Can Small Banks continue doing home loans?

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Like most banking institutions in today's climate, small banks are not immune from regulatory concerns and issues. "We can work to recover bad loans, but we can do nothing to alleviate the cost of the increasing burden of compliance," said Fife Commercial Bank CFO Mark Southwick. Most community banks are happy to accept the tag as "customer oriented," however many found themselves expanding into first lien lending over the past five years to meet demand from their customer base. This expansion has recently become a cost-to-benefit concern as federal regulations require more time to insure compliance, especially challenging for banks with assets less than $100mm. The article continues with Hershey State Bank's CEO Kenneth Niedan, "...with slightly more than $65 million in assets and 17 employees, [the bank] got into mortgage lending four or five years ago because of demand in the market. The fee income from that business amounted to about 12% of the bank's gross this year. But the bank officer overseeing that lending line also had to take on the burden of auditing loans for compliance, which takes more than half of her time. She has concerns about whether she can keep up with all the regulations. The Dodd-Frank Act's rules on mortgage lending are "giving us the fits."

 

Shifting gears to the financial markets, the U.S. Treasury Department recently released the International Capital Data for November. The so-called "TIC" number is basically a breakdown of which country is purchasing our debt. According to Treasury, "The sum total in November of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC outflow of $16.6 billion. Of this, net foreign private outflows were $30.5 billion, and net foreign official inflows were $13.9 billion." Foreign residents decreased their holdings of long-term U.S. securities in November, while U.S. residents increased their holdings of long-term foreign securities. You may be asking yourself right now, "why is this number important to me, I'm just a mortgage broker/processor/underwriter/secondary trader or compliance officer?" Because it is very important to know how willing foreign investors are in purchasing U.S. debt. When TIC data is rising, this traditionally indicates the net purchases of long-term securities is increasing; you know that foreign investors are still interested in buying U.S. debt and that interest rates will most likely remain low. If, however, TIC data is decreasing, this traditionally indicates the net purchases of long-term securities is decreasing; you know that foreign investors are losing interest in buying U.S. debt and that interest rates will most likely need to rise in the future to entice more buyers.

 

But the Fed's activities are still very relevant. The latest report from the New York Federal Reserve Bank which reported net purchases averaged $2.52 billion per day ($12.6 billion total) for the week ending January 29, which compared to mortgage banker selling that averaged $1.1 billion. So yes, on a percentage basis the Fed is still buying more than originators are producing.

 

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Thoughts & Surveys on current builder & lender environment - Good & Bad News

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The industry is changing. The first half of 2013 is a distant, fond memory for residential lenders. Subprime, non-prime - what's the diff? Business Week reports on it. And the lender landscape is changing - one East Coast correspondent rep wrote me, "The Johnny-Come-Latelies who were attracted by the huge margins in 2008-2012 are finding that those margins just aren't there anymore, especially with the Agencies in the play. Smaller lenders can't afford compliance and legal staff, and will be exiting. But some of that will be delayed as due to the large amounts of cash and servicing portfolios that some have accrued. But even there, many are currently selling their servicing portfolios for cash to survive, so I expect to see a lot of consolidation in the 2nd half of this year when that runs out." Those are tough words!

On the lender side, Zelman & Associates reports, "The purchase mortgage market has become competitive in recent months as refinance activity has plummeted largely due to rate volatility. As such, many contacts have reported that in order to remain competitive, they are sacrificing margins by engaging in aggressive pricing, which has been to the benefit of consumers, and spending heavily on marketing. Additionally, contacts have noted that they are exploring new business channels or considering expanding product offerings to offset declining overall business. As an indicator of the impact of competition on mortgage pricing, we monitor the primary-secondary mortgage rate spread, which measures the difference between the rate lenders offer to consumers (30-year fixed mortgage rate - the "primary" rate) and the rate secondary market investors offer to lenders for those mortgages (the current coupon on a 30-year Fannie Mae MBS - the "secondary" rate)... During December, the primary-secondary mortgage spread tightened approximately four basis points to roughly 94 basis points, suggesting some price competition. This was down considerably from 143 basis points at the peak in September 2012 and the average of 101 basis points during 2013, which benefitted from both elevated refinance activity as well as higher HARP originations which offer outsized economics. Despite the recent tightening, the spread remains well above the historical average of 45-50 basis points, suggesting that borrower financing costs could improve further as competition intensifies among originators, although the approximate 25-30 basis point increase in guarantee fees over the last several years coupled with potential additional increases in fees will limit the extent of compression this cycle, indicating the spread could contract 10-15 basis points before reducing lenders' origination revenue to below-average levels. We would also note that although higher overhead costs for originators could impact historical comparisons, the significant decline in the refinance index would suggest spreads are likely to continue compressing."

