Volume 2 | Issue 156 | Thursday, August 14, 2003

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	“While refinancing higher cost debt led to a record pace in the first half of the year, demand for new money will be the driving force during the second half of the year." --Micah Green, president of the Bond Market Association, commenting on a sharp increase in bond issuances in the first half of 2003.

Top National News

Fannie Vulnerable to Interest Rates (Washington Post)
Mortgage Applications Fall Sharply (Chicago Tribune)
Rising Rates Make ARMs More Appealing to Buyers (Los Angeles Times)
U.S. Housing Prices Rise, Fuel Worry About 'Bubble' (Chicago Tribune)
Debt Investors Wary of Mortgages (Financial Times)
To the Beach--or Bust? Kabooming Coastal Real Estate Prices Raise Bubble (USA Today)
Predatory Lending Protection Sought (Akron Beacon Journal)
State Expands Probe of Firm's Home Sales (Bergen Record)

Residential Finance News
Ohio Judge Puts Toledo Predatory Lending Law On Hold
Low Interest Rates Spark High Issuance of MBS and Treasuries

Commercial/Multifamily Finance News
DealMaker of the Day

Spotlight: Technology
Document Storage Goes Electronic

Fannie Vulnerable to Interest Rates
Washington Post (08/14/03) P. E2; Crenshaw, Albert B.
A spike in interest rates caused Fannie Mae's duration gap to jump from negative one month to positive six months in July, which means that the debt used for its mortgage purchases will mature faster than the mortgages themselves. Fannie Mae's profitability could suffer due to the additional hedging needed to minimize the effects of fast-moving interest rates. Even so, the company says it duration gap remains within the acceptable range of interest-rate risk
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Mortgage Applications Fall Sharply
Chicago Tribune (08/14/03) P. 3-3
The Mortgage Bankers Association of America's loan applications index dropped 16.1 percent last week to a one-year low of 824.6, with refinancing volume tumbling 20 percent to 3,238.4. Though refi activity has declined considerably, MBA chief economist Douglas Duncan says the boom will not end until refinancings account for only 20 percent to 25 percent of new applications. Last week, 55.8 percent of all new applications were refinancing requests.
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Rising Rates Make ARMs More Appealing to Buyers
Los Angeles Times (08/14/03) P. C1; Harris, Bonnie
To calm jittery borrowers fretting over the recent uptick in interest rates and to prevent business from stagnating, loan agents and mortgage brokers increasingly are steering homebuyers toward adjustable-rate mortgages. Although interest remains at a very attractive level even with the rise, industry insiders say many consumers are worried that they will not be able to afford the home they want. Financing the purchase with an ARM--which has a very low initial rate, currently about 3.44 percent--makes them eligible for a bigger loan; however, it also brings with it the risk of significantly higher payments once the fixed-rate period expires. As such, some economists are warning that the growing availability and use of ARMs can mean financial trouble down the road for consumers who do not stay on top of their budgets. "With such a wide variety of ARMs being pushed right now, the consumer has to be extremely careful about reading the fine print," says Nima Nattagh of mortgage consultant FNC Inc., for instance. "It can be easy to overreach just because someone says you can afford to borrow more. What happens to the rate after those first few honeymoon years is the real concern."
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U.S. Housing Prices Rise, Fuel Worry About 'Bubble'
Chicago Tribune (08/14/03) P. 3-1
The National Association of Realtors reports that home prices were up 7.4 percent in the second quarter from a year ago; and, for the first time, no metropolitan area in the survey recorded a decline. Although the appreciation in residential prices has been the catalyst for concern about a housing market bubble, NAR chief economist David Lereah projects that home-price gains will brake from 7.5 percent for the first six months of 2003 to about 5 percent for the second half of the year as mortgage rates increase. Home prices rose the most in Riverside and San Bernardino, Calif., at 24 percent, followed by Providence, R.I., at 23 percent and Los Angeles at 21 percent. San Francisco had the highest median home price at $560,200, followed by Anaheim-Santa Ana, Calif., at $471,700 and Boston at $409,100; while the national median existing-home price was $168,900.
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Debt Investors Wary of Mortgages
Financial Times (08/14/03) P. 26; Wiggins, Jenny
Debt investors continue to forsake financial companies that invest in or trade mortgages, worried that a shakeout in the bond market will saddle some firms with crippling losses. The new state of caution comes after a spike in government bond yields late last month threw the bond markets into a state of turmoil. The unanticipated increase affected several kinds of debt but was especially negative for mortgage securities, which traditionally have been sensitive to interest-rate volatility. Investors probably will not learn how investment banks and other financial organizations have been impacted by the bond market volatility until third-quarter earnings are made public.
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To the Beach--or Bust? Kabooming Coastal Real Estate Prices Raise Bubble
USA Today (08/14/03) P. 1B; Fogarty, Thomas A.
While overall home-price appreciation currently stands at 7 percent, prices along the coasts have posted double-digit growth. The average sales price has surged 78 percent to $457,000 over the last three years in North Carolina's Outer Banks, for instance; and prices have risen rapidly in San Diego, Cape Cod, South Florida, and South Carolina's Hilton Head as well. Many experts are expecting a major correction in prices now that lenders are imposing stricter underwriting standards, the shift from stocks to real estate has slowed, and interest rates have started to climb. While one camp warns that the vacation property market will not escape the cool-down, others predict that appreciation in beach markets will remain robust in the long term due to demand among retiring baby boomers as well as environmental and anti-growth restrictions.
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Predatory Lending Protection Sought
Akron Beacon Journal (08/13/03) P. D1
Ohio Attorney General Jim Petro announced a settlement with Household Finance over predatory lending practicing during a news conference but added that the agreement will not be enough to stop the problem in the state. Petro joined housing advocates in urging lawmakers to include predatory practices under the Consumer Practices Act and to make financial institutions, which currently enjoy an exemption, subject to the law's provisions. Ohio has a high rate of home foreclosures, and housing advocates say predatory lending is partly responsible for the rising trend.
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State Expands Probe of Firm's Home Sales
Bergen Record (08/13/03) P. A1; Fallon, Scott
Investigators in New Jersey's Department of Banking and Insurance have broadened their probe into a real estate partnership charged with falsifying loan applications and making a fortune from selling older homes in dire need of repair to first-time buyers with government-backed mortgages. Officials expect to receive up to 125 complaints from North Jersey homeowners who were victimized by this property-flipping scheme executed by partners at Roselynd 2000 over the last few years. While the state Department of Banking and Insurance has met with a number of banks in an effort to help the affected buyers stave off foreclosure, refinance their mortgages, and obtain public grants for possible renovation work, officials in Paterson, N.J., have drawn up legislation to help protect consumers from buying dilapidated property in the future. The ordinance, which city authorities say could be implemented as early as next month, would require a municipal inspection on the resale of any residence; at present, inspectors examine only new homes before issuing a certificate of occupancy.
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Ohio Judge Puts Toledo Predatory Lending Law On Hold

