More Thoughts on Renegotiations and LO Comp; Capping Gfees? Don't Hold your Breath
The industry continues to grapple with issues caused by the "bad apples" in the lending industry. Just what the public needs or wants to see: Florida leading the nation in fraud. Here is the latest.
And good companies are expanding. Texas-based Premier Nationwide Lending is continuing to expand. Over the past 11 years, Premier has grown from start up to funding over 11,000 units for $2b/yr. (Recently named in the top 50 mortgage companies in America by Mortgage Executive Magazine.) It maintains a 75% purchase vs. refi ratio and is dedicated to long term relationships. Premier recently expanded to 14 states and is looking to fill retail and branch opportunities for producers and DE underwriters. Premier is run by the same management team that ran the SW regional wholesale center for NAMC in the '90's and consider themselves "a mortgage company for producers run by producers." For more information, contact John H. P. Hudson at email@example.com or visit www.pnlretail.com - all inquiries are confidential. Licensed in AK, CO, FL, IA, LA, MN, MO, ND, NE, NM, OK, PA, TX, and WI.
"Rob, have you heard anything Congress capping the agencies' gfees, to help more borrowers?" No, I have not - that's a new one on me. Both Congress and the agencies have pretty much only raised them as of late. In fact, about a month ago, comments made by GSE regulator Ed DeMarco leads us to believe that we're likely to see a 70 basis point guaranty fee before yearend, which could drive business back to FHA and portfolio lenders. (In a speech before the National Association of Business Economics, DeMarco said that the agency expects to continue increasing g-fees, which currently are in the range of 50 basis points.) If you recollect, in his speech DeMarco promised that the agency this year would "establish" a brand new government entity that will issue mortgage-backed securities, hinting that in time the platform would be sold to private investors. However, the entity is being built outside of Fannie and Freddie but is being constructed with GSE money.
Yesterday the commentary contained information on the Access National branch closure story. Access National announced that it is closing its 38-person mortgage production office, specializing FHA and VA streamlined refinancing. In addition, the president of Access National (ANCX) had sold stock in several transactions leading up to the announcement. I received this note: "There is no law against a person selling the stock of his or her company. In fact, savvy business people will rarely have all their holdings in one company, even if it is their own. The key to investments is diversification, and I continue to hear stories of employees of Lehman, WAMU, Fannie, Countrywide, Freddie Mac, Nat City, and others who had their life savings tied up in one company, only to see it evaporate. Those individuals are the ones who will be working for the rest of their lives to make up for the shortfall. Regarding Access National, this is the first time the president reportedly sold any stock since 2004, amounting to 5% of his holdings. Congratulations to him for taking some chips off the table and diversifying."
I received several notes on the practicality of the renegotiation of locks. "One Capital Markets person noted, "LOs seem to forget that it is a real economic cost to the company. After all, the company has guaranteed to stand by its lock - shouldn't the borrower? And shouldn't the LO remind the borrower of this?" Purchases take precedence over refi's; loans about to go to docs over loans that haven't even been underwritten yet."
But Daniel Shlufman of Classic Mortgage wrote, "In the first place, LOs don't forget the cost to the lender. We just believe that the cost of not delivering a loan at all (i.e. if the borrower forces us to move a loan or leaves us entirely) is higher than the cost of delivering it at a reduced profit. If that is not the case, this secondary market economics should be more transparent so LOs understand it better. Secondly, the secondary market folks often forget that "secondary" comes from the root word "second" which means that "first" a loan must be closed and sold to them before they can sell it "secondly" on their market. So, since their sole source of "product" is loans from LOs, they do sometimes need to lose money on one deal to keep future deals coming (i.e. not to other lenders investors)."
He continued, "But, most importantly, borrowers don't care about out little insider business terms and operations. They just know that rates are lower and there is no financial disincentive to stop them from getting these lower rates. So, unless lenders want to reinstate the formerly standard .5-1.0 lock fee (or even a modified .25) which I think is a great idea, there is no reason for the borrower to "guarantee" anything or, even more so, to think that they did! Has anybody agreed on the price of a car, furniture, insurance policy or stock (or closely related, a commercial loan,) without putting down some money? Of course not! So why should they get a rate "guaranteed" from us without doing do?"
Another commented, "I was under the impression a Loan Officer could no longer have their comp reduced when the borrower wanted to re-negotiate a locked loan. Before the comp changes mandated April of 2011, we would share the cost of offering a better rate with the loan officer. Now the company absorbs it all. Can we still include the loan officer?"
And, "Oh come on, at least give both sides of that story on renegotiations. Broker/Dealers can't renegotiate when rates go higher and secondary doesn't pass on the profits of the hedges that work properly. A hedge is used to mitigate exposure to market risk at an understood cost to potential profits. If done properly, that cost is either your maximum exposure or a limitation to profit. Granted, I've tried explaining that concept to many an Originator and they just stare at me and repeat the question, 'So are you gonna lock?'"
