The Cons of Brokering Out Loans; Barron's take on Radian; Reverse Mortgage Lending Slows
Here's something that may sway a few undecided voters. (Is anyone
undecided at this point?) The U.S. debt ceiling is expected to be reached
before 2013, the Treasury Department said, but default won't happen until early
next year (if at all) because of extraordinary measures. The debt ceiling is
$16.4 trillion - with a "T".
Next Monday is observed by many companies as Veterans Day. It originated
as "Armistice Day" on Nov. 11, 1919, the first anniversary of the end of World
War I. Congress passed a resolution in 1926 for an annual observance, and Nov.
11 became a national holiday beginning in 1938. President Dwight D. Eisenhower
signed legislation in 1954 to change the name to Veterans Day as a way to honor
those who served in all American wars. The day honors military veterans with
parades and speeches across the nation (not necessarily those who died for our
country). Those in the real estate and lending businesses know that veterans
are a force to be reckoned with: there are almost 22 million of them in the
United States (1.6 million females, per the Census Bureau; 2.3 million blacks;
1.2 Hispanics). Over 9 million are older than 65 years, and about 2 million
were younger than 35. In other words, prime home owners. (More tomorrow!)
The industry has watched as Redwood Trust issues non-agency (read: jumbo)
securities, add clients, lay the groundwork for buying agency paper, and in
fact announced some very positive financial results last week for the 3rd
quarter. It continues to expand, and Redwood Trust is looking to fill
several job vacancies in Northern California and now Denver. That's right -
it is hiring for a newly created operations and servicing facility in
Colorado. Details can be found at http://bit.ly/Ykyv2v.
the questions that every Capital Markets person faces from the sales staff is, "Can
we broker loans - and if not, why not?" Brokering loans, of course,
does not let the lender off the hook in the event of fraud even when the
investor is doing the underwriting, and in fact problems in the
broker/wholesale relationship can impact the correspondent relationship if the
investor offers both channels - a transference of liability. Management often
points to the economic reality that brokering loans does not supporting the
overhead of the company: from the owner's perspective why should LO be provided
a desk and a phone and a computer if they are just going to broker out?
companies allow brokering under restricted situations. There is
always the "greater fool theory": some company will be offering to
buy a product for which the lender does not want responsibility. Given that the
company does the underwriting, doc drawing, etc., except for fraud or other
serious issues, the lender's buy back risk is viewed as minimal. And large
enough firms have a dedicated person on staff to deal with the flow and
approvals, leaving Capital Markets out of it. But for the most part, an LO
inside of a mortgage bank is not supporting the bank by brokering out a loan -
they are supporting themselves. Do brokered loans help support the
warehouse facility, the rent, the accounting services, or the volume of loans
through Capital Markets?
Some companies allow branches allowed to set their own comp plans. But LO
comp rules make it tougher and more complicated, and branch managers tell
me the GFE is more complicated, for loans being brokered. Successful
companies are all about efficiency, not catering to loan-by-loan-by-loan issues,
and have instilled a culture of, "If we cannot underwrite in-house we
don't need it." The remaining correspondent lenders offer the vast
majority of products currently being funded, and LO's asking the Capital
Markets departments to obtain approval from a small wholesaler, given the
amount of paperwork, just for one loan makes little sense.
And other companies make it less attractive financially to broker loans.
Fees might be charged to the originator for a brokered loan. For example, some
branches, and thus branch managers, must meet minimum profitability levels
month after month. If these are not met, the fee for a brokered loan is
ratcheted up, or brokering abolished entirely. And any profit sharing
arrangements between the company and personnel rarely include brokered loans.
Or for lenders in a jumbo market (cities or either coast), and where
correspondent jumbo pricing is viewed as poor, in-house versus brokered loan
percentages is carefully monitored ("90% or greater in-house or else"
seems to be a common refrain among owners).
As a top branch manager for Fairway Independent Mortgage Corp. told me,
"Good sales people and top LO's like predictability. They can sell on
reliability, and what they can control." Editor's note: It would seem that
focusing on one-off products, and counterparties that are not established and
financially sound, is not the best thing in this lending environment.
Switching gears, hey, don't forget that the end of a CFPB comment period is
coming up tomorrow. The CFPB, under the direction of the Dodd/Frank Act, will
be combining the existing RESPA and TILA disclosures into one form, as well as
changing the existing HUD-1 Settlement Statement. Here is more information: http://conta.cc/RzsgVh.
Well, the reverse mortgage business is not setting the world on fire, despite
having Robert Wagner give his best home-spun advice on TV ads. Here is the
latest skinny on the lending segment.
About a week ago, Ocwen outbid Nationstar in a $3 billion auction for
ResCap's servicing business, which makes it the fifth-largest mortgage servicer
in the country. Until it filed for bankruptcy last spring, ResCap
occupied that number five spot (in conjunction with Ally) and handled about
$329 billion of mortgages, and Ocwen was viewed as primarily a non-A paper
servicer. Not anymore! Seeing as size and profitability increase in tandem when
it comes to loan servicing, winning the ResCap bid fits very nicely into
Ocwen's larger business acquisition strategy. Of course the acquisition
has potentially dire implications for the 950 employees based at ResCap's
Waterloo, Iowa office. Though there hasn't been any official word on
whether or not jobs would be moved out of Waterloo, Ocwen has an illustrious
history of moving American jobs overseas. When the final court decision
on the bankruptcy is in, it will come down to the creditor body, who will
probably prioritize getting what they can out of the bankruptcy estates over
where jobs are located. As for ResCap's portfolio of 47,000 whole loans,
Berkshire Hathaway made a successful $1.5 billion bid, which suggests, as this
commentary discussed a week or so ago, that Warren Buffett is betting on the
recovery of the housing market.
