Given the potential compensation fluctuations facing many in the industry ("sometimes they fluc up, sometimes they fluc down," to quote a joke), it is important to remember what exactly motivates people. If you have a few minutes to spare, and can take your focus away from the amazing art work, this is worth a view for any manager: AUTONOMY MASTERY PURPOSE

Yesterday the markets were concerned, in part, about S&P cutting Japan's credit rating for the first time in 9 years to AA- to account for their mounting debt. What about here in the US - are we broke yet?

Our deficit is over $14 trillion. This doesn't matter - until it does. But when does that happen? When the Federal Government runs a deficit, it has to borrow money, mostly be selling Treasury securities. And it pays interest on that borrowing (just like you and me), and continues rolling over the debt and paying interest indefinitely. Most analysts look at the deficit as a percentage of GDP. In the early 1980's, many thought that deficits above 3% of GDP would cause economic pain. During the 1990's, thanks in part to the tech boom, the deficit came down, but in the 2000's it rose again. But investors, here and abroad (especially China) stepped in and bought Treasury securities, helping to keep demand high, prices high, and rates low. 'Round and 'round we go, and where it stops, nobody knows - but few argue that a high deficit helps our credit rating or our borrowing costs, which in turn influence mortgage rates.

What happens over the weekend? For loan applications taken on or after January 30, "lenders extending consumer credit secured by real property or a dwelling must disclose certain summary information about interest rates and payment changes in a tabular format.  The disclosure must also state that consumers are not guaranteed to be able to refinance their mortgage in the future." This is, of course, Reg. Z, the implementing regulation of the TILA. It has been optional for the last few months, but no more.

Yesterday I mentioned a large bank's retail channel offering FHA loans to borrowers with a 500 FICO. A retail loan agent wrote to me saying, "Rob, as an account executive on the wholesale side for the past 15 years I consistently had retail envy when I heard about these sexy catch all programs that could be used by retail to gain more market share. And frankly it was a big part of the reason that I moved over to the retail division, and in the bigger scheme of things I see offering these programs only internally as a way for the bank to be able to actually control the transactions to a tighter measure and provide assistance to a certain group of borrowers that are currently being stopped at the door. The appetite and potential quality of these transactions from the TPO side could get out of control quickly and hurt the overall image of the banks offering the programs and therefore I get it as to why they'd want tighter control. All of the banks are finally coming out of a massive refi boom from the summer months and if Wells was to roll the 500 FHA program out to the wholesale side, how many man hours would they burn on these borrowers and what would it mean for all of the 740+ borrowers that are putting down 20% in means of turn times?"

Regarding Freddie & Fannie's mounting REO glut: "The critical issue here is that the MBS Servicers interests are, at times, not fully aligned with either the homeowner or government policy. This is because the servicers, who are mainly banks, do not have the credit risk associated with the loan since it has already been securitized and sold. The GSE's have the risk. Maybe the GSEs should take over the servicing function for loans that they wrap in their day-to-day G-Fee business. Since they own the credit risk, they will be fully interested in the lowest cost solution to delinquency."

"Another pro-active (foreclosure aversion) idea for the agencies would be that prior to the home becoming REO the owner-occupied borrower, once seriously delinquent, could be offered the opportunity to rent the property at the current market rent. The government would legislate a program that would permit investors to take these loans off their balance sheet once the home is rented to the borrower thereby strengthening these financial institutions and freeing up their balance sheets so they can lend. As the renter successfully makes 24-36 payments on time, they qualify to purchase back the property at the then market value."

Another, on the Realtor side, wrote, "One of the biggest points of Fannie & Freddie's REO congestion is the lack of brokers they're using. Their current system of using on a few listing agents is ridiculously inefficient. Of course every Realtor in the business wants to get in on this action, and there are some very qualified folks out there being left out of the game. Someone at Fannie & Freddie needs to recognize that they need more hands on deck to move these homes.  Basically, they need to at least double the number of Realtors listing these properties if they want to make a dent."

