Fannie Mae and Freddie Mac eased some guidelines for lenders refinancing mortgages, including new relief from buying back the loan, according to an alert sent to lenders.

Beginning immediately, Fannie will waive future repurchase claims on the new loan if an appraisal on the property is done. Previously, if a lender obtained an appraisal, it was still responsible for representations and warranties for the property’s value on the new loan.

Freddie relieved lenders of buyback risk tied to “creditworthiness, any other underwriting requirements, value, condition and marketability of the (the property) and certain fraud requirements” for refinance applications received beginning Nov. 19, according to its notice.

Repurchase risk still remains for new servicers refinancing a mortgage financed by either Fannie or Freddie.

Before the changes announced Friday, the GSEs required retail lenders to verify that at least one of the borrowers on the loan had a source of income if the monthly mortgage payment changed by 20% or less after the refinance. It waived this requirement Friday and will allow retail lenders to verify the borrower has enough reserves to cover 12 months of the new mortgage payment before approving the new loan.

The reserves can include checking and savings accounts, stocks, bonds, mutual funds and even amounts vested in retirement accounts, according to the changes.

The GSEs also reduced how much documentation lenders will need to get the refinance approved. Lenders won’t be required to verify a borrower’s past or current income. Fannie and Freddie also waived requirements to look into large deposits on borrower statements.

The changes were made to expand even further the reach of refinancing and to assist borrowers who owe more on their mortgage than their home is worth. The Federal Housing Finance Agency altered the Home Affordable Refinance Program to remove some repurchase liability on the old loan for the original servicer.

Other barriers to HARP including some appraisal requirements and upfront fees and a loan-to-value ceiling were also removed.

More than 519,000 underwater borrowers refinanced under HARP through July, more than the roughly 400,000 in all of 2011.

Democrats in the Senate reintroduced legislation last week to expand HARP to waive repurchase risk for all lenders, not just the original one. But the bill will not likely pass before the election in November, if at all.

Still, the GSEs expect the new rules will allow “lenders more efficiently reach an even broader base of eligible borrowers,” according to the alert put out by Fannie.

Basel III is the continuation of a poor record of fundamentally flawed Basel systems, but with more complexity, Thomas Hoenig, director of the Federal Deposit Insurance Corp. said Friday.

Hoening delivered the remark at The American Banker Regulatory Symposium in Washington, adding that Basel III will not improve outcomes for the largest banks since its complexity reduces rather than enhances capital transparency.

“Basel III will not improve the condition of small- and medium-sized banks,” he said. “Applying an international capital standard to a community bank is illogical, particularly when models have not supplanted examinations in these banks. To implement Basel III suggests we have solved measurement problems in the global industry that we have not solved. It continues an experiment that has lasted too long.

Hoenig has an alternative to Basel. He calls it the “tangible equity to tangible assets ratio. Tangible equity is simply equity without add-ons such as good will, minority interests, deferred taxes or other accounting entries that disappear in a crisis. Tangible assets include all assets less the intangibles.”

The tangible capital measure does not remove the complexities from the balance sheet, does not differentiate risks among assets and doesn’t tier the measure into any number of refined levels, he said.

Hoenig’s measure accepts that firms quickly shift their allocation of assets to take advantage of changing risks and rewards. He said the simpler, but stronger measure clearly reflects the losses that a bank can absorb before it fails, regardless of how risks shift, and provides a consistent and comparable measure across firms.

Since the federal safety net of deposit insurance is a substitute for capital in protecting the depositor, the supervisor should expect the same minimum capital as the market would without the net, the FDIC director said. The equity ratio for the banking industry before the safety net was implemented ran between 13% and 16%. 

“Therefore, the starting point for any discussion of an acceptable level of tangible equity for all banking firms should be well above the 3.25% level now implied by the Basel III proposal,” Hoenig said.

Assessing individual institutional risk more precisely and judging whether the minimum capital is adequate is a challenge in Hoenig’s approach.  He feels the judgment should be determined through the periodic examination process, which for the largest banks has become deemphasized in favor of stress tests. 

