More on EPO; Divining Industry Trends from Bank Earnings, Radian Results, & Green Tree's Broker Biz Exit
The CFPB is expected to spend a lot of time in 2014 on the
closing process, and it has a round of public comments due February 7.
It was put out early last month, and has only 17 questions. Make your
Besides the CFPB's influences, what's going on out there in the industry?
Darned if I know, but maybe we can learn something from the collective
bank earnings announcements. Most of the large mortgage originators,
including the likes of Wells Fargo, J.P. Morgan, Bank of America, Citi,
BB&T, PNC Financial, SunTrust, U.S. Bancorp, and Fifth Third
Bancorp, have reported 4th quarter, 2013 results. Mortgage
banking earnings declined, as one would expect, by meaningfully lower
mortgage volumes partially offset by stronger than expected gain-on-sale
margins. In fact, for "the big boys" total originations were down
roughly 40% from the third quarter. Mortgage applications were also down
about 33% on average (for the companies that reported them) which
doesn't bode well for the 1st quarter of 2014.
saw a lot of interest rate volatility during the second half of 2013.
That makes it difficult for mortgage companies to effectively hedge
their pipelines. But for some good news, rep and warranty costs and
repurchase demands were lower in 4Q for most banks, driven by
mortgage-related settlements some of the larger banks made with the
GSEs. Mortgage Servicing Rights were all over the map, with some
companies showing increases in MSRs and others taking hits.
expect mortgage banking profitability to trend down in 2014 driven by
further declines in mortgage volumes. (The 40% drop was certainly higher
than the 27% forecast by the MBA.) What I am continuing to hear is
smaller lenders increasing market share at the expense of the big banks,
especially on the purchase side. And if anyone's business model banked
on the volumes and margins of 2012 and the first half of 2013 continuing
indefinitely, well, I've got news for them...
Speaking of earnings, mortgage insurance company Radian announced its fourth quarter and full-year 2013 financial results.
(Radian is the largest MI company with $161 billion in insurance in
force.) It had net income of $36 million and achieved MI operating
profit, saw $47 billion of new MI business in 2013, a 27% increase from
2012, announced a shrinking legacy MI book (71% of MI portfolio
represents business written after 2008), and a shrinking legacy FG book
(79% decline since the company stopped writing new business in 2008).
Continuing on with MI ramblings, more GSE (government sponsored enterprise, e.g., Fannie & Freddie) are carrying private MI. Although
Fannie Mae and Freddie Mac securitizations dropped significantly in the
fourth quarter of 2013, the share that carried private mortgage
insurance continued to increase, rising to 24% in the most recent
quarter (up from 17% in the 2nd quarter of 2013). If you'd like to pony up for the report: "fourth-quarter use of private mortgage insurance."
promised, let's continue yesterday's Early Pay Off (EPO) penalty
discussion with some notes from trained professionals - these are not
a note from a broker in Northern California: "We got hit with a $12,000
EPO penalty in 2013 when one of the loans we sent to a wholesale lender
was paid off prior to the six-month seasoning period. We had nothing
to do with the refi that paid off the loan, so the penalty was very
painful. We agreed to pay the penalty nonetheless b/c we know we agreed
to do so in our broker agreement, and b/c the wholesale lender had to
pay the penalty to its investor. We agreed to pay even though we no
longer do any business with the particular wholesale lender hitting us
with the penalty; we don't want to be known as the company or broker that does not honor its agreements."
I received this from a senior manager on the West Coast: "You should mention that, as
the industry evolves with lower profits and more and more small
servicer lenders, it does not take a rocket scientist to figure out
lenders are going to enforce stiffer penalties on EPOs especially as
F&F are enforcing penalties. In some cases a YSP is just a fraction
of what could be owed. I always tell my loan officers if they can't
control the borrower they should pursue the refinance directly. At least
in those circumstances we can capture some if the list revenue on the
new deal. A rather fair renegotiation practice is important, as no
lender wants to close loans in illiquid coupons only to see them EPO in a
month or two."
Donna Beinfeld with Donnashi Enterprises, Inc. contributes, "Predatory
Lending guidelines were issued by Fannie Mae several years ago. Many
states (i.e., New Jersey) adopted the policy which included refinance
churning, product steering, and bait & switch. As time went on,
these guidelines were rolled into UDAP, and as of 2013, CPFB established
guidelines for fair advertising and information passed onto the
borrower about a mortgage, which is called UDAAP. UDAAP refers to:
Unfair Deceptive Acts and Practices which includes the above three
items as well as: deceptive advertising. I agree that you cannot control
a consumer's desire to lower his/her interest rate. As an industry we
cannot require a consumer to continue paying a higher price for their
loan, if rates drop in a way that can represent a lowering of one's
payment. The FHA, however, does indirectly enforce a 6-month rule for
refinancing. The policy requires that the borrower make at least six
months of mortgage payments in order to qualify for a streamline
refinance. Lenders and Servicers would be best to pay attention to
requests for payoffs, and work directly with the consumer in lowering
their interest rate. All of the agencies have some kind of a streamline
refinance program. This would by-pass churning by an originator; it
would by-pass penalizing a broker or lender who is not involved in the
borrower's refinance. The six-month rule is a good one, but it should
not be created to punish a company that helped a borrower get a lower
rate, and has nothing to do with the current payoff and new mortgage."
