TheMReport — News and strategies for the evolving mortgage marketplace.
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cover story to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates," as he put it in the SOTU—a new streamlined process for nonGSE loans, administered by the Federal Housing Administration: "No more red tape. No more runaround from the banks." The sticking point, though, was how to pay for the plan: Obama wanted to finance it by levying a "Financial Crisis Responsibility Fee" against the big banks. That made it a nonstarter in Congress. Now, on the backside of several big servicer settlements and billions in penalties paid by major lenders, Wall Street is likely to fight further punishment—and Capitol Hill conservatives would relish another chance to stick the president with an anti-business label. Freakout factor: 6 out of 10. The upfront cost to banks would be considerable, but if it comes off, it could grow confidence in borrowers, cut down on future walkouts, and put cash in consumers' pockets (and add to the GDP). Time frame: If it doesn't happen early in the new congressional session, it's unlikely to happen. Watch to see how early and hard the GOP Congress digs in. 03 Increasing Investors' Inhibitions What's eating mortgage investors, though, isn't the refinancepolicy game: It's monetary policy. Rumors on Wall Street abound that a reinvigorated Obama administration could appoint more aggressive Federal Reserve and Treasury officials, including a replacement for Fed chairman Ben Bernanke at the beginning of 2014. Even if there's little shakeup in the current team, recent Fed policies have introduced new risks for real estate investment trusts (REITs). 24 | The M Report Take Bernanke's latest round of quantitative easing: QE3, as The Street calls it. The Fed has bought an estimated $70 billion a month in agency mortgagebacked securities, keeping consumer borrowing rates as low as possible. That's great news for borrowers and job markets, but it pushes up refinancing rates and prepayments, driving riskadjusted returns down nominally for mortgage investors. As of late November, REIT book values had dropped 2 percent and Agency MBS yields were off 40 04 Beefing Up the Bureau One of the biggest X factors contributing to regulatory uncertainty in the past year has been the nebulous mission of the Consumer Financial Protection Bureau (CFPB). But with the campaign in the rearview mirror, a new head in Richard Cordray, and a strong ally—CFPB co-founder CFPB will likely take a leading role in defining the very rules of the mortgage game, sharpening enforcement mechanisms put in place by the Dodd-Frank financial reforms. basis points in the last quarter of 2012, according to stock analysis website Seeking Alpha. Expect those trends to continue. But "while spreads have compressed, we believe risk is also lower in today's environment," Gary Kain, president and CIO of American Capital Agency Corp., said in a November earnings conference call. "Therefore, nothing has changed our view that an actively managed portfolio can continue to generate attractive risk-adjusted returns." Freakout factor: 3. The fundamentals of our monetary policy are strong, and it's a rare area of predictability and stability in Washington. Time frame: It's already happening! Elizabeth Warren—in the Senate, this agency is ready to rock. "If you're a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can't afford with confusing forms and deceptive practices are over," Obama said in his 2012 SOTU. "Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them." What does that mean, exactly? Last September, the bureau issued a notice of proposed servicing standards under the Real Estate Settlement Procedures Act; it's currently poring over hundreds of mortgage lenders' ads nationwide for fraudulent and misleading claims, and it's setting up an unprecedented mortgage database to regularly check the health of the market. In coming months, expect agency movement on a Homeowner Bill of Rights that mandates streamlined paperwork and plainlanguage disclosures. But more than that, the CFPB will likely take a leading role in defining the very rules of the mortgage game, sharpening enforcement mechanisms put in place by the DoddFrank financial reforms. "After signing Dodd-Frank in 2010, key provisions like the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) are still up in the air," Clear Capital's analysts concluded in their post-election economic report. "This regulatory uncertainty exposes the industry to higher risk, putting private investors of mortgages on their heels." That's one way of looking at it; another way is that if qualified mortgages get defined narrowly, with tougher safe-harbor provisions, lenders and traders will have to put more of their own skin in the game, and liquidity might tighten. In that scenario, "minority, lower-income, and first-time homebuyers will have the most trouble, and many will be blocked from homeownership," Mark Zandi, Moody's chief economist, wrote in the Washington Post last fall. "Ironically, these are the very groups that financial reform was supposed to protect." Freakout factor: 7. If you thought Professor Warren was a formidable populist when she watchdogged TARP or set up the CFPB, wait till Sen. Warren helps the agency set its priorities for the next four years. Time frame: The hits started coming last fall, and they'll just keep on coming through 2013. 05 Talking Up Writedowns All these initiatives are likely to get some attention, but the