"Why do chicken coops have two doors? Because if they had four doors they'd be sedans."

And thus starts Friday, with very good rates but a lot of news for folks in the mortgage banking and real estate business to be watching. First, of course, the debt crisis continues in Washington - more on that below.

Second, Monday is August 1st, which is the end of the public comment period for the nearly universally dreaded QRM provisions. Those "in the know" believe that, as proposed, the restrictions are unlikely to fly. (There is more at QRMDoubts.)

Third, regulators say they've identified conflicts between Basel III and parts of the Dodd Frank Act relating to credit rating agencies. (Yes, those rating agencies that mistakenly rated billions of mortgage debt several years ago, and which are providing information about downgrading government debt now.) Representatives from the SEC, the Federal Reserve Bank, and the OCC gave evidence to the House Financial Services Subcommittee on credit rating agencies in Washington on Wednesday. Federal Reserve Board associate director of banking supervision Mark Van Der Weide told the panel the Reserve Board plans to remove mentions of credit rating agencies from its rules "in the near future" but he said the process was being complicated by Basel III, which does mention credit ratings agencies. Section 939 A of the Dodd Frank Act requires all federal authorities to review and replace references to credit ratings agencies in their regulations, with "alternative measures of credit worthiness". Van Der Weide said the Fed had received feedback from the public and commentators saying the act "could lead to distortion in the market". Great.

Fourth, Bank of America is facing a new securities-fraud lawsuit filed by former Countrywide investors (including BlackRock and the California Public Employee's Retirement System) that opted out of a $624 million settlement last year. According to the suit Countrywide misled shareholders about its finances and lending practices. For more go to: BankofAmerica.

Returning to the debt crisis, and the apparent inability for our elected officials to send a budget to the president, the bond market seems focused on three developments: "(1) A downgrade of Treasuries by at least one ratings agency.  (2) A more prolonged downdraft in economic activity, caused in no small part by the uncertainty raised by the debt issues.  (3) Clinging to the notion that a full-scale Treasury default will be avoided, mostly because it's too painful to think otherwise." Paul Jacob, with Banc of Manhattan, points out that although these issues would normally cause the yield curve to steepen (leading to higher mortgage rates), but there are a few reasons why rates have not done much of anything. "For one thing, markets are supposed to look past labels and truly assess risks - has the U.S. long-term deficit outlook really changed over the past 6 or 12 months?  Then there's the state of the economy - things are slow, which would keep rates low. And lastly, China, a major world economic influence, continues to hold US dollars and securities, helping prices. Very good points.

Corporate earnings for mortgage-related companies took a turn for the worse in the last day or two. Old Republic International (RMIC) swung to a $66 million loss in the second quarter on worsening claims costs in its troubled mortgage guaranty business. The insurer said Thursday it would likely place the mortgage guaranty unit into run-off mode if it does not manage to transfer the unit to a separately capitalized subsidiary before the end of August. CEO Aldo Zucaro in January predicted the mortgage guaranty industry won't be profitable until 2013.

PHH lost $41 million, in part due "fair value charges on mortgage servicing rights (MSR)" of $117 million. During the 2nd quarter the investor saw interest rate lock commitments (IRLCs) of $7.5 billion, compared to $8.4 billion in the second quarter of 2010. Its mortgage loan servicing portfolio increased to $174 billion as of June 30, 2011, up from $156 billion at June 30, 2010. "While our servicing portfolio delinquencies rose slightly to 3.22% at quarter-end from 3.15% at the end of the first quarter, they are still approximately half those of most other large servicers. Foreclosure costs remain elevated at $24 million, compared to $20 million in the second quarter of 2010, driven by increased repurchase requests. As we expected, our mortgage origination market share declined from 4.3% in the first quarter of 2011 to 3.7% in the second quarter."

Genworth Financial lost $96 million in the 2nd quarter. The company said its U.S. mortgage insurance unit's operating loss worsened to $253 million in the quarter, compared with a loss of $40 million in the same period last year. The wider loss came after the company set aside $300 million in reserves to cover bad loans. Genworth noted that the total flow of delinquencies declined 2 percent from the previous quarter, however.

