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Lawmakers Solicit Consumer Comments On 7 Financial & Housing Reform Topics
Do you want some input in financial reform? There are many ways to do this, and here is another. The public will have the opportunity to submit written responses to seven questions that will be published in the federal register online at www.regulations.gov. The administration also plans a series of public forums across the country on housing finance reform. The questions are:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy? more…

My clock radio went dead, so I was faced with the usual question, “Do I pay to have it repaired, or do I buy a new one?” I went to a local repair shop, and on the door was a sign that said, “WE CAN REPAIR ANYTHING. (PLEASE KNOCK – THE BELL DOESN’T WORK!)” Needless to say, I have a new clock radio.

$1.1t 2nd Mortgage Problem
It is also going to be hard to fix the potential problem with 2nd mortgages. There are roughly $1.1 trillion in second-lien mortgages out there. A research firm in New York believes that Bank of America, Chase, and Wells, who combined own about 40% of them, may have to set aside an additional $30 billion (matching their expected profits for all of 2010!) to cover possible losses on home-equity loans. (Home equity loans are often open-ended, as opposed to closed-end 2nds.) But of course banks have already set aside billions to cover bad loans – will it be enough? Of course second-lien loans are a hurdle when modifying first loans since first mortgages usually can’t be modified or written down because lien priority dictates that junior loans be erased first. As mentioned above, analysts are arguing whether or not the billions held in reserves will be enough. Bank of America holds $138 billion of home-equity loans with $112 billion of second liens. Wells Fargo holds $123 billion of home-equity loans, with about $103.7 billion in a junior-lien position, while CitiGroup’s portfolio is “only” about $49 billion. For the complete story. more…

How Does an ARM Adjust?
Holders of adjustable-rate mortgages across the country are demonstrating to complain that the rate used to calculate their loans has actually gone up. In some cases loan payments went up by 9%. “What is this ‘COFI’?” asked one borrower in California. “Next thing you’ll tell me is that the value of my home could actually go down – no way!” On December 31, the Federal Home Loan Bank of San Francisco, which oversees COFI, first published in 1981, announced without explanation that the rate had jumped 0.835 percentage point to 2.094% from 1.259%. The index is called the 11th District Monthly Weighted Average Cost of Funds Index, or COFI for short. The 11th district covers California, Arizona and Nevada. Click to scroll to our data section to see current and historical COFI data.

When an ARM adjusts, it adjusts to the sum of COFI or whatever index the loan is tied to plus a base rate that’s set at the time the loan is set up. At the time of the adjustment, the base rate (or Margin) is set and the index is taken at whatever the market rate of that index is at the time. So for example, if a loan with a 2.25% Margin and a COFI index was adjusting today, it would be 2.25% + 1.786% for a total rate of 4.036%. Depending on the adjustment intervals of one’s loan contract, this formula would be used at each adjustment. more…

Does A Loan Originator Have To Buy Back A Bad Loan Even After It’s Modified?
Yesterday I mentioned the question about whether or not modified loans could still be forced back to the seller for buybacks. Freddie Mac does indeed say that the seller would still need to buy it back after a modification. At the current time, however, there is the belief that sellers continue to be successful in challenging these because most contracts don’t specifically allow the servicers to modify the loans. And in fact several national law firms are making a run at challenging the large servicers, who find themselves caught between not being able to modify a loan and being forced to modify it by the GSE’s and HAMP. Servicers claim that the reps and warrants stay with the seller, and especially if the loan is modified due to fraud or material misrepresentation then the seller may have to indemnify the loan with some deposit of money to the investor.

BofA To Select Certain Loans To Modify
Bank of America will soon begin offering, by invitation only, loan modifications based on a reduction of the mortgage principal to some of its borrowers. Borrowers with principal balances of 120% or more of the home’s market value or who are confronted with endlessly increasing balances on negative amortization loans will be the target (they must meet the basic qualifications of HAMP), and stories reported that BofA will forgive up to 30% of the mortgage loan balance in two stages: the bank will offer an interest-free forbearance of up to 30% of the principal balance for five years, and if the homeowner stays current on mortgage payments for the period of time, then the amount will be forgiven. Urged by the US Government to do more, we may see that other banks are willing to take some losses now to avoid much greater losses later if the housing markets begin to drop again. Industry observers say that it is a variation on the implementation of HAMP, rather than a new alt-HAMP or HAMP-light program. Say what you want, HAMP volumes have been disappointing, especially for Pay-Option ARMs. Bank of America estimates that 45,000 loans will be affected for about $3 billion in principal reductions ($67,000 per loan). more…

Daylight Savings Time Reminder
Don’t forget to “Spring ahead” this Sunday morning. We lose an hour of sleep.

Another Bank Closure
The FDIC made a rare Thursday move and shut down LibertyPointe Bank This bank catered to the Orthodox Jewish community in Manhattan and Brooklyn, and will be taken over by Valley National.