Speaking of input, "The House Financial Services Committee wants to hold the Bureau of Consumer Financial Protection (CFPB) accountable, so it's asking those who have been impacted by the Bureau's work to come forward and tell their story. Starting this week, the committee's website offers individuals a web form to let committee members know how the CFPB has impacted them as consumers, as business owners or how the Bureau has affected their customers. 'Holding Washington accountable to hardworking taxpayers is a never-ending battle.  That's especially true when it comes to the Bureau of Consumer Financial Protection, the most powerful and least accountable government agency in all of Washington,' said Chairman Hensarling (R-TX). 'The Financial Services Committee is committed to true consumer protection.  True consumer protection means you not only protect consumers from 'Wall Street' but from Washington as well.'"

Zipping over to the markets, we saw a nice increase in bond prices, and a drop in rates, Wednesday. But few lenders were seen re-pricing for the better - why not? Adam Quinones with Thomson Reuters writes, "A number of reasons can be cited to explain this defiant behavior. It's a chicken or the egg debate. 1) Lenders are protecting pull-through - no need to adjust the hedge. 2) Fallout is a problem but new apps are filling fallout holes - originators would basically be swapping pipelines and migrating down-in-coupon if fallout was an issue, and it is too soon for that approach. Why swap coverage down-in-coupon when prices are still rallying? 3) Whole loans are going directly into the servicing portfolio, likely the case for larger money center banks that originate loans against deposits - which also helps explain the short squeeze: a general lack of supply and stack compression. Lastly, 4) maybe desks are protecting newly acquired MSRs (mortgage servicing rights).

 As expected, the Fed cut its asset purchases by $10 billion. Current buying levels from the Fed continue to be supportive, with a Deutsche Bank MBS analyst noting that Fed demand is likely to absorb all net supply well into spring. Through February, buying outright and through reinvestment of paydowns is estimated to average $2.2 billion per day, against originator supply that is running at around $1 billion.

What was unexpected was the major stock markets losing over 1 percent as the bid for risk deteriorated despite efforts from some emerging market central banks (Italy and South Africa) to shore up their currencies by raising benchmark rates. When the closing bond bell rang (there is no actual bell, so don't send me an e-mail) agency MBS prices had improved about .5 and the 10-yr's yield was down to 2.67%.

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Floating Note Rate Auction Primer

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Darn it - I forgot to send the leprechaun a card! Lucky Charms turned 50 years old - but with Atlanta shut down due to snow, there will be plenty of time for a leisurely breakfast. Time is fast - how is it that we're almost done with January? And just to think, anyone turning 50 this year was not alive when Kennedy was assassinated, 40 years ago the Eagles "Already Gone" was at the top of the charts, and 30 years ago Ronald Reagan was running for his 2^nd term. Time flies...Certainly the job market is flying around, with various firms hiring and others cutting back.

 

Michael Simmons, SVP with Axis AMC writes, regarding the Newday article, "Fascinating mess of an article - stuck in a time warp and inaccurate on a number of levels. First, HVCC was never 'retracted' - it expired statutorily in, if memory serves, November of 2010 and was replaced, essentially intact, by AIR (Appraiser Independence Requirements). An even bigger distortion was the false assertion that HVCC mandated that appraisers work for AMCs. What it did require was there is a buffer between the appraiser and anyone in loan origination ordering an appraisal. The intent was to remove the potential threat of direct coercion upon appraisers. That did have a substantial effect on diminishing individual intimidation of appraisers by loan officers - but, in the view of some, replaced that personal intimidation with institutional pressure. In truth, the explosive growth in AMCs was the result of many lenders seeking ways to reduce their own costs and liabilities by outsourcing. What's most disheartening in the article is the insinuation that all AMCs are evil and fail to use local appraisers or pay reasonable and customary fees. Under the regulatory environment today, lenders can ill afford to use an AMC that underpays appraisers or employs a bidding process for assignments or brings out-of-area appraisers in to do reports. While at times uncomfortable and inconvenient, and perhaps destined for some change, regulation that mandates best practices and compels compliant behavior will and should endure."

 

Turning to the actual markets, rates are not doing much, which is fine for those in capital markets. The big news might be the Treasury holding its first Floating Rate Note (FRN) auction today of $15 billion. It raises many issues: why would any secondary guy look at floaters? Should anyone be hedging with USTs and short rising interest rates? What about the ARM market? EPDs risk? It's tough to say, considering there's no consumer credit built into treasuries.

 

What happened last week?

 

MBS OVERVIEW

There are no major economic releases today and no major Treasury auctions. Today is all about the FOMC interest rate decision and policy statement.

 

ACROSS THE POND

After India announced a rate hike the prior day, Turkey announced an even bigger rate hike last night designed to stem the outflow of capital out of their country and to prop up their currency. Initially this worked in early trading but now the market has shrugged it off and their currency is selling off again. This is providing a lift for MBS pricing this morning.

 

THE FED - WILL THEY OR WONT THEY? 

They started their meetings yesterday and will release their policy statement today at 2:00EST.  The bond market is rallying in early trading as they are SPECULATING that what is going on with Turkey and other emerging market countries will cause the Fed to pause here.

