credit report.  Previously, a new appraisal was required when the Settlement date was more than 120 days after the Note date.  Now, when the Settlement Date is more than 120 days after the Note Date, Sellers may now warrant the value of the subject property is not less than the appraisal.
CFPB’s Regulation by Enforcement Hot Topic At MBA
David Motley, the incoming MBA Chairman, is not fond of how the CFPB determines what is legal or illegal.  Speaking at the MBA conference, Motley essentially called regulation by enforcement a practice where no one is certain what is right or wrong that is bad regulation.  Another area Motley thinks needs attention is the lack of housing supply and listings.  He believes lenders have a role to play in getting builders to increase construction.
Freddie Survey Says 76% of Renters Think It Is Cheaper Than Buying
The battle rages on as to whether it is cheaper to rent than to buy.  Freddie Mac multi-family conducted a survey where 76% of renters say they believe it is cheaper to rent than to buy.  Freddie also offers a rent vs. buy calculator on their site that may be useful to determine which is cheaper.  If you are buying a $150,000 condo with $200/month condo fees, instead of renting an apartment for $1,000, you would come out much better renting, to the tune of $14,913 over 7 years.  This does not consider tax benefits of owning.  But, if your rent is $1,200 you would save $1,306 by buying over 7 years.

NAMB Creates Task Force to Examine Mortgage Interest Deduction
Should we keep the mortgage interest deduction or should we scrap it for more generic tax breaks?  Other trade groups have come down one way or the other.  MBA and NAHB will consider alternatives to the interest deduction, claiming the people who could use it most don’t itemize.  NAR is adamant that the mortgage interest deduction is invaluable and will fight any attempts to weaken it.  Now that these groups have stated the logic for their positions, NAMB is reviewing those arguments to see what we should support.

Flood Insurance Gets Money to Avoid Shutdown
Several weeks ago, FEMA told Congress that their flood insurance program would not be able to pay their bills at the end of October without debt forgiveness.  Congress took the warning seriously and now both House and Senate have passed a $36.5 billion-dollar relief bill that will help FEMA deal with the hurricanes and fires this fall.  It also forgives the $16 billion-dollar debt the NFIP had run up.

Watt Says Alternatives to FICO a Good Way Off
FHFA Director Mel Watt calls a possible move by the GSEs to a score other than FICO “complex.”  Fannie Mae says, “Credit scores are not an integral part of DU's risk assessment because DU performs its own analysis of the credit report data.”  But Fannie Mae does not ignore scores either.  They use FICO scores for floors, such as 620 for most programs.  They also base their loan level price adjustments on FICO scores.  Watt is concerned whether alternative scores predict default as well as FICO.  He reiterates that competing scores could create a race to the bottom much like happened at the credit rating agencies a few years back.  His comments indicate we will not see changes until at least 2019.
Credit Scores May Not be Great Predictors for Mortgages
No one disputes that credit scores are a valid tool to quickly assess how a loan will perform.  They are particularly effective for credit cards but there are indications they are not the holy grail for mortgages.  Although Fannie Mae charges fees for certain levels, they don’t underwrite based on scores but on the credit profile.  New evidence shows states and cities with lower scores often outperform those with higher scores when it comes to foreclosures.  States in the deep South like Louisiana, Mississippi, and Alabama have the lowest scores but fare much better than states like Delaware, New Jersey, and Maryland that have higher scores.  
Fannie Mae Raises Outlook for 2018
Many people had predicted a mortgage slowdown in 2018.  Even of purchases held, despite predicted higher rates, they reasoned that fewer refinances would provide a drag on the market. Now, economists are thinking housing will continue to be strong, allowing purchase-money mortgages to augment fewer refis. Fannie Mae is predicting a year with total volume similar to 2017.
Are Home Sales Up or Are They Down?
When one looks at the National Association of Realtors report for September, it says existing home sales were just a slight bit better than August but 1.5% lower than last year.  Redfin says home sales are down 8.1% from last year.  Some of the difference is that Redfin does not survey the entire market, just the markets where they have offices.  Everyone blames lack of inventory for the lackluster sales.

Rate Outlook
MBA’s top economists are predicting a rise in interest rates to the upper 4s in 2018 and above 5% in 2019.  That may be correct but nearly all of the economists predicted something similar for 2017.  We live in a volatile world.  Long-term rate predictions never seem to be that accurate.
Right now, most economists are predicting that raising rates and the Fed tapering or selling it mortgage-backed securities will have little effect on the economy and only a small effect on mortgage rates.  Perhaps.  So far, mortgage rates haven’t gone up, so we can’t measure the effect on rates.
President Trump likes to tease the media so he continues to keep his Fed Chair a mystery.  He says he really likes Janet Yellen, but, "In one way I have to say, you like to make your own mark ... which is maybe one of things that she's got a little bit against her," Trump added.  There are rumors that President Trump likes Stanford economist John Taylor for Fed Chair.  Taylor is famous for the “Taylor Rule.”  Without going into the mathematics, that rule would put the Fed rate at 3.75% instead of the current 1.25% target.  Can’t imagine he would want that since he was complaining about Yellen raising rates when he first took office.
New home sales came out this week and the numbers were a bit shocking.  Sales of new single-family houses in September 2017 were at a seasonally adjusted annual rate of 667,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 18.9% above the revised August rate of 561,000 and is 17.0% above the September 2016 estimate of 570,000.
Durable Goods orders piled on with a 2.2% increase, nearly double the expected 1.3%.  Those two much better than expected numbers hit rates with about a half-point increase Wednesday morning but things have leveled off a bit since then as people realized the home sales figure was a rebound from a very poor August.
Weekly Jobless Claims came in at 233,000, showing that the hurricanes were just an aberration.  We have a strong jobs market.
Tomorrow, we get 3rd quarter Advanced GDP and the University of Michigan Consumer Sentiment Survey.  Unless these are totally shocking, they probably won’t move the needle that much.
Next week brings the first-of-the-month rush of economic news which could push rates up or down, likely up since most of the economic news lately has been positive.  It is unknown how much the employment figures will be affected by the hurricanes.  If employment is still hot, despite the hurricanes, expect rates to take a moderate hit.

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].

Oct 26, 2017