Yesterday I was in Denver, speaking at the Colorado Mortgage Lenders Association, and, besides the increasing need for capital among lenders, the rumored upcoming audit of 360 Mortgage & the CFPB's potential fines*, and market share jockeying, a hot topic was home price appreciation in the area. Shoulda woulda coulda... The number of existing homes for sale in the USA has been cut in half over the last 6 years. There were 3.8 million homes for sale as of February 2007, and at the end of February 2013 there were 1.94 million, per NAR.

Yesterday I mentioned a Bloomberg article talking about how American homeowners could soon be using their homes as cash machines (a term that makes most lenders shudder), and as it turns out there is an updated Bloomberg article which clarifies some of the quotes.  I might add that while a lot of lenders are projecting 10-20% growth in 2013, the regulatory climate with Basel III, QM, etc., and the changing rate environment, could still impact growth rates in the 2^nd half of 2013 and beyond. Home equity volumes have been increasing since mid-2010 primarily by regional lenders tapping into the refinance market and using the 1st Lien HELoan as a refinance option for stronger customers (lower loan sizes than typical 1^st mortgage refi volume, high FICO, decent CLTV, shorter terms primarily in the 10-20 year range, etc.).  Many believe that this growth should continue at least through the first half of 2013, driving a lot of the projected growth this year.  HELOCs were up 3% in 2012 and should be up a bit more than that this year with home values improving and a renewed strategic focus by some larger lenders. But every day the industry is reminded that changing capital requirements and contradictory regulations are all a tremendous drain for lenders.

* Although no one has heard of any mortgage bankers paying fines, it would not take much before a small mortgage banker would simply give up. As the agency vested with primary authority to enforce federal consumer financial laws, the CFPB has broad enforcement powers, including the ability to collect civil money penalties ranging from up to $5,000 per day for "first tier" violations to $25,000 per day for reckless violations, and $1 million per day for knowing violations. Here you go.

Remember from October that the Consumer Financial Protection Bureau's first three fines were against credit card companies for deceptive and illegal practices. What does it, and in theory other government agencies, do with the money? Well, here's the official policy.

I bring all this up because folks are interested to see just how big of a hammer the CFPB wields, and yesterday a few mortgage insurance companies found out. "For more than a decade, four of the nation's largest mortgage insurers paid millions of dollars in kickbacks to home lenders in exchange for business, raising insurance prices for consumers," the Consumer Financial Protection Bureau said Thursday. But the MI companies admitted no wrongdoing. I wonder if any referral fee will come under scrutiny - after all, there is a fine line between a kickback and a referral fee. The CFPB fined Genworth, UG, MGIC, and Radian a total of $15.4 million for an alleged scheme that the bureau said was a common practice in the lead-up to the nation's housing meltdown.  More

MGIC was quick to issue a statement in response that it sent to me. "MGIC Investment Corporation's principal subsidiary, Mortgage Guaranty Insurance Corporation ("MGIC"), commented on the consent order settlement announced today by the Consumer Financial Protection Bureau (the "Bureau") to resolve a previously disclosed investigation of captive reinsurance transactions in the mortgage insurance industry. The settlement is subject to approval by the U.S. District Court for the Southern District of Florida. The settlement results from a nearly five-year-old industry-wide investigation into captive reinsurance arrangements originally commenced by the U.S. Department of Housing and Urban Development ("HUD") in 2008. HUD subsequently transferred its investigation to the Bureau. MGIC cooperated fully with the Bureau during the investigation. The complaint filed by the Bureau with the U.S. District Court today alleges that certain captive reinsurance transactions entered into by MGIC violated the Real Estate Settlement Procedures Act ("RESPA") because the projected value of the reinsurance was less than the reinsurance premiums paid by MGIC to the reinsurer. As the consent order settlement recites, the settlement is not "an adjudication of any fact or legal conclusion" and will not have "any preclusive effect in any other action or proceeding". Likewise the consent order makes clear that "MGIC is not making any evidentiary admissions of liability" for the practices alleged.

In 1997, HUD issued guidance to the mortgage industry indicating that properly structured captive reinsurance transactions were not prohibited by RESPA. MGIC believes its reinsurance arrangements were structured in accordance with that longstanding guidance. Among other things, MGIC obtained actuarial opinions from independent actuaries reflecting that the reinsurance premiums paid by MGIC were reasonably related to the risk assumed by the captive reinsurers. In addition, borrowers received notice from their lender that the borrower's loan might be reinsured by an affiliate of the lender. As part of the notice, each borrower was given an "opt-out" right to exclude his or her loan from the captive reinsurance transaction."

The response goes on. "Significantly, MGIC's captive reinsurance transactions caused no harm to any borrower because MGIC's premium rates were not based on, or affected by, captive reinsurance. Moreover, given the significant downturn in the housing market over the past 5 years and the more than ten billion dollars of claims MGIC has paid, MGIC's premium rates were not artificially high. Captive reinsurance was commonly used by mortgage insurers in the past to stabilize claims experience and protect against catastrophic losses. Indeed, MGIC received nearly $900 million in loss reimbursements from its captive reinsurers. These reimbursements provided much needed capital to MGIC that helped MGIC survive the worst of the housing downturn. As part of the settlement, MGIC agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten (10) years. In fact it had voluntarily suspended most of its captive arrangements in 2008 in response to market conditions and GSE requests. MGIC also agreed to pay a civil money penalty in the amount of $2.65 million. MGIC's payment is part of the $15.4 million in penalties the Bureau announced, and is the lowest amount (by more than $1 million) paid by the three other settling mortgage insurers.

