SPREAD: What is the Average "Spread" that an A Paper Wholesaler would like to maintain?

Since we were talking about spreads quite a bit today, I'm curious if anyone has inside knowledge about what some typical "spreads" were for the average "A" paper wholesale company.  Gross and Net.  I imagine that Prov runs a lean machine with very few AE's and RM's and Ops Managers, but that a smaller boutique lender with lots of managemers will have troubles.

5 years ago I was an RM for a subprime lender and I know our portfolios were sold out the back door for 105.00 in 2001-2002, and slowly whittled down to 103.00 by the time I left in 2005.  I heard "war stories" from the seasoned folks that talked about FNM and FRE deals selling for 106 and 107 in the 80's.  No idea if that was true or not.

If I had to guess, Prov is probably running .4 and most of the others run .8 - 1.1, but I'm kind of pulling those numbers out of the air, wouldn't be surprised if it was lower, and with the crazy spreads we're seeing now, it would appear to be they are 3X these numbers. 

Just thought I would open the discussion.

okay, no takers here, well, looking at some of the prices of MBS, I am thoroughly confused as to market pricing today with the FNMA 4.5's at 102, and we are still not seeing them on retail rate sheets, that must mean that someone is pocketing massive gains somewhere....I just want to know where the money is!

I remember Matt saying that normal mark up or profit margin is 50 basis points or 16 ticks. Of course volume was twice what it is now. In todays market it's as you and me both see on the different coupons at least 150 to 200 basis points.

As the largest independent mortgage bank in the nation we mark up our correspondant rate sheets I believe it was 50 basis points for Conventional and I think it was said 75 to 100 basis points on FHA and I rarely get beat on rate unless I'm going up against provident as we are correspondant with 13 different lenders.

So there is definitely a lot of money going around, it just hasn't made it to Main St yet. I'm a firm believer that after the roll we will see smaller margins, given freed up credit lines for investors and continued Treasury buying and lenders clearing out pipelines.

Curt,

As I mentioned in another thread, the interest rate on the underlying loans in a MBS is typically around 0.5% higher than the pass-through coupon rate.

This 1/2% difference is the servicing and guaranty premium. The guaranty premium charged by Ginnie Mae on a Ginnie I pool is .06% leaving the lender with a servicing premium of 0.44%. So on a principal of $100,000 the lender is paid $440/year to service the loan. The present value of this stream of income is worth about 2% to 2.5%, in the same manner as the yield premium for a rate 3/8 to a 1/2 over par is worth 2% to 2.5%.

Here is a link to the Ginnie Handbook for servicers if you would like more information on guaranty and servicing fees: http://www.ginniemae.gov/guide/guidtoc.asp?Section=Issuers#chap

On Friday a popular wholesale lender was offering 100.25 (0.25 premium) on an FHA 30 year at 5.00%. One large correspondent lender was paying 102.5 on that same loan. The equivalent MBS is the 4.5 coupon. On Friday the Feb GN coupon was about 102.50. As has been discussed there is a large variation in price between lenders coming in and out of the market to regulate their pipeline and the amount of loans flowing into operations.

So how much income does that represent? The wholesale lender in this example was making about 4.5%. 2.25 (value of the servicing premium) + 2.5 (premium on 4.5 coupon) - .25 (YSP pd to originator) = 4.5%.

The correspondent income was 2.25 (value of the servicing premium) + 2.5% (premium on 4.5 coupon) - 2.5% (paid to originator) = 2.25% income.

A national retail lender was quoting retail customers 5.00% with 1.00% origination on an FHA 30 yr. Their gross income on that loan would be about 2.25% SRP + 2.5% coupon premium + 1.0% origination = 5.75% in gross income.

TWO WORDS: THINK TANK

Harlan, first of all, thanks for the response, and you are exactly right.  Good to see another member with knowledge of the secondary.  One thing we've been tracking in our daily War Room is the Spread between the cost/ysp of rate sheet PAR and the price of the closest MBS coupon in order to observe the effects of the recent rate drop on the margins lenders have had to build in.

Curt, Mike is pretty much right on as far as the numbers.  In stable days, Provi would usually be 16-23 ticks out from MBS price.  In other words, if a 5.0 MBS coupon was at 100-22, then Provi would be at Par.  We've seen an MBS coupon as low as 100-13 and still gotten par, but that is uncommon.  By contrast, we are seeing that same spread over 60 ticks in most cases now. 

We're going to start indexing it so we can graph it.

Mr. Cooper,

In my 9 years I have never read a more complete comparison of wholesale, correspondent, and retail profit on a particular scenario. I really appreciate your contribution!

You're quite welcome!

Harlan, THAT is the answer that I really was looking for.  I had no idea what the servicing premium was. (how much) and putting it into NPV obviously makes sense as well. 

I think Matt could use you as a moderator some days.  AQ look out!

All I know at this point is the spread to Main street is to high and lenders/banks are making all the cash. And no matter how anyone paints it they are being a bunch of greedy bastards, that's right, I said bastards. Main street needs to get excited about real estate to bottom us out and start pulling back on the stick to climb out of here.

4.50% interest rates on ginnie especially I think would be a huge start but we need them to hold for 3-4 months into the summer when the purchase market starts kicking in to take over momentum. I'm not greedy, I don't need massive yields but clients need those affordable rates without massive discounts.

I'm making t-shirts that say "tighten that spread".  I think I'll sell a million before anyone knows what I'm talking about.

Clem Borkowski:

I'm making t-shirts that say "tighten that spread".  I think I'll sell a million before anyone knows what I'm talking about.

Well, at least those in the know will be on board.

Clem Borkowski:

I'm making t-shirts that say "tighten that spread".

Clem, um...ha-hem...let's keep it PG-13 in here