(Of course there are lenders out there that do not charge a penalty for EPOs. I have no intention of publishing a list of those that do or don't, but, for example, Republic Mortgage Home Loans does not.)
this note from a well-placed source: "In the real world, when FNMA
receives an Early Pay Off from a cash window transaction, they simply
debit the lender's FNMA trust account. There's of course a bill for
accounting purposes, but it isn't a conversation - there is no pleading.
It is funny how the whole investment community expects that an asset
should last longer than just a couple of months. (Sarcasm font.) I
would bet that if there are lenders out there with longer periods, it's
to account for the time that it takes the lender to purchase and to
complete the loan sale and shipping process (up to 60 days plus FNMA's
120 would make 180 days, although most loans are sold much faster)."
this from a money manager I know, "Lenders, and their originators,
should not think that they can place a loan in an MBS security and have
it escape the EPO metric. Wall Street regularly looks at the issuers of a
security, and also at the prepayment that the particular issuer's
securities have experienced in the past. There
is a premium for securities sold by issuers who have good prepayment
track records and a market price penalty for issuers whose securities
pay off quickly."
was this note from a servicer. "Talk to the lenders out there about the
huge number of payoffs that they receive in day 12 through about 160.
Brokers and originators know the various policies out there, and they
engineer their closings to avoid the EPO recapture fees. That doesn't
make it any less of a negative economic event for the investor who paid
1.25% SRP, expecting to get that .25% servicing fee for the next 6-8
years, and instead, they are only able to capture a whopping .125% for a
loan that pays off at month 6. For
every loan that you appeal to the investor at day 117 on the basis of
"come on... it was only 3 days....can't you give us a break because it was
so close to the cutoff", there are probably 10 more that paid off on day
123. So if you're willing to have the investor come back to you for
loans that pay off at day 123 (on a 120 day EPO period), then maybe an
equitable arrangement could be met for your 117 day payoff."
And Robert Pieklo, SVP Secondary Marketing with American Financial Resources, contributes, "Remember that with Fannie and Freddie the LLPAs are not considered when paying an EPO. So,
for example, if you have a loan with 275 bps of LLPAs, and you sold it
to Fannie and the gross price on the commitment was 106, one would have
received 103.25 in premium when sold. If it were to EPO, you would still
will see a lot of flux this year in the industry, and yesterday was a
good example of that with news from Astoria and with Green Tree.
Astoria Financial Corporation,
the holding company for Astoria Federal Savings and Loan Association,
the second largest thrift depository in New York State will be expanding their correspondent lending footprint
to include Northern California (San Francisco, Marin, San Mateo, and
Santa Clara counties). Astoria Financial is a portfolio lender known for
its "competitive ARM pricing and exceptional customer service." Please
contact Chris Blake for further information: email@example.com.
"After much consideration, Green Tree Servicing LLC has decided to exit the Wholesale mortgage lending business. This decision was very difficult for us as we value the relationships we have built throughout the years, but due to shifts in the current market and regulatory environments,
we have decided to focus our business lending resources on
concentrating and improving our core Correspondent lending channel. We
will continue to support both delegated and non-delegated
Correspondents. In addition to best efforts, individual mandatories,
rate sheet forwards and live trades, correspondent customers will also
have access to AOTs and bulk deliveries in the near future. As we
implement this change, all wholesale loans in process must be locked on
or before February 11, 2014 and closed and funded on or before April 16,
2014. Rate lock extensions may be granted, according to current policy,
provided the extension does not exceed April 16, 2014. Green Tree will
honor all loan commitments as it winds down its Wholesale pipeline of
approved loan requests."
Rates have done well this week, and this year, so we shouldn't complain if they want to take a breather.
The 10-yr. note and agency MBS prices all dropped/worsened by about
.250-.375, and the 10-yr. closed at a yield of 2.62%. There is probably
more focus on the weather than on the markets. This morning we've had
the ADP employment data for January, always of questionable validity
since it doesn't include government payrolls, that came in near
expectations at +175k. (January has the largest seasonal adjustment
factor.) The Mortgage Bankers Association released its weekly report on
mortgage application activity - almost unchanged from the prior week.
Later we'll have the January ISM Non-Manufacturing figures, as well as
the details of the Treasury's Quarterly Refunding (next week's auction
of 3, 10, and 30 year securities). For numbers, in the early going, the 10-yr is back to 2.60% and agency MBS prices are better by nearly .250.