 

In my opinion, this will not impact their policy - they will announce another reduction in the pace of their monthly purchases of Treasuries and MBS. The only question is the amount of the taper. The economic data that we have received (including the miss in the NFP) is not enough to alter their own economic projections and their decision to taper further is more based on their outlook and not on the past. Also, as we have discussed several times. The bond market has actually improved since their December meeting which clearly gives them permission to taper again since their concern is rising rates...and rates didn't rise...they improved.

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Executive Rate Market Report: Durable Goods whiff

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 What is on the agenda for today?

Durable Goods:   Wow a big-time miss to the downside. On the Headline number, the market was expecting a gain of 1.8% but instead got a decrease of -4.3%. Plus, November was revised downward. The Core number was expected to show a gain of 0.5% but instead got a decrease of -1.6%. The prior period was also revised downward. Our benchmark FNMA 3.50 February coupon improved from -13BPS just before this report to +1BPS just after the report. That is an improvement of +14BPS. But still, that is a curiously small upward movement on such a miss to the down side and could be indicative that we are at the top end of our intra-day channel as MBS cannot seem to climb back above the 101.00 mark.

 

Case-Shiller Home Price Index   continues to show steady growth in home prices. The year-over-year (YOY) reading hit 13.7% which matched market expectations and is not a factor in pricing.

 

Next Up: Consumer Confidence.    This is a major report. The market is expecting a reading in 78 to 79 range which would be an improvement over the last reading. A reading over 79 will pressure pricing and a reading of 77.5 or lower will help pricing.

 

 Treasuries:    We get our first of three Treasury auctions this week. But this is a 2 year Note and is too short of a term to have a significant impact on the longer term bond yield curve.

 

 

FOMC:   They started their meeting today and will release their policy statement tomorrow. In my opinion, they will announce another reduction in the pace of their monthly purchases of Treasuries and MBS. The only question is the amount of the taper. The economic data that we have received (including the miss in the NFP) is not enough to alter their own economic projections and their decision to taper further is more based on their outlook and not on the past. Also, as we have discussed several times. The bond market has actually improved since their December meeting which clearly gives them permission to taper again since their concern is rising rates...and rates didn't rise...they improved.

 

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Clearing up Confusion on Lender paid versus Borrower paid Compensation

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Life has a lot of confusion, and there still seems to be some about lender (creditor) paid compensation versus borrower (consumer) paid compensation. In fact, just yesterday I received this note: "I currently work for a wholesale lender that offers the full spectrum of loans.  The new (interpretation of the) rule that borrower paid compensation must equal lender paid compensation is causing my brokers to lose out on jumbo loans since they cannot be competitive.  Most of my brokers have chosen a lender paid compensation level of one amount which is fine for an average loan size in my area but is not on the occasional jumbo.  To be competitive they want to charge less by doing the loan as a borrower paid transaction and either charging the lower amount or giving some of their fee back as a broker credit so they net the lower amount. The lender I work for will not allow that although there seem to be a number of different interpretations of this in the market. If borrower paid comp must equal the broker's chosen lender paid comp, can they still give a broker credit (when going borrower paid) so they can net the lower fee and be competitive?"

 

To be blunt, the basic premise of your question is incorrect. After a discussion that I had with two CFPB officials yesterday, my view is that it appears that nowhere is it written that consumer/borrower paid compensation may not be different than lender/creditor paid compensation. Removing the double negative leads to borrower paid compensation may be different than lender paid compensation. They are not required by current regulations to be the same. Lenders may place creditor paid compensation in one "bucket", and consumer paid in a different bucket - that is at their discretion, but comparing "buckets" is not required. There is no rule that says all transactions must pay the LO the same amount/way. So yes, lenders may opt to pay the same scale on every transaction, but it is not mandated by the regulations. And thus the market may see different wholesalers paying different amounts (wholesalers have the option to impose their own compensation rules, if the prefer, as long as they don't go against the industry-wide rules).

 

In any discussion of this it is important for everyone to remember that there are three things that are NOT mandated by the rules put forth by the CFPB. The first is that creditor and consumer paid compensation be the same. The second is that, between two transactions, the LO must make the same amount of money. (The rule does not prohibit it, but this turns on facts based on the terms of the loan, or any proxy for the terms of the loan. The interpretations, of course, go to differences between programs - these impact the terms of the loan. So we find that the rule does not dictate that a lender can't pay different amounts on different programs. But the reality of the situation is that programs contain distinct requirements, and thus will probably have different loan terms.) The third is that two originators be paid the same. (The CFPB's rule making does not specify that two LOs in the same office be paid the same, but that all applicable provisions, such as the LO comp rule, or Fair Lending, must be adhered to.)

 

Father Norton woke up Sunday morning and realizing, after a long period of terrible weather, it was an exceptionally beautiful and sunny early spring day. He decided he just had to play golf.