Continuing on with company-specific news, here are some recent MI and
investor updates that will give you a flavor for trends in the industry.
Precise details can be found in the actual bulletins.
Here is Barron's take on the current status of Radian's business.
And a few folks have asked about the details of the Chase/MetLife
In October Citibank has updated its LTV, FICO, and DTI ratios for DU and
manually underwritten loans in response the implementation of DU 9.0. The
policy on financed properties has been revised to state that, for ARM
transactions on second properties, borrowers who own a combined total of 5-10
residential properties are subject to a LTV/CLTV/HCLTV maximum of 65% for1-unit
properties and 60% for 2-unit properties. The maximum LTV/CLTV/HCLTV for
condo projects with Limited Review DU findings has been capped at 80% as per
the new DU requirements. DU Refi Plus and LP Open Access guidelines on
income and asset documentation, borrower eligibility, removing existing
borrowers, existing subordinate liens, multiple mortgages, condo project
approval, and property market rent have been updated as well. For
MyCommunityMortgage loans, guidelines on qualifying manually underwritten loans
and LTV/CLTV/HCLTV requirements for ARM transactions have been updated, and
both Border Region Variances and the Expanded Approval recommendation have been
Citi has also updated guidance on non-traditional credit for agency
transactions, appraisal documentation, and non-occupant co-borrower loan
eligibility. See pages 3 and 4 of the lending bulletin here.
Charles County, MD has been added as a Citibank Assessment Area, and the
Texas counties of Baylor, Deaf Smith, Gray, Scurry, Stephens, and Wilbarger
have been removed.
Citi has aligned its flood insurance policy with the Flood Insurance
Modernization Act that was signed into law back in July. The policy has
also been updated to align with Fannie's policy, which allows a $5000 maximum
deductible for first and second mortgages unless state law permits a higher
Last week was quite the week for equity and fixed-income markets - or at least
it had the potential. We had the better-than-expected employment report, but
the big story last week was Hurricane Sandy and its short- and long-term
economic impact. Initial estimates suggest damages could run as high as $50
billion, which includes $30 billion in household, business and infrastructure
damages and roughly $20 billion in lost output, according to Moody's. Wells
Fargo's economic department notes that, "The economic impact of a
hurricane has historically evolved in three distinct phases, beginning with
an increase in pre-storm spending, a pullback in economic activity and
post-storm rebuilding. Moreover, with the exception of Hurricane Katrina and
Rita, the rebuilding effort typically occurs rather quickly, with a jump in
remodeling activity and an increase in construction employment. Any rebuilding
effort, however, will have to occur quickly, as the weather turns in the
Northeast and makes it difficult to make any real progress in winter. Another obstacle
to the expected turnaround in rebuilding is the small percentage of homeowners
in the impacted areas with flood insurance. According to a Wall Street Journal
article, only one percent of homeowners
have flood insurance in New York City."
One can't have a decent recovery without jobs and housing, housing and
jobs. Housing is certainly pulling its weight, and is stable or improving in
many areas. But Friday's number reminds us that even with the October increase
the year-to-date average is only 156,000 monthly additions to jobs, so at the
current pace it would take about four years to bring the unemployment rate down
to 6.0 percent, which is considered full employment.
Turning to economic blather, this week is pretty light in terms of scheduled
news - besides the election, of course. Today we have some forgettable ISM
Services number, nothing tomorrow or Wednesday, and Thursday is Initial &
Continuing Jobless Claims. Friday, ahead of what for many is a 3-day weekend,
are trade balance figures, import & export prices, and another University
of Michigan Consumer Sentiment number. All of this pales, of course, to the
impact of Sandy, the U.S. election, and the continuing (but somewhat improving)
issues in Europe. Our 10-yr closed at a yield 1.73% - too early here in Kansas
to know where the markets are yet!
(Parental discretion advised.)
A woman decides to have a facelift for her 50th birthday. She spends
$15,000 and feels pretty good about the results. On her way home, she stops at
a newsstand to buy a newspaper. Before leaving, she says to the clerk, "I
hope you don't mind my asking, but how old do you think I am?"
"About 32," is the reply.
"Nope! I'm exactly 50," the woman says happily.
A little while later she goes into McDonald's and asks the counter girl
the very same question.
The girl replies, "I'd guess about 29."
The woman replies with a big smile, "Nope, I'm 50."
Now she's feeling really good about herself. She stops in a drug store on
her way down the street. She goes up to the counter to get some mints and
asks the clerk this burning question.
The clerk responds, "Oh, I'd say 30."
Again she proudly responds, "I'm 50, but thank you!"
While waiting for the bus to go home, she asks an old man waiting next to
her the same question.
He replies, "Lady, I'm 78 and my eyesight is going. Although, when I
was young, there was a sure-fire way to tell how old a woman was. It
sounds very forward, but it requires you to let me put my hands under your
blouse. Then, and only then can I tell you EXACTLY how old you are."
They wait in silence on the empty street until her curiosity gets the best
of her. She finally blurts out, "What the heck, go ahead."
He slips both of his hands under her blouse and begins to feel around very slowly
and carefully. He bounces and weighs each side, pokes and prods. He pushes,
After a couple of minutes of this, she says, "Okay, okay, enough! How old am
He completes one last squeeze, removes his hands, and says, "Madam,
you are 50."
Stunned and amazed, the woman says, "That was incredible, how could you
The old man says, "Promise you won't get mad?"
"I promise I won't." she says.
"I was behind you in line at McDonald's."