Non-Conforming Mortgage Market All But Vanishes in 2Q08

The non-conforming sector of the residential mortgage market, which as recently as 2006 accounted for half of all new originations, watched its fortunes continue to sour in the second quarter of 2008.

According to numbers compiled by Inside Mortgage Finance, combined jumbo, subprime, and Alt A originations accounted for just 8 percent of total mortgage activity in the most recent three-month period. The jumbo share of new loans made plummeted to only 6 percent in the quarter, while the subprime share fell to 0.5 percent and the Alt A share slipped to 1.6 percent. The conforming mortgage sector – Fannie Mae/Freddie Mac and FHA/VA – has become the only game in town for many borrowers. FHA posted the biggest market share gains of any sector in 2Q08.

Alternative Mortgage Share of Originations Tumbles in 1Q08

The share of U.S. mortgage originations associated with alternative or non-traditional mortgage products tumbled in early 2008 as the ongoing mortgage credit crisis forced both lenders and borrowers into conventional mortgage financing.

According to numbers compiled by Inside Mortgage Finance, just 9 percent of mortgage originations in the first quarter were interest-only, payment-option ARMs, 40-year balloon loans, or some other type of Alt A mortgage product. This compared with a 30 percent share for all of 2007 and a record high 32 percent share in 2006. The most popular alternative mortgage product in early 2008 was the interest-only ARM and most of these loans were sold to either Fannie Mae or Freddie Mac.

Jumbo Share of Originations Slipped to 8% in Early 2008

The absence of a liquid secondary market for non-governmental mortgages is taking a big toll on the jumbo sector this year. According to numbers compiled by Inside Mortgage Finance, the jumbo share of total mortgage originations sank to just 8 percent in the first quarter of 2008. That was way down from the 15 percent jumbo share found a year ago.

Other sectors of the residential mortgage market that took big hits in the first three months of 2008 included: subprime, down to 2 percent from 14 percent a year ago; and Alt A, where the market share tumbled from 14 percent to 4 percent

The New HOEPA Rules: How Strict New Rules From the Fed Will Impact Your Mortgage Business in 2008

While Congress and the Bush administration grapple with problems in the mortgage market and propose long-term solutions, the eventual outlook for their reforms is hazy at best. Only one major overhaul of mortgage market regulations is guaranteed to be finalized this year: the Federal Reserve’s revision of the Home Ownership and Equity Protection Act (HOEPA).

The proposed revision will cause the biggest shift in mortgage regulation in two decades as it addresses practices in origination, loan terms, servicing and advertising. Furthermore, the rules will apply to all lenders, not just those examined and supervised by the Federal Reserve.

The Fed is expected to use its authority to transform guidance on nontraditional and subprime lending into regulation. The regulator also confirmed that some Alt A mortgages will fall under the regulation’s strict rules for subprime mortgages.

In February 2008, an audio conference sponsored by Inside Mortgage Finance Publications brought together one of the authors of the Fed’s proposed HOEPA revision as well as two legal experts looking to pick the regulation apart. Paul Mondor, an attorney in the Fed’s division of consumer and community affairs, noted that the regulator is considering strengthening the income verification requirements detailed in the proposed revision of HOEPA.

Subprime and some Alt A mortgages would be subject to increased regulation, including a requirement for lenders to verify the income and assets relied upon to make a loan, including expected income. For higher-priced loans under the revised HOEPA triggers, lenders would also be required to consider borrowers’ ability to repay, limit prepayment penalties and require escrows for taxes and insurance.

Donald Lampe, a partner at Womble Carlyle Sandridge & Rice, noted that the rule might be finalized by September and become effective at the beginning of 2009. During the audio conference, the Fed’s Mondor did not object to the projection. “The intent is to act very quickly at comment closing,” he said.

Meanwhile, Laurence Platt, a practice area leader at K&L Gates, compared the Fed’s proposed HOEPA revision with other HOEPA bills in Congress. He determined that the Fed’s HOEPA rule may be a lot easier for the industry to deal with than predatory lending legislation pending in Congress.

The Fed’s stance on originator liability, for example, is generally favorable to lenders. Mondor said the Fed will require a pattern-of-practice provision in its ability-to-repay provisions, because a standard that allowed individual borrowers to bring lawsuits would “chill the living heck out of the market.”

The panelists also discussed which servicing practices will be prohibited under the new rules, new conditions for the use of yield-spread premiums, new requirements for prepayment penalties and the seven misleading or deceptive advertising practices that would be banned under the proposal.

To order a copy of the conference CD, click here.

Brandon Ivey
Editor
Inside Mortgage Finance Publications, Inc.
April 2008

Agency Share of MBS Market Climbs to Record 94% in 1Q08

If there was any question that the U.S. residential mortgage market has effectively become a government-agency market in the current credit-starved lending environment, first quarter numbers should put any uncertainty to rest.

According to new data compiled by Inside Mortgage Finance, the agency share of new mortgages that were securitized in the first three months of 2008 soared to a record-busting 94 percent. Fannie Mae and Freddie Mac together accounted for a record-high 83 percent of new securitized mortgage volume, while Ginnie Mae activity represented an additional 11 percent. Meanwhile, non-agency mortgage security activity – namely those involving subprime, Alt A and jumbo mortgages – sunk to just 6 percent in the first quarter. That was the lowest market share for the non-agency sector seen in 17 years.