So he told the Associate Pastor that he was feeling sick and persuaded him to say Mass for him that day.

As soon as the Associate Pastor left the room, Father Norton headed out of town to a golf course about forty miles away. This way he knew he wouldn't accidentally meet anyone he knew from his parish.

Setting up on the first tee, he was alone. After all, it was Sunday morning and everyone else was in church! At about this time, Saint Peter leaned over to the Lord, while looking down from the heavens and exclaimed, "You're not going to let him get away with this, are you?"

The Lord sighed, and said, "No, I guess not."

Just then Father Norton hit the ball and it shot straight towards the pin, dropping just short of it, rolled up and fell into the hole. IT WAS A 420 YARD HOLE IN ONE!

St. Peter was astonished. He looked at the Lord and asked, "Why did you let him do that?"

The Lord smiled and replied, "Who's he going to tell?"

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Servicing transfers on fire; Banks & credit unions will pay for Target fiasco; HARP 3.0 hopes dim but rates improving

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Just like the industry counted down to QM, now we can count down to Girl Scout Cookie Season! We have about 16 days - but there is a lot about these treats the public doesn't realize. As was noted in this mortgage commentary last year, two commercial bakers are licensed by Girl Scouts of the USA to produce Girl Scout Cookies: ABC Bakers and Little Brownie Bakers - based on geography. Thin Mints make up 25% of the total sales, followed by 19% from Caramel deLites (from ABC)/Somoas (from LBB) - so the name for the same cookie depends on the bakery. And the number of cookies per box, which has not only dropped over the years to save money, varies based on where you are in the country! The dark underbelly of the industry...where is the protection for the consumer from the CFPB??

Yesterday I mentioned the Flagstar layoffs, and mortgage banking results. "Flagstar, which laid off 600 last week. I received a few comments that should be noted as they are justified. Flagstar also showed a profit of $160.5 million for the 4th quarter?" And also, "Flagstar did not lay off 600 people last week. The bank laid-off somewhere south of 350; approximately 200 were laid off in September of last year and approximately 65 employees retired or left on their own during Q4 2013."

 

A daily commentary on the mortgage industry tends to encompass a lot of subjects, most of which have their own special newsletters, periodicals, and so on. But one trend that is hard to ignore is the huge wave of servicing pieces moving back and forth between companies. Citigroup will lay off 950 people in its mortgage servicing unit after it sold the rights on 64,000 loans to FNMA. The latest big block was Wells Fargo selling its mortgage servicing rights on 184,000 loans (UPB of $39 billion) to Ocwen Financial for an undisclosed sum. The sale will be finalized as servicing is transferred over the course of 2014. Plenty of analysts think Ocwen (New Co. spelled backwards) will be buying/obtaining about $100 billion during 2014, so this is no surprise. The loans underlying the MSRs are primarily in private label securities - in the past this has been the highest margin business for Ocwen because of the high delinquency rates on private label portfolios. It is viewed as a positive for Home Loan Servicing Solutions (HLSS) because these MSRs should good assets for HLSS to invest in. Assume a purchase price of 40 basis points for the MSRs, the cost of the MSRs would be $156 million. Throw in some ducats for the company's investment in servicing advance equity (assuming a 5% delinquency rate and an 11% advance rate) and we're talking about $350 million of capital when this portfolio is moved to HLSS.

I have been saying for quite some time that companies are going to be needing cash, and that servicing loans is not for amateurs - hence the rise of subservicers. GOS (gain on sale) margin compression, on top of drastically smaller pipelines, is the driver for companies selling blocks and flow servicing. Long term thinking would conclude the asset will appreciate nicely with rising rates, if we find ourselves in that environment (which would lead to the next industry trend: even deeper cuts to expenses). Like I said - not for amateurs.

 

So what are the servicing buyers thinking?

 Housing values are doing well, and rates are expected to creep higher over the long run, so adding servicing is good - right? But a company just doesn't go out and start it up next week like the old days: buying, boarding, collecting the payments, remitting to investors, charging fees, and handling delinquencies. Refis are only a pen-stroke away in this era of government-sponsored assistance programs. Just like the cost of originating a compliant loan is only going to increase, the cost of servicing is only going up. Loss mitigation is not cheap. And the owner of servicing had better be prepared to defend that servicing against the barbarians at the gate - putting the photo of the LO on the monthly statement is so...2008

 

Speaking of costs, per the Credit Union National Association, Target's holiday shopping season data breach is costing the nation's credit unions an estimated $25 million to $30 million. The hack cost about $5.10 per new credit card issued. Added up, that comes to tens of millions of dollars for the financial institutions. Credit unions and banks have criticized Target over the data breach. Even though the financial institutions had no involvement with the incident, they have to finance the cost of reissuing new cards for shoppers affected by the hack. Banks are not reimbursed either, and we can certainly expect some class-action Target lawsuits. In fact, many banks and credit unions are incurring the expense of helping their depositors and card holders deal with this event.

