Fannie's Premium Recapture Policy; Margin vs. Volume Formula; How are MBA Applications Counted?
In spite of a lot of chatter and proposed legislation about phasing out Fannie & Freddie, much of the industry is behind the agencies. Not only do they help companies in the secondary markets, providing an outlet for loans, but in the primary market, is some other entity going to step in and provide industry standards for documentation, underwriting, or processing? And so we find stories about politicians focused on the guarantee feature of the agencies, with changes expected to take years. In the agencies' camp, they are certainly being run as for-profit institutions, and the industry expects more gfee changes this year.
Certainly the agencies' activities and changes impact the industry, and I received this observation note from a Capital Markets vet. "Your readers might be interested to know how Fannie Mae is handling Premium Recapture Fees. Earlier this year Fannie announced they may charge the lender on loans that prepay within 120 days. Essentially, Fannie Mae is drafting an amount equal to the Gross Price above par paid to the lender by Fannie Mae. Most loans have a Loan Level Pricing Adjustment, which is a reduction from the Gross Price, however, Fannie Mae's process does not consider any LLPA's in their process.
"For example, on an early prepayment, if Fannie Mae pays the lender a Gross Price of 102% for a loan that has an LLPA of 1%, they are billing the lender at 2% (102%-100%) even though the lender will have received only 101% for the loan (lender receives 101% by virtue of being funded at 102% and then being drafted a 1% LLPA). This is not equitable. It appears that many lenders have complained about this inequity, however, Fannie Mae has not indicated a willingness to change their process. In light of record profits, it seems odd that Fannie Mae would want to take more money out of the pockets of their lender partners for this reason." FAQ from Fannie
Speaking of Fannie, Adam Quinones with Thomson Reuters reports, "FNMA published its new buyup and buydown grids. Buydown costs jumped considerably across the board - I'm talking 50-95bps more expensive. Huge spike. FNMA clearly wanting excess strip into higher mortgage rates. Naturally buyups improved considerably as a result (except 3.5 notes). FNMA is paying 4.51x for excess at 3.75% and 4.34x at 3.875%. Both buyups are better by 50bps (52 for 3.875%). This is the ledge for borrowers. Servicing retained best execution pivots at 3.75-3.875% depending on your internal mortgage servicing rights multiple."
With margins being reduced at LO, branch, and corporate levels, I received this nifty e-mail.
There is a formula I use all the time with both our secondary and production folks. The formula is simple:
(Old margin / New margin) - 1 = % More / (Less) business production will need to close to offset the change in price.
Examples: Old Margin (before price change) = 4.0%. New Margin (after price change) = 3.5%
(0.04 / 0.035) - 1 = 0.14 or 14%.
If you cut your margin by 1/2 point from 4.0 to 3.5, you need to close 14% more business to earn the exact same profits.
Or Old margin = 3.5% and new margin = 4.0%.
(0.035 / 0.04) - 1 = -0.13 or -13%.
If you raise your margin from 3.5 to 4.0, you can close 13% LESS business and still earn the same profits.
Is this formula perfect? Of course not. It doesn't take into account costs (either fixed or variable). It doesn't take into account loan officer morale, but it's shockingly effective at quickly making a point. The conversation usually goes like this:
Sales manager: "We are out of the market! We need to cut our margins by 0.75 point to be competitive."
CFO: "But our margins are at 3.0 now. Cutting them to 2.25 would hurt."
Sales manager: "But I'll get way more volume."
CFO (who runs the calc of (0.03 - 0.0225) - 1 = .33 or 33%: "Will you guarantee that you'll increase closings by 33%? You closed $200 million last month. Can you promise you'll close $266 million next month?"
Sales manager: "Uh..."
A modern loan officer's life is filled with comp and regulatory issues. John Hudson with Premier Nationwide Lending observes, "Not to get too religious, but I saw this and it reminded me of LO's not paying attention to the regulatory world surrounding them... 'He was oppressed and afflicted, yet he did not open his mouth; he was led like a lamb to the slaughter, and as a sheep before its shearers is silent, so he did not open his mouth.' - Isaiah 53:7 What does it take to get industry participants to respond to calls to actions, donate to PAC, or even bother to read and assess the impact new regulations will have on them... The few cannot carry the weight of the masses...."
Guy K opined, "I remember the first company I worked for when I got in the mortgage business. I was on a 55% split and made really good money (no point/no fee loans had just started). The owner of the company continued to plow his profits back into his business and expanded to larger quarters in 1992, right at the peak of that refi boom. When things crashed in 1993, he was left with no loans coming in the door (we were a refi only shop) and a huge monthly nut to cover. He had no savings and he eventually went out of business and filed BK. But the LO's and sales manager all made really good money and had no liability.
"Everyone in this business knows that we go through cycles of feast and famine. You need to put money aside (like the proverbial squirrel) for the hard times that will eventually get here. But when I hear talk about cutting LO's compensation, it seems disingenuous to me since it's these same LO's that have given these owners such huge profits the last few years. So now when things get tougher the LO needs to share in the pain? If it wasn't for them, the owners wouldn't have the fancy cars, big homes, etc. (how do you like that stereotype!).
"During the feasting periods, lenders continue to expand in an effort to capture larger market shares. The risk is that they will over expand, or expand at the wrong time and get stuck with the higher expenses when revenues decrease as rates go up. That is the greed factor of our business (at least one aspect of it). Just because the owners don't budget well doesn't mean the LO should suffer. The owner needs to learn how to manage expenses better and save some of the huge profits that they have made these last few years. Maybe not expand so fast and think about what will happen when rates start to go back up (which we all know WILL happen). But what do I know; I'm just a lowly LO, although I did have a branch for 7 years so maybe I do know a little about both sides of the fence."
The MBA reported some interesting news today: it seems that the move higher in rates nudged some fence-sitters to act on applications and locks. So even with the more expensive rates, the MBA's seasonally adjusted index of loan requests for home purchases rose 4.7%, with refis up 5% and now accounting for 69% of overall applications.
Some folks out there want to know how the MBA comes up with the weekly application numbers. First, on the Weekly Application Survey, the MBA tracks retail and consumer direct applications for the prior week in terms of number, dollar, and composition of applications. It asks participants to report based upon the HMDA definition of an app, i.e., when credit is assessed. As anyone in the industry knows, this may be but is not always coincident with a lock, but the MBA believes that at least some participants are reporting based upon the RESPA definition that triggers a GFE, and others might be reporting based upon locks. (The MBA does what it can to promote consistency, but some companies just track different items in their systems.)
The MBA does require only retail and consumer direct loans to avoid any double counting that could come with wholesale volumes. Those "in the know" think that the MBA number includes almost 90% of retail and consumer direct app volume, but continues to say "more than 75%" on its press releases to be conservative. Participation in the survey is free, and participants receive aggregated results on a weekly basis, and additional detailed results on a monthly basis with data at the state level among other stats. More information HERE.
How about some quick investor, conference, MI, and vendor news?
U.S. Bank Home Mortgage Wholesale Prime Plus, the portfolio broker division, recently got rid of its prepayment penalty.
I received this from several sources: "Due to the fact that Hudson City Savings Bank has determined that recent actions by Stewart Title Guaranty Company are un-businesslike, and constitute a breach of its contractual obligations to the Bank, we will no longer accept Title Insurance or Attorney Closing Protection Letters issued by this company. Kindly make certain that all potential borrowers and attorneys with whom you may do business are made aware of this requirement, especially those people dealing with the coordination of closings and title insurance follow-up, as we do not want borrowers to be inconvenienced prior to settlement."
In Orange County, the OC CAMP group will host an event tomorrow led by Bill Sparkman. "Our theme this year is 'Attack It' and our goal is to bring in speakers and awareness for our members to be best prepared for the evolving market." Here is a link to sign up.
Turning quickly to rates, Tuesday started off bad (the yield on the 10-yr shot up to 2.27%), but then improved as the higher yield levels drew in buying interest and prices steadily improved as investors were more risk averse. By the close the 10-year note was higher/better by almost .250 in price and the yield was back down to 2.19%. MBS prices also finished better by roughly .250 - nice to see, and leading many to comment, "Do rates really have to be this high - after all, nothing has really changed with the Fed, so has this been an overreaction?" There is no scheduled news, and the only event is a $21 billion 10-year note auction at 1PM Eastern time. In the early going rates and prices are unchanged from Tuesday's closing levels.
Rates are still pretty low, and higher rates mean our economy's doing
better, right? Let's compare them to, say, Mongolia. Business Week
reports that "Mongolia's central bank plans to cut interest rates on mortgages by almost half to 8 percent from around 15 percent
this month, following a new policy approved by the government to ease
financial burdens on the middle class. The new mortgages require a down
payment of 10 percent to 30 percent and must be paid back in 20 years,
are valid for apartments smaller than 80 square meters (861 square
feet), qualified applicants must have a full-time job, and monthly
payments cannot exceed 45 percent of the family income. Mongolia is
experiencing double-digit growth and new job opportunities in the mining
industry and its supply chain are building a middle class that is in
need of housing. The strongest demand is in Ulaanbaatar, where half the
city residents live in unplanned neighborhoods called "ger districts,"
which lack infrastructure such as running water and central heating.