“This is no simple task,” Hoenig continued. “However, it is through this process, properly conducted, that supervisors can best assess a financial firm’s fundamental operations, liquidity, asset quality and risk controls.”

The latest stimulus from the Federal Reserve may spur more home sales, just not to the intended buyers.

By buying up $85 billion in Treasurys and agency mortgage-backed securities each month through the end of the year and $40 billion in MBS for each month after, the Fed may force some institutional investors to substitute these assets for others.

Investors would sell these bonds for riskier assets, and since the crisis struck in 2007, there’s plenty of risk in housing.

“To the extent that the so-called portfolio balance effect of quantitative easing causes investors to demand alternative assets – such as direct exposure to housing – home sales to institutional investors could increase,” said Paul Diggle, property economist with Capital Economics.

Much of even the fastest improving housing markets are dependent on cash buyers. More than 43% of Phoenix home sales in July were made with cash, up from 40% a year earlier, according to real estate analytics firm DataQuick.

Traditional investors in mortgage bonds were already looking to buy up properties. Two Harbors ($11.90 -0.06%), a real estate investment trust focused on agency and private-label MBS, is launching another company to acquire homes and rent them out.

It’s Fed Chairman Ben Bernanke’s hope that the increase in activity from the investor side drives up prices for homeowners taking smaller returns on their savings. Instead, he said, the stimulus announced yesterday could return equity for the more than 10 million borrowers still underwater.

“My colleagues and I are very much aware that holders of interest-bearing assets, such as certificates of deposit, are receiving very low returns. But low interest rates also support the value of many other assets that Americans own, such as homes and businesses large and small,” Bernanke said during a press conference Thursday.

Buy owner-occupant homebuyers remain the elusive last key for a housing market showing signs of a recovery. The stimulus announced this week may not make mortgages much cheaper. Any drop may be offset by an increase in guarantee fees Fannie Mae and Freddie Mac are set to charge in November. The lender passes those charges on to the homebuyer.

Diggle doesn’t expect the 30-year fixed-rate mortgage to go lower than 3.25% after holding tight last week at 3.55%.

Too many are still looking for work and would be able to afford a home until they find one. This is where a wrinkle in QE3 might actually affect housing. Bernanke said the bond buying program won’t stop until economic indicators – mainly unemployment – tell him to. Still, that might be a ways out.

“We believe MBS purchases could continue for at least six months, if not much longer,” said JPMorgan Chase ($41.57 0.17%) analysts said in a research note after the announcement.

The Fed has some room. As of June 30, it held roughly $840 billion in MBS. At one point after the crisis, it held as much as $1.2 trillion. At $40 billion a month, Chase analysts estimate the Fed won’t reach the high for another 10 months.

“The bottom line is that the housing market will benefit from QE3. Just don’t expect it to mark a step change in the housing recovery,” Diggle said.

The latest data on corporate profits show further gains to new record peaks, with the second quarter showing $2.11 trillion (annualized).  Before the Great Recession hit in 2008, the prior record high profits were $1.78 trillion.  The runaway profits are one key reason for the high stock market valuations.  An ultra-loose monetary policy has forced cash to yield zero, so the money has been chasing bonds and stocks, and to some degree real estate.

The high profits unfortunately have not yet translated into higher business spending.  Private business spending (which is classified more formally as non-residential fixed investment in GDP accounting) was scratching out only $1.99 trillion in the second quarter.  In most periods, business spending would actually be comfortably higher than corporate profits since much of the spending also comes from borrowing from banks and by issuing corporate stocks and bonds, as can be seen in the chart below.  For example, prior to the recession, business spending was $2.3 trillion (while profits were $1.8 trillion).  But that is clearly not the case today.  Have private businesses simply gone on strike?

The ‘fiscal cliff’ possibility at the start of next year (unless a new federal budget can be passed) is not inspiring businesses to spend now.  The added costs from healthcare legislation and/or new regulations may also have dampened enterprising spirit.  Or it could simply be that businesses are looking for increased aggregate macroeconomic demand – from say, additional federal government spending, particularly related to investment in infrastructure.  Simply, if business spending were to return to normal in relation to corporate profits, then the economic growth would be much faster and job creations much more robust.