 

The dust has settled on thousands of disappointed loan officers, or, for that matter, any company pinning its survival on another HARP-related refi boom. Michael Stegman, the advisor at the Treasury Dept. said that the Treasury Department believed there should be no change in the HARP eligibility date. He added, "Very few homeowners whose loans were originated after the cut-off date are underwater and advancing the date would do more harm than good by prolonging market and investor uncertainties. A change in the HARP eligibility date would allow borrowers who have previously refinanced through the HARP to refinance through the program for a second time ("re-HARP"). Currently, only loans which were sold to the GSEs prior to May 2009 are eligible to refinance through HARP. If that cutoff date was moved to May 2010, then borrowers who refinanced through HARP between May 2009 and May 2010 would be able to refinance through the program for a second time. There have been numerous pushes to either extend the eligibility date by 1 year or remove it completely."

 

How 'bout these rates!? Sure, we had some news here in the U.S. But the big news came from China, which showed a weak manufacturing report (PMI). If China's economy is weak, that means that the world is not ordering as many goods from China - so maybe the world economy is a shade weaker than thought? China's PMI manufacturing index dropped to 49.6, below the consensus of 50.3. Readings below 50.0 indicate a contraction in the sector. China has been an important engine of growth for the world economy, so a slowdown would have significant implications for global markets.

 Regardless of the reason, LOs and borrowers will take it. But Capital Markets personnel are nervous - no one wants too much improvement during a rate lock period - no one wants renegotiations on loans - Wall Street certainly doesn't renegotiate on the hedges which allow lenders to sell loans at a better price!

 

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State Lending programs exempt from QM; Information on Points & Fees cap

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Salvador Dali commented, "What is important is to spread confusion, not eliminate it." As we all know the QM rule became effective January 2014. Some say that if the first victim of the rule is clarity, the second is the consumer, with the industry a close third. Already there are as many ways to calculate the three percent points and fees cap as there are lenders who are concerned about safe harbor. One question that has been raised by several originators is how does the requirement to include lender paid compensation paid to a non-self-funding originator play into the disclosed APR? It seems that the answer to this question is not shared by all lenders. According to Bill Kidwell with IMMAAG, "attorneys at the CFPB, before and during a November roundtable discussion with the Director and several of his staff, responded that the answer was straightforward - lender paid compensation only counts toward the calculation of the 3% Points and Fees cap for determining if the loan is a Qualified Mortgage. It DOES NOT get 'double counted' in the APR. Remember that the interest derived from the base rate is already in the APR and that is the source of the same lender paid compensation." Bill continued, "So, if you have a lender mandating that you include, or if their TIL disclosure increases the APR because they include the lender paid compensation as an addition to calculate APR, please push back and have them contact the CFPB for clarification." (IMMAAG, an industry information and compliance company is gathering information about QM problems so they can be collected and submitted to the Bureau in a solutions oriented way. If you have issues or questions about the implementation of QM and you want to discuss them with someone who is concerned and wants to help solve them you are invited to send an email to admin@immaag.com, subject "QM Questions.")

 

Interestingly enough, home loan programs tied to state programs have escaped the QM confinements, per Bloomberg. "Every state has one of these little-known agencies, which legislatures set up in the 1960s and 1970s to promote affordable housing. Now, as regulators tighten mortgage rules and big banks resist lending to riskier middle-income Americans, HFAs across the U.S. are rapidly expanding to restore the fading dream of homeownership. The state agencies got a boost from the Consumer Financial Protection Bureau, which exempted them from stricter mortgage regulations that it rolled out this month." Remember that the CFPB has gone on record as saying non-QM loans are not bad loans! Here is the article about state-assisted loans. But there is an entire industry that knows that these aren't "higher risk borrowers" as the title suggests - someone should have put a little more thought into that headline.

 

I'm sure in the Top 10 list of movie quotes for business people, Glengarry Glenn Ross' "ABC....always be closing" is somewhere right behind "Greed, for the lack of a better word....is good," and, "You feeling lucky, Punk, well do ya?" OK, so that last quote isn't officially in a business movie yet, but I HAVE incorporated it into my own screenplay about a non-QM underwriter coming to terms with a QM world. You know who else is interested in closings? That's right, the CFPB. The agency is seeking information about the mortgage closing process from industry, consumers and other members of the public; specifically, information on key consumer "pain points" associated with mortgage closing and how those pain points might be addressed by market innovations and technology. The CFPB wants "to encourage the development of a more streamlined, efficient, and educational closing process as the mortgage industry increases its usage of technology, electronic signatures, and paperless processes." This can all be considered a part of the CFPB's incremental steps towards their "Know before You Owe" initiative.

 

What are vendors, investors, and agencies up to lately?

