According to the most recent ARMCO Mortgage QC Trends Report, in Q3 2016, as
in the previous two quarters, Legal/Regulatory/Compliance defects were the
major driver of the overall defect rate as lenders continued to make
adjustments in the implementation of TRID requirements. Some highlights
include: The benchmark Critical Defect Rate drops to 1.27%, supporting a
downward trend after reaching a high of 1.92% in Q1 of 2016; Overall defects
associated with the Legal/Regulatory/Compliance category jump by over 14%,
however, critical defects within the same category drop to a 12-month low,
comprising 22.69% of all critical defects due to changes in lender severity
ratings are the cause of this decrease; Critical defects associated with
Income/Employment lead all categories for "Credit Related Defects".
The top reported critical defects are all associated with the miscalculation of
income. Access the full report here.
For brokers, "Great news to get your business kick
started in March. Carrington Mortgage Services, Wholesale Lending
has made the process easier and the experience better for its brokers with the
following changes: First, management is removing automatic appraisal review
for conventional loans, and eliminating automatic VOD requirements for purchase
and refi loans. All 4506T requirements are being revised based on
AUS. Finally, pre-closing VVOE on Streamline & VA IRRRL loans were removed. These
are just a few of the changes made recently in Carrington's ongoing effort to
become easier to use and with a commitment to their 'under-served'
strategy!" Brokers new to Carrington should contact Matt Evans, VP
Sales West, (949-517-6033) or Sam Bjelac, VP Sales East, (410-603-8053).
Jim McCarthy, a founding member of the CFPB and expert
on the complaint process, announced that he will be helping companies navigate
the complex world of corporate complaints. Jim will be leaving
PennyMac to hold a series of seminars through InsideArm.com in March and April designed
to help businesses navigate the pending CFPB complaint intake, and Company
Portal changes. He also wants you to contact him if you
need any help with the CFPB complaint process or technology. To register
for the seminars, click here.
In merger & acquisition news....
It isn't the first, and won't be the last. Caliber
Home Loans Inc. will be buying the residential mortgage assets of Banc of
California. After the deal goes through it will reduce operating locations
by more than 60 percent and total employees by about half, leaving it with
fewer than 950. The deal includes the leases related to Banc of California's
mortgage-origination offices. Bloomberg reported that, "Annual run-rate
expenses will drop by more than $150 million, and the bank expects to book a
one-time cost of about $4 million, per the filing.
Banc of California has
had its share of turmoil and bad press, with its former CEO Steven Sugarman
resigning in January when the company disclosed a probe by the Securities and
Exchange Commission. The sale is specific to Banc Home Loans, the Bank's retail
division. Portfolio Lending falls under the commercial division, so it's
"business as usual" with originations coming from its Wholesale and
Correspondent partners. The sale also includes a portion of the servicing
assets.
On the bank side
of things, it has been quiet recently. In the last week or so it was announced
that Legence Bank ($304mm, IL) will acquire 8 IL branches with about $146mm in
deposits from MidCountry Bank ($797mm, IL).
Research by Bank
Director finds the primary reasons bankers cite for walking away from an
M&A target are: price too high (64%), credit quality (54%), culture at the
target (49%) and regulatory concerns (17%).
So, what is important in maximizing value in an M&A
deal? STRATMOR's Jeff Babcock weighed in with his thoughts given recent
experience: there are still many more motivated, well-capitalized buyers for
retail origination platforms than there are such entities available for sale.
"It continues to be a true 'sellers' market' for
mid-size Independents. The challenge for prospective sellers is not just
attracting a buyer, but aligning with the right buyer to optimize the sale
execution of their company. We believe that selling shareholders can (and should)
proactively position their organization to strategically fit with the most
motivated buyers - and thereby realize the level of economic value which
reasonably satisfies their financial expectations. Highly competitivebids from
multiple bidders will be realized where theseller scores high on certain
quantitative andqualitative criteria.
"Management's ability to achieve
consistent Net Income margins and sustained profitability is one of the most
compelling value elements. By consistent, we mean profitability which is not
simply linked to origination market conditions with wide variances between good
years and bad years. Net Income margin is defined as the channel profitability
including all allocated expenses. For 2014, the MBA/STRATMOR PGR Retail margin averaged
50 basis points across all mid-size Independents which improved to 66 basis
points in 2015. (Although full-year 2016 PGR data has not been fully compiled
as of this date, STRATMOR anticipates mid-size Independents will once again
report profit margins in the 60 to 70 basis point range.)
"Regarding product mix, for obvious reasons, today's
buyers are focused on (sometimes even obsessed with) a seller's purchase
business share - but not just for the last six months. A consistently
above-average purchase share demonstrates management's commitment to building
and maintaining referral sources over several years. There is a sense that
where this is the case, a lender's sales force will not revert to refinance
volume when there is a mini interest rate rally. A strong purchase business
culture eliminates some of volatility in the inherently cyclical mortgage
business.
"The next most impactful element of product mix is a
prospective seller's government lending share (inclusive of FHA, VA and USDA
loans). It is generally assumed that government originations generate higher
revenues and margins than agency conventional loans. The PGR average government
share for midsize Independents has been 40 percent for 2014/2015.