"If regulators do away with the Fannie and Freddie system and don't replace it with some form of implicit or an outright explicit government guarantee, the 'Law of Unintended Consequences' will strike. Ginnie Mae's will undoubtedly price way better than any private MBS and the government will be over-run with FHA mortgages.  Leave it to politicians to screw it up again.  I say again, because it was all this nonsense about lending to the "underserved", which is code for those that don't qualify using traditional credit risk principals, that was a primary reason for the problems in the agency portfolios today. It is an example of the 'medicine' being worse than the disease."

Now we're on to Part IV of the LO compensation series, noting the Fed's responses to the MBA's questions. Remember that company's individual policies may differ from these to some extent, as there is still a lot of interpretation. Many company's policies will vary as long as there is no ability or an originator to steer the consumer into a less favorable product and  that factors unrelated to the terms or conditions of the loan such as cost and expense of origination come into play. That will be the ultimate deciding factor.

Q12. Does Dodd Frank affect the treatment of managerial compensation if a manager also originates some loans? Some branch managers only manage an office and do not originate loans, while other branch managers both act as loan originators and have management responsibilities. The latter branch managers receive compensation as a loan originator for each loan originated, and also receive compensation based on the production of the entire branch.

A. Fed Response - Yes. If a manager originates loans, then the manager cannot receive compensation based on loan terms, even if such compensation would be limited to loans not originated by the manager. Being a loan originator subjects all compensation received by the manager to the rule, even compensation received in the manager's capacity as manager. The manager, however, like other originators, can receive a fixed percentage amount of all loans originated.

Q13. May employee loan originators generally, or of a certain branch or group in particular, be compensated in whole or part based on profit during a particular period attributable to the branch or group? Profit is determined based on standard accounting methods to calculate revenue and expenses of the branch or group during the applicable period.

A. Fed Response - No. Profit includes amounts due to the rates and terms of loans and cannot be a basis for originator compensation.

Q14. Are there a minimum number of loan originators for a branch or group that would allow compensation based in whole or part on profit?

A. Fed Response - No. Compensation to originators based on profits of a branch is problematic no matter what the number. Were such compensation permissible, it could lead to net branches of one individual to circumvent the restrictions of the rule.

Q15. An example of varying compensation between two subsidiaries. Subsidiary A is a retail prime loan creditor and Subsidiary B is retail near prime loan creditor. Loan originators for Subsidiary A only work on and receive compensation for loans for Subsidiary A and loan originators for Subsidiary B only work on and receive compensation for loans for Subsidiary B. Can Subsidiary A and Subsidiary B have different commission structures for their respective loan originators?

A. Fed Response - Yes. The employees of each Subsidiary may originate loans only for their respective Subsidiary and, thus, their compensation would not vary based on a loan being a prime loan or a near prime loan.

On to the markets! After starting the day a little worse, we saw a little improvement yesterday after the dismal economic data: initial claims 454K, 49K higher than expected, continuing claims 3.991mln, 118K higher than expected, and Durable Goods order down 2.5% (expectations were for a 1.5% gain). Further improvement was seen after a good 7-year Treasury auction after digesting the Pending Home Sales number. MBS prices rallied/improved by about .250 with our friend the 10-yr closing at 3.38%.


A married couple in their early 60s was celebrating their 41st wedding anniversary in a quiet, romantic little restaurant. Suddenly, a tiny yet beautiful fairy appeared on their table.

She said, "For being such an exemplary married couple and for being loving to each other for all this time, I will grant you each a wish."

The wife answered, "Oh, I want to travel around the world with my darling husband."

The fairy waved her magic wand and - poof! - two tickets for the Queen Mary II appeared in her hands.

The husband thought for a moment: "Well, this is all very romantic, but an opportunity like this will never come again. I'm sorry my love, but my wish is to have a wife 30 years younger than me."

The wife and the fairy were deeply disappointed, but a wish is a wish. So the fairy waved her magic wand and "poof" the husband became 92 years old.

The moral of this story: Men who are ungrateful buffoons should remember fairies are female.......