The Federal Housing Finance Agency (FHFA) published an interim final rule in the Federal Register recently which mean that the long drawn-out saga over compensation for executives of the Federal Home Loan Banks (FHLBanks) and Freddie Mac and Fannie Mae (the GSEs) may be drawing a close. The interim rule, four years in the making, is set to go into effect in June and FHFA will accept public comments until July 15. In June 2009 FHFA published rulemaking with requests for comments on an executive compensation rule.
That rule basically set out the authority of the agency and its director to set compensation for executives of the regulated entities that were reasonable and comparable and set out various ways in which that reasonableness and comparability would be determined. In recent years it has been a source of controversy - do the agencies pay enough to attract the talent they need? In 2012, both GSEs hired new CEOs under executive compensation packages approved by FHFA in March of that year.
The packages eliminated long term incentives and reduced executives' annual compensation, other than that of the CEOs, by 10%. Although FHFA initially targeted CEO total direct compensation at $500,000, Freddie Mac's newly hired CEO was to earn $600,000. This represents a reduction of cash compensation of 88% from the $5.1 million that the former CEO received in 2011.
In December of 2012 the FHFA Office of Inspector General said that FHFA should establish three priorities for oversight of GSE senior compensation: general structures, processes, and cost controls for senior professional compensation; controls over compensation offers to new hires; enforcing GSEs' compliance with the pay freeze with respect to the use of promotions and changes in responsibility.
The interim rule published by FHFA can be summarized as follows: In general the Director may review compensation for an executive officer of the regulated entities and prohibit any that is not reasonable and comparable to compensation for similar businesses. No bonuses will be paid to any senior executive during the period of conservatorship. In determining reasonable and comparable the Director can take into consideration any factors he considers relevant including wrongdoing and abuse.
The Director may not prescribe a set a specific level or range of compensation. Regulated entities must give 30 days' written notice to the Director before entering into any written arrangement that provides a term of employment exceeding six months, provides compensation in connection with termination of employment, or pay for performance or incentive pay. Compensation offers for new hires require five days' notice to the Director.
A GSE may not enter into an agreement or contract for payment of money or anything of value in connection with the termination of employment of an executive without advance approval of the Director except that contracts of this nature entered into before October 28, 1992 are not retroactively subject to such approval or disapproval. Any renegotiation, amendment, or change to these grandfathered agreements is subject to the Director's approval.
Perhaps more germane to folks was news that the Consumer Financial Protection Bureau (CFPB) finalized rules to facilitate access to credit by creating specific exemptions and modifications to the CFPB's Ability-to-Repay rule for small creditors, community development lenders, and housing stabilization programs. The amendments also revised rules on how to calculate loan origination compensation for certain purposes. The final rule (is anything final anymore?) amends the CFPB's Ability-to-Repay rule, which was finalized in January of this year. "The CFPB finalized its Ability-to-Repay rule on January 10, 2013.
The Ability-to-Repay rule established that most new mortgages must comply with basic requirements that protect consumers from taking on loans they do not have the financial means to pay back. Lenders are presumed to have complied with the Ability-to-Repay rule if they issue 'Qualified Mortgages' (QMs). These loans must meet certain requirements including prohibitions or limitations on the 'risky' features that harmed consumers in the recent mortgage crisis. If a lender makes a Qualified Mortgage, consumers have greater assurance that they can pay back the loan."
The bulletin went on. "The CFPB proposed the amendments finalized today in conjunction with the adoption of the Ability-to-Repay rule. The CFPB solicited public input on the proposal before releasing today's final rules. Today's amendments:
- Exempt certain nonprofit creditors: The final rule exempts from Ability-to-Repay rules certain nonprofit and community-based lenders that work to help low- and moderate-income consumers obtain affordable housing. Among other conditions, the exemptions generally apply to designated categories of community development lenders and to nonprofits that make no more than 200 loans per year and lend only to low- and moderate-income consumers. Similarly, mortgage loans made by or through a housing finance agency or through certain homeownership stabilization and foreclosure prevention programs are exempted from the Ability-to-Repay rules.
- Facilitate lending by certain small creditors: This amendment makes several adjustments to the Ability-to-Repay rule in order to facilitate lending by small creditors, including community banks and credit unions that have less than $2 billion in assets and each year make 500 or fewer first-lien mortgages, as defined in the rule. First, the rule generally extends Qualified Mortgage status to certain loans that these creditors hold in their own portfolios even if the consumers' debt-to-income ratio exceeds 43 percent. Second, the final rule provides a two-year transition period during which small lenders can make balloon loans under certain conditions and those loans will meet the definition of Qualified Mortgages. The Bureau expects to continue to study issues concerning access to credit and balloon lending by small creditors. Third, the final rule allows small creditors to charge a higher annual percentage rate for certain first-lien Qualified Mortgages while maintaining a safe harbor for the Ability-to-Repay requirements."