"Another consideration is the share of jumbo
originations. In contrast with government products, jumbo loans generate
significantly lower revenues and are a drag on earnings. The PGR jumbo
average for mid-size Independents is four percent. Obviously, therefore, a
significantly above average jumbo share is generally a negative.
"Model match and cultural compatibility are two
concepts thrown about loosely in M&A discussions, but they are both
absolutely critical to the success of an acquisition. Model match refers to the
fundamental style of doing business - branch network composition, originator
compensation structure, product focus, mortgage banking disciplines, etc.
"Corporate culture is all about the effectiveness by
which a lender deploys and manages its human capital. An assessment of culture
typically includes corporate values, leadership style, strategic direction,
management effectiveness, communications, accountability, etc. While no two
organizational cultures will be exactly alike, they must be compatible. The
history of mortgage banking M&A is littered with examples of failed
transactions which resulted from culture clashes, many of which were probably
avoidable if the parties made cultural considerations a higher priority.
"Compliant originator compensation plans is one topic
has assumed greater significance with the advent of Dodd-Frank and is often
among the first questions from a prospective buyer. Within this context, compliant
means uniform commission structures based entirely on volume with as few
variations as possible. Any commission arrangement that is tied to revenue
levels is a doubtful plan. Incentive compensation will also be reviewed in
terms of possible exposure to Fair Lending violations. Bank buyers are
particularly sensitive to these issues given the strategic importance of
"reputation" and 'trust' across virtually all Bank operations.
"Buyers also expressly prefer that a prospective
seller has completed its transition of originators to a non-exempt status such
that they are eligible for minimum wage and overtime compensation. More
generally, changes to lender compensation plans - especially changes to sales
compensation - should be enacted prior to an acquisition so that the seller's
staff does not perceive that such changes were implemented as part of the sale
or initiated by the buyer. Where the buyer must initiate compensation changes,
it introduces uncertainties that are likely to detract from value.
"STRATMOR is often asked about whether the quality of
the sales force matters. In every mortgage company sale, the primary
asset being acquired is the origination capacity, quality and loyalty of the
lender's field sales force. Sales force quality is typically measured in terms
of productivity, tenure/ turnover, age and concentration. A detailed analysis
of a lender's production performance provides an analytical assessment of sales
management effectiveness (recruitment, training, motivation, retention).
"We accomplish this assessment by segmenting a client
lender's sales force into quintiles based on performance and then compare the
metrics against the industry population using our Originator Census benchmarking
survey tool. Since the top 40 percent of originators typically account for
about 80 percent of total production, it is insightful to focus on these
performers. Often most of a client's turnover occurred in the bottom 40
percent of loan officers. And, since Originator Census data
differentiates between voluntary and involuntary terminations, we can glean a
sense of how proactive a lender is in clearing out low producers.
"Although subjective in nature, there
appears to be a correlation between management effectiveness/tenure and
financial performance ranking among PGR participants. For example, management
effectiveness should be assessed in terms of leadership, strategic planning,
employee satisfaction, accountability and communications. Does the subject
company bring a history of adapting to change, innovation, creative utilization
of technology, dependable management reporting and cost controls? Mortgage
banking is a people business where 80 percent of expenses are related to
compensation. Management's ability to leverage its human capital is
therefore an indispensable skill.
"What about production momentum? Management's track
record in improving market share is the best measure of production momentum.
Whenever feasible, STRATMOR encourages clients to seek out local or regional
market share reports. A prospective seller that can demonstrate a consistent
ability to gain market share, irrespective of the industry cycle, is more
valuable than lenders whose volume tracks with the industry trends.
"Management's ability to earn respect
and appreciation from counterparties, regulators, borrowers and even
competitors provide great comfort to a prospective buyer. Investor Report Cards
are one source of objective reputation assessment, as well as systematic
measurement of borrower satisfaction, e.g., STRATMOR's MortgageSAT Borrower
Satisfaction Benchmarking program.
Lastly Jeff addressed management roles going forward.
"Since a key element of an acquisition's economics comes from eliminating
redundant overhead and support functions, the enthusiastic commitment to such
actions by key seller executives, who are most responsible for holding together
the seller's production organization, is a critical deal point." Thanks
Jeff!
Interest rates for those interested...
Although the data has been solid what is moving rates now
isn't necessarily economic news from a month or two or three ago, but rather
the series of speeches from the presidents of the various Federal Reserve
districts. There seems to be a coordinated message, yesterday, for example,
from the Fed's Harker, Williams and Dudley, that a March rate hike is a
distinct possibility. And if traders and investors think rates are going to be
higher in six months, or three months, the demand for fixed-income securities
tends to drop, and rates move higher - a self-fulfilling prophecy. The odds
of a March 15 FOMC rate hike are now over 80%. We'll see what Fed Chair
Yellen says in her next speech Friday afternoon.
This morning we've had weekly Initial Jobless Claims (-19k to
223k, lowest since 1973!). Coming up are the ISM-New York Business Confidence
Index (Feb), and the Treasury will announce the auction sizes for next week's
3, 10, and 30-year auction. For numbers, yesterday the 10-year note worsened,
closing at a yield of 2.46%, and the 5-year Note and agency MBS prices worsened
about .5 in price. This morning the move toward higher rates continues with
the 10-year at 2.47% and agency MBS prices worse a smidge versus last night.
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