Another abnormal aspect of the current profits data is that the private sector wages-and-salaries have not risen commensurately.  Wages-and-salaries are much more stable while profits are subject to big swings so the ratio of the two will be a bit volatile over the short-term.  But note the persistence of wages-and-salaries bouncing along the bottom in recent years.  The persistent high unemployment rate has no doubt dampened wage growth prospects.

• Foot traffic can give a strong indication of future home sales. SentriLock, LLC. provides NAR Research with monthly data on the number of showings.
• Foot traffic has been strong throughout the year in the area covered by the Long Island Board of REALTOR®. However, traffic was atypically strong in both the spring and now the late summer.
• If the trend keeps up, sales for 2012 will be significantly stronger than 2011 reflecting improved buyer confidence in the wake of steady improvements in employment and record low mortgage rates. Traffic was 32% higher in August than the same time in 2011.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses jobless claims.

• It’s another week of disappointing job market data: initial claims for unemployment insurance for the week ending Sept 8 rose by 15,000 claims to 382,000 from the previous week’s revised (upward) estimate. This puts the 4-week moving average at 375,000, which is higher than 300,000 weekly claims during normal times (see graph below).
• On a positive note, the economy’s recovery from the Great Recession of 2009 has actually been more resilient than the economy’s recovery in the aftermath of 9/11. After 9/11, weekly job claims rose from 200,000 claims to about 400,000 per week, and then recovered to about 300,000 by 2004 or a 3-year span. In contrast, claims rose from about 300,000 to a peak of 600,000 claims during the Great Recession of 2009, and have dropped to about half of that in the 3-year span. Also, the number of insured unemployed has fallen steeply from about 6 million to just about 3 million.
• Notwithstanding this, one hopes for a faster and deeper recovery in the jobs market. NAR estimates about 1.5 million net new jobs in 2012, and 2.3 million jobs in 2013, which can add to the demand for existing/new homes.
• Separately, the Fed announced more purchases of mortgage bonds.  In theory, this should lower mortgage rates a bit, but in practice the small changes to already generational-low mortgage rates will have no noticeable impact.  The game changer will be returning underwriting standards back to normal from the current overly strigent conditions.

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses inflation and the consumer price index.

• The consumer price index increased at the highest monthly pace in over 3 years.  The August consumer prices rose by 0.6 percent over a single month, or at a 7.5 percent annualized rate.
• There is normal volatility in month-to-month data so one should not assume this high rate of inflation will necessarily continue.  In fact, because of tame inflation in prior months, the 12-month inflation to August was only 1.7 percent.
• The big driver of inflation in August was higher gasoline prices, which jumped 9 percent in a single month.  Given that September gasoline prices have also been moving up and because of higher oil prices from the Fed’s decision to pump more money (i.e., more quantitative easing), inflation will be in high gear for at least the next few months.
• The rent component continues to make gains, albeit at a slightly slower rate than before.  August rents rose by 0.2 percent, leading to a 12-month gain of 2.6 percent.  While not in this report, many private companies tracking apartment rents have shown a higher rent increases.  For example, REIS reported 3.7 percent increase in apartment rents.
• The average hourly earnings reached $23.52 in August, which is up from $23.12 from one year ago.  However, the wage increase was essentially the same as the consumer price increase so there has been no improvement in purchasing power in the past 12 months for those people with jobs.  The social security recipients can expect the cost of living adjustment starting in January, 2013 to be around 2.0 to 2.5 percent based on recent trends inflation.

The delinquency rate measured 12 months after origination has improved dramatically on mortgages backed by Fannie Mae and Freddie Mac. According to the FHFA’s first quarter report on the enterprises, the 12-month delinquency rate is now back to 2002 levels even though the unemployment rate is significantly higher than it was in 2002 and price growth was stagnant until this spring. Weak equity growth and high unemployment are the main drivers of delinquencies suggesting that the rates in 2002 and 2003 would have been much higher if similar home price and employment trends had been present.

Likewise, the delinquency rate on loans financed by the FHA 12 months after origination has fallen dramatically since 2007.

