Loan Officers Pay Attention

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If someone chirps at you today, "Hey, it is the shortest day of the year!" smile knowingly, and tell them every day has the same number of hours in it, but today is the Winter Solstice, caused by the tilt of the earth relative to the sun. It is, however, the official start of winter, and in the Northern Hemisphere the day with the least amount of time where the sun is above the horizon; put another way, we'll see more sunlight from here on out! I have no idea why the mainstream press, and every LO, has not latched on to the higher cost of borrowing that is already being put into place by lenders. Sure, the gfee changes and loan level price adjustments don't actually hit until March and April, but aggregators and lenders are already putting these changes in place. And the changes result in a price hit to borrowers of 1.5-2.0 points, or even more, depending on LTV and credit score. So for a $300 loan, it could cost the borrower $6,000 at the table, or a higher rate. For example, Chase built in the g-fee increase into their best efforts pricing today for lock periods 60 days and greater. Not to pick on Chase, but they are the #2 correspondent out there, and their pricing group is building in an additional 96 bps on average to cover the gfee and LLPA increases. Why do you think Chase changed this?  Does this alter the economics of the transaction?  "Chase will be revising the calculation used for Best Efforts renegotiation pricing to use the base price (current 60 days pricing) minus the cost to break the lock (25bps); the price adjustments, including extended rate lock fees; and prior extension and re-lock fees; plus the SRP.  This went into effect for all renegotiation requests received December 17th and after." Not enough has been said in the news on the impact of the impending G-Fee and LLPA increase.  Taking an average purchase loan in Dallas TX, for example, $212,000 loan amount, 80% LTV (20% down), and 750 FICO at a rate of 4.625%, after the g-fee and LLPA increase, the new rate would be a full 0.125% higher in rate at 4.75%.  The pricing components are broken down as follows: the 10 bps g-fee increase equates to around 70 bps worsening in price, the removal of the 25 bps adverse market delivery charge improves the pricing by 25 bps, and then there is an additional LLPA (price adjustment) for the 80% LTV / 750 FICO bucket of 50 bps worsening to price. The net price impact is 95 bps worsening for this scenario. A secondary marketing manager at a national mortgage company calculates the impact of the 10 bps base g-fee increase as a worsening of 74 bps in price on average (48 to 83 bps depending on the note rate). The LLPA worsening impact, weighted based on recent production, was calculated at a weighted average of 61 bps for this lender (the actual LLPA adjustment changes vary based on LTV and FICO and range between a worsening of 25 bps and 150 bps). These two components combined with the 25 bps adverse market delivery charge improvement, net an average of 110 bps worsening (actual changes are dependent on the note rate and LTV/FICO bucket). The 25 bps adverse delivery market charge adjustment of 25 bps will remain in place for properties located in Connecticut, Florida, New Jersey, and New York.  The LTV/FICO LLPA adjustment changes do not apply to loans with terms <= 15 years.  Capital markets and secondary managers should be concerned with the effect this has on their locked pipeline and looking to build this g-fee and LLPA increase into pricing within the next couple weeks, if not sooner. On the other hand, I received this note from an industry vet. "I am getting a little weary of all of the huffing and puffing of housing industry folks about Freddie and Fannie G-fees and delivery fees/loan level price adjustments. Everyone is on record as saying it is critical to have more private capital in the mortgage market and everyone bemoans the fact that F/F/FHA comprise 90 percent. Anytime the FHFA takes steps to reduce the federal presence in the market, either by suggesting conforming loan limits are cut or fees increased, there is gnashing of the teeth that the economy is too weak to allow it and the housing market will crash. Rob, last time I checked, interest rates were still near historic loans.  We have become addicted to government subsidies and government-fueled low interest rates so that any increase in rates/costs are seen as a death knell for the industry.  I just attended the MBA Independent Mortgage Bankers Conference in Miami and during a question and answer period a panel was asked by a mortgage banker when Fannie and Freddie were going to start lowering G-fees.  What world does that guy live in? The world really won't end with higher rates or a return to normalcy in interest rates.  I bought my first home in 1982 with a prime, 'teaser' interest rate of 13.25 percent, and it was a neg-am loan so the next year I owed more than I did at the start.  But the interest rates in the economy at that time were 18 percent. The country survived. We will again. People can afford 5 percent mortgages. Those are still near all-time lows." But at this point originators, Realtors, and borrowers don't quite realize yet what is going to hit them with the gfee, loan level price adjustment, and QM changes. "In a world of pristine credit quality, we're seeing some of the higher credit tiers impacted the most. The 680-740+ tiers will feel this updates much more than the 620-679 tiers. We noticed with any loan over 70% LTV, count on LLPAs up at least 50bps. Apparently, there's no such thing as a vanilla loan these days and a 720+ fico is still a substantial credit risk.  A 740 fico at 85% LTV will have a 150bp LLPA, up from 25bps. OUCH!" The net effect here is a move to increase conventional rates, much more than initially expected. "Our take?  It is by far the most significant step FHFA and the agencies have taken to date in their efforts to better align the conventional market with the private sector. Many of these LLPA updates will push rates .25-.375 higher (i.e. worsening price 75-150bps). This is before accounting for any actual g-fee updates which we'd expect to have another .125 or so impact on rates. This impacts current locks, but has already been priced into long-term locks, which include builder business - and educating those builders is important. The changes will impact hedges and mandatory execution, along with the need of refreshed pricing policies (extensions, re-locks, worst case, etc.) as exceptions can be extremely costly and impact hedge reporting. In other words, LOs should not play a game of locking in loans for a shorter period than will be required to close them, and trying to extend with a minimal price hit. The price hit will be huge. And don't forget QM and Ability to Repay: with some of these LLPA updates, obtaining par rates and bona fide discount points may be difficult.  