MBA (8/14/2003) Sorohan, Mike
An Ohio judge has issued an injunction against a Toledo predatory lending ordinance, after the American Financial Services Association sued the city to prevent the ordinance from taking effect.

The order, issued August 7 by Judge Robert Christiansen of the Lucas County, Ohio, Common Pleas Court, puts on hold for at least 30 days Toledo Ordinance No. 271-03, which prohibits certain “predatory” lending practices within the city. The ordinance, for example, prohibits lenders from “knowingly” making loans based on overstated appraisals, misrepresenting a borrower’s income and/or guiding borrowers into loans “detrimental to them solely for the lender’s monetary benefit.”

It is at least the third such hold placed on a city ordinance; AFSA had obtained earlier holds on predatory lending ordinances in Philadelphia, Pa., and Dayton, Ohio, arguing that cities and other local governments were operating outside of state law by incorporating such ordinances.

According to the Washington, D.C., law firm Lotstein Buckman, AFSA sued Toledo earlier this year to enjoin the enforcement of Ordinance 291-02, a law proposed to combat predatory lending practices in Toledo. In its complaint, AFSA argued that the Toledo City Council “exceeded its powers to regulate financial institutions and residential home mortgage lenders,” because many financial institutions doing business in Toledo are either federally chartered national banks or federal savings associations, and therefore regulated exclusively by federal law.

In response to that suit, the Toledo City Council repealed the original ordinance, 291-02, and enacted Ordinance No. 271-03, which altered the original ordinance to exempt federally charted banks. But AFSA, in filing for an injunction, said that the new ordinance still operated outside of the city’s ability to enact laws affecting financial institutions.

Toledo Mayor Jack Ford has been a strong proponent of the ordinance, arguing that it protected consumers without direct government intervention. Ford and Rep. Marcy Kaptur, D-Ohio, recently announced a $5 million partnership among Fannie Mae, the Northwest Ohio Development Agency and the Toledo Fair Housing Center, along with several local banks, in creating a pilot program aimed at helping people restructure loans defined as “predatory” under the ordinance and educating them to avoid such loans in the future.

A final ruling is expected later this fall.
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Low Interest Rates Spark High Issuance of MBS and Treasuries

MBA (8/14/2003) Murray, Michael
Bond issuance totaled $3.6 trillion in the first half of this year, a sharp 43.3 percent increase over issuance in the first half of 2002, with Treasuries and mortgage-backed securities (MBS) helping to fuel the pace. But potentially higher interest rates could change the market dynamics with a demand for new sources of funds.