BofA’s Mistaken Foreclosure
Did you hear the one about the parrot and Bank of America? A nun and a parrot walked into a branch… never mind. Seriously, last October BofA erroneously believed a house in Pennsylvania (state motto: Cook with Coal) was vacant when the borrower defaulted and sent a contractor there with instructions to install a new lock and otherwise “secure” the property” although it turned out that the owner wasn’t in default and the house wasn’t vacant. Regardless, BofA has apologized for its contractor entering the home of a mortgage borrower when she was away, cutting off utilities, padlocking the door, and confiscating her 11-yr old pet parrot, Luke, for over a week. The result is a lawsuit against BofA for emotional distress and a prescription medication for anxiety. more…

State of Mortgage Industry
Let’s start off with two basic premises. First, there has always been a range of borrowers (credit & risk-wise) that need home loans at rates that match the risk. Second, there have always been investors out there with varying degrees of appetite for risk, and demand more return for higher risk. For prime borrowers, the end of the Fed’s MBS program is in sight: 5 weeks, $55 billion, that’s $11 billion a week. After which, of course, mortgage rates zoom out of reach, everyone still left in the business will have nothing to do, all refi’s and purchases will end, and I will fill the commentary every day with the worst puns and one-liners imaginable. Seriously, what is going to happen?

Based on anecdotal evidence, it appears that many mortgage companies had great Decembers, then January volumes of about half of December’s, and expect February to be somewhere between January and December’s volume levels. And although 2009 profits tended to make up for 2008 losses, profit margins also appear to be coming down as the realization sinks in that companies will want the production to support staffs. more…

Economic Worries
Yesterday’s stock market drop dominated the financial news. And a slowing economy helps rates and mortgage loan agents, right? (It’s a two-edged sword.) So the markets did not pay much attention to Non-Farm Productivity increasing over 6% during the fourth quarter of 2009. Efficiency in the last nine months of 2009 soared at the fastest pace since 1966 as companies cut worker hours even after sales stabilized. Factory Orders for November were up 1%, better than expected. And 4Q09 GDP was 5.7% at the first reading last week. But the focus, and one of the reasons given for stocks taking a beating, was on Jobless Claims which hit a 7-week high.

There is certainly a lot to be nervous about. There is the concern that around-the-world budget deficits will need to be financed by issuing more debt. California, with the 8th largest economy in the world, is continuing to have budget problems. On top of all that, oil prices declined over 5% while gold prices also fell, down over 4%. The dollar was weaker to the yen, but firmer to the euro as the risk aversion trade returned, and this helped Treasuries and mortgage security prices, dropping rates to December levels. more…

Comeback For Jumbo Loans
What is the American Securitization Forum? Darned if I know, exactly, but they were meeting in Washington DC and came out with a statement conjecturing that non-agency product (a $1.2 trillion market 4-5 years ago, $25 billion in ‘08 and $44 billion in ‘09) may start to be securitized again later this year. The reason? There’s more talk about it this year than last! Right now, however, jumbo loan production is pretty small, and profit margins are pretty slim since jumbo rates aren’t all that much higher than agency rates. (I have an idea! Let’s split the pools into tranches, and then have Wall Street work with the rating agencies… oh, never mind, I guess we tried that.) As I mentioned yesterday, banks are holding onto this product, but if other buyers materialize and the loans can be sold at profits, things could loosen up. Whole loan packages and syndications of interests in pools of loans may be steps in the right direction.

More on the return of Jumbo mortgages and mortgage securitization overall from this Bloomberg report. more…

This CNBC report from the World Economic Forum in Davos this week has some comments worth calling out from Bank of America CEO Brian Moynihan and Barclays President Bob Diamond. Highlights from each below:

BRIAN MOYNIHAN, BofA CEO
“Bank of America is not too big. Big by definition is not the question, it’s a question of how you conduct your activities, how you manage activities and how you manage risk.” more…

The CEOs of Goldman, Bank Of America, JP Morgan Chase, and Morgan Stanley went before the Congressional Financial Crisis Inquiry Commission today to revisit what happened during the heat of the financial crisis in 2008. Yesterday the NYT published a good list of questions that should be asked. Some are populist propaganda, but many are relevant and legitimate. Perhaps the best question of all, that gets at the root of the entire issue, was offered by David Stockman, OMB Director under President Reagan. The question is below, but unfortunately the political pitchfork waving in a key election year will likely overshadow the ability to get to the root of that question. And even if Congress can get to the root of the banking problems, take a look at this picture of the testifying CEOs. Do these expressions (especially Blankfein and Dimon, the two on the left) look remotely contrite or willing to play ball?

Without the Troubled Asset Relief Program, Wall Street banks would not have survived the shock to the financial system that occurred in September 2008. Nor would they have subsequently accrued large profits and bonus pools in 2009. Shouldn’t a substantial share of those bonus pools be sequestered on bank balance sheets for several years to increase the banks’ capital levels and shield taxpayers against another bailout?/blockquote>