What is bothersome for many CEOs, as we enter the 4th quarter, is profitability - or lack thereof. I received this note from the CEO of a residential lender in New Mexico. "Rob, my Secondary guy is telling me that he's not going to meet his goals that we set months ago. Are you seeing that everywhere?" Yes I am, even lenders doing mostly purchase business. Few forecast the speed at which rates moved higher and refis decreased, and the impact on profit margins. As volumes have dropped off, lenders have cut profit margins, and other lenders have to match those reduced profit margins. So not only are companies making fewer loans, they are making less per loan. (One can expect this to happen until competition is reduced with companies leaving and/or merging.) On top of that, profits are further being hit by renegotiating locks to keep the pipeline alive. So don't send your Secondary guy to the dung heap quite yet.

Unfortunately shutdowns are not rare with the US. Government - but I am sure there are other things to spend on for Washington DC. George W Bush was the only president in recent decades not to experience a shutdown. The federal government closed once under Ford and HW Bush, five times under Carter, eight times under Reagan, and twice under Clinton. But yesterday the NMLS reminded us that it is not a federal government agency, and so with the shutdown of the government's non-essential services NMLS will remain open. The NMLS call center and test centers will also remain open.

The CFPB's pricing rules and regulations for QM loans is a quagmire. But we're not done yet! Back in March Department of Housing and Urban Development (HUD) began the process of issuing its own qualified mortgage rule. Back then, according to HUD spokesman Brian Sullivan, the FHA has authority, under the Dodd-Frank Act, to review the CFPB rule and issue a separate ability-to-repay rule for loans guaranteed by FHA. A ways back the Office of Management and Budget had cleared a proposed rule setting qualified mortgage standards for FHA-insured single-family mortgages for issuance in the coming weeks. The OMB signed off on the proposed standards on 9/12.

So now lenders can now comment on the QM proposal from HUD, which would apply to mortgages insured, guaranteed, or administered by HUD and to single family mortgages insured by the Federal Housing Administration (FHA). But the clock is ticking - we only have until 10/30 to object to its components. But HUD says its proposal is aligned with the Ability-to-Repay criteria set out in the Truth in Lending Act (TILA) and also builds off of the QM rule from the Consumer Financial Protection Bureau (CFPB) finalized earlier this year on the conventional side. To begin with, in order to meet HUD's QM definition, mortgage loans must require periodic payments, have terms not to exceed 30 years, limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Section 184 and Section 184A loans), and be insured or guaranteed by FHA or HUD.

HUD proposes to designate Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans covered by this rulemaking to be safe harbor qualified mortgages and proposes no changes to their underwriting requirements.

However, per Mortgage News Daily, "for its largest volume of mortgage products, those insured under Title II of the National Housing Act, HUD sets out two categories for Qualified Mortgages which are determined by the relation of the Annual Percentage Rate (APR) of the loan to the Average Prime Offer Rate (APOR).   Both use the same formula for an APR; APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium (MIP).  The first category, A Rebuttable Presumption Qualified Mortgage will have an APR greater than the product of that formula, the second category Safe Harbor Qualified Mortgages will have an APR that is lower."

MND continues, "Lenders originating the Safe Harbor mortgages have the greatest legal certainty that they are complying with the Ability-to-Repay standard but can still be challenged by consumers who believe the loan does not meet the definitions of a Safe Harbor Qualified Mortgage."

Under HUD's QM rule, HUD will no longer insure loans with points and fees above the CFPB level for qualified mortgages, but expects that these loans will adapt to meet the points and fees limit. In addition, HUD classifies all Title I, Section 184 and Section 184A insured mortgages and guaranteed loans, which most likely would have been nonqualified mortgages under the CFPB final rule, as safe harbor qualified mortgages.

As aggregators and lenders everywhere check the rules and see how much of their recent government production would fall inside or outside these rules, it makes sense for you to view them straight from the horse's mouth.

