Recently I gave a speech to a group of loan originators and Realtors in Sacramento. Of course the topic of compensation arose - maybe because I brought it up. Anyway, aside from a few rumored exceptions, most smaller lenders are waiting to see what the large accumulators (Wells, BofA, Chase, USB, Citi, GMAC, etc.) are going to do. Wells' wholesale group, for example, announced that it would come out with a policy in February. Brokers are well aware that they will get paid either by the lender or the borrower - not both - with the goal, of course, being to prevent steering. READ MORE

Many mortgage banks that are ahead of the crowd have already run numbers to analyze historical production for their loan agents - average loan size, buybacks, file completeness, FICO's, etc., etc. - to get a good handle on what they can expect from their agents, and compensate them accordingly going forward. It is heavily rumored that the large banks, in looking at changing their LO compensation, are analyzing loan file stats - not loan stats. For example, how much trouble do they have with incomplete files and missing documents, were packages put together correctly, were locks closed in time, etc. Stay tuned...

And how is retail loan officer production out there? The STRATMOR Group, which works with mortgage companies in researching and assembling data, indicates that loans closed per loan officer for large lenders averaged around 4.5 loans per month during the first half of 2010. But given the upswing that companies have seen in the second half of 2010, the firm estimates that average production during the second half of the year it may come in closer to 8.0.

There is a lot of coverage in the press about the erosion in broker business. One vet wrote, "It is easy to see the reasons for the decline in broker business - it is an old, outdated model. Now there is a concerted effort to change two material structural problems with the mortgage industry. This effort starts at the regulatory level, but the legislators are being influenced by a very powerful bank lobby which believes that there were two fundamental problems with the old distribution model: accountability and disproportionate compensation.

The vet continued, "Accountability/Counterparty Risk - At the peak of the so-called "good old days," somewhere between 60% and 70% of all loans were originated by independent mortgage brokers.  Many if not most principal brokers signed Loan Origination Agreements with little regard for liability, largely because they were allowed to maintain miniscule capital levels.  By design, it is very difficult, if not impossible to pierce the corporate veil that protects the principals.

"Disproportionate Compensation Relative to liability - The revenue potential on every mortgage is roughly between 3.00-4.00% when you add origination fees to the value of servicing.   (Loan amounts, programs and the sophistication of the consumer could obviously influence this range up or down.)  Given the level of competition at the wholesale level, it was very common for as much as 50% of the revenue potential to be earned by the originator and the principal broker leaving a thinner level of revenue for the mortgage wholesaler.  This made it difficult for mortgage wholesalers to increase capital levels through retained earnings.  The result was that a wholesaler's off-balance sheet liabilities grew at disproportionate levels relative to their retained earnings. In short, when it became time to pay the piper, mortgage wholesalers could not. The massive closure of mortgage bankers left investors (mostly banks and servicers, and sometimes taxpayers) holding nearly all of the liability.

"In short, we had a prevailing lending model where 50% of the revenue was paid out to a counterparty that had zero liability. This model was rigged to fail, and it created an environment ripe for abuse, even if the participants were indeed "only giving the banks what they were asking for.

"Enter MDIA.  Enter FinReg.  Originators need to understand that there is a concerted effort to make sure that this doesn't happen again.  The holes that don't get plugged by regulation will be plugged by banks that will ultimately institute TPO policies that accomplish the same objectives. For us brokers - the light we see at the end of the tunnel is definitely a train!"

That all being said, let's move on to some investor chit chat. I need to note a clarification on the IMA servicing package details that I mentioned Friday. Namely: "The $1 billion trade actually closed Nov. 30 and is 100% Fannie servicing.  The two deals you referenced are two additional offerings currently in the market and set to bid this week, Thursday, Dec 9.  We also have a California Fannie deal of $225mm Fannie that bids this week - tomorrow."

In a story from the Financial Times, "Bank of America has told US regulators that it has sold enough assets this year to meet the final condition that was set on its landmark plan to repay $45 billion in government bail-out funding. BofA was given until the end of this year to record the gains. US regulators believe the move will help build the bank's equity as it regains its footing after leaving the government's troubled asset relief program (TARP) in 2009. Apparently cutting back its stake in BlackRock and interest in China Construction Bank has BofA close to $3 billion. According to Treasury officials, 122 TARP recipients have now repaid all, or a portion, of their government aid.

