Bananarama sang, "It's a cruel ... cruel ... cruel summer, Leaving me here on my own, It's a cruel ... it's a cruel ... cruel summer, Now you've gone..." I don't know who is humming that more: companies and LOs who built their entire business model, without an alternative game plan, on refi business, borrowers who didn't lock after the first wave of rate increases, or any investor in a residential mortgage REIT or home builder. Yes, the market is stable this morning, but the talk has increasingly moved to ARMs and intermediate ARMs (non-agency ARM bidders include firms such as BAML, Credit Suisse, Goldman, and Barclays; unfortunately ARM prices at the agencies are poor - they sit in their portfolios). On the origination side, production managers report that practically all the refi loans that were labeled as rushes (due to the jump in rates) have just about made it to the end, which should relieve some of the pressure on appraisers, underwriters, docs and funding (& hedging) - and underwriting turn times are dropping.

I have received, and continue to receive, comments showing the frustration originators and compliance folks have with the APOR issue, and trying to comply with high cost mortgage rules. It turns out that the Mortgage Bankers Association is on it, or at least is trying. (For anyone not familiar with the issue, THIS will provide some information).

The MBA has met with Freddie Mac to discuss the issue, since one of the problems with the calculation is that it draws from Freddie's weekly average rate survey. There are several challenges with its "index". First, it is a survey of purchase money rates with much of the data being pulled from internet websites. The rates are traditionally 10-20 basis points, or more, below the MBA rate survey, therefor lenders are starting out .25 closer to the HPML cap.  Second, because the index is a week behind current weeks pricing, any rate moves upward mean that lenders are closer to the HPML cap simply because the data is delayed/older than current actuals. Both of these mean that the industry is hamstrung by an index that the MBA does not reflect true average rates and by tier week rate moves.

The MBA has highlighted these points in its QM letter to the CFPB (on page 2 HERE). The Freddie survey has been around for 40 years (yes, pre-internet and websites) and thus it is a valuable benchmark, but it is a problematic one when rates are volatile and so much is riding on this spread. Sources say that, so far, the CFPB has not been receptive to the MBA's comments - probably because it cannot come up with an alternative while staying true to the staff-driven belief that anything more than 150 over APOR is a return to subprime. And thus the industry is presented with a threesome of problems: the Freddie rate itself, the lagging nature of the rate, and the way the other rate caps are interpolated based on the yield curve.

One suggestion is to ask the CFPB to make public the firms that are being surveyed for the rate so that the industry can see who is missing, and to assure that the CFPB knows exactly how the rate is derived. Regarding the lagging rate, the MBA hopes that enough evidence can be generated from the most recent rate surge to show that the combination of a lagged indicator and a tight rate cap will make it even more difficult to give locks in a volatile environment. Another suggestion is to publicly put out the interpolated rate ceilings on other products, which may cause the CFPB to look at them again. The industry hopes so, since none of this is really helping to protect the consumer.

When the government seized Freddie and Fannie five years ago, was shareholder value impaired when the government instituted a "dividend sweep"? According to the latest lawsuit it was. In an interesting twist, the lawsuit doesn't seek damages, but does seek to force Treasury and FHFA to abide by the original terms.

It is nearly impossible to keep track of all the lawsuits out there. Two insurance industry trade groups, the American Insurance Association and the National Association of Mutual Insurance Companies, whose members sell homeowners insurance, have filed suit against the Department of Housing and Urban Development (HUD) challenging HUD's final rule formalizing its use of disparate impact liability under the Fair Housing Act (FHA). HUD's rule, adopted in February 2013, provides that if a practice has a discriminatory effect HUD or a private plaintiff can establish liability under FHA even if there is no discriminatory intent.

The Consumer Financial Protection Bureau (CFPB) has also been using disparate impact tests in fair lending examinations and investigations and the suit could impact its authority as well. Ballard Spahr published an analysis of the new law suit on its blog. Alan S. Kaplinsky, said that the lawsuit, filed on June 26 in federal court, alleges that the HUD rule is contrary to law for two reasons: (1) based on the FHA's plain language, it only prohibits intentional discrimination, and (2) the plaintiffs allege that the HUD rule cannot apply to insurance companies because it is contrary to the federal McCarran-Ferguson Act which forbids federal laws which invalidate, impair, or supersede state insurance laws unless the federal law specifically relates to insurance. While this specific suit involves the insurance industry, it has no doubt very big ramifications for the mortgage industry as well.