So the FHA needed $1.7 billion and government and conventional loans are in flux, but everything is cool on the jumbo side, right? Nope! Not only am I hearing that bank retail channels are aggressively pricing product (thus beating the pricing of independent mortgage like a rented mule), but the market for non-agency mortgage bonds (not backed by the government) is not firing on all cylinders. It suffered a setback in September when one offering was shelved and another had to slash its price amid tepid investor demand. PennyMac Mortgage Investment Trust cut prices on its debut mortgage bond at least twice to attract buyers, said investors who considered the offering. The firm sold a portion of the bonds at a discount of about 4-1/2 cents to government-backed mortgage bonds, a gap that grew by a cent or more since last week. And Shellpoint Partners LLC put its second mortgage bond on hold just before it was set to begin marketing the deal, said people familiar with the planned offering.

In 2008 I had a mortgage trader respond to my email inquiring of his whereabouts by replying, "Deep inside my foxhole, waiting for daylight." According to Peter Wallison and Edward Pinto's Op-Ed in the Washington Post earlier this year, he may have to climb back in at some point. The scope of where we've been, and what we've become as an industry isn't lost to anyone still originating, underwriting, servicing, or selling a loan. It may to people who operate outside the industry, but as the writers of this opinion illustrate, the pitfalls of the current "reformers" of the industry, may very well be repeating the same pitfalls of the past. Is it accurate to say that tax-payers are still exposed to similar losses of the past five years? That's open for interpretation, but at the very least you can look at  the recent success' by the "mega-banks" to lower capital and liquidity mandates laid out in Dodd-Frank (not to mention LIBOR manipulation), as both indicators of their strength inside Washington, and their ability to sculpt "reform". Are my C-Rations still good?

Yesterday the commentary brought up the question of who, the lender or the originator, owns the client database. Out in California, Rob Hirt, CEO of RPM, in a letter to his LOs wrote, "...your RPM contract shows that you have a right to your client contacts and RPM has always honored the loan officer credo ... a copy of the contact management database goes with the Loan Officer. Additionally, I am now adding an addendum to your contract that states that if you have created 'intellectual property' that is not sponsored by RPM-then you also have the right to keep that 'intellectual property'."

Let's move on to some bank, agency, and investor updates, including the price change to Fannie's DO.

Effective today, Fannie Mae subscribers will see a change in the Desktop Originator (DO) casefile submission price, as well as other changes, on their November invoices for October use. Notification of the price increase has been communicated via bulletin which amends the subscriber's rate sheet.

New Penn Financial, LLC (New Penn) launched its mini correspondent program "which enables clients such as mortgage bankers, community banks and credit unions to expand their mortgage businesses while limiting risk and maintaining their brand credibility. Under the program, mini correspondent clients originate loans, submit them to New Penn for underwriting and clear-to-close issuance, complete the closing/funding process and sell the loans back to New Penn. The client remains the lender of record and is responsible for disclosures, closing and funding, while New Penn provides the loan decision."

Bank M&A activity continues as banks expand, contract, or line up their departments to add efficiencies. One PacificCoast Bank ($280mm, CA) has received Fed approval to acquire Albina Community Bank ($121mm, OR) for an undisclosed sum. Bridge Bancorp, Inc., the parent company of Bridgehampton National Bank, announced the signing of a definitive agreement to acquire FNBNY Bancorp and its wholly owned subsidiary, the First National Bank of New York (collectively "FNBNY").  East West Bank ($23.3B, CA) will buy the parent company of MetroBank ($1.1B, TX) and Metro United Bank ($457mm, TX) for $273mm in cash and stock or about 1.7x tangible equity.

The impasse in Congress on the budget and debt ceiling talks has resulted in a shutdown of non-essential functions. But this helped rates yesterday, and stronger-than-expected economic data had little impact. (The news was that the Chicago PMI rose to 55.7, above the consensus of 53.5, and the highest level since May.) The U.S. 10-yr T-note yield hit its lowest level in nearly two months, thanks to the potential slowdown in the US economy from the shutdown. And looking at agency MBS prices, "organic" supply (current production of about $1 billion a day) is more than manageable as official buying from the Fed is still going strong.

Today we have some second tier economic numbers, but things start heating up with tomorrow's ADP numbers, Thursday's Jobless Claims, Factory Orders, and Challenger Job Cuts, and Friday's employment data. In the early going, rates have moved higher from Monday's close:


2.62% is now 2.66% on the 10-yr, and MBS prices are worse about .125.