The heads of all three banking regulators, the Federal Reserve, OCC, and the FDIC, have made comments alluding to the need for more relaxed lending standards that are in line with sound underwriting. Yesterday’s announcement by the FHFA that it intends to cap the time frame for reviews of problem loans on new originations may help to relax the put-back and reputation risk to lenders going forward, but risks to lenders from the rebuttable presumption stipulation of the qualified mortgage rule and risk weights on high LTV loans under Basel III could mitigate this effort.

State court ruling deals blow to U.S. bank mortgage system

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By Michelle Conlin

Sept 14 | Sat Sep 15, 2012 4:21am IST

Sept 14

(Reuters) – The highest court in the state of Washington recently ruled that a company that has foreclosed on millions of mortgages nationwide can be sued for fraud, a decision that could cause a new round of trouble for the nation’s banks.

The ruling is one of the first to allow consumers to seek damages from Mortgage Electronic Registration Systems, a company set up by the nation’s major banks, if they can prove they were harmed.

Legal experts said last month’s decision from the Washington Supreme Court could become a precedent for courts in other states. The case also endorsed the view of other state courts that MERS does not have the legal authority to foreclose on a home.

“This is a body blow,” said consumer law attorney Ira Rheingold. “Ultimately the MERS business model cannot work and should not work and needs to be changed.”

Banks set up MERS in the 1990s to help speed the process of packaging loans into mortgage-backed bonds by easing the process of transferring mortgages from one party to another. But ever since the housing crash, MERS has been besieged by litigation from state attorneys general, local government officials and homeowners who have challenged the company’s authority to pursue foreclosure actions.

A spokeswoman for MERS said the company is confident its role in the financial system will withstand legal challenges.

The Washington Supreme Court held that MERS’ business practices had the “capacity to deceive” a substantial portion of the public because MERS claimed it was the beneficiary of the mortgage when it was not.

This finding means that in actions where a bank used MERS to foreclose, the consumer can sue it for fraud. If the foreclosure can be challenged, MERS’ involvement would make repossession more complicated.

On top of that, virtually any foreclosed homeowner in the state in the past 15 years who feels they have been harmed in some way could file a consumer fraud suit.

“This may be the beginning of a trend,” says Elizabeth Renuart, a professor at Albany Law School focusing on consumer credit law.

The company’s history dates back to the 1990s, when banks began aggressively bundling home loans into mortgage-backed securities. The banks formed MERS to speed up the handling of all the paperwork associated with recording the filing of a deed and the subsequent inclusion of a mortgage in an entity that issues a mortgage-backed security.

MERS allowed the banks to save time and money because it permitted lenders to bypass the process of filing paperwork with the local recorder of deeds every time a mortgage was sold.

Instead, banks put MERS’ name on the deed. And when they bought and sold mortgages, they just recorded the transfer of ownership of the note in the MERS system.

The MERS’ database was supposed to keep track of where those loans went. The company’s motto: “Process loans, not paperwork.”

But the foreclosure crisis revealed major flaws with the MERS database.

The plaintiffs in the Washington case, homeowners Kristin Bain and Kevin Selkowitz, argued that the problems with the MERS database made it difficult, if not impossible, to determine who really owned their loan. It’s an argument that has been raised in numerous other lawsuits challenging the ability of MERS to foreclose on a home.

“It’s going to be very easy for consumers to say they were harmed because it’s inherently misleading,” says Geoff Walsh, an attorney with the National Consumer Law Center. If consumers can’t identify who owns their loan, then they don’t know whom to negotiate with, and can’t even be certain of the legitimacy of the foreclosure.

In a statement, MERS spokeswoman Janis Smith noted that banks stopped using MERS’ name to foreclose last year. She added that the opinion will “create confusion” for homeowners in the state of Washington while the trial courts consider its effect on pending cases.

Meanwhile, MERS is attempting to remake itself. The company has a new chief executive and a new branding campaign. In Washington D.C. federal lawmakers have recognized the need to create a national mortgage-recording database that would track all U.S. mortgages. MERS is lobbying to build it.

The case is Bain (Kristin), et al. v. Mortg. Elec. Registration Sys., et al., Washington Supreme Court, No. 86206-1.

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