In July 1776, the estimated number of people living in the newly independent nation was 2.5 million. (Nowadays, this is approximately the number of people on the freeway in Atlanta or Seattle during rush hour.) The nation's estimated population on this July Fourth is over 318 million. So we should all invest our money in anything that appreciates with population growth, right?

California has gobs of people, and as California goes, so goes the nation, right? The California State Assembly approved SB 1459. The bill is now enrolled and sent to the governor for signature or veto. The California Mortgage Bankers Association "has vigorously supported the legislation, which will allow use of the Uniform State Test (UST) for California MLOs.  The bill would also modify hourly education requirements, requiring MLOs to get 2 hours of state-focused pre-license education (as part of the 20 hour requirement) and 1 hour of state-focused continuing education (as part of the 8 hour requirement)."

(This reminded me of a note I received a while back from an LO at a large bank. "Are any of the guys emailing you about bank registration versus LO licensing actually producers? I was licensed in more states than most, and it means zilch. Realtors don't care; clients don't care. Everyone wants the same thing which is to hit contract dates without excuses. Like everyone else I crammed before the test, bought some practice exams, did some forgettable education, passed the tests and the next day I quickly forgot it all then went back to originating. The same goes for Continuing ED; I click through a bunch of screens and forgot everything a few hours later. At my bank they flood us with training - do the vast majority of LOs remember the minutiae? Big producers will produce regardless of if they are licensed or registered and their referral sources don't care.

"The Community Home Lenders Association (CHLA) urged the Federal Housing Finance Agency (FHFA) to take actions which could facilitate a transition to mortgage market reform, in a manner that protects consumers and promotes competition. In a letter to FHFA Director Mel Watt, the CHLA said that any transitional actions that FHFA takes should focus on these pro-consumer objectives, by promoting competition and consumer access to community-based lenders and by preserving GSE infrastructure to maintain securitization access and a non-discriminatory cash window. Specifically, the CHLA urged FHFA to: Carry out its risk sharing pilots in a manner that preserves competitive access to securitization, prohibits vertical integration, prohibits volume discounts, and tests out a risk sharing guarantee at the loan level; conduct research into the impact of various reform structures on the preservation of a cash window that meets the needs of all lenders and the consumers they serve; complete work on a common securitization platform and single security; adopt immediate G Fee parity and equal terms and conditions for all lenders; and evaluate access and affordability under different risk sharing options."

In a story funded by banks, the FHFA Inspector General cited the risks of non-bank servicers. (Okay, just kidding on that funding note.) But the WSJ notes that, "Federal Watchdog Says Nonbank Financial Firms May Lack Adequate Funding". Let's see.... If banks have Basel III concerns (MSRs hitting 10% of Tier 1 Capital), if regulators are afraid of concentrating the servicing in the hands of too few banks, and if nonbanks don't have enough capital to do the job - well, who the heck is going to service the $10 trillion or so of residential loans outstanding? Bloomberg also summed up the report. Here is the actual report which singles out servicers of troubled loans.

In an unrelated but coincidental story, pop-archeologists discovered the early set of Creedence Clearwater Revival lyrics for "Who'll Stop the Rain." It turns out that early versions were actually about loan servicing. For example:

Long as I remember, the payments been comin' in
Clowns opening the checks, what's the investor's PIN?
Customer whines go unheeded, no one will ever know.
And I wonder, still I wonder, who'll service the loans?

So the report said that a nonbank mortgage servicer that took on more loans than it could handle ended up delaying payments to Fannie Mae and Freddie Mac. The servicer, which the report does not identify by name but everyone besides me seems to know with certainty, used short-term financing to acquire a large portfolio of delinquent loans backed by one or both of the government-sponsored enterprises. This company lacked the infrastructure to handle so many loans, leading to consumer complaints and the payment delays, and limited credit availability threatened the servicer's ability to fund its operations.

The FHFA, which runs Fannie & Freddie, is certainly aiming to keep the FHFA at the forefront of being relevant, and being around regardless of what Congress does. Russell Rau, a deputy inspector general for audits and who wrote the 17-page report, recommends that FHFA develop a formal framework that would include routine exams, reviews and testing to ensure nonbank servicers can meet current servicing requirements. The FHFA and F&F have been supportive of banks selling mortgage servicing rights to nonbanks largely to help struggling homeowners and to limit the GSEs' own losses.

