Understanding Your Operation is Critical to Profits; Recent Lender/Investor Updates
aren't many folks in the world who, on their death bed, would exclaim, "I
wish I had another day of work!" With that in mind, I am biking around in
the high country in Southern Utah, camping with no internet, and Brad Nease with Carrington is pinch hitting
for a portion of today's commentary - brought to you through the wonders of
modern technology. Thank you Brad! And there are still some lender updates, and
a little humor at the end.)
Let's talk revenue.
Are you the CEO, President, CFO, or head of Secondary? If I were to walk
into your company, right now, and ask: What is your company making (in
basis points)? What is your gross or top end number? What is your
net or bottom line number? Do you know? Would you be able to go
directly to an excel spreadsheet and point to your GOS (?); your gross and net
numbers? Do you know what it takes from a volume perspective to break
even at your current profitability levels? Do you know how many basis
points it takes to originate and fund a loan?
You would be surprised at how many people don't know...
It is the job of the Secondary Marketing Manager ("SMM") to ensure that the
profit margins given to him/her by the Business Head are achieved when the
loans are purchased. In most cases, the SMM is responsible for the lock
desk. They are responsible for the pricing on the rate sheet. This
means they are responsible for making sure that the pricing on the rate sheet
has the necessary margin built in to achieve the profits the Business Head
After every loan sale, a spreadsheet should be produced that provides Executive
Management with the 'Buy' price, the 'Sell' price, the hedge gain/loss, and the
net margin, at minimum. In addition, if you are able to track expected
margin within your MIS (Mortgage Information System), this will provide the
Business Head with a perspective as to how the SMM is doing in achieving
his/her goal of bringing in the margin that was used to build the rate sheet
pricing. This spreadsheet should also incorporate all trades month to date.
The trade should be listed in chronological order and the monthly weighted
averages should be tallied for each individual category.
In addition, the SMM is responsible for monitoring lock extensions,
renegotiations, and program changes. Leakage, for purposes of this
article, is defined as the amount of negative differential (in basis points)
between the margin used to build the rate sheet and what was actually achieved
when the loan/s are purchased. This is the nemesis of all SMM's. In
a culture where pricing on the rate sheet is changed 'willy-nilly' (a very
technical secondary marketing term) based on how favorable/unfavorable a firm
may look on a pricing comparison of their competitors, it's a Leakage based
environment. Waiving, willy-nilly, extension, renegotiation, and program
change fees are the Leakage based environment.
Whether you sell loans on a
Best Efforts basis or you hedge and sell on a Mandatory basis, you are being
charged those fees. You MUST recoup a large majority of those fees.
If you don't, you won't achieve the margins the Business Head has prescribed
and your job could be at jeopardy. Are you delivering your loans on
time? Or, are you constantly asking for extensions from your investor
because your shipping/post-closing department is unable to deliver the loans
within the prescribed commitment period. The investors don't extend for
free! This is Leakage.
Finally, are you reconciling your purchase advices with your investor?
You would be amazed at how many loan purchases are done incorrectly, in your
favor and out of your favor. Please, please, please, begin a process,
whether it's in Secondary or in Accounting, where you are reconciling the price
the loan was sold to the price actually received. People make
mistakes. When they do it creates Leakage. It is imperative as an
SMM to make sure that you are receiving what you expect!
So what is or what are the solutions?
First and foremost, the Business Head must be on board with the changes you're
about to make. If he/she is complicit with the culture of chasing a spot
on a rate sheet comparison or allowing the 'willy-nilly' fee waivers to occur,
you have no recourse or way to push back. If this is the case, you must
be very clear with your boss that there is no way for you to be held
accountable for the lack of profit margin.
If the Business Head agrees with the changes, here are some specific ways to
manage these processes. There must be in place a directory of all
programs and the intended profit margins the company is to earn. This is
a listing by business line (wholesale, retail, direct to consumer, etc.) of the
products and the profit margins. In addition, there should be a
gatekeeper. This person is normally the one who issues the rates in the
morning and any intraday changes that might occur. At the bottom of the
directory, there should be signature lines with the requirement that the SMM
and the Business Head should sign if there are any changes to the
margins. Once a decision has been made to change the margins, the
signatures must be obtained prior to implementation.
Next, it doesn't matter if you are in a Best Efforts or Mandatory
environment. The waiver of lock extension and renegotiations is a
killer. For example, currently roll costs of TBA MBS for a current coupon
FNMA 3.5 is about 10/32. If you divide 10/32 by 30 days, it costs the
company that's hedging and selling on a mandatory basis about 1.04 basis points
per day. Let's round to 1 basis point. Thus, to extend for 15 days,
it costs 15 basis points.
In addition, there are human resource costs in
generating the lock extension. The lock desk personnel that are
performing the actual extension. . . The operations staff member
requesting the extension. . . These are actual costs. If you're selling
on a Best Efforts basis, this is how your Correspondent Investor is calculating
the cost to extend your Best Efforts commitment. Also, if you attempt to
ask for the extension after the lock has expired, all bets are off because the
mortgage banker that hedges or the Correspondent Investor has lifted the hedge
for the particular loan you're working on. Thus, there's nothing to
extend. The commitment is gone!