Treasuries and MBS issuance grew 41 percent and 64.6 percent, respectively, to $328.4 billion and $1.66 trillion, and favorable market conditions that include historically low interest rates and slow economic growth supported the growth in issuance volume, said Micah Green, president of the Bond Market Association.

But Green also cautioned that a potential for stronger economic growth and higher interest rates in the second half of the year would affect market dynamics, particularly in mortgage refinance activity.

“While refinancing higher cost debt led to a record pace in the first half of the year, demand for new money will be the driving force during the second half of the year,” Green said.

MBS issuance accounted for almost half of total bond issuance at 46 percent for the first half of 2003, but rising interest rates will likely slow market activity in the current quarter, Green said.

“While the rise in interest rates indicates a slower rate of refinancing activity going forward, we can’t lose sight of the fact that even current mortgage rates are still historically low,” said Green. “Nevertheless, we will do well in the second half to approach the record MBS issuance levels seen earlier in the year.”

Despite the likelihood of higher interest rates, the quarterly report said Treasury issuance should continue to lead the way in the second half of the year based on higher budget deficits. In late July, the Treasury Department announced it would borrow $104 billion during the current third quarter.

“2003 looks like another record year for fixed-income issuance, due in large part to the strength of Treasuries, the fiscal needs of states and localities and the effect of historically low interest rates on demand for mortgage debt,” Green said.

The report also said that Treasury issuance through June was driven by the rising federal deficit, slow economic growth, and spending related to homeland security and Iraq. Based on higher deficit projections, the Treasury market is expected to grow further through the end of this year and analysts expect fiscal policy to enhance economic growth, while deficit growth should slow and Treasury issuance starts to drop.

Home equity activity accounted for 40 percent of Asset Backed Securities (ABS) issuance, which grew to $297.6 billion in the first half. New issue activity in the manufactured housing sector, however, continues to decline, the report said.
Growth in the municipal sector reflected state and local governments’ increasing reliance on the capital markets to fund budget deficits and spending, as well as the low interest rate environment, which created opportunities to refinance debt, lowering capital costs.

Meanwhile, refunding volume remains strong, rising to $64.4 billion in the first half of 2003, up from $56 billion in the year-earlier period.

The high level of conforming residential home mortgage originations and sales, supported by low interest rates, led to a 50.7 percent rise in long-term federal agency debt issuance while short term issuance grew 11.7 percent.

Secondary market trading volume was up across all markets in the first half of 2003, and outstanding volume of money market instruments that include commercial paper, time deposits and bank acceptances, totaled about $2.56 trillion at the end of June.

The current edition of the Research Quarterly includes a primer on prepayment in the mortgage market, which is particularly relevant to MBS investors in the current environment, as prepayments slow as rates rise. As the influence of the mortgage-related sector increases across the entire bond market, prepayment speeds affect the entire fixed-income universe.
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DealMaker of the Day

MBA (8/14/2003) Murray, Michael
Repeat borrowers and low interest rates led GMAC Commercial Mortgage Corporation (GMACCM), Horsham, Pa., to two deals: a multifamily property and an industrial property totaling more than $10 million. The GMACCM offices originated $7.84 million on a multifamily complex in Tacoma, Wash. and $2.775 million on a self-storage facilty acquisition in Austin, Texas.

Skyvillage Apartments GMACCM arranged $7.84 million fixed-rate refinancing for a Tacoma, Wash., apartment complex called Skyline Village Apartments. The 109-unit apartment complex has 111,950 square-feet on 9.76 acres. It consists of 27 one-story, four-unit buildings. Amenities include a clubhouse with kitchen and meeting area, outdoor swimming pool and shuffleboard court. Each unit is equipped with a full-sized kitchen, fireplace, dishwasher, washer/dryer patio and an attached garage.

Joseph Kimm, Jr., senior vice president of the Seattle
loan origination office arranged the transaction through Freddie Mac. Skyline Village Apartments, LLC received the financing.

“It was a great opportunity to work hand-in-hand with a repeat borrower on a deal with an excellent property location,” Kimm said.

In Austin, Texas, the AAA Self Storage facility in Austin, Texas has 91,945 rentable square-feet and is situated on 14.29 acres. The property consists of ten one-story buildings containing 554 self-storage units.

GMACCM vice president Damon Reed of the Birmingham, Ala., loan origination office arranged the fixed-rate acquisition financing. SK 290 West, LP, received the funding through Lehman Brothers. Reed said that the principals of the borrower are actively acquiring self storage facilities and mobile home parks throughout the western United States. He has closed loans with the same principals over the past 12 months.