With the run up in rates, lock desks are once again fielding questions about long term locks (6 months or a year) from borrowers and LOs spooked by the market. Remember when Wells Fargo Home Mortgage's wholesale clients (brokers) were notified that Wells' policy, when it had a wholesale department, "prohibits a borrower from paying extended lock fees"? "Wells Fargo Home Mortgage policy prohibits the borrower from paying extended lock fees (for locks 90 to 360 days in length). This does not impact rate extensions that can be paid by the borrower. Since extended rate locks are not a borrower fee related to the loan transaction, charges for this service will not be disclosed on the GFE or on the HUD-1." Of course secondary market prices are traditionally poor when locks go out that far.

But builders have always been interested in long term locks, and builder business is pretty strong. Some lenders, such as Envoy Mortgage last autumn, have created builder divisions especially with Realtor listings being tight. Long term locks are niche products, of course, but the problem for capital markets folks with builder business is, of course, hedging the darned stuff. The MBS market is most liquid 1-3 months out, and builder business goes out 6-9 months. Is the LO going to financially stand behind a 9 month rate lock? Of course not. When I was running Capital Markets, and I'd quote a rate and price to an LO with a builder client who wanted to obtain pricing six months out, they would laugh at the 1-2 point fee - but just look at the 4-6 point move we've had in the last two months.

As a quick tutorial, one can't really sell a mortgage-backed security today that settles (closes) in six months. But companies can collect an up-front sizeable fee, and/or turn to options, like puts and calls. I'll keep this basic and short! Buying a "put" from a broker-dealer gives you the option (not the obligation) to sell something in the future at a certain price. A builder who likes the rates and pricing six months from now could pony up 1.5-2 points and the lender use it to buy a put - but most LO's never want to hear that, nor do builders, who often want lenders to guarantee today's rates and prices. Still, many lenders offer extended locks out to 90 days - the MBS market actively trades out there, and sometimes investors will go out 120 days IF the client pays a deposit (often 1%).

Different investors handle this differently - it is best to ask. Without naming names, some will treat the up-front fee of .5-1.0 as non-refundable, others will refund it if the loan is denied, and others are very willing to count it toward closing costs. But capital markets folks continue to remind LO's that there is no free money. The commitments are rarely transferable, meaning that if the builder finds a buyer, and then the buyer cancels, the rate lock can't be given to someone else. And other lenders may offer some custom construction clients some type of float down option at today's prices - but usually the borrower pays interest until then.)

And let's not forget the changes in the secondary markets effective NOW regarding fails charges.

Speaking of which, the MBA is in the final stages of preparing a response to the TBA margin best practices recommendation by the Treasury Market Practices Group (TMPG) in November 2012. The recommendation, which amends the industry best practices that primary dealers must follow, would require the bilateral margining of all TBA positions entered into with a primary dealer. Concern remains over the impact of this recommendation on market participants who do not interact directly with primary dealers. Recently SIFMA held a conference on this topic and indications are that the New York Fed's supervision of this rule will focus almost entirely on primary dealers. "We expect that neither TMPG nor the New York Fed will prescribe specific terms for compliance. Rather, the terms of the margin process, such as variance thresholds and frequency of exchange, are expected to be negotiated by the respective parties and to reflect accepted market practices. Finally, it appears that the practice of broker-dealers posting margin on behalf of a mortgage originator will be allowed to continue." For more information contact Dan McPheeters at dmcpheeters@mortgagebankers.org.

We're still grappling with the latest employment data, which was viewed as a good report across the board: nonfarm payrolls were higher than expected, there were revisions higher to previous reports, and hourly earnings jumped. And thus smart folks out there are saying that employment numbers like these are consistent with market pricing for a September tapering-off of QE3. That being said, many are starting to whisper that although the financial press continues to focus on the Fed's eventual wind-down of QE3, the news is becoming old. Looking back, Friday's trading action is interesting: both stocks and Treasury yields closed the session at their highs, demonstrating that higher equity prices and higher yields aren't necessarily mutually exclusive events (despite what many may claim).  Interestingly, psychology is beginning to shift whereby higher rates are now considered fuel for stocks rather than a hindrance. 

Things appear to have stabilized over the weekend, however. For example, in Asia and London trading markets saw better buying of US Treasury securities. Greece looks like it will secure the next tranche of troika aid, Portugal settled its political crisis (for now), the International Monetary Fund will probably cut its global growth forecast, and China may be adopting austerity cuts.

We do have $66 billion of US Treasury auctions this week, starting with tomorrow's $32 billion 3-yr. note auction. This will be a great way to gauge market positioning after Friday's flush. The coming two weeks will bring a slew of Fed-related headlines, including FOMC minutes and a Bernanke speech on Wednesday. In terms of numbers, Friday's close of a 2.71% yield on the 10-yr. is not much changed with 2.72% early this morning - so don't look for much change on rate sheets based on MBS prices.