There's a saying, "We are born naked, wet, and hungry. And then things get worse." But perhaps, just perhaps, smaller mortgage brokers and bankers won't see things get worse with the Qualified Residential Mortgage ("QRM") plans. Dodd-Frank requires lenders to retain 5% of the credit risk of any mortgages closed outside of the guidelines - but what are the guidelines? Will it be based on agency - effectively killing the jumbo/non-agency market? What if the agency guidelines go away? Will it be based on LTV, cutting into FHA or the MI company business share? Anyway, the issue has been somewhat quiet, but recently the Senate Banking Committee heard from FDIC Chairman Sheila Bair, and she told members that regulators will soon release its QRM that will determine how much risk loan originators retain after securitization. Apparently it is targeted at larger institutions. Per Ms. Bair the direction of the rule will be focused on issuers and securitizations, not small originators - which include community banks. Mortgage brokers and bankers are hoping they're also included.

Yesterday I regurgitated the latest public information on comp from Wells (wholesale) and GMAC. A well informed reader wrote, "I have a good perspective on how the various lenders were viewing LO comp.  Unfortunately for anyone looking for uniformity, their perspectives vary significantly.  SunTrust, for example, is clearly ahead of the curve in policy implementation.  Wells wants to micromanage everything a broker does, and MetLife seems to be more like Wells than SunTrust.  It appears that Stearns will offer an anti-steering document that is going to be required in every file.  Whether it is to be signed by the broker or borrower or both is yet to be determined. Regarding oversight, most wholesale companies, at this point, aside from a 'reps and warranties' addendum to the broker agreement that the FRB regs were being followed, are taking the approach that there would be no oversight.  The exceptions are Wells and MetLife, with Wells expected to produce an 18-question form that would be going out to broker principles very shortly that deals with broker compensation plans."

I receive a fair number of questions along the lines of, "What if I don't have a comp plan by 4/1?" or "Why are Wells and MetLife going to require our comp plans - aren't reps and warrants like other investors are doing enough?" It is not hard to see why, given the possible financial liabilities of a foreclosure or lawsuit, there is pressure to sign off on a comp plan. Will anyone be watching? You bet:

As I noted last week, "The maximum amount of any liability of a mortgage originator to a consumer for any violation of this section shall not exceed the greater of actual damages or an amount equal to 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including a reasonable attorney's fee." Although I could not find it, it is purported that penalty highlights also include an increase in the rescission period, so "Penalty highlights" (costs/fees/penalties) include the rescission period increasing from 1 to 3 years, in addition to 3 times the MLO comp received, penalties include all finance charges, interest, fees, and legal fees, and unlimited rescission period for loans in foreclosure. Much of this is paid for by the servicer out of foreclosure proceeds.

In the event of a foreclosure, scenarios show that the penalty reduces the servicer recovery during the foreclosure/REO process, and for a performing loan the penalty reduces the funds owed by borrower if the loan is in rescission period, or the borrower's UPB is reduced if it is outside of the rescission period. So in terms of numbers, loan size = $450,000; interest rate = 5.25%, pre-paid finance charge = $5,670; total interest paid for 3 years = $70,875, originator comp broker = 2.50% (estimate) x 3 = $33,750, estimated attorneys' fees = $65,000, total penalty= $175,295.

One can pick apart these numbers all one wants, but the fact remains that large investors with capital on the line are concerned about anything close to them. I will throw in my opinion here, and say that I doubt that attorneys will be turning a blind eye to any indiscretions, given the current environment. And it would not take many "deals gone bad" to cause severe financial damage to a thinly-capitalized lender which is why large investors and servicers are extremely cautious - whether this involves reviewing comp plans or stringent reps & warrants. And lenders are spending a lot of resources setting up plans. "Don't do the crime if you can't do the time."

