Cleverness is alive and well in lending, and the "free Russian cat with your loan funding" story yesterday brought a few e-mails. Chris L. contributes, "Thanks for sharing the idea about giving a cat at closing. That could be the 'purrrr-fect' house warming gift for our new borrowers.  My concern is with our compliance department.  If we give the cat as a gift, the single family residential property might then be viewed by them as mixed use since it is now a 'cat-house'.  And Brian M. offers, "Those Russian Bank cats don't come free, I hope the cost is reflected on a separate Fee Line. If adopted here, this practice could be a catastrophe. Does the appli-cat-ion process determine who qualifies?"

There is little cleverness or humor in commercial & multi-family servicing, and in fact is quite a serious business. Yesterday the MBA released its rankings for servicers - congrats to Wells Fargo. And it shows how little I know about that side of the business, as I've barely heard of #2 PNC Real Estate/Midland Loan Services.

"Rob, do you know much money the CFPB has collected in fines?" Yes, it is pretty well documented. A couple months ago the government's General Accounting Office issued a report showing that the total is approaching $150 million. (If you don't want to dig through the GAO information, Ballard Spahr did a nice write up on the Civil Penalty Fund.) This is about what it pays out every year in compensation to its 1,200+ employees, based on page 13's numbers from its budget.

Fannie Mae plans to sell its headquarters and consolidate employees to a single location in the District, the organization announced Thursday. Here's what's behind the decision and when the move might happen. And no, it does not appear that Fannie and Freddie will be building-mates; I am sure Freddie wouldn't agree to be in the lower floors with no views, limited parking, and soda pop vending machines that only work periodically.

I received this note. "Fannie Mae's announcement this week that every mortgage originator and servicer in the United States that are approved by FNMA or FHLMC  must check the FHFA's Suspended Counterparty List, effective immediately, and make sure that none of their own employees are on it, ensure that any TPOs have processes in place to check their employees, and then check every loan transaction as well to be sure no one on the list is involved in any way with a GSE loan, sounds familiar like a lot of other lists lenders have to check. But when you go to the list, it has 1 name on it: Lee Farkus, who as you know is serving 30 years in the federal pension and will older than dirt if and when released. Here's the link to the 'list' and the bulletin. I have to run now as I have policies, procedures, systems, TPO and vendor applications, employment applications, etc., that all need revised to screen out Lee Farkus!    Your tax dollars and mine at work......  You can't make this stuff up!!

I am stating the obvious here, but many banks are seeing a renewed interest in home equity lines of credit and home equity loans. And banks are exploiting their ability to ramp up home equity loans versus that of independent mortgage banks. In total, HELOCs underwritten in Q1 this year climbed 8% to $13B from a year earlier. HELOC origination levels are still well below what they were in their heyday, but are on the rise. Also of interest is a recent study from Pepperdine University which found that home equity lines of credit are playing a more significant role in financing lower middle market business M&A deals this year. In fact, HELOCs were used by buyers to finance 17% of small business deals ($2mm to $5mm in size) and also 17% of deals between $5MM and $50MM. For both small business owners and home owners, it is likely HELOCs will continue to grow as a source of funding given a rebounding economy. Done the right way with the right level of controls in place, HELOCs can also represent a growth opportunity for community banks.

Given the risks, larger banks have taken steps to protect themselves in this lending sector. For example, Wells Fargo recently said it would only offer interest-only HELOCs to customers with at least $1mm in savings and other liquid assets, while other customers would have to pay principal and interest on such loans. In underwriting floating rate loans, whether for HELOCs or in other sectors, it is important to assess whether potential borrowers will be able to meet the obligations of their loan, both rising interest payments and the repayment of principal in a rising interest rate environment. Loans should be structured according to the credit worthiness of borrowers with the future rate environment in mind. Banks may decide that new HELOCs should be extended only to select high-caliber borrowers with good-to-excellent credit scores and low debt. In addition to careful assessment for new underwriting, be sure to consider the risks from HELOCs that are already outstanding and to assess any flow-through impact that could occur from problems within the portfolio. Regulators are well aware that a sizeable chunk of outstanding HELOCs were originated 6-10 years ago and that the reckoning time has come for many borrowers to start paying down principal. Additionally, those loans with a floating rate structure should be assessed for the borrower's ability to withstand an increase in interest payments.

Along those lines, Equifax sent out a blurb saying, "Between 2004 and 2008, low home prices and loose credit standards led to a significant increase in the amount of HELOCs that were originated. The typical HELOC resets into amortization after 10 years of interest only payments and borrowers who are a decade removed from their originations will have to begin repaying the principal balance. Today, HELOCs opened between 2004-2008 account for 60 percent of outstanding loans and more than $221 billion in HELOC loans will hit the market from 2014-2018. However, the financial circumstances of borrowers and the value of properties against which these lines are held have deteriorated. On July 1, 2014 the FDIC, OCC, Federal Reserve Board and NCUA released a financial institution letter, promulgating risk management principles and expectations that should be adhered to by FDIC-insured banks. Equifax is available immediately to provide insight on the updated guidance and additional considerations for lenders managing HELOC resets, including addressing underwriting precautions for renewals, extensions and rewrites, maintaining compliance with existing agency guidelines, leveraging data to develop well-structured and sustainable modification terms, and analyzing end-of-draw exposure in allowance for loan and lease losses estimation processes (ALLL)