- "Establish how to calculate loan origination compensation: The Dodd-Frank Act mandates that Qualified Mortgages have limited points and fees, and that compensation paid to loan originators, such as loan officers and brokers, is included in points and fees. This cap ensures that lenders offering Qualified Mortgages do not charge excessive points and fees. Today's amendment provides certain exceptions to this Dodd-Frank requirement that loan originator compensation be included in the total permissible points and fees for both Qualified Mortgages and high-cost loans. Under the revised rule, the compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee does not count towards the points and fees threshold. This amendment does not change the January 2013 final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor." The amendments will take effect with the Ability-to-Repay rule on January 10, 2014.
The CFPB also separately issued a rule today delaying the effective date of a provision in a rule issued in January 2013 which implemented a Dodd-Frank Act amendment prohibiting creditors from financing certain credit insurance premiums in connection with certain mortgage loans. The rule provision would have taken effect on June 1, but on May 10, 2013, the CFPB issued a proposal to suspend the June 1 effective date while it sought comment on clarifications to how the Dodd-Frank Act prohibition applies to credit insurance products with certain periodic payment features.
The prohibition will take effect on January 10, 2014, along with other regulations implementing other Dodd-Frank Act mortgage provisions. However, the CFPB plans to seek comment on the appropriate effective date when it issues the proposed credit insurance clarifications for public comment. "The CFPB will continue to work with industry and consumers for a smooth transition to the new rules." Read it for yourself HERE.
A copy of the amendments to the Ability-to-Repay rule is available HERE .
A copy of the rule issued on credit insurance premiums is available HERE.
What the heck does all that mean? The news is good for brokers (smaller originators). But we should keep in mind that one of the areas the MBA is looking at is what happens if a lender has agency variances and those loans are sold to an aggregator. Does whatever protection the lender had through their contract extend to the aggregator? If a small lender qualifies under this, will that be OK to protect a correspondent investor if they buy the loan and something happens later in its life?
As best I can tell, the news does not address those questions. The Dodd-Frank Act mandates that QMs have limited points and fees, and that compensation paid to loan originators, such as loan officers and brokers, is included in points and fees. This cap ensures that lenders offering Qualified Mortgages do not charge excessive points and fees. The May 29th amendment provides certain exceptions to this Dodd-Frank requirement that loan originator compensation be included in the total permissible points and fees for both Qualified Mortgages and high-cost loans.
It appears that under the revised rule, the compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee does not count towards the points and fees threshold. This amendment does not change the January 2013 final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor. The amendments will take effect with the Ability-to-Repay rule on January 10, 2014.
Shortly after the release, the Credit Union National Association's (CUNA) President and CEO Bill Cheney said, "We are hopeful these adjustments will enable more credit unions to continue to meet their members' borrowing needs in a way that minimizes risk and default." So we have CUNA weighing in on the amendments which include an exception for certain small lenders who want to extend loans with debt-to-income ratios above the 43% qualified-mortgage threshold.
And HousingWire stated that, "Additionally, the CFPB said it's delaying the launch of a new regulation that prohibits creditors from financing credit insurance premiums in connection with certain mortgages. In response, CUNA's Cheney said, "The CFPB's six-month delay of the provision on financing credit insurance premiums is key in that it will give credit unions more time to sort out what has proved to be a confusing element of the Dodd-Frank law." CUNA is currently reviewing the changes and expects to release its final analysis in a few days."
In the financial markets, nothing goes in one direction forever, and yesterday we had a nice bounce back from recent weakness. There was no real news, and so the focus was on the results of the 5-yr note auction (which went well) and the fact that yields were attractive to a number of investors. Lower prices, higher yields and wider spreads drew in opportunistic buying from hedge funds and other investors in lower coupon mortgage-backed securities as the day progressed. At the same time, mortgage banker supply was limited at less than $2.5 billion which was split between 30-year 3s and 3.5s. By the end of the day agency MBS prices were better by .250-.375, and the 10-yr closed at a yield of 2.12%.
Unlike yesterday, today we have quite a bit of news. First, the preliminary Q1 GDP (expected unchanged at +2.5%, it was +2.4%) comes out. Remember that the US government has announced changes to its methodology in calculating the size of its economy (i.e., GDP) that will take effect in July 2013. The modifications, the first major adjustments made to the GDP since 1999, are expected to increase the size of the US economy by +3% (i.e., $475 billion) to $16.3 trillion. The changes will be applied to GDP numbers back to 1929. But that is in July.
We also had Initial Jobless Claims (expected unchanged at 340k, it was +10k to 354k). At 10AM EDT will be Pending Home Sales Index for April (+1.1 versus +1.5 previously) and then a $29 billion 7-year Treasury note auction at 10AM PDT. The 10-yr is up to 2.16%, and MBS prices are slightly worse.