Hard to believe that yesterday marked the 10-year anniversary of American Home Mortgage’s bankruptcy filing. Many years ago, Angelo Mozilo warned our industry that liquidity problems could bring a company to its knees quicker than anything else. Prescient. Sure enough, liquidity issues are mentioned in the latest major lawsuit (not to mention double funding, ill-gotten gains, putting purchased loans on the warehouse line, and personal liability) that CEOs, capital markets staff, and warehouse lenders are reading at bedtime, and asking their staffs to read. Of course, anyone can sue anyone any time. More below.

Legal Headlines

It is tough for regulators and politicians to consider scaling back regulations or reducing the regulatory burden when financial institutions and individuals continue to be mired in legal actions due to alleged illegal activities. The latest example, involving Ron McCord and First Mortgage, and rumored to have already impacted the Academy Mortgage/First Mortgage/Cunningham deal that was to close in its entirety August 1, involves a lawsuit filed in the United States District Court in the Southern District of New York, Case 1:17-cv-05788-AT filed 07/31/17. The case was filed by CapLoc, a subsidiary of Eli Global, against Ron McCord, Citizens State Bank, SpiritBank, American Southwest Mortgage Corp., Southwest Mortgage Funding, and First Mortgage. Ouch.

CapLOC was formed in early 2017 to provide warehouse lending to mortgage lenders that might become available for acquisition. "FMC and McCord represented that FMC would be willing to sell its mortgage lending business, but that it needed cash quickly from a new warehouse lender if it was going to survive as a going concern. At the time, CapLOC had the funding capacity, but lacked the infrastructure necessary to perform all the analytical and custodial functions of a warehouse lender. Defendants assured CapLOC that they possessed the expertise required to fulfill those functions and promised to perform those functions for CapLOC's benefit while CapLOC built its operations. McCord and FMC emphasized that time was of the essence and unless CapLOC began funding loans quickly, FMC risked going under.

"In reliance on Defendants' representations, CapLOC entered into a series of transactions dated March 30, 2017, where it agreed to provide a line of credit to fund new loans originated by FMC. Each of the Defendants played a substantial role in inducing CapLOC to provide funding, and each Defendant [allegedly] participated in and benefited from the remarkably fraudulent conduct that ensued. Once CapLOC's agreement to fund loans was secured, Defendants almost immediately began [allegedly] wrongfully taking CapLOC's funds, ultimately paying themselves approximately $34 million of CapLOC's money by selling to CapLOC (1) loans that breached the parties' agreements without disclosing the ineligible nature of those loans, and (2) "double-note" loans that had been previously paid off or sold to other investors, and are thus worthless. Upon discovering Defendants' fraud, CapLOC demanded repurchase of the ineligible loans. Defendants [allegedly] rebuffed CapLOC's demand. CapLOC brings this suit to recover the losses it suffered because of Defendants' brazen fraud and for all other damages and relief allowed by law."

The suit alleges that, "Between 2015 and 2016, FMC experienced a loss in profitability that reduced its liquidity. By January 2017, FMC's liquidity was insufficient to handle haircuts, operations, buybacks, and other unforeseen events. FMC was over-leveraged and its capital base could not support additional business initiatives or production increases. Upon information and belief, FMC began using funds from its Fannie Mae custodial accounts to cover operational expenses..."

Updates on Taxes and Underwriting

Lest I forget, Friday I had a note on PennyMac's update to Principal Balance Purchased - Payment Amortization Policy. The PennyMac site went to an error page; here is the correct URL: https://www.gopennymac.com/announcements/17-22-payment-and-amort-policy-update.

As the debate between Fannie and Freddie regarding including, or not, business income/losses from secondary sources shown on K-1's rages on...

Effective Tuesday, August 1, 2017, the IRS began rejecting 4506T's if the e-Signature is covering any verbiage on the 4506T form, especially pertaining to the Signatory Attestation Clause. To assist in complying with IRS policy, Equifax will also begin rejecting these 4506T's prior to submission to the IRS on the same date. As of Monday, July 17, 2017, Flagstar's Submission Review will begin to hold the authorization form if information is not visible.

Effective immediately, for both new registrations and pipeline loans, Flagstar's Non-Delegated Correspondents are no longer required to obtain the borrower tax transcripts using Equifax via FSBN (Flagstar Bank Network).  Flagstar Bank will now accept other vendor results.  For pipeline loans, the condition will continue to state the results are to be provided from Equifax via FSBN but Flagstar will still accept them from other vendors.

Effective immediately, Flagstar Bank announced that for both new registrations and pipeline loans, Non-Delegated Correspondents are no longer required to obtain the borrower tax transcripts using Equifax via FSBN (Flagstar Bank Network).  Flagstar Bank will now accept other vendor results.  For pipeline loans, the condition will continue to state the results are to be provided from Equifax via FSBN but Flagstar will still accept them from other vendors. Non-Delegated Correspondents with FHA SO (broker) approval can utilize vendors of their choice on FHA SO loans.

For loans purchased on or after August 1st, Wells Fargo Funding has expanded its tax return transcript requirements on Conforming Conventional loans to allow 1099 IRS transcripts in lieu of actual 1099s when income is derived entirely from 1099 income. Also noted, Wells has expanded its streamline project approval policy on Non-Conforming Loans to include projects with two to four units.

FTMC now permits real-estate transactions involving 1031 exchanges, allowing the borrower to exchange like properties and defer tax from the gains provided the transaction is documented in compliance with IRS Section 1031. However, Reverse 1031 exchanges, replacement property is already purchased prior to the sale of the relinquished (old) property, are NOT permitted.

