If there is one thing that an investor will never let any originator off the buyback hook for, it's fraud. Not only that, but the penalties can go far beyond merely buying back the loan, and saying' "My bad." Just in the last few days, Laura-Jean Arvelo and Ronald O'Malley, a New Jersey mortgage broker and former head of the Bergen County Improvement Authority, was indicted by a federal grand jury on charges of preparing fraudulent mortgage applications. Both are charged with wire fraud, bank fraud and loan application fraud in order to take bogus documents and falsified applications to trick lenders into making mortgage loans and benefited from fees they received.

 

Ryan Miller of Missouri was sentenced to more than 12 years in federal prison and pay $6 million in restitution for mortgage fraud, wire fraud, money laundering, and aggravated identity theft - he submitted loan applications that contained false statements to lenders to obtain money.

 

And Todd Leary, a former college basketball star in Indiana, may serve up to 3 years on charges that he stole appliances from foreclosed homes. Leary supposedly paid two other men to move refrigerators and other appliances out of foreclosed homes and then sold them to an Indianapolis appliance store, claiming that he worked for a company that bought, repaired and then resold foreclosed homes. Leary told police that he picked the homes off an auction listing on the Hamilton County sheriff's website.

 

A week ago I wrote about the reasons that lenders continue to shy away from lending to recent flips. One person wrote, "An investor takes a property which is vacant, bank owned, most likely not being maintained in the manner the neighborhood expects, buys it at auction, short sale, etc. most likely with their own cash, cleans it up, and probably sells it through a reputable Realtor. A fully qualified borrower with a minimum 20% down payment on a conventional FNMA/FHLMC mortgage and who most likely occupy the property and improve the quality of the neighborhood and pay the property taxes comes in. They buy furniture, employ landscapers, housekeepers, babysitters, etc. - why does the lending industry back away from that?"

 

Another wrote, "Consider the bank moving the REO and their motives. When a bank REO hits the MLS, if priced correctly, it will garner multiple offers.  An end buyer is welcome in this realm, but reality is that only the cash investors who can play in this game.  The bank knows that

selling REOs to buyers who need financing is laden with considerable delay (60+ day escrows) and significant risk to loan qualifying fallout. Furthermore, the property is unlikely to pass lender property inspections without a call for a long list of repairs.  It's costly, and impractical from an accounting perspective, for a REO bank to invest more money into a depreciating asset.   Selling to a cash-only buyer, often from a pool of offers, ensures a quick no hassle close.  The multiple offers create an auction process, often the surest way to define market value."

"Properties typically resell to end buyers at market value. The property is improved and repaired.  Typical rehab work includes not just cosmetic items like paint and carpet, but new kitchens, bathrooms, roofs (or repairs), foundation repair, plumbing, drainage, etc. The flips are sound properties, having to meet strict appraisal inspections and often FHA guidelines.    When priced consistently with sales in the neighborhood, a flip is more appealing due to the upgrades: in a 50 year old home who wouldn't want contemporary bathrooms and kitchens?  Lastly, the flip keeps a neighborhood from suffering from artificially downward price pressure.   If the REO sale is not followed with a resale at a higher price, eventually, after enough REO sales, the neighborhood is forced to adopt the distressed sales price."

 

"The flip investor is carrying the cost of unoccupied listed property. The key success factor in this equation is velocity.  If the purchase price is right, and comps hold, the resale price will yield the desired profit.  What happens when the turn takes twice as long and a price reduction is necessary to finally move the property?  Could be that any illustrious profit ultimately equates to a loss. It may be that the short-turn cash investor, while seeking a profit, is an essential player in the overall housing recovery.  After all, in the absence of their participation, what would happen to our own neighborhood value? And why do most large investors, except for Wells Fargo, want to discourage home sale liquidity?"

