Servicing Revenues Gain Importance; Lender Margin Survey; LO Comp an Ongoing Issue; Amazing All-Cash Buyer Numbers
Hundreds of lenders across the nation are targeting purchase business. When was the last time refis accounted for less than 50% of MBA's weekly application index? Mike Fratantoni reports that at the end of June/first week of July 2009 it dropped below 50% briefly. It was below 50 percent for much of 2008, though, and for much of 2004-2007 as well. So the industry has been there, and will be there again.
Remember, however, that the MBA measures mortgage applications, not real estate transactions. And many people question the National Association of Realtors' numbers ("Do they double count every transaction?"), but somewhere in there is the truth. Speaking of stats, certainly the results of a Goldman Sachs survey turned heads this week: its researchers calculate that more than half of all homes sold in the United States last year, and so far this year, are all-cash transactions. (Hey, if you have the cash, or run a fund backed by lots of cash, why hassle with the rules, regulations, disclosures, underwriting, and costs in today's current environment?) The study was done by economists Shan, Marty Young and Charlie Himmelberg. The data came from the Census Bureau, NAR, the MBA, and Lender Processing Services. Some of the reasons are noted above, but also include lower home prices than five years ago, foreign buyers, and fewer transactions in general. Here is the WSJ's take on it. All this is fine for Realtors, title companies, and the like, but not necessarily for mortgage banks or banks.
"When the champagne is flowing no one cares if they're drinking out of dirty glasses." And of course every financial institution is out there, wondering what others are doing, and how it stacks up. Earlier this week I posted some early results from the STRATMOR survey, and this week accounting firm Richey May released the Q2 results to the customers of RICHEY MAY SELECT. There were several interesting items worth noting in the results. "Overall production for our customers increased by 11% from Q1 of which, approximately 53% was purchase production (up from 40% in Q1). This is the first time in over a year that purchase production outperformed refinance production. The bad news coming out of the second quarter is that loan margins continue to tighten (this is the fourth consecutive quarter of this trend) but, the good news is companies were still able to improve their pre-tax net income, if only marginally.
"We continue to see the trend of servicing revenue making up a larger portion of total revenues (although it is still a relatively small piece of revenue). Over the past four quarters servicing revenue has increased 17 Bps which is important when secondary revenue has declined 41 Bps over that same period." If interested, people can review a "snapshot" of RM's 2nd Quarter Trend Report for Independent Mortgage Bankers here and you can e-mail RMSelect@RicheyMay.com for more information on how to participate in the RICHEY MAY SELECT program.
Yes, servicing is de-consolidating. As Joe Garrett, of Garrett McAuley points out, "Now that so many of you are retaining servicing, it might be interesting to see how the big aggregators are valuing it. The Big Four are using an average multiple of 2.9X the spread, with all of them obviously using a higher multiple as rates move up and run-off declines." Aside from the definition of the Big Four (servicing volume would put Ocwen on that list, for example), it is interesting to see the values. Wells is valuing its average servicing fee of 27 basis points at 81 basis points, or 3x (versus 2.5 a year ago), Chase is valuing its average servicing fee of 41 basis points at 112 basis points, or 2.7x (versus 1.8 a year ago), BofA is valuing its average servicing fee of 32 basis points at 77 basis points, or 2.4x (versus 1.6 a year ago), and U.S. Bank is valuing its average servicing fee of 31 basis points at 106 basis points, or 3.4x (versus 2.5 a year ago). As any purveyor of servicing (IMA, Mountain View, Phoenix Capital, MIAC, to name a quick few) will tell you, however, that broad strokes and averages don't work. What is important are things that impact the credit quality of the loan, and how long it will stay on your books.
LO comp is also a part of margins, or diminishing margins. Industry vet John H. reports, "Recently one of our top producing, outside loan originators was pitched by a producing sales manager / recruiter of an entity on the merits of his firm's LO comp plan. The recruiter posited that his firm pays a 175 basis point commission to loan originators for self-sourced, outside sales transactions. Our originator immediately questioned how the recruiter's company could possibly offer a competitive retail interest rate to its borrowers while paying out 175 basis points in commission to the Loan Originator. The recruiter's response was that whenever there is price resistance from borrowers who are coming in to the company's pipeline through its 'Outside Sales Channel', the loan is simply re-coded in the company's loan registration system as an, 'In-House Marketing Channel' transaction in which the borrower receives a lower rate and the sales commission to the LO is reduced from 175 basis points down to 100 basis points."