LLPAs of 150-300bps will be all too common - think of what will happen to rates by folding that price increase into them.      At least mortgage servicing rights became a lot more valuable, right? Those existing borrowers will be even further removed from refinancing. I received this note from an LO at a large aggregator. "We are going to price the new LLPA and GFee increase into our rate sheets within the month. Our locks are typically 60 days plus they want to bake in a month for delivery to the agencies. For the LO like myself who wanted to game the system and do a 90 day lock on a deal there is an automatic 75 bps hit for locks over 60 days until the first week of January. I would imagine the other big banks will follow suit. As for private money, with our, and other banks like Wells, non-conforming loans they are a good .25-.375 less in rate. However we chose the best of the best borrowers and force them to have huge post closing liquidity, at least 12 months. This is on top of the minimum down payment, high credit scores, and above $417k loan amounts. Your Average Joe does not qualify for these loans and is stuck with agency products and we will never offer them a nonconforming product so long as Fannie and Freddie exist. It is an incredibly tough environment for even big bank LOs, with QM upon us (already embedded in my LOS system) and the gfee and LLPA increase...and the taper announcement did not help. A full taper would be the knockout punch and would put me out of my misery forcing me to start looking for another job in another field." Jason Oelrich, president of Liberty Financial Group in Washington, observed, "Lew Ranieri is 'spot on' in calling out the impact to housing affordability. As we are all fully aware, at the end of the day there is an immutable relationship between the monthly earnings of a homebuyer and the maximum debt service that he or she can shoulder...especially with all of the QM limitations coming.  Given the "1:10 monthly payment rule of thumb" relationship between interest rates and purchase price (e.g., a 1% move in interest rate impacts the monthly payment roughly the same as a 10% move in purchase price), I am also concerned that this LLPA change could prematurely stifle near term continued home value appreciation, and could possibly even result in a double-dip correction downward in some markets...particularly when considering the impact to MBS pricing and interest rates that future Fed tapering will have.  Poor timing and complete lack of forethought indeed...we are still a long ways from where we need to be as an industry which is so vital to the wellbeing of our national economy.  You just know that a significant unintended consequence of the quest for privatization is to usher in Subprime Era 2.0..." Let's try keeping up with some recent M&A deals in the mortgage banking and banking world - they just don't stop. PMAC announced plans to purchase Residential Funding. (As is happening with many other lenders, rumors about the viability of RFC have increased in recent months as it has closed branches and facilities and sold servicing.) In its 58th bank merger/acquisition transaction of 2013, KBW announced that First Financial Bancorp, the parent company of First Financial Bank, and The First Bexley Bank announced the signing of a definitive merger agreement. Under the merger agreement, First Financial will acquire First Bexley in a cash and stock transaction in which First Bexley will merge with and into First Financial Bank. The Bank of Marion ($349mm, IL) will acquire First Southern Bank ($242mm, IL) for an undisclosed sum. Cornerstone Bank ($1.3B, NE) will acquire Bank of Marquette ($35mm, NE) for an undisclosed sum. Hanmi Bank ($2.8B, CA) will acquire United Central Bank ($1.6B, TX) for $50mm in cash or about 0.62x tangible book. The Victory Bank ($141mm, PA) will merge with Hundingdon Valley Bank ($159mm, PA) in a merger of equals. PacTrust Bank is now Banc Home Loans, a division of Banc of California.  The name change reflects the company's expanded offerings, including the Expanded Criteria program for borrowers with lower credit and several Alt-Doc programs based on tax returns or bank statements. M&T Bank has rolled out its FNMA HomeStyle High Balance product, which allows borrowers to finance either their purchase or refinance and the cost of their home rehabilitation through a single mortgage.  Guidelines follow the HomeStyle Conforming product with slightly lower LTV limits. A Little Heartwarming Christmas Story When four of Santa's elves got sick, the trainee elves did not produce toys as fast as the regular ones, and Santa began to feel the Pre-Christmas pressure. Then Mrs. Claus told Santa her Mother was coming to visit, which stressed Santa even more.  When he went to harness the reindeer, he found that three of them were about to give birth and two others had jumped the fence and Heaven knows where. Then when he began to load the sleigh, one of the floorboards cracked, the toy bag fell to the ground and all the toys were scattered. Frustrated, Santa went in the house for a cup of apple cider and a shot of rum. When he went to the cupboard, he discovered the elves had drunk all the cider and hidden the liquor.  In his frustration, he accidentally dropped the cider jug, and it broke into hundreds of little glass pieces all over the kitchen floor. He went to get the broom and found the mice had eaten all the straw off the end of the broom. Just then the doorbell rang, and an irritated Santa marched to the door, yanked it open, and there stood a little angel with a great big Christmas tree. The angel said very cheerfully, 'Merry Christmas, Santa. Isn't this a lovely day? I have a beautiful tree for you. Where would you like me to stick it? And so began the tradition of the little angel on top of the Christmas tree. Not a lot of people know this. If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, "What Do We Know About the Future of the Agencies?" If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers. Rob (Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)