Compensation discussions are happening around the country. In Northern California, Comstock Mortgage announced two panel discussions "examining the impact the Federal Reserve Loan Originator compensation rules will have on our industry and on loan originators." Using a set of solid panelists, the purpose of the panel is to give loan originators and their management a chance to ask questions of mortgage industry professionals who are actively engaged in studying the issues and implementing the rules for their specific companies. The discussions are slated for 2/23 in Dublin, CA and 2/25 in Sacramento, CA. For information contact Casey Fleming at or to register for the seminar, contact Kathleen Chothia at (925) 484-1466.

Three thousand miles away, in Parsippany, New Jersey, NYLX is putting on a seminar on the same topic on the 24th. "Join us at the Hilton Parsippany on February 24th from 9am-12:15pm as we host an informative session with noted experts that can help you achieve your 2011 compliance goals without compromising your competitive edge. Find clarity and direction amidst the confusion!" Go here to start the registration process.

The compensation issues, as well as others, have certainly caused those remaining in the mortgage industry to band together. One such organization that has sprung up is the Mortgage Action Alliance which is a "grass roots, voluntary, non-partisan, and free lobbying effort to help make sure our voices are heard." Per one of the organizers, "Mortgage Action Alliance allows you to be kept updated with the key legislative issues that affect our business. One signs up online for MAA, and when there is a key issue up for debate, a "call to action" may take place, in which you will receive an email from MAA and be asked to "take action" by simply completing a few steps online - the result is that automatic letters will be sent to your Congressmen immediately." 

Merscorp Inc., owner of MERS (and the electronic-registration system that contains about half of all U.S. home mortgages), will propose a rule change to stop members from foreclosing in its name. MERS (which is easier to say) has certainly been in the press, and it hasn't helped the industry that courts have issued different verdicts on whether MERS, as an agent for the mortgage owner, has the right to bring a foreclosure action.

Looking at the markets, interest rates are behaving themselves - whatever that means. Yesterday the Conference Board's Leading Indicators increased 0.1% in January after rising 0.8% in December.   Six of the 10 indicators in the leading index contributed to the increase, led by the interest-rate spread and the stock market.  The Philadelphia Federal Reserve general economic index rose to 35.9, the highest level since January 2004, having risen from 19.3 in January.  But Treasuries preferred, wisely, more on the rising tensions in the Middle East, and an increase in U.S. Jobless Claims. The yield on the 10-yr hit 3.56%, the lowest level since Feb. 4th (and much lower than the 3.77% Feb. 9 level). Today we have no scheduled economic news. China stole the headlines by raising reserve requirements in that country by 50 basis points to further combat inflation. So far this morning we find the 10-yr at 3.61% and MBS prices worse by about .250.

(When I was a kid, we had both Lincoln's and Washington's birthdays off. Now we only have one holiday, and it is Monday, and I will be taking it - so there will be no commentary. Have a nice 3-day weekend.)

Here is one proposal to stop the abuses in automobile sales: "Auto Sales Staff Honest Operation of Local Emporiums."
This is an act to eliminate abuse in automobile sales.
1. Anti-steering.  When a customer enters an automobile showroom, they must be asked which model car they wish to consider. This must be recorded (within 3 minutes) and signed by the customer before they can be shown any vehicles.  No sales representative may show, demonstrate, or offer a higher-priced vehicle unless such vehicle is offered at the same price as the vehicle originally requested.

2. Salesperson Compensation.  Sales persons may no longer be compensated based on the cost of the vehicle or based on the options or add-ons which are sold with the vehicle.  No salesperson may be compensated based on the price of the vehicle or the terms of the sale.  Permissible methods of compensation include per-car fixed payments or payments based on the number of sales per month.  Under no circumstances may any sales person be paid based on up-selling or by selling additional options.
3. When a customer agrees to purchase a vehicle, he/she must first be given a comparison sheet showing the monthly payment for two other vehicles.  The purchase may not be completed until at least 3 days after such disclosure is provided.
4. Safe Harbor.  There will be no restrictions on method of compensation if all vehicles in the dealership are offered at the same price.
As soon as this new law is adopted and the auto sales business collapses, a proposal for regulation of the electronics industry will be published.