Five US regulators writing the Volcker rule have ended three years of debate and approved a ban on proprietary trading by some banks. The Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Reserve and the Securities and Exchange Commission voted in favor of the rule, which also holds bank CEOs more accountable. “The rule also imposed tighter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks. To pursue a hedge, banks would need to provide detailed and updated information for review by on-site bank supervisors.”  (read more...)


The actual 71-page Volcker Rule, effective 4/1/14, can be found here. Does it end hedging, and therefore mandatory locks, for banks? The MBA weighs in: “Required under Dodd-Frank, this final rule would prohibit bank holding companies and their subsidiaries from engaging in certain forms of proprietary trading. While an exemption is provided for risk mitigating hedging activities, compliance will require a "hedge effectiveness" analysis. The hedging provisions can be found on pages 15-17 of the rule. Excluded from the rule's prohibitions are purchases and sales of loans and GSE and GNMA securities (pg. 18).  MBA is analyzing the rule in further detail and will provide a summary of the rule and its impact to the mortgage banking community in the coming days. For more information, please contact Jim Gross at, or Dan McPheeters at


Since we’re chatting about the MBA, recently it reported that profits for independent mortgage banks and mortgage subsidiaries of chartered banks fell by around 50% in the third quarter of 2013 compared to the previous quarter. The independent mortgage bankers made an average profit of $743 on each loan originated during the third quarter, down from $1,528 per loan in the second quarter. Per Marina Walsh, AVP of Industry Analysis (and yes, this industry needs analysis!), “Third-quarter profits were reduced by half because of several factors: per-loan production expenses that reached study-highs, declining production volume and reduced secondary marketing income. Historically, mortgage bankers have struggled to control fixed costs and right-size in a declining market, and the increasing costs of compliance and quality control only exacerbate an already difficult situation.” Average production profit dropped from 75 basis points in the second quarter to 38 basis points in the third, marking the fourth consecutive quarter that production profits have decreased. The decline in production volume per company saw a less steep decline, from $439 million in the second quarter of 2013 to $391 million in the third quarter. Volume dropped 6% while the net cost to originate a loan climbed $366 to $4,573.


And we can finally stop yammering about the DeMarco-Watt question about heading up the FHFA, overseer of Freddie and Fannie: President Obama’s pick Of Mel Watt has been confirmed by the Senate. “Watt’s nomination has proved popular with industry groups; he’s been endorsed by the Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders, along with numerous civil rights and housing advocacy groups. Many believe that as head of the FHFA, Watt would change the agency’s focus to give more aid to struggling homeowners. Now we can start guessing about expanding HARP date ranges….


“NAR commends the U.S. Senate today for approving the nomination of Rep. Melvin Watt for the position of Federal Housing Finance Agency director. During his two-decade tenure in Congress, Watt served on the U.S. House Financial Services Committee and was an outspoken advocate for homeownership. His leadership on the Subcommittee on Housing and Community Opportunity and the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises helped promote and protect safe, affordable access to homeownership for creditworthy buyers. NAR looks forward to continuing our work with Rep. Watt as he transitions into his new role as FHFA director.”


This leads us to the agencies. Everyone is still talking about, as well they should, the ramifications of the latest gfee increase. The impact is, of course, the same as other increases, although as some of the sharper Capital Markets folks have pointed out, some of the details are lacking. But originators need to keep this in mind. The 10 basis point g-fee is paid on the outstanding balance of the loan for the life of the loan. It is like an increase in the interest rate. While the 25 basis point up-front adverse market fee (also paid on the loan balance) is paid just once, at the time of closing. For example, if the loan exists for 8 years, then the g-fee increase represents an increase in cost to the borrower of about 80 basis points over the life of the loan, while the elimination of the adverse market fee only saves the borrower 25 basis points.


The agencies know a thing or two about risk, as do the MI companies, and transferring credit risk. Isaac Boltansky with Compass Point LLC ( does a great job tracking these things, and reported yesterday morning on the Senate Banking Committee’s hearing on credit transfer risk yesterday afternoon. “The Senate Banking Committee is scheduled to hold a hearing on credit risk transfers in the mortgage finance system. The witnesses include a representative from MGIC Investment and representatives from the GSEs. We reviewed the written testimony and associated statements this morning and recommend reading both the FHFA’s statement and MGIC’s testimony. The FHFA statement is of particular note as it provides an overview of the GSEs’ risk transfer transactions to date as well as details the pros and cons of each transaction type. We continue to believe that the FHFA will mandate an increase in its risk sharing goal for each GSE from the 2013 level of $30 billion as part of its 2014 conservatorship scorecard. It is important to note, however, that the FHFA and GSEs will likely continue to favor an expansive array of risk transfer structures as opposed to focusing on a single method. The FHFA testimony leads us to believe that the GSEs will continue to embrace prefunded capital market transactions (e.g. STACRs) and insurance transactions while also exploring the feasibility of issuing credit-linked notes via bankruptcy remote trusts and the use of senior/sub securities.”

I am occasionally asked about mortgage servicing rights and their values in the foreseeable future; although I pride myself on being able to predict which See’s Candy holds the caramel filling and not the coconut (Spoiler Alert: the swirls on the top are different), I am far from an expert on where MSR’s will be in a year. However, with mortgage interest rates inevitably on the rise, the values of MSