According to the U.S. Census Bureau, 21.3 percent of the American population (52.2 million people) participated in government assistance programs each month in 2012. The participation rates were highest for Medicaid at 15% followed by the Supplemental Nutrition Assistance Program (food stamp program) at 13%. Children under the age of 18 were more likely to receive means-tested benefits than any other cohort. A means-tested benefit is a determination of whether an individual or family is eligible for government assistance. African Americans were more likely to receive government assistance at 42%, followed by Hispanics (36%), Asians or Pacific Islanders (18%) and non-Hispanic whites (13%).

On the subject of CFPB Director Richard Cordray overruling a judge, and the CFPB's proposed fine of PHH, I received this note from Dico Akseraylian, SVP at PHH: "We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well-settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities. The Company did not provide reinsurance on loans originated after 2009. We intend to file an appeal to the United States Court of Appeals. While there can be no assurances as to the final outcome of any such appeal, we believe our appeal will be successful and, as a result, are not adjusting our previously issued earnings guidance for this matter."

The CFPB ordered California's Guarantee Mortgage Corporation, an independent mortgage bank now owned by American Pacific Mortgage, to pay a civil penalty of $228,000 for paying its branch managers based, in part, on the interest rates of the loans they closed.

The following is from Brad Nease, SVP of Mortgage Capital Management.

Pipeline Risk Management Philosophy

Who are you?  Are you a risk taker?  Do you avoid risk at all costs?  What is your management philosophy behind how you manage your pipeline?  Are you doing $100M per month all Best Efforts?  Are you doing $15M per month and hedging your pipeline?  Who are you and does your philosophy match your firm's goals and risk tolerance?

Many people think that hedging your pipeline involves more risks than a Best Efforts execution strategy.  Hedging your pipeline is definitely more complicated with many more details involved than a Best Efforts strategy.  But, it does not mean that hedging your pipeline means you are taking more risks when you Hedge versus a Best Efforts execution strategy.  In addition, having someone running Secondary Marketing that understands and has performed Hedging strategies is a definite advantage.  That definitely makes that someone more expensive than someone that runs Secondary Marketing and has only performed on a Best Efforts strategy.  Our firm works with Secondary Marketing Managers that have only performed on a Best Efforts execution strategy and others that are very experienced and understand the Hedging execution process.

Hedging your pipeline does not mean more risk.  It does mean more upfront cost.  If done well, history shows that your Return on Investment is extremely high.  But does it mean more risk - NO!  Hedging your pipeline can be done without additional risks, on a very conservative basis.  Many people don't know this.  Many people think that hedging your pipeline means making a bet on which way the market is headed:  the market is rallying so we are going to go long; or the market is deteriorating so we are going to put on more hedges. . .  Not true.  The philosophy should be that you are manufacturers of widgets.  One part of the manufacturing process is interest rate risk.  You bring loans in and the borrower locks.  Hedge those loans that the borrower locks - period!  Taking a risk either way is TAKING RISK!  Hedging is a part of the manufacturing process.  Gambling should never be a part of your manufacturing process!  It should be noted, some Hedge Advisory firms believe that gambling is a part of the process.  When evaluating firms, you should be asking very specific questions about their Hedging philosophy.

Have you evaluated the costs involved?  What does a Hedge Advisory firm cost to analyze your pipeline and provide you with the necessary reporting to Hedge your pipeline?  Normal costs for effectively hedging your pipeline is anywhere from 5 to 9 basis points.  Typically and historically, the additional revenue earned by Hedging your pipeline versus a Best Efforts strategy is anywhere between 25 to 75 basis points.  Today however, depending on your investors and exit strategies, the conventional spread is around 70 basis points and on government loans around 90 basis points.  Therefore, on a historical basis, if you take the conservative route and say your costs are 9 basis points and your return is 35 basis points, your Return on Investment equals 3.8.  In today's world, conservatively speaking, with a 9 basis point cost and 70 basis points in return, your Return on Investment is 7.7!

Last part of the equation is who is running Secondary Marketing.  If you have someone that only knows Best Efforts execution strategies, do you have a Hedge Advisory firm that can step in and integrally work with that person to begin the Hedging process?  Is the Hedge Advisory firm a competent coaching firm that understands the dynamics, is conservative in nature, understands that you are a manufacturer of widgets, and wants to maximize the value of your pipeline while operating in a conservative environment? 