Capital Markets

Capital markets personnel are always outnumbered 100 to 1 by loan officers. Recently I heard a story about a CEO putting all the LOs on a conference call and asking the entire group what investors they wanted to be approved by. And what products they wanted. Of course, chaos ensued, especially given that there are still about 100 correspondent investors out there of varying degrees of sophistication and product specialties. Life in secondary marketing...

In terms of the bond market, long-term rates moved slightly higher Friday, and thus the yield curve steepened, after the strong jobs report for July. To refresh your memory, nonfarm payroll was much stronger than projected at +209k versus +183k, with private payrolls at +205k (vs. +178k). Meanwhile, the unemployment rate, average hourly earnings and work week were as expected at 4.3%, +0.3% and 34.5. Following the news, December rate hike odds ticked up closer to 50% from the mid-40% area according to the CME's FedWatch Tool. The 10-year yield hit a high of 2.29% but ended the week yielding 2.27%.

As we proceed with August we have a new set of data, not much of which is expected to change rates or the Fed's opinion about the moderately strong economy. Coming up later this morning we have some additional labor market reads with the Labor Market Conditions Index and Employment Trends Index - both released at 10AM ET. Tomorrow morning is some news on small business optimism, and the Bureau of Labor Statistics' JOLTS (Job Openings and Labor Turnover) figure.

Wednesday is the usual mortgage applications data from the MBA, along with nonfarm productivity, unit labor costs, and some trade figures. Thursday, we jobless claims and then some inflation data at the producer level with PPI. Friday the 11this the CPI (Consumer Price Index) as well as a read on weekly earnings. For those that care about rates, we start the week with rates about the same as they were at the end of last week: the 10-year is yielding 2.28% and agency MBS prices are worse a tick or two.

Jobs, Personnel, and Products

Pacific Union Financial LLC recently announced that it is extending the PacificPlus offering to its Correspondent channel. PacificPlus is an innovative mortgage program that protects a homebuyer's down payment. Pacific Union's Retail and Wholesale channels already offer PacificPlus, so the addition of the Correspondent channel makes it available across all Pacific Union sales channels. PacificPlus is powered by +Plus  down payment protection by ValueInsuredSM. It is easy for mortgage specialists to provide and an inexpensive feature that provides home buyers the security of knowing no matter where life takes them, their home down payment is protected. To learn more about adding PacificPlus as a benefit to your clients contact a Pacific Union AE. Visit www.pacificunionfinancial.com/pacificplus-corr for more information.  

"Continuing the growth momentum from the previous year, Envoy's production and branch growth have continued to break records during the first half of 2017. Production for the first half of the year closed in at an all-time high for funded retail units and for the highest daily funded volume. Building on the strong production momentum, Envoy Mortgage also continues to strengthen their sales leadership with the addition of Caleb Mittelstet as Regional Vice President in our Western Division. Caleb has over 15 years of sales management experience in the industry. Envoy's newest addition will be instrumental to managing and developing production. The momentum refuses to slow down at Envoy Mortgage. With over 150 branch locations nationwide, the rapid coverage expansion across the US has created a buzz within local communities and within the mortgage industry, leaving those to wonder why so many top branches are gravitating toward Envoy. To learn more about the Envoy opportunity, email recruiting@envoymortgage.com."

A Los Angeles area based mortgage banker is seeking for a Servicing Manager with Ginnie Mae, Fannie Mae and Freddie Mac servicing experience. Experience in working with Dovenmuehle Servicing is a plus.  The manager will direct all servicing efforts, including but not limited to department oversight, compliance monitoring and portfolio retention efforts. The ideal candidate should have 5+ years' experience. The company is a multi-state "Customer-Centric" lender, with an emphasis on building relationships with their customer. Production continues to grow year-over-year with Retail and Wholesale channels.  If you are interested in a confidential conversation about the opportunity send your contact information to me; please specify opportunity.

"Here we grow again! Under the exciting leadership of our EVP of Production, Michael Pankow, American Pacific Mortgage is happy to announce a new branch partner in our Portland market. Dakota Gale and team, dba Green Mortgage Northwest has joined APM. Welcome Dakota and team! Since Michael took over the reins, APM has added 224 new originators and is gaining momentum with the addition of four new recruiters added to their arsenal. For more information on how you can join this established, strategic and strong company, please reach out to our Directors of Business Development Peter Schwartz by phone at 916-770-0053, or Dustin Block by phone at 303-378-3166."

Congratulations to Bob O'Branovich, who has joined Platinum Mortgage, Inc as Regional Sales Manager - TPO Production. With over 20 years of Wholesale management experience, Bob will focus his energy and experience to help grow the Platinum Wholesale team on the East Coast. "Platinum Mortgage is a Direct Seller / Servicer of FNMA, FHLMC, FHA, VA and USDA products offering very competitive rates combined with Superior "Account Focused" Customer Service. Platinum is expanding its team of top producing Account Executives in the following East Coast markets: VA - MD/DC Metropolitan, North Carolina, Florida, and Michigan. Please contact Bob O'Branovich to discuss an outstanding opportunity to join the exceptional team at www.Platinumez.com."

In other personnel news, Brett Hively, Managing Director (Sales) and Executive Member of Deephaven Mortgage LLC since 2013, has resigned from the company. During his time at Deephaven, the company has grown to over 100 sellers and become one of the largest issuers of MBS in the market today (approximately $471 in the second quarter of 2017).  There is no mention of future plans now, but it will be exciting to see what's next for this industry veteran.