Morning Report - Notes from the CFPB conference

Vital Statistics:

	Last	Change	Percent
S&P Futures	1467.5	0.4	0.03%
Eurostoxx Index	2713.3	5.1	0.19%
Oil (WTI)	93.31	-0.5	-0.54%
LIBOR	0.304	-0.001	-0.33%
US Dollar Index (DXY)	79.6	-0.140	-0.18%
10 Year Govt Bond Yield	1.89%	0.00%
RPX Composite Real Estate Index	191.6	-0.1

Markets are flattish after Wells Fargo's earnings beat expectations and import prices showed that inflation remains contained. Bonds and MBS are up small.

Richard Cordray of the CFPB laid out the outlines of what will be considered a qualified mortgage at a presentation in Baltimore yesterday.  Big picture, he believes that lenders were too loose with credit in the past, but now they are too tight.  The Rule will be called Reg Z, or the Ability-to Repay and Qualified Mortgage Standards under the Truth in Lending Act.  These rules are intended to both protect consumers and increase access to credit. The highlights are

• A cap in points and fees
• No exotic (IO, increasing principal, 30 year + maturity, balloon) loans
• DTI < 43%.  Period.  (In other words, nothing on FICO or down payments)
• DTI ratios must be calculated on the expected long term payment, not teaser rates on ARMs.
• Provides immunity from homeowner lawsuits under the QM rules for prime loans.  Rebuttable presumption for subprime.
• Safe harbor is only for homeowner lawsuits under QM rules, all other rules still apply
• Rules will take effect 1/10/14 and will be phased in over a period of years
• Community banks / credit unions, and low income lenders will have relaxed standards

There were several housing advocates, consumer advocates, etc on the panel.  For the most part, they lauded the agency, but thought the QM rules were too skewed in favor of the financial industry. They also feared that it would restrict CRA lending. On the other hand, SIFMA praised the rule. The most eye-opening comment came from Cordray himself, when he said that he believed that we would not have had a financial crisis if these "ability to repay" rules would have been in effect before.  Really.  Of course the term "housing bubble" was not uttered during the entire discussion. 

Will it increase lending? My sense is that unless the GSEs and FHA agree to insulate lenders from buy-back risk if they follow the QM rules, it will not in any meaningful way.

Well Fargo's earnings release beat expectations on the top line, but net interest margins were disappointing. Particulars regarding mortgage banking:

• Originations fell from $139B in Q3 to $125B in Q4, reflecting the normal seasonal decline. Originations were up 4% YOY.
• Pipeline at quarter end was $81 billion, down 16% QOQ and up 13% YOY.
• Net interest margin declined from 3.89% to 3.56% YOY.  Q3 NIM was 3.66%
• Total delinquency and foreclosure rate was 7.04% down from 7.96% in Q3
• They continue to wind down the legacy Wachovia assets.  The "Pick a Pay" loan portfolio has a UPB of $63.8 billion and is being marked at $58.3 billion, or at 91%.  Note, the UPB is ex-writedowns already taken.