If you have someone that understands Hedging and has performed successfully in that environment, they will be more expensive and should be considered when evaluating whether to make the move into the Hedging world.  The direct costs involved in Hedging include:

1.         The Hedge Advisor's fee.

2.         The Secondary Marketing Manager's salary - a Best Efforts person or an experienced Hedging person.

So, let me ask you - does hedging your pipeline mean you need to take more risk?  No!  If you're not a risk taker, hedging your pipeline does not mean you take more risks.  It does mean that the process is more detailed, more expensive, more complicated, but the Return on Investment is well worth it.  Thus, the question should not be whether you are a risk taker or not, it should be - have you evaluated the Return on Investment on hedging your pipeline versus you Best Efforts execution strategy.

Our firm typically begins to work with a firm that is doing between $15M - $20M per month in overall volume.  Your capital level should be at a minimum level of $2.5M with relatively high liquidity.  We work with firms that have Secondary Marketing Managers that have only performed on a Best Efforts execution strategy and with Secondary Marketing Managers that are very experienced and have Hedged pipelines in their past.

So, should the question be - are you a risk taker?  Or should it be, have you evaluated what it means to hedge your pipeline, the costs involved, and what is the return on investment in hedging your pipeline versus a best efforts execution strategy?  Hedging your pipeline is not easy, but many firms in our industry do Hedge their pipelines and are very successful at their strategy.  They are able to execute and provide better pricing on the rate sheet and put additional revenue to the company's bottom line.

Thus, the better question is - have you done the analysis?  Do you understand the dynamics of hedging your pipeline?  Do you have a Hedge Advisory firm you trust that can coach you through the process and make you successful in a 'Hedging your pipeline strategy'?

As I said earlier, there are many firms that are hedging their pipelines and they are doing it very successfully.  You are competing against them!  What should you do?

Don't fight the Fed. Industry experts are beginning to examine the probability of a rate hike occurring in September, as May's average market expectations indicated that there is a 29 percent chance of rates rising in September, according to Wells Fargo Securities Economics Group. Wells Fargo examined previous trends from 2004-2006, and found that the market was unprepared for the rate hikes, as the market priced in an average 4 percent probability that a rate hike would happen in June 2004. Just one month after the first rate hike occurred, market expectations were much more accurate as the next three rate hikes were predicted with 66, 62 and 86 percent probabilities. Current market expectations of a rate hike are still low, as a June hike is expected with 3.7 percent probability, a September hike with 29 percent probability and an 83 percent probability for a rate hike to occur by December. Upcoming data releases should signify a strengthening economy and more than likely, an initial rate hike to occur in September.

So after the number Friday the Odds of September Fed Liftoff Climb After Payrolls Beat Forecasts.  The odds of a Federal Reserve rate rise in September improved after the best jobs report in five months eased concerns that the U.S. economy is struggling to regain momentum after a first-quarter contraction.  Fed Chair Janet Yellen and her colleagues are trying to figure out if economic weakness at the start of the year is transitory or longer-lasting, as they consider the timing of their first rate rise since 2006. The hesitant consumer has contributed to low inflation, with core PCE running at just a 1.2 percent year-over-year rate. This makes it difficult for the Fed to raise rates in June but inflationary pressures are building enough to justify a September rate hike.

Yup, the economy is led by jobs and housing, and the most obvious sign of underlying strength can be seen in the sizable second quarter payroll numbers. And for the folks that like to slice and dice the numbers the labor force participation rate increased for the second-straight month, indicating that more people are reentering the labor force. And it appears that impact from the port strike and harsh weather are subsiding. The dollar is already beginning to stabilize and the price of oil is considerably higher than it was earlier this year. Construction spending jumped 2.2 percent in April and was revised higher for March. The trade deficit narrowed considerably in April. The ISM manufacturing index picked up modestly in May, with the orders component hitting its highest level this year.

What's happening this week for scheduled U.S. news? Not much today or tomorrow or Wednesday the 10^th. Thursday things pickup with Initial Jobless Claims, Retail Sales, and Import Prices, and then on Friday is the Producer Price Index and some University of Michigan numbers. We closed the 10-yr Friday at the easy-to-remember 2.40% yield level.

Jobs and Announcements

Are you in the correspondent job market? Freedom Mortgage Corporation is seeking a VP to manage its Correspondent Operations Lending Division. Responsibilities include assuring compliance of all state & federal regulations while ensuring quality of closed loan products & funding procedures while forecasting monthly funding & capacity goals. Additional responsibilities include planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems in accordance with Freedom's policies & applicable laws. Qualified candidates are encouraged to submit a confidential letter of interest and/or resume to Cindy Smaney, SVP of TPO Operations.