“GMACCM provided the borrower with a loan that covered 75 percent of the purchase price,” Reed said. “We were able to lock the rate prior to the increase in interest rates at 5.15 percent.”
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Document Storage Goes Electronic

MBA (8/14/2003) Glad, Stephen
When it comes to storing electronic copies of loan documents, more and more companies are “going cold.” As in “COLD”—Computer Output to Laser Disk. Implementing COLD systems can save “huge amounts” of time and storage space for a mortgage lender by providing immediate access to electronic copies of loan documents, according to clients that have used the system.

When the Pennsylvania Housing Finance Agency, Harrisburg, Pa., stored loan packets in paper files, thousands of hours were spent searching through filing cabinets to find documents and deliver them to the person who needed them. With a limited budget, the organization’s information technology (IT) staff searched for software that would allow them to archive both paper loan documents and computer-generated reports for fast retrieval by customer service reps and other staff members. They selected a system that allows any authorized employee to simply type a loan number or other searchable field and bring up the needed documents in a matter of seconds.

“If you could ever completely capture the time savings that we have achieved by obtaining online retrieval of all of our valuable documents, the number would be huge,” said Kathy Degler, senior programmer analyst for the PHFA. “We have also freed up a considerable amount of space by eliminating the need to keep paper documents on site.”

Degler said the PHFA maintains a “huge” number of documents, the majority of which are loan packets for single-family mortgages which must by law be kept for a period of up to 40 years. These packets run from 25 to 50 pages each and include an initial setup sheet, settlement documents, tax information, etc. Since its creation in 1972, the agency has provided more than $7 billion for 100,000 homes and 60,000 rental units, as well as $1.2 billion of financing and $158 million of tax credits for the creation of 56,000 rental units and $270 million of Homeowners' Emergency Mortgage Assistance loans to save 29,000 homes from foreclosure.

PHFA’s customer service representatives frequently need to access these documents, for example, to answer a question or resolve a problem for a borrower. It now has more than 3 million pages of such documents that were previously filed away in filing cabinets. The organization’s home assistance mortgage program has another 500,000 pages of documents that previously occupied additional storage.

Degler said that not only did these documents take up valuable office space, but retrieving these documents was a difficult and tedious process when they were needed to serve borrowers. She said between 15 and 20 staff were occupied on a fulltime basis filing and retrieving documents. Accessing documents was a particular problem for agency staff members located in satellite offices in Philadelphia and Pittsburgh, she said. Loan documents had to be delivered to them either by employees who were driving between offices or by mail.

The agency’s first effort at introducing electronic document management involved developing its own code from scratch, based on the DOS operating system. “We found that it was very difficult to achieve the level of performance we needed to manage our document volume while delivering a highly usable system,” Degler said. So the agency’s IT staff began evaluating a number of different commercial document imaging systems. Their goal was to find a system that would store a virtually unlimited amount of document images and computer-generated reports and provide near-instantaneous access over the company’s network.

The agency eventually selected Metafile Information Systems Inc., Rochester, Minn., whose MetaViewer Enterprise system combines imaging and COLD in single system so that users can call up both types of documents with a single search. “It also offers the ability to search on the full text of COLD documents which means that we don’t have to worry about someone not being able to find a document because we never thought of indexing a particular field,” said Kim Boal, manager of network services for PHFA.

According to Metafile officials, MetaViewer Enterprise captures, organizes, full-text indexes and delivers personalized content to the entire organization. Once documents are in the system, they can be retrieved using standard search tools and customized searches over a LAN, WAN, company intranet, or the Internet. Features include a full-text index and search engine; an Internet Explorer-like user interface, document security at both the document and page level; extensive document annotation tools and email notification of new documents.

Degler said PHFA’s loan officers, collectors and financial staff now have “near-instantaneous” access to each of the loan packets and financial reports that have been entered into the system. More recent documents are stored on hard disk while older files are burned to DVDs and stored in a jukebox for retrieval at only slightly slower speeds.

“In the past, when a loan officer took a call from a customer, they would have to tell them: ‘we will get your file and call you back’, walk over to the document archiving area, wait while a clerk located the needed file, look at the documents, call the customer back and return the documents to the filing department,” Degler said. “Now, the loan officer takes the call and, without even putting the customer on hold, searches the imaging system for the customer’s file, gets an answer in a few seconds and resolves the customer’s inquiry on the spot. The improvements in productivity extend to nearly every person in our organization.”

Degler said the agency has saved more than 2,200 square feet of space that used to be devoted to paper document storage. “We are moving into a new building in a few months and are busy scanning everything we can because each scanned document means that we will need less space, have to buy less furniture and have lower moving expenses,” she said.

Additional information about the Metafile systems can be found at www.metafile.com.

(Stephen Glad is a writer at Structured Information, Birmingham, Mich. The article does not represent an endorsement by the Mortgage Bankers Association of any product or service, but rather is presented on an information basis for MBA members.)
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