Brad Nease wrote, "To your hedging conversation - I think it is reasonable for production people to ask for help when rates are going down. But, I think its better when they understand the dynamics of hedging and thus understand the pickle they're putting you in when you ask for an extension or renegotiation. Your clarification about broker dealers not renegotiating when rates are going down is correct. Production needs to understand that when they lock a customer, THAT is when the line is drawn in the sand as far as that specific lock. If rates get better by 25 basis points during a lock period for one of their customers, that means that the hedge for that specific lock deteriorated by 100 basis points in price. Depending on if the loan is a retail or wholesale lock, margins for the company have been declining. Overall, firms across the US have been reducing their margins to stay competitive. It is not unheard of to see a wholesale margin at 125 bps and a retail margin at 200 or 225 bps. If that's the case, many wholesale firms won't be covering their overhead and retail firms will breakeven. I realize that many seasoned production people understand this dynamic. But, when you lock a borrower, the conversation with the borrower 'that this is a great rate and you're comfortable with the payment, correct?' must occur. Otherwise, secondary people could make the same requests of production people when rates go up. 'Hey, I didn't put a hedge on for your customer when they locked, I'm going to need to raise their interest rate from 3.25% to 3.50%. Hope you understand.' You know that doesn't happen, but in essence, that's what production people are asking of secondary marketing people."
Switching topics to LO compensation (yes, hitting all the hot buttons today), Lendsmart's CEO Scott Flaherty writes, "I will add to your attorney's comment from a while back that, yes, it certainly could be possible to vary compensation to an LO based on loan product if that loan product took varying degrees of time, skill and education on the LOs part. But, as with most things, it isn't just that simple. Mr. Mondor made it very clear that although it was possible, you would need to prove what those time and skill differences were. You would need a comprehensive written study done that would sample a large group of loans and document the actual work and time differences within those files. The time differences would need to relate to the LO only. Not to an assistant or processor. Since the difference in pay would be to the LO, the study would be limited to only the time and efforts of the LO. And if the differences equate to only a 20% difference in the measured factors, then you could argue a 20% difference in pay between the products. We asked our team the question "Is the effort and cost involved with producing this study worth what the results will be?" Let's be honest, there isn't much of a difference in time needed to originate an FHA loan vs. a conventional loan. Maybe 15 or 20% if anything at all right? (We polled our 100 originators and many said no time difference and others said as much as 25 or 30% difference) So what would that equate to? A 10 to 20 basis point increase in an LO pay? The problem is, those who chose to run with this idea that you can vary pay, want to do it because the income is higher on these deals not because the work load is different. They want to pay 25 to 75 basis points higher on these loans. In some cases that is 50 to 100% more than the pay on conventional loans. I highly doubt that any brokerage or correspondent a) did a study to support their difference in pay or b) could show that their difference in pay is relative to the results of that study. Lastly, if you were to vary the pay based on FHA vs. conventional, why wouldn't you vary it differently on all products then? Aren't there time differences on VA loans, USDA loans, Bond loans? Would the results of your study tell you that state bond loans are more work than conventional? Do you want to pay more on those bond loans than conventional? Those who do bond loans are yelling "NO!" What a nightmare that study and the application of those results would be on the operations of most companies. Very little reward for being a white elephant and bringing on that risk." Thank you Scott!
Turning to some recent vendor & investor updates...
Mortgage Capital Management announced the addition of two features to its Risk Management System. "The Rate Protection Plan reduces fallout and provides long-term market assurance, while the Pooling Parameters Software helps create optimum 'spec' (specified) mortgage TBA pools to meet investor requirements." Sounds good to me! Secondary marketing folks know MCM, but for more information about Mortgage Capital Management's updates, visit mortcap.com.
RFC...GMAC...Ally...Green Tree... Frankly I have lost track. But it appeared that the jumbo conduit in all of this would carry forward, but not anymore. "MAC Bank Correspondent Funding (GMACB) Approved Correspondent Clients, please note that Ally Bank will not accept Jumbo commitments after April 19, 2013. All loans committed to Ally Bank/GMAC Bank must be closed by May 31, 2013 and purchased by Ally Bank/GMAC Bank on or before June 21, 2013. Rate lock extensions will be granted, according to policy, provided the extension does not exceed June 21, 2013."
Fannie Mae has announced plans to update DU over the weekend of May 19th to incorporate new elements into the DU Underwriting Findings Report, changes to the Special Feature Codes, and revisions to the messages issued on Housing Finance Agency loans. For more information, see the Release Notes on the Desktop Underwriter website. The April Loan Delivery Change Notification has also been updated to include four new fatal edits, which will be added as part of the upcoming April 22nd release.
(Heading to Missouri today, and the markets appear to be relatively quiet in the early going - but it is too early to ascertain...)
23 Adult Truths (part 2 of 2)
13. I'm always slightly terrified when I exit out of Word and it asks me if I want to save any changes to my ten-page technical report that I swear I did not make any changes to.
14. I keep some people's phone numbers in my phone just so I know not to answer when they call.
15. I think the freezer deserves a light as well.
16. I disagree with Kay Jewelers. I would bet on any given Friday or Saturday night more kisses begin with Miller Light than Kay.
17. I wish Google Maps had an "Avoid Traffic Mess", routing option.
18. I have a hard time deciphering the fine line between boredom and hunger.
19. How many times is it appropriate to say "What?", before you just nod and smile because you still didn't hear or understand a word they said?
20. I love the sense of camaraderie when an entire line of cars team up to prevent a jerk from cutting in at the front.
21. Shirts get dirty. Underwear gets dirty. Pants? Pants never get dirty, and you can wear them forever.
22. Even under ideal conditions people have trouble locating their car keys in a pocket, finding their cell phone, and Pinning the Tail on the Donkey - but I'd bet everyone can find and push the snooze button from 3 feet away, in about 1.7 seconds, eyes closed, first time, every time.
23. The first testicular guard, the "Cup," was used in Hockey in 1874 and the first helmet was used in 1974. That means it only took 100 years for men to realize that their brain is also important.