One bright spot, if there is one, is that D.R. Horton, the largest U.S. homebuilder, reported a bigger-than-expected quarterly profit, helped by cost cuts. The company managed to cut its selling, general and administrative expenses to less than 12% of revenue.

One issue that seems to have quieted down is LO compensation. But it is in no way a dead issue as companies continue to adjust and fine tune the rules and regulations. National Mortgage News came out with a list of "Ongoing Reminders About Compensation Under the Dodd-Frank Wall Street Reform and Consumer Protection Act" worth noting. Lenders are encouraged to remember that payments made by creditors to loan originators are not payments made directly by the consumer, regardless of how they might be disclosed under HUD's Regulation X, which implements the Real Estate Settlement Procedures Act. Because the long-term performance of the loans is not a term or condition of a loan it is permissible to go back and "ding," or take back part or all of the commission on a particular loan from a loan originator, if the loan has an early default because that's not a term or condition. "However, you should be certain you are not violating wage and hour laws of the Fair Labor Standards Act and not violating state wage and hour laws as set forth by the Division of Labor Standards Enforcement in California or for that matter, any other state."

The third item on this list is a reminder that compensation to originators can vary based on how the loan application was produced, for example, commissions may be higher for leads generated by the originator versus the company. Federal Reserve Board staff states that as long as compensation is not based on loan terms or conditions, or a proxy, it is acceptable. If pricing of two loans differs, there may be a concern that channel is being used as a proxy for loan terms or conditions but other factors may justify differences. Be certain you can prove it in the event of an audit. Fourth, a mortgage loan originator is a person who arranges, negotiates or obtains a loan for a consumer and whose compensation is based on whether any particular loan is originated. Thus there are two sets of requirements to be a loan originator: (1) arranging, negotiating or obtaining a loan for a consumer and also (2) having compensation based on any particular loan. Both sets of requirements must be met for a person to be a loan originator, and this person may not pay some or all of the third party fees of a consumer or otherwise credit the consumer out of his own pocket. Lastly, it appears that for purposes of the Dodd-Frank rule affiliates are treated as a single person, so that when a lender acts as a mortgage broker and is thus, a loan originator for purposes of the rule where there is a party that is an affiliated settlement service provider, such as a title company, the bona fide and reasonable charges received by the affiliated settlement service provider are also considered part of the loan originator compensation.

At least rates are behaving. Thursday rate-sheet MBS prices (Fannie 4's, which contain 4.25-4.625% mortgages) rallied nicely, resulting in some intra-day price improvements. Treasuries opened higher following a mixed session overnight on poor earnings and weak economic news, as well as, on the uncertainty regarding the U.S. debt ceiling. The 10-year note closed with a yield of 2.95%.

We opened this morning with the 10-yr at 2.92%: Spain's credit rating (remember Europe? It isn't going away.) was put on downgrade watch by Moody's, and the PM announced they would dissolve the parliament and hold early elections in November. (Maybe the US should try that.) China may lend money to Greece. Over here, the Tea Party resistance sunk Boehner's bill before it ever made it to a vote. Republican officials will try to push something through again this morning, but all I see in the press is more jawboning.

 


WIFE'S DIARY:
Tonight, I thought my husband was acting weird. We had made plans to meet at a nice restaurant for dinner. I was shopping with my friends all day long, so I thought he was upset at the fact that I was a bit late, but he made no comment on it. Conversation wasn't flowing, so I suggested that we go somewhere quiet so we could talk. He agreed, but he didn't say much. I asked him what was wrong; He said, 'Nothing.' I asked him if it was my fault that he was upset. He said he wasn't upset, that it had nothing to do with me, and not to worry about it. On the way home, I told him that I loved him. He smiled slightly, and kept driving. I can't explain his behavior I don't know why he didn't say, 'I love you, too.' When we got home, I felt as if I had lost him completely, as if he wanted nothing to do with me anymore. He just sat there quietly, and watched TV. He continued to seem distant and absent. Finally, with silence all around us, I decided to go to bed. About 15 minutes later, he came to bed. But I still felt that he was distracted, and his thoughts were somewhere else. He fell asleep - I cried. I don't know what to do. I'm almost sure that his thoughts are with someone else. My life is a disaster.

HUSBAND'S DIARY:
Boat wouldn't start, can't figure it out.