Congress Revisits Originator Compensation Reform; Servicing Values in Question; Freddie Mac COO Resigns; Loan Officer Liability
Sometimes, all you have is your good name. Harry What?
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The latest comp news comes from the National Association of Mortgage Brokers (NAMB), which, through a call-in campaign, apparently has spurred on the House Financial Service Committee to examine the impact the Federal Reserve Board's recent regulation controlling employee pay will have on loan originators in its Oversight Plan. "In the House Financial Services Committee's Oversight Plan released today, the Committee will examine the implementation of proposed rules issued by the Federal Reserve governing mortgage origination compensation, which are scheduled to become effective April 1, 2011."
The MBA already urged delayed implementation: FULL STORY
If you're a loan agent, or any non-hourly profession, are you owed over-time if you work more than 40 hours a week? It depends who you ask, but many HR folks are watching this one: QUICKEN
One person not sticking around to see the result is Freddie Mac's chief operating officer, Bruce Witherell, who quit yesterday. This comes a day after Wells Fargo's CFO resigned/retired, and before tomorrow's official release of the Treasury's Freddie & Fannie proposals.
What happens if a loan originator doesn't adhere to the compensation regulations? The regulations are spelled out as follows: Section 129B of the Truth in Lending Act is amended by inserting after subsection (c) (as added by section 1403) the following new subsection:
''(d) LIABILITY FOR VIOLATIONS.
''(1) IN GENERAL.-For purposes of providing a cause of action for any failure by a mortgage originator, other than a creditor, to comply with any requirement imposed under this section and any regulation prescribed under this section, section 130 shall be applied with respect to any such failure by substituting 'mortgage originator' for 'creditor' each place such term appears in each such subsection.
''(2) MAXIMUM.-The maximum amount of any liability of a mortgage originator under paragraph (1) to a consumer for any violation of this section shall not exceed the greater of actual damages or an amount equal to 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including a reasonable attorney's fee.".
One investment banker wrote to me on this and said, "I think it's referring to the sections regarding the new compensation rules. I'm not sure if there are other fines though - there must be more guidelines - the government must also be able to bring action to originators - the above seems like penalties directed towards consumers who have been wronged. I'm not sure if any consumer would ever find out." Of course, large investors will be approving any plans that are put forth by brokers or any companies that sell loans to them to make sure they adhere. This may create a real problem for a company selling loans to multiple investors, and therefore may have to go through multiple compensation plan approval reviews!
The Fannie & Freddie plans have been well leaked to the press at this point, although anything that is decided upon will takes years to implement. Of great interest to many investors, and especially those servicing loans, is what will happen to the value of servicing under the plan, and how this will impact street pricing for originators. (And let's not forget Basel III simmering out there.) Minds much smarter than mine suggest that existing servicing will be "grandfathered in to the current process/values. Going forward, at some point, however, the minimum servicing fee for newly securitized loans would be reduced from 25bps to 5bps. Concurrent with this lower minimum fee, servicers will only be required to process loans that are less than 89 days delinquent. For the current loans, the Servicer will be allowed to earn the float, late fees and ancillary income; however, it will be obligated to make advances as needed while the loans are less than 89 days delinquent. Loans that are 90+ days delinquent will be transferred to a "Special Servicer" who will be paid on a "cost plus" basis from a pre-negotiated schedule. This Special Servicer can be another party or a different department within the original Servicer. So writes a trader at BofA/Merrill Lynch.
The suggested outcome goes on. The GSEs (or other "wrapping entity") may raise the minimum guarantee fee to something in the 40 to 65 basis point range. So perhaps for most servicers, a drop in the servicing fee, combined with an increase in the g-fee, may be somewhat close to a "wash" price-wise. Or perhaps not - it may depend to some extent on how much of the delinquency burden the GSE takes versus the servicer. The Merrill piece suggests that "it make perfect sense to give the economic risk of the entire delinquent mortgage function to the experts who can then charge the correct price versus paying a known DM fee schedule." Also, since the large bulk servicers are banks that will fall under the new Basel III rules, reducing the capitalized MBSR from 25bps to 5bps will mostly solve the proposed capital restriction issues.