Edgar Degas stated, "Painting is easy when you don't know how, but very difficult when you do." Helping guide a behemoth like the U.S. economy is difficult to say the least, and it doesn't make it any easier when the press expects you to have a crystal ball. I love it when the press says things like, "'Fed's Yellen Remains Mum on Timing of Rate Change.'  Janet Yellen delivered a cliffhanger in the mountains of Wyoming. The Fed chairwoman left the public guessing about when the central bank will start raising short-term interest rates." Are "the markets" expecting someone to come out and say, "Okay, Tuesday, February 10th, 2015 we'll raise the overnight Fed Funds target to 0.125%. And then we'll raise it again on Thursday, July 9th, 2015to .250. Because we know that on those dates the unemployment rate will be 6.5% and 6.2%, respectively, and the inflation rate will be 2.1% and 2.8%." No one has a crystal ball - certainly no one that nine months ago were predicting noticeably higher rates by this time in 2014.

Matt Graham contributes, "Regarding the comment, 'There is seems to be a disconnect between bonds and stocks,' this comes up so often on MBS Live that I've written a few reference articles to explain the phenomenon.  This one addresses it both generally and specifically (and with a few interesting charts!). And in this one I wrote up a more user-friendly recap of how we got here and what might be important going forward. I'm pretty sure this is 'the answer' to the disconnect question. Of course it's rarely as simple as ONE factor doing all the work, but I think this is the biggest consideration right now, and it appears that larger media outlets are finally starting to talk about it."

And in my blog at the STRATMOR Group web site ("A Primer on Cash Sales Versus Securities") I received an, "Interesting primer on cash versus securitization execution. One point I did not see in your overview is regarding lenders who securitize are able to form their own pools and capture and specified pay-ups. But with the cash window, Fannie captures the pay-up. On the other hand, small balance pools from less well known originators might not trade as well." Agreed - specified pool prices really help fuel the decision making process.

And this: "I would argue that both take-out options are always there for large lenders, and really comes down to what they want to do with servicing...and if there is any arbitrage in cash that day. It is correct that small lender pools would get adversely bid depending on a number of factors. Take my buddy who works at a small bank: they recently started selling to Freddie servicing released because they don't want the hassle of chasing payments and hiring people like me to cut into banking profits.

The MBA's Dan McPheeters spread the work earlier this week about the Securities and Exchange Commission. "The SEC adopted new asset-backed securities disclosure rules, commonly referred to as Reg AB II. While the SEC has not release the final text of the rule, an official fact sheet can be found here. We are continuing to gather information, and will follow-up when the final text becomes available. Also adopted today were credit rating agency rules governing conflicts of interest, corporate governance, and transparency. A fact sheet of this rule can be found here."

Continuing on with the markets, housing and jobs drive the economy, and we've sure had a slew of housing numbers. I have lost track of which index has told us what, but yesterday the National Association of Realtors told us that Pending Home Sales picked up in July, increasing by 3.3% following a drop in June. Although down about 2% from a year ago, the index is at its highest level since August 2013.

LOs need to remember that even though Treasury rates may drop (mostly due to overseas events), MBS prices may lag - and that is what we're seeing now. This mostly takes place in higher coupons as investors think, "If rates drop, these higher loans will refinance and won't be on our books as long as lower rate mortgages - and pools made up of those mortgages." Yesterday the 10-year improved nicely and closed at 2.33%, but agency MBS improved less than .125. The month wraps up today with Personal Income and Consumption (+.2% and +.1%, respectively) as well as 9:45AM EST's Chicago PMI (52.6 last) and the University of Michigan survey of confidence comes by 10 minutes later. We had a close of 2.33% Thursday, and in the early going today we're at 2.34%. Don't look for much change on rate sheets.

As we head into the last official weekend of the summer (no white shoes to formal events after Monday!), it is good to know that alternatives exist for the simple six-pack. In this exciting new development for beer lovers, we have the 99-pack.

Jobs

Private Mortgage Insurance company Genworth Financial is seeking two experienced Account Managers, one in its Charlotte NC territory and one for the Iowa/Nebraska/South Dakota territory. Candidates should have exceptional customer interaction skills as well as a proven track record of sales execution and leadership. The person hired will be expected to provide the highest level of internal and external customer service, manage customer relationships, and develop growth strategies for assigned accounts, have 4+ years of experience, and have a college degree or equivalent. The successful candidate will be responsible for developing calling plans to cover all assigned accounts, monitor branch volume and calling activity, take necessary actions to achieve account volume goals, execute and lead implementation of Genworth products and initiatives, and identify and communicate new opportunities to provide solutions to customer needs. They will need to have strong presentation and communication skills, and have the ability to work flexible hours with occasional overnight travel. Interested Candidates should send their resume to Kristin Miller and for more information on the company visit Genworth.