His note continued. "Under the flat compensation statutes, rules & regulations, entities are permitted to pay different LO flat compensation schedules for different marketing channels to enable the company to recoup added marketing costs that a company incurs when it assumes some or all of the marketing functions that would otherwise be performed by a self-sourcing, outside sales, loan originator. If a company has more than one marketing channel, it needs to be able to solidly document these additional costs and prove how each transaction actually originated. I have read compliance guidance recommending that individual loan originators be limited to one and only one marketing channel within a given firm as a safeguard against regulatory and civil claims that borrowers were fraudulently placed into a given marketing channel as a ruse to justify the receipt and payment of illegal LO comp that is actually based on impermissible loan characteristics (lender's margin which is a function of retail price-to-borrower).
"Yet, here is another prime example of a company that is willing to risk not only its own safety and soundness, but the careers and lives of the loan originators that are willing receiving the illegal compensation based on a blatant disregard for the law as it is now written. My final comment concerns the 'rules of engagement' or 'code' that we live by in the marketplace. When a company loses valuable human resources and market share to competitors which are acting in blatant disregard to the law and their illegal conduct threatens your own viability, there is nothing dishonorable in protesting the actions of the violators and demanding a level playing field through regulatory enforcement action."
The Board of Governors of the Federal Reserve, the FDIC, and the OCC are seeking comment on proposed guidance describing supervisory expectations for stress tests conducted by financial companies with total consolidated assets between $10 billion and $50 billion. These medium-sized companies are required to conduct annual company-run stress tests beginning this fall under rules the agencies issued in October 2012 to implement a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). To help these companies conduct stress tests appropriately scaled to their size, complexity, risk profile, business mix, and market footprint, the three agencies listed above are proposing guidance to provide additional details tailored to these companies. The stress test rules allow flexibility to accommodate different approaches by different companies in the $10 billion to $50 billion asset range. Consistent with this flexibility, the proposed guidance describes general supervisory expectations for Dodd-Frank Act stress tests, and, where appropriate, provides examples of practices that would be consistent with those expectations.
"Rob, the post office is approaching not delivering mail on Saturdays. When issuing initial TILA disclosures after application, must I include Saturdays when counting the 3-day period to provide disclosures?" You should ask your compliance person, but to the best of my knowledge it depends on whether (and to what extent) you conduct business on Saturdays. For purposes of issuing the initial TIL disclosures, "business day" means a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions. If you do not conduct business on Saturdays, you should not include Saturdays when counting the 3 business day period. But hey, what do I know? If you have some extra time, see Regulation Z, 1026.2(a)(6).
There are a lot of opinions out there about whether or not higher rates are going to choke off any housing recovery. (And if housing doesn't recover, then the odds are stacked against the economy improving. Well, it is easy to make the argument that housing as already recovered in most parts of the nation.) But housing is only one part of the equation, and the other is jobs, which is why yesterday's claims for jobless benefits showing an unexpected drop in the prior week really slugged us. It is at its lowest level in almost six years, signaling the U.S. job market continues to mend. But stocks also took it on the chin, in spite of the "good" news - equities are very concerned about higher rates and their impact on the economy. Say what you want about the actual number, the slowdown in firings may be a precursor to a pickup in hiring, which would bolster household incomes and spending. And fewer dismissals are also helping boost consumer confidence.
On housing, the August NAHB Home Builders confidence index rose to the highest level in nearly eight years. And today so far we've had July's Housing Starts and Building Permits. Starts were +.9% and Permits +2.7% - both slightly lower than expected, but up nonetheless. The housing market continues to roll - it is hard to argue that it is not.
Looking at the numbers, yesterday, depending on coupon and maturity, prices on agency mortgage-backed securities finished the day worse by .250-.625. And the 10-yr closed at a yield of 2.75%. This morning rates are worse again, with the 10-yr up to 2.78% and agency MBS prices worse .250.