There are many other discussion points along these lines. I hope this
gives you at least some pause to begin to consider how to ensure that the
margin you're supposed to achieve is at least close to what is coming in the
back door when the loans are purchased. Have a Great Day! (If you'd like to
reach Brad Nease, of Carrington, e-mail him at Brad.Nease@carringtonms.com.)
How do Ops and compliance folks keep up with things? Here are some somewhat recent lender/investor updates.
As always, it is best to read the actual bulletin, but this will give one a
flavor for what is happening out there. In no particular order...
Stearns Lending, which is involved
in correspondent, wholesale, and retail residential lending, announced that
Gary Fabian has joined up as Chief Financial Officer. Those who track
these things know that he most recently served as Vice President - Production
Finance of MetLife Home Loans.
Fifteen- and 30-day locks on Everbank
refinance transactions will only be made available after they have received a
"RESPA accepted" within the Everbank system. Loans may be locked before
being granted a "RESPA accepted" status for 45- or 60-day lock terms.
At the beginning of May, Everbank updated its FHA program offerings, which now
include a 5-year ARM and 15- and 20-year fixed terms along with the existing
30-year fixed rate high-balance offering for purchase and refinance
transactions. For the Streamline Refinance program, 5-year ARM and 15-
and 30-year fixed rate high-balance options are now available.
Parkside Lending has updated
guidelines such that appraisers are allowed to give value to home improvements
completed without the necessary permits from the property's governing
municipality-garages converted to living space, accessory units and the like-so
long as they're done in a professional workmanlike manner. These home
additions will be reviewed by the underwriter for health and safety issues.
Wells has issued a reminder that all
Freddie Relief Refinance Mortgage transactions under HARP 1.0 guidelines (that
is, with loan submission dates before February 6, 2012) are required to
close/fund and record by May 31, 2012. Those loans that don't meet the
deadline will be denied and will be required to be re-registered and submitted
in compliance with HARP 2.0 guidelines.
The Client Tools section of the Broker's First website now features a new Rent
Calculator, which uses the Fannie/Freddie method to calculate rental income for
properties on a 1040 Schedule E or Form 8825 for Partnership and S-Corporation
tax returns. Bear in mind that it's ultimately Wells that determines the
final income/loss that is used in the loan qualification.
Wells Fargo Correspondent has
revised Form 10, which is a notice about appraisals that is required to be
distributed to and dated by HomePath Mortgage borrowers and included in the
loan file. The new verbiage states that Form 10 must now be signed and
dated by all borrowers at least five business days before closing to ensure
that they have enough time to act upon the form's recommendations. Wells
Fargo Funding Compliance, which has recorded a high incidence of problems
surrounding Form 10, reminds correspondent lenders to ensure that they have
borrowers sign and date the form by that five-day deadline and use the
up-to-date version. Section 842 of the Wells Funding Seller Guide
contains guidance on HomePath loans, including documentation requirements.
Wells Funding is expanding its Mandatory and Best Effort options for government
loans and simplifying pricing. As of May 21st, the Best Effort rate sheet
will display a single government price for FHA, VA, and Guaranteed Rural
Housing loans being locked so that sellers no longer have to select either GNMA
I or II. This doesn't affect Mandatory commitments, which should still be
registered as either GNMA I or II trades. While interest rates on FHA and
VA 15-year fixed products may only be adjusted in increments of 0.5% at
present, the expanded guidelines will allow adjustments in 0.125% increments,
and the High Balance FHA Loan program will allow the option of 15-year
fixed-rate transactions. The High Balance VA Loan program will allow
15-year fixed-rate transactions, 30-year fixed-rate transactions with
amortization terms of 240-360 months, and 5/1 ARMs. Sellers should ensure
that their internal processes comply with the enhanced offerings.
Wells Funding reminds correspondent clients that the Agencies' implementation
of the ULDD on July 23rd will affect those lenders who deliver directly to
Fannie and Freddie but will not have an impact on the WFF delivery process for
loans apart from affordable loans. When delivering an affordable loan
(i.e. Home Opportunities program, Fannie MyCommunityMortgage®, and Freddie Home
Possible® loans), sellers are required to provide particular ULDD data elements
via Wells Seller Guide Form 11, which must be completed, signed, and included
in the Closed Loan Files.
Fifth Third has issued guidance on
the protocol for submitting HASP Open Access loans using FHLMC HVE values and
reminds correspondent lenders and brokers that they must go through the proper
process to establish loan eligibility in pricing. This involves first
submitting the loan to Loan Prospector using an estimated property value
provided by the borrower, making sure that the loan received an "Accept"
decision, and then reviewing the LP findings to calculate HVE availability and
value. The loan should then be resubmitted using the HVE value returned
to confirm that the decision is still "Accept," and the final step is
submitting the credit file to Fifth Third using the HVE value returned with
both the first and second sets of LP findings. Lenders are reminded that
such values may be used for one- or two-unit properties only. Three- and
four-unit properties, manufactured homes, and leasehold estates are
excluded. Correspondent lenders should ensure that the HVE value is at a
Medium or High confidence level and no more than 120 days old at the Note date;
in circumstances where the confidence level is insufficient, either a 2055 or
full appraisal must be ordered.