Wells Fargo's mortgage division, as the #2 servicer and with its 25% market share in 2010 attracting interest, has been busy lately. Yesterday Wells Fargo Home Equity announced a 5% increase in CLTV when the subject transaction meets certain criteria, although not to exceed the WFHE maximum of 80% CLTV. The numbers are based on market classifications, condominiums, or second homes, but with Wells Fargo and other investors maximum CLTV's vary by loan amount, so check the guides.
On the wholesale side, within the last week or two ago WF's wholesale group addressed "Non-Referred Vendor Fees, issued a clarification for FHA Streamline Refinance Payment Requirements, and a reverse mortgage update focused on requirements to provide proof that borrowers have received a list of HECM counseling agencies.
Wells' wholesale division also notified brokers of upcoming "benefit to borrower" policy changes, as well as the TIL disclosure changes that took effect on January 30th. Lastly, Wells sent out a bulletin to brokers addressing, "Federally Regulated Brokers: S.A.F.E. Registry Opening Date Announced, Freddie Mac No Longer Allows Streamlined Refinance (FOSR) Transactions, Home Equity Income Requirements Update, Reminder: Texas Attorney Fee Disclosure Requirements, Enhancement: FHA "Property Flipping" Policy Changes - Extended Until Dec. 31, 2011, Condominium Project Approval Changes, FHA Elimination of the Master Appraisal Report (MAR), Documentation Requirements of Rental Income from the Subject Property, Rental Income Qualification Requirements When a Departure Residence Becomes an Investment Property, Rental Income Qualification Requirements from a Property Other Than the Subject Property Owned Less Than 12 Months, WFHM/WFHE Market Classification List Update for Five Counties in Florida, and New Compensation and Anti-Steering Rules: Preparing for Lender-Paid State Levels and Compensation Adjusters." Phew!
At least we had a little rebound Wednesday in the bond markets, which helped out rates. As one trader from Jefferies put it, "While the performance of mortgages over the past few sessions has been incredibly disappointing we continue to expect that over time adding into these pockets of weakness will pay dividends. Supply will remain nearly non-existent at these rate levels and once the market establishes a new trading range investors will be in search of ways to enhance returns, particularly ones which offer the liquidity of MBS."
We saw some of that yesterday, and it was paired with a decent $24 billion 10-yr auction. And let's not forget Ben Bernanke's testimony, and that fact that the bond markets were "oversold" and therefore one would expect a bounce at some point. When the proverbial dust had settled, mortgage security prices were about .375 better than Tuesday's close. Hopefully you don't mind (too much) rates where they are, as many analysts feel that in the immediate future rates may chop around at these levels for a while.
This morning we've had our usual weekly Jobless Claims, which dropped by 36,000 to 383,000, and the 4-week moving average fell 15,000 to 431,500. (Many prefer focusing on the 4-week moving average since it irons out some of the weekly volatility.) Regardless, this puts the jobless claims number at its lowest level since the summer of 2008. After the news we find the 10-yr yielding about 3.69% and MBS prices slightly worse. We still have a $16 billion 30-yr auction to muddle through.
A man walks into a loan officer's office and sees an agent sitting behind the desk. He walks up and introduces himself and they chat about a home loan. After a while he tells the agent, "Look I know this is forward, but I think you're the right person to give me a home loan. If I gave you 10 points, would you do it?"
She looks at him for a minute and says, "Really? Ten points?"
"Yes," he says.
She tells him OK.
A minute or two go by and he asks her, "If I give you a dollar, will you still give me the loan at that rate?"
She looks at him with disgust and asks, "What the heck do you think I am?"
He replies, "Well, we've already established that. Now we're just working on the price."