SunTrust involved in insurance kickbacks? "Holy captive reinsurance, Batman!" (Please remember the source on this one - I cannot validate it.)

CitiMortgage updated its list of brokers, correspondents or other loan originators whose loan originations (or who have any role in the origination) are not acceptable to CitiMortgage for purchase. Clients should check it out.

Union Bank has a new pilot program for a "Jumbo 30-Year Fixed Rate Mortgage" starting today "This product will be underwritten to Union Bank's standard Portfolio Product guidelines except that the minimum loan amount must be above conforming loan limits:  Minimum Loan Amounts 1-Unit > $417,000, 2-Units > $533,850, 3-Units > $645,300, 4-Units > $801,950."

UB also made some changes to its Tenants-in-Common vesting on 2-4 unit properties where it clarified for refinance transactions "all current vested owners and borrowers must remain the same; no new borrowers may be added to the loan. Assets - Guidelines regarding liquid assets, unacceptable assets, minimum down payment requirements and reserves. Non-Occupant Co-Borrowers - 2-4 units are not allowed."

Wells Fargo reiterated its closing process in escrow states to its broker clients. "Some brokers or closing agents are requesting to close loans in escrow states under the non-escrow state process. While it is our goal to meet your needs, our organizational risk is increased when we follow a process outside our established compliance and quality controls." Starting in January "If the property is located in one of the following states, the escrow state conditioning policy must be followed and the loan must close under the escrow state process: AZ, CA, HI, ID, MT, NV, NM, OR, UT, and WA. All other states are considered non-escrow states and loans must be conditioned and closed according to the non-escrow state process."

Wells' wholesale folks also noted the discontinuation of Home Equity Balloon Line of Credit Terms. "Balloon line of credit terms will no longer be available from Wells Fargo Home Equity. This includes only the HELOC with a 10-year draw followed by a balloon payment."

LuxuryMortgage, who along with Bank of Internet has partially assumed the Thornburg Mortgage mantle, rolled out a new Super Jumbo 10/1 IO and fully amortized fixed program to $4 million. (No pricing hits for cash out, condo's, and 2nd homes on Luxury's Platinum ARM program for all LTV's.)

The unemployment data from Friday morning gave the press something to talk about for the remainder of the weekend. Mortgages better by about .125 on volume that was a shade less than normal. One would expect volumes to drop off a little, as anyone who locked on Thursday regretted it and anyone who didn't hoped for further improvement Monday. Basically, the Non-farm Payroll number was disappointing, regardless of the spin government officials put on it. Private payrolls are the weakest since January. After that we learned that Factory Orders fell 0.9% in October, worse than expected, but the ISM Non-manufacturing Index rose in November. At least the mortgage markets "caught a bid" after the employment data. Treasuries were quickly off to the races but we still have the overseas issues with which to grapple, along with this week's 3-yr, 10-yr, and 30-yr supply and very little in the way of scheduled US economic news. Fed Chairman Bernanke was on "60 Minutes" last night, saying that the Fed is prepared to do more if need be.

Some folks may be happy to find out that there is no scheduled economic news today or tomorrow. And even on Wednesday the only pseudo-economic release is the MBA's application index; Thursday is Initial Jobless Claims. Friday we'll see some trade figures, and a Michigan Consumer Sentiment number. Overseas, a report from Reuters on the IMF suggests that, "The euro zone should have a bigger rescue fund and the European Central Bank should boost its bond buying to prevent the sovereign debt crisis from derailing economic recovery." And this week we have central banks meeting in Australia, Canada, New Zealand and the UK which might arouse some interest. We find the 10-yr at 2.96% and mortgage prices are better by .250 or more.  FULL SCHEDULE

The wife and I were sitting around the breakfast table Sunday morning.
I said to her, "If I were to die suddenly, I want you to immediately sell all my stuff."
"Now why would you want me to do something like that?" she asked.
"I figure that you would eventually remarry and I don't want some idiot using my stuff."
She looked at me and said: "What makes you think I'd marry another idiot?"