Time to Buy Fannie/Freddie Stocks Yet? Mortgage Litigation Tally, Another LPS Settlement
"Talent hits a target no one else can hit; genius hits a target no one else can see." Hedge funds and investment banks have a lot of talent, and periodicals note how some prominent hedge funds have been buying preferred shares in Freddie Mac and Fannie Mae. And something tells me those guys don't buy stuff on whims. The preferred shares have been rallying lately as the GSEs post massive profits and the overall housing market improves. But the official stance is that it is unlikely Fannie/Freddie will be recapitalized and sold back to investors. As you would expect, the hedge funds have been lobbying Washington for the government to sell its stake in the firms.
Switching gears to the FHA issue and high priced loans, I received this note relating to the FHA/HPML issue from a private mortgage banker. "Our compliance counsel has read the regulatory guidance and reviewed detail of a webinar we viewed earlier this year. Dodd-Frank Act added provisions to TILA that provide for the exclusion from points and fees items that are included under the finance charge provision of the APR. They include all government mortgage insurance premiums, guarantee programs and PMI, as inclusion in the points and fees might exceed high-cost mortgage thresholds and the cap for qualified mortgages. However, it should be noted that the Bureau will be determining whether to adopt its proposed more inclusive finance charge definition when it finalizes the 2012 TILA-RESPA Integration Proposal. That regulation was announced in 2012 but has been delayed in implementation to later this year. This will change the GFE/TIL form as we know it today and include as proposed a closing disclosure required to be issued 3 days prior to settlement. The HUD-1 will also go away if implemented as proposed." Thank you!
And lawsuits continue to be settled, the latest being between mortgage servicing company Lender Processing Services Inc. and the plaintiffs led by the Baltimore County Employees Retirement System. LPS agreed to pay $14 million to settle claims the company misled investors about improper practices underlying its business model, including the "robo-signing" documents, in connection with foreclosures. This suit has been bumping along since 2010, and accused LPS and several executives of making false or misleading statements related to an alleged practice of improper "fee splitting" and of engaging in illegal document-filing practices related to foreclosures. LPS has been through the drill before. In January, the company said it would pay $127 million as part of a multistate settlement with attorneys general in 46 states and the District of Columbia. In February, Lender Processing entered into a non-prosecution agreement with the U.S. Justice Department and paid $35 million to settle an investigation into its mortgage document signing practices.
Recently a number of mortgage industry insiders have pointed to the reduction in real estate litigation as a sign that equilibrium may finally be upon us.....but, 'not so fast,' says Ballard Spahr in their Mortgage Litigation Update for this week. They conclude that while the total number may be drifting down, it still is very high compared to historical analysis. They write, "From an overall standpoint, the index shows that 2012 was a huge year for mortgage litigation. The total number of reported cases for the year (934) represented a 15% increase over 2011. Fortunately, in the latter half of 2012, total litigation numbers gradually eased down from the all-time high we saw in the second quarter of 2012. The total number of cases reported in the fourth quarter (223) was about 5% less thatn the preceding quarter, and 15 percent less than the record set in the second quarter of 2012.” Anyone interested is furthering their knowledge of mortgage related litigation should check out their industry related webinar on May 17th , 12-1 PM EDT, by registering here.
Of particular interest to lenders, brokers and loan originators are answers to the following questions: What constitutes a proxy for a loan's terms? When may a loan originator grant concessions to a borrower? What bonuses may a creditor pay its loan originators? K&L Gates has an outstanding write-up which can be found on their site.
LO comp is still a confusing issue two years after the CFPB's mandated a major change in the way loan officers are compensated. (A week or two the commentary had a note discussing, "If you work as a LO for a mortgage brokerage company and you are getting paid a salary plus bonus, that the max bonus a broker can pay is 10% of the loan officers' annual salary. He said it just came down, have you heard about this?" I had not heard that, nor, in recollection, have I heard anything about a 10% rule. But I received this note: "The 10% came out of the rule that will go into effect in January 2014. In the new Rule LO's will be able to receive up to 10% of their total annual compensation in the form of a profit based bonus, so long as the amount of the bonus is not calculated on their individual loan production profitability. There are lots of nuances with that and the other elements of the Rule, so your readers should not run out and make changes based on what they read without consulting an attorney or compensation expert."
Frankly, with all of the complications with the existing and new rules, there is no way people should make changes to (or verify compliance) their compensation structures without consulting a qualified lawyer. Relying on what some guy down the street is doing in this area is a recipe for massive Truth-in-Lending liability.
The commentary also noted, "Now that their compensation is predetermined by law, we are hearing that LOs have less incentive to recheck their work, since they know they will be paid-regardless of what happens to the loan down the line," says Parvesh Sahi, VP of compliance solutions at Ellie Mae. I received this e-mail: "I am an LO in Illinois. This quote struck a nerve with me. I have previously owned a company. Had a net Branch for years and am now a plain LO. When these laws on tolerance of GFE first came out it was the loan officer that bore the brunt of the mistake. The 'Company' took their portion first before the LO was paid. If the amount the company made was below their profit margin for the deal, they took the remainder out of your branch and debited your branch P&L. Whether you were a net branch or loan officer you were at the mercy of the company paying you. Now that has reversed and these same companies now have a compliance team and have made it their responsibility to review the GFE and disclose. It most cases an LO cannot disclose anymore. This quote by the VP at Ellie Mae, I believe has struck the nerve of many loan originators. The industry cannot blame everything bad that happens in the mortgage industry on loan officers."
Loan officers, and their borrowers, have been yanked around by the fixed-income markets lately. There hasn't been any earth-moving news lately, but instead a series of "death by a thousand cuts." Remember Europe? Things seem somewhat rosy, but they are really not. On the sovereign bond front, the big story is Greece where 10-yr yields collapsed by 90 basis points (like ours going from 2.00% to 1.30%) following the Fitch upgrade Tuesday afternoon. Greek 10-yr yields are now closing in on the 8% level versus nearly 30% at one point. Italian and Spanish borrowing costs are both relatively stable and each country is enjoying strong demand for new debt syndications (Spain saw huge demand for the 10-yr syndication Tuesday and Italy is in the market now with 30-yr paper). Up in France, the smartest guys in the room there may have an idea. A Bank of France securitization proposal is being considered as a template for a Europe-wide SME (Small & Medium Sized Enterprise) lending program which involves the creation of a private company to pool existing loans to SMEs and then issue new securities that can be traded.
Here in the States, we have tame wholesale inflation (Producer Prices only up .1%), and weaker than expected Manufacturing data (Empire Manufacturing falling more than expected). Those, combined with lower prices, are luring in buyers. And let's not forget the Fed. So we started off somewhat quiet, saw a rally after the weak data, then a sell off, then unfavorable re-pricing took place. The rally then stalled when investors who have been steadily selling bonds in recent days took advantage of the improvement in prices and began to sell again. (Is anyone still reading this?)
Today, while I am on a plane somewhere over the Southwest, we'll have the Consumer Price Index, Housing Starts & Building Permits, Jobless Claims, and Philly Fed will be released. And it is too early to know where the market is...