Benjamin Lawsky, the Superintendent of New York's Department of Financial Services, also likes being relevant and has launched separate investigations into two nonbank servicers, Ocwen Financial and Nationstar Mortgage. Some nonbank servicers, of course, do not have the infrastructure to properly service all of the loans they have acquired, thus "biting off more than they can chew." American Banker notes that "nine of the top 20 servicers for Fannie Mae loans and seven for Freddie Mac are nonbanks" and the industry wonders if they are more vulnerable to economic downturns.

And residential servicers are not the only ones taking a hit in the press. According to Reuters, New York state bank regulators are preparing an investigation into commercial real estate special servicers, traditionally a fee-intensive business. The article states that regulators are looking into whether loan servicers have related businesses that may have conflicts of interest with bondholders. Reportedly Benjamin Lawsky, the superintendent of New York's Department of Financial Services, will be leading the initial investigation. Who are these guys? Starwood Property Trust's LNR subsidiary is the largest U.S. special servicer with 36% market share, followed by CWCapital at 34%, and C-III Asset Management at 16%. CMBS special servicers tend to be buyers of B-pieces in CMBS securitizations assuming that the first loss position entitles them to be named special servicer when a loan defaults. Everyone knows that special servicing is a labor intensive process requiring significant infrastructure and that the special servicer's economic incentive is to maximize value to the securitization trust since they receive incentive fees for resolutions. Fees from borrowers include default interest, modification fees, extension fees, late fees, assumptions fees, and consent fees, and fees paid by the CMBS trust include inventory fees, workout fees, and liquidation fees.

Plenty of major banks are hoping that their HELOC portfolios don't turn into "troubled" loans. Four federal financial institutions regulatory agencies and the Conference of State Bank Supervisors (CSBS) issued guidance to financial institutions regarding home equity lines of credit (HELOCs) nearing their "end-of-draw" periods, which occurs when the principal amount of the HELOC must begin to be repaid. The guidance encourages financial institutions to effectively communicate with borrowers about the pending reset and provides broad principles for managing risk as HELOCs reach their end-of-draw periods. Lots of borrowers will be just fine, but others may find it difficult to make higher payments or to refinance their existing loans due to changes in their financial circumstances or declines in property values. "When borrowers experience financial difficulties, financial institutions and borrowers generally find it beneficial to work together to avoid unnecessary defaults. The guidance describes how financial institutions can effectively manage their potential exposures under these circumstances. The guidance promotes an understanding of potential exposures and describes consistent, effective responses to HELOC borrowers unable to meet their contractual obligations. The appropriate accounting and reporting procedures for HELOCs nearing their end-of-draw periods are also discussed: Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods.

Risks are everywhere! On June 25, the OCC published its semiannual risk report, which provides an overview of the agency's supervisory concerns for national banks and federal savings associations, including operational and compliance risks. As in prior reports and as Comptroller Curry has done in speeches over the past year, the report highlights cyber-threats and BSA/AML risks. The OCC believes cyber-threats continue to evolve and require heightened awareness and appropriate resources to identify and mitigate the associated risks. Specifically, the OCC is concerned that cyber-criminals will transition from disruptive attacks to attacks that are intended to cause destruction and corruption. Extending another recent OCC theme, the report notes that the number, nature, and complexity of both foreign and domestic third-party relationships continue to expand, resulting in increased system and process interconnectedness and additional vulnerability to cyber-threats. The report also states that BSA/AML risks "remain prevalent given changing methods of money laundering and growth in the volume and sophistication of electronic banking fraud." The OCC adds that "BSA programs at some banks have failed to evolve or incorporate appropriate controls into new products and services," and again cautions that a lack of resources and expertise devoted to BSA/AML risk management can compound these concerns. Finally, the OCC expressed concern that competitive pressures in the indirect auto market are leading to an erosion of underwriting standards. The OCC's supervisory staff plans to review retail credit underwriting practices at banks, especially for indirect auto loans.

Well, now that the World Cup is out of reach for the United States, we can all go back to watching the bond market tread water, right? But there was some movement to the downside Tuesday as traders talked about sellers hedging locks ahead of the unemployment data Thursday and the holiday Friday. MBS prices ended the day worse between .250-.50, depending on coupon on maturity.

But it is a new day! We will have ADP for June. Its correlation to the official numbers is always questionable, but it is expected at +179k. We also had the weekly MBA apps numbers, which were -.2% last week and down 37% for the year. Later we'll have Factory Orders - does the market care? For numerous, Tuesday the 10-yr ended the day at 2.56% and now it is at 2.55%; agency MBS prices are a touch better.