 

If an investor buys a pool of mortgages at 103 or 104, they'd like to have those loans on their books for a lengthy period of time in order to earn back that premium. The latest concern for investors has arisen from a recent announcement by Freddie Mac. (http://www.freddiemac.com/sell/factsheets/pdf/streamlined_refinance_mortgage.pdf It details a streamlined refinance program that allows "easy refinance" for "up to 95% LTV." Some market participants have interpreted this as a fresh step undertaken by Freddie that could significantly boost prepayment speeds - not desired if you just paid 5 points above par. Analysts, however, believe that this is yet another false alarm.

           

Freddie has always had a streamlined refinancing program (Fannie discontinued its streamlined refi program in April 2009), and its current form has been around since at least early 2009 (with minor tweaks here and there every once in a while). It has had little impact, and is viewed as ineffective. Loans must be manually underwritten under this program - no LP. The program provides no relief on reps & warrants (any rep and warranty relief associated with the original LP-underwritten loan no longer applies to the new loan). The lender retains all the reps & warrants for the current market value of the property, which almost ensures that a full appraisal is obtained, and the new loan has all the standard delivery fees instead of lower fees like with HARP loans. MI levels remain the same, and the max LTV is 95% which doesn't help underwater loans.

 

Is originator capacity increasing? Perhaps, although anyone with a rate lock may be trying to push the loan through prior to expiration. Everyone knows that the prices reflected in the security market for mortgages are not being passed through to rate sheets. (If a Fannie 4% is trading at 103, plus a servicing-released premium, why isn't a 4.5% loan priced at a 3 or 4 point rebate on the rate sheets?) Rate-sheet prices, however, are beginning to improve a little, relative to MBS prices, an indication that originators are possibly creating some capacity and attempting to grab some refi production volume.  It isn't 2002-2003 yet, for many reasons, but the mortgage market has a long history of "warming" when rates stay low for an extended period, finding ways to increase refi volume over time.

 

Yesterday the markets were relatively quiet. Most of the price volatility happened in the early morning. The 10yr rallied off 4.00% early April to make new rate lows last week 2.42%.  That's a monster move by any measuring stick.  Mortgages wound up Thursday down (worse) between .125-.250 with origination running at about $3 billion. Stocks rallied modestly, while the 10-year Treasury note worsened by almost .5 and its yield hit 2.63%. The Pending Home Sales Index for July rose 5.2% to 79.4 versus an expectation for a 1.1% decline - somewhat encouraging but no one is expecting a big upswing in prices.

 

Here in the US, the unemployment rate is estimated by a household survey called the Current Population Survey, conducted monthly by the Federal Bureau of Labor Statistics. The unemployment rate is calculated by dividing the number of unemployed persons by the size of the workforce. An unemployed person is defined as a person not employed but actively seeking work. The size of the workforce is defined as those employed plus those unemployed.

Who is the largest private employer in the United States? Wal-Mart! 2.1 million of us work there. In the public sector, the US Government employs about 2% of the nation's workforce. The US Postal Service is the largest civilian employer, with about 600,000 folks. Private sector job growth continues to be the key to a sustainable economic recovery, especially if we expect to see much of an improvement in housing prices. Economists continue to believe the probability of a double-dip recession remains low, but are cautious. Heading into this employment data, most believe that if private sector job creation does not improve (or at least hold-up) in the near term, there will be significant ramifications on the economic horizon ranging from the outcome of the November mid-term elections to the likelihood that the Fed proceeds with an additional dose of quantitative easing.

 

The long-awaited payroll numbers came out, and Private payrolls rose 67,000 in August after a 107,000 increase in July. The unemployment rate rose to 9.6% from 9.5%, but it was a "good" rise in the unemployment rate since the participation rate rose to 64.7% from 64.6% and household employment rose by 290,000, the first increase in four months. Average hourly earnings were +0.3% month over month, better than consensus expectations. Although it is not a great number in the big picture, but it was better than expected. As you'd expect, the bond market had a bearish reaction, with 10-yr Treasury prices losing a point and moving up to a yield of 2.74%. Mortgage prices are worse between .250-.50. Look for things to become quiet and thinly traded as folks head out for the holiday weekend.