 

On January 9 the USDA sent out a "Status Update on Proposed Changes to Eligibility Areas Based on 2010 Census Data". "As January 15, 2014 approaches, many are wondering whether Rural Development will be implementing the Future Eligibility maps based on the 2010 Census data.   At present, the eligible areas remain unchanged and we continue in a 'holding pattern' until either an appropriations bill or a continuing resolution is passed.  Notification will be sent pertaining to changes to this status."

 

HUD has delayed the implementation of Financial Assessment and Reserve Requirements for HECM loans that were originally scheduled to go into effect on January 13^th.  Updated guidance will be published shortly and will apply to all HECM case numbers assigned 90 days from the release date.

 

Flagstar, which laid off 600 last week, announced its earnings. Mortgage banking income fell to $44.8 million from $75.1 million in 3Q. Total mortgage originations came in at $6.5 billion, down 16.9% from $7.8 billion in 3Q. Rate lock commitments fell 22% to $6.5 billion from $8.3 billion. The gain-on-sale (GOS) margin (based on closings) fell to 0.66% from 0.90%.

 

In response to QM, Bank of the Internet has made several guideline changes, including eliminating prepayment penalties on all loans registered after January 10^th.  Loans registered and cancelled before January 10^th will be subject to a .375 adjustment rate (equal to the prepayment penalty buyout) if they are re-registered within 120 days of the cancellation.  BofI will be continuing to offer Interest Only Portfolio products and will require that all HPML borrowers receive a copy of their appraisal.

 

Secondary folks are out there hedging locks! Despite no economic data, distractions from an ABS conference in Las Vegas, and snow on the East Coast, MBS volume was above normal (above $1 billion) with Tradeweb reporting at 118% of the 30-day moving average, and Treasury prices worsened. The rumor is that Treasury prices worsened due to hedging of upcoming corporate debt pricings - but all on one day? Does anyone really know for sure? The 10-year note closed out at a yield of 2.860%.

 

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Storm may lead to a quiet market; are we going to hire or lend to millennials?

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The residential lending industry, and the companies inside of it, is always in a state of flux. I am repeatedly hearing, "We're keeping a close eye on personnel costs - if apps stay down here, we'll be evaluating our staffing." We all know what that means - and I don't see applications zooming higher in the near future. Who will make it through to Memorial Day unscathed? Yahoo recently wrote about it. The title of the article is a little misleading as not all the banks featured are cutting, and there are reminders that the originators that hustle/leave their desk will have more success than those that don't.

 

"I want my children to have all the things I couldn't afford. Then I want to move in with them." I would venture a guess that the majority of our comrades in lending or real estate have children of varying ages. I recently saw a cartoon of a high school boy talking to his counselor, saying, "I'd like one of those careers where you make a six-figure income while wearing a T-shirt and sweatpants." How are these youngsters coming along? Sallie Mae tells us that the average American family borrows 27% of the total cost of their child's college education, either through student loans or loans taken out by Mom and Dad. Experian research finds that when comparing the generations, it finds Gen Y (Millennials, 19-29 years old) has an average credit score of 628 vs. 653 for Gen X (30-46 years old), 700 for Baby Boomers (47-65 years old) and 735 for the Greatest Generation (66 years and older).

 

Banks and lenders have been known to write off Gen Y for a host of reasons, including that they typically have less money to invest and need fewer products and services. Simply put, Gen Y isn't as profitable now as other customer segments, but that will change. Baby Boomers are a good source of business for retirement planning and revenue for banks and other lenders, but we should not find ourselves generationally "locked down" and forget about Gen Y and Gen X. There are 90 million Gen Y (Millennials) folks around, and lenders are salivating. For banks looking to provide retirement advice, a new survey from TIAA-CREF finds 43% of respondents between the ages of 18 and 34 don't feel informed about retirement planning. By contrast, only 15% of those polled between the ages of 35 and 44 feel that way. It is true that those in Gen Y still have many years before retirement, but it's all about tailoring your message to fit the audience. So while many 20-somethings may turn a deaf ear when it comes to retirement issues, you'll have a more willing audience if you discuss savings and budgeting. And LOs find themselves taking the role of counselor rather than mortgage order taker.

 

Studies find people in their 20s today aren't as likely be entrepreneurs as are their Baby Boomer counterparts, but the percentage who run their own businesses typically goes up with age so get involved early. Banks and lenders are trying to create strong relationships over time: you want to be on the short list of companies today's 20-somethings turn to down the road for business loans, small business services, and home loans. To attract Millennials LOs agree that mobile access is a given, especially for banking. Banks and lenders also must have online tools and resources youngsters can use to help them figure out their finances. Understand that Gen Y has grown up in the Internet world, so they are very comfortable online and find enjoyment communicating digitally. This is an on-demand and do it yourself (DIY) generation, so technology is important. The key for community bankers, however, is also to understand that technology alone isn't enough. There is no substitute for one-on-one attention, so don't forget your roots because your bank is already well positioned at its core - just add more tools.