'We are pleased to put this matter behind us and believe that this settlement is in the best interests of the Company and its customers,' the Company said."

Genworth also sent its response to me. "Genworth U.S. Mortgage Insurance (USMI), a unit of Genworth Financial, Inc. (NYSE: GNW), today announced it has agreed to settle with the Consumer Financial Protection Bureau (CFPB) to end the agency's review of industry captive reinsurance arrangements. As part of the settlement, Genworth will pay $4.5 million and, along with other mortgage insurance companies, refrain from certain reinsurance arrangements for a period of 10 years. The settlement will be recorded in the first quarter of 2013, and is not anticipated to have a significant impact on Genworth USMI financial results. With this settlement, the CFPB did not make any findings or determinations that Genworth or any other company violated any law. 'Genworth USMI agreed to settle this review so we can focus our resources on working with customers to help borrowers responsibly achieve and maintain homeownership, and to resolve the uncertainties inherent in such a review and any possible resulting litigation,' said Rohit Gupta, president and chief executive officer of USMI. 'When Genworth USMI developed its captive reinsurance arrangements, it received guidance from the Department of Housing and Urban Development (HUD), which previously had responsibility for this area. HUD indicated that these arrangements are permissible if certain requirements are met. Genworth followed the guidance, and had the arrangements tested by independent third parties to verify that the HUD requirements were met. Further, consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement. Private mortgage insurers paid more than $40 billion, several billion of which came from lender-affiliated reinsurance companies, to offset losses from defaulted mortgage loans during and after the financial crisis, providing much-needed liquidity and capital to help support the housing industry during the most severe crisis since the Great Depression,' Gupta said."

The Ohio Mortgage Bankers (who I'll be visiting next week) sent out a note to members saying that, "HUD has posted a proposed rule in the Federal Register, to change the test case review process for lenders new to the FHA program. Under this proposal, the lender would close the loan and FHA would review the loan after closing. There is a great deal of concern over the fact that many loans will not be able to obtain FHA insurance due to errors by lenders and underwriters who are just beginning to learn FHA procedures. Please make your concerns known to HUD during this short comment period. The proposed rule can be found in the March 21, 2013 Federal Register, Volume 78 No. 55." Here is the "ink".

There sure isn't anyone out there complaining about rates (although as this commentary has been saying for a long time: rates won't be the problem this year, it will be the cost of originating a loan). Prices on 30-year FNMA 2.5% securities, the "bucket" containing 2.75-3.125% 30-yr Fannie loans, is above par (100). Add on some servicing, perhaps some buyups, and it is not hard to see 30-yr rates below 3.5% in the near future. There are several reasons for the renewed interest by investors and therefore the increased demand in owning fixed-income U.S. securities: an unexpected increase in weekly jobless claims in the U.S., aggressive QE asset purchases announced by the Bank of Japan, ECB holding rates unchanged with no additional stimulus, and uncertainty about North Korea.

But all of that is so "yesterday." Our economy is driven by jobs and housing, housing and jobs, and today we've had the first-Friday-of-the-month unemployment data. Economist Elliot Eisenberg noted, "While the economic recovery will soon enter its fifth year, wage growth is invisible. In part, it's because unemployment is high, but also because more and more jobs are in leisure/hospitality and retail. These two sectors now account for 21% of US employment, yet pay just $13/hour and $16/hour respectively. Manufacturing pays $23/hour, yet employs just 9% of the workforce. Good paying jobs are being lost and not being replaced."

The unemployment rate for March was expected 7.7%, with Non-farm payrolls at +200k. But March's numbers were only +88k, although there were revisions to January and February of +61k. Are we feeling the impact of the payroll tax hike? And the Unemployment Rate was 7.6%, mostly due to folks dropping out of the workforce. These weak job numbers have kicked the stock market, but helped the bond market: the 10-yr is down to 1.68% and we can look for agency MBS prices to improve .250 if not more.

(Here is part 2 of a little trivia to use at the Happy Hours tonight.)

Q: Why is someone who is feeling great 'on cloud nine'?
A: Types of clouds are numbered according to the altitudes they attain, with nine being the highest cloud. If someone is said to be on cloud nine, that person is floating well above worldly cares.
Q: In golf, where did the term 'Caddie' come from?
A. When Mary Queen of Scots went to France as a young girl, Louis, King of France, learned that she loved the Scots game 'golf.' So he had the first course outside of Scotland built for her enjoyment. To make sure she was properly chaperoned (and guarded) while she played, Louis hired cadets from a military school to accompany her. Mary liked this a lot and when she returned to Scotland (not a very good idea in the long run), she took the practice with her. In French, the word cadet is pronounced 'ca-day' and the Scots changed it into 'caddie.

Q: Why are many coin banks shaped like pigs?
A: Long ago, dishes and cookware in Europe were made of dense orange clay called 'pygg'. When people saved coins in jars made of this clay, the jars became known as 'pygg banks.' When an English potter misunderstood the word, he made a container that resembled a pig. And it caught on.
Q: Did you ever wonder why dimes, quarters and half dollars have notches (milling), while pennies and nickels do not?
A: The US Mint began putting notches on the edges of coins containing gold and silver to discourage holders from shaving off small quantities of the precious metals. Dimes, quarters and half dollars are notched because they used to contain silver. Pennies and nickels aren't notched because the metals they contain are not valuable enough to shave.