Many in the mortgage business think we are at a war of survival.  Garth Graham has a different take on this, as he recommends Preparing more for battle before you start fighting to maintain your market share. 

 

With no news, and a storm hitting, the MBS and fixed income markets didn't do a whole heckuva lot Tuesday, except discuss how the refereeing during the 49er/Seahawks game was poor. Looking at our pal the 10-yr, its yield Friday was 2.83%, began Tuesday at 2.86%, and ended the day at 2.83% - just not much to say! In the very early going we're at 2.85%, and agency MBS prices are off a tick or two - but the issue today may be more "liquidity" - which traders came into work today during the storm? 

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Mortgages jobs coast to coast; thoughts on LO comp

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How 'bout that Chinese housing market? New home sales last year exceeded $1 trillion for the first time as property prices in cities the government considers "first tier" surged in the absence of more nationwide property curbs. The value of new homes sold in 2013 rose 27 percent from 2012. China's existing-homes market is about one-third of new homes by sales because the nation only allowed private home ownership in 1998. The government doesn't release data on existing-home sales. (New and existing home sales in the U.S. were about $1.1 trillion last year.)

Last week the CFPB charged that Fidelity, a St. Louis-based non-depository mortgage lender, entered into an agreement with a bank in which the bank referred potential borrowers to Fidelity in exchange for kickbacks. The kickbacks were disguised as inflated lease payments for renting office space within the bank. The Real Estate Settlement Procedures Act (RESPA) prohibits giving and receiving kickbacks for referrals of settlement-service business involving federally-related mortgages. When companies pay kickbacks in exchange for referrals, it can hurt competition and inflate real estate settlement costs for consumers, while creating an uneven playing field that puts law-abiding businesses at a disadvantage.

 

Shutting down kickbacks is worthwhile but could be quite a challenge. It didn't take too much digging to find this credit union press release out in California. And there is this from the DOJ website: "Real estate agent or broker commission rebates to borrowers do not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business." May a real estate agent rebate a portion of the agent's commission to the borrower? If so, how should the rebate be listed on the HUD-1? According to HUD, yes, real estate agents may rebate a portion of the agent's commission to the borrower in a real estate transaction. The rebate must be listed as a credit on page 1 of the HUD-1 in Lines 204-209 and the name of the party giving the credit must be identified. Real estate agent or broker commission rebates to borrowers do not violate Section 8 of RESPA as long as no part of the commission rebate is tied to a referral of business. (Remember that RESPA is now administered by the CFPB.

I am not a compliance officer, but it would seem Redwood Credit Union's rebate program seems to fly in the face of the DOJ, although I'm sure their lawyers have fully explored and done their due diligence on this. Or the policy has changed in the last 18 months. ("Focus on the rebate. In exchange for a referral pipeline of quality home buyers and sellers in their market, participating realtors provide a percentage of their commission back to members at closing. 'Promote the rebate as a tremendous member benefit,' said Friedman. 'It is the single, largest benefit a member can receive from a credit union. What else pays a member $1,000 or $2,000 at no cost to the credit union? There's no other benefit you can offer that provides that level of return to the member at one time.'")

 

From Nevada, Primary Residential's SVP Burton Embry writes, "It continues to amaze me that companies are having such a hard time with LO compensation. We pay the same across the board regardless of loan type, whether it is a conventional, FHA, VA, or USDA loan which removes any incentive to push a consumer to one loan versus another. We pay the same for retail loans versus broker loans thereby removing any incentive to make a loan one way or another purely on a compensation motive. The basics of LO compensation are not that hard.  However, and this is hugely important now, if I am an LO and my company can't figure out what to do on LO compensation or I think my company might be getting it wrong, it is important to know that effective this month, LOs can now be held personally liable for the violations committed by their company.  LOs need to seriously think about that."

 

 WELCOME TO  2014

Our Phones - Wireless

Cooking - Fireless

Cars - Keyless

Food - Fatless

Tires - Tubeless

Dress - Sleeveless

Youth - Jobless

Leaders - Shameless

Relationships - Meaningless

Attitudes - Careless

Babies - Fatherless

Feelings - Heartless

Education - Valueless

Children - Mannerless

Country – Godless

We are speechless,  and Congress is CLUELESS!!

 

CFPB penalizes Lender on kickbacks & referrals

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While we wait for the it to put forth a final rule on Lender & Borrower paid compensation, the CFPB is reportedly looking at how financial product and service providers advertise to consumers. As part of the review, the CFPB said it found direct marketing happened most often through internet display and search (44%), direct mail (22%), direct response TV advertising (16%), direct response print ads (8%) and social networking (4%). Banks should review how they advertise through these and other channels to ensure they don't get sidewise with regulators given this focus.

 Many organizations consider the time after Christmas, and before the New Year, as a period of....shall we say, minimal productivity? At the very least a time to use vacation days accrued, instead of sitting at your desk wondering if those Christmas cookies from the investor care package sitting in the break room are still good. Apparently the CFPB is on a different calendar. On December 30, the agency posted to the Federal Register (that would be our nations BLOG) a notice adjusting the thresholds of the asset-size exemptions for collecting HMDA data and establishing an escrow account for certain mortgage loans under TILA. Ballard Spahr writes, "Pursuant to Regulation C, which implements HMDA, depository institutions with assets below an annually adjusted threshold are exempt from HMDA data collection requirements. In its notice, the CFPB increased the 2013 threshold of $42 million to $43 million for 2014. Thus, depository institutions with assets of $43 million or less as of December 31, 2013 will be exempt from collecting HMDA data in 2014."  Also, as many know Reg Z requires creditors to establish an escrow account to pay property taxes and insurance premiums for certain first-lien higher-priced mortgages. The rule contains an exemption for creditors that operate predominantly in rural or underserved areas that meet certain other criteria, including an annually adjusted asset-size threshold. In its release, the CFPB increased the 2013 threshold from $2 billion to $2.028 billion for 2014.

 

But we're not done with the CFPB. Late last week it ordered a Missouri mortgage lender, Fidelity Mortgage Corporation, and its former owner and current president, Mark Figert, to pay $81,076 for funneling illegal kickbacks to a bank in exchange for real estate referrals. According to the Consent Order, the lender had entered into an agreement with a bank in which the bank referred borrowers to the lender in exchange for kickbacks disguised as payments made by the lender for renting office space within the bank. The Order states that during the relevant period, the principal had "managerial responsibility for [the lender] and materially participated in the conduct of its affairs," thereby making him a "related person" for purposes of Dodd-Frank Title 10.  The bank was not named as a target.

 

Compliance folks know that the Section 8 kickback prohibition allows payments for good or facilities actually furnished or services actually performed. The Consent Order references a 1996 HUD policy statement that discussed this provision in the context of office rentals. The policy statement indicated that in determining whether rent payments were disguised referral fees, HUD would look at the general market value of the rental property, not its value to a settlement service provider. According to the Consent Order, the average monthly rent paid by the mortgage lender to the bank was substantially more than monthly rents for comparable space not located within a bank. But hey, don't take my word for it: StayAwayFromKickbacks.

LO Compensation Discrepancies Continue;CFPB "fact v fiction" on ATR

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As most of you know, in 2013 the Oxford Dictionary proclaimed the new word of the year was "selfie."  I think Anthony Weiner may have helped awareness of that word.  And the mortgage banking word of the year was certainly "compliance."  What will the word of the year be in 2014?  My STRATMOR colleague Garth Graham thinks the word of the year will be "Conversion."  He has a good write up about why, in a series of articles on "Why Conversion Matters Most."

LO compensation continues to be a concern;  "We have seen some chatter about originator comp and some wholesalers allowing varying compensation. I am not sure how they deem this within the rules - specifically the 'Borrower paid' and 'Lender Paid' transactions. Below is a piece from the Preamble of the rule. I am by no means an attorney, but even I can't imagine this excerpt can be interpreted any way but 'DON'T VARY COMP'. 'Consumer Payments Based On Transaction Terms. TILA section 129B(c)(1), which was added by section 1403 of the Dodd-Frank Act, provides that mortgage originators may not receive (and no person may pay to mortgage originators), directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of principal). 12 U.S.C. 1639b(c)(1). Thus, TILA section 129B(c)(1) imposes a ban on compensation that varies based on loan terms even in transactions where the mortgage originator receives compensation directly from the consumer. For example, under the amendment, even if the only compensation that a loan originator receives comes directly from the consumer, that compensation may not vary based on the loan terms. As discussed above, § 1026.36(d)(1) currently provides that no loan originator may receive, and no person may pay to a loan originator, compensation based on any of the transaction's terms or conditions, except in transactions in which a loan originator receives compensation directly from the consumer and no other person provides compensation to a loan originator in connection with that transaction. Thus, even though, in accordance with § 1026.36(d)(2), a loan originator organization that receives compensation from a consumer may not split that compensation with its individual loan originator, existing § 1026.36(d)(1) does not prohibit a consumer's payment of compensation to the loan originator organization from being based on the transaction's terms or conditions.'"

They say that fact is stranger than fiction,    just ask any whoever underwrote a SISA loan....on second thought that might be fiction is stranger than fact. Anyway, the CFPB is hoping that the facts stand up against fiction, at least when it comes to QM and Ability to Repay. The agency recently issued a "fact versus fiction guide" on its ability-to-repay/qualified mortgage rule. The guide is intended "to help dispel some of the most common misconceptions about what this new rule actually means for consumers." Mainly, the misconception (according to the CFPB) is that the rule's requirements, which the guide describes as "basic guidelines that lenders can follow," will make it more difficult for consumers to obtain credit. In the guide, the CFPB counters various "fictions" with "facts" designed to show why lenders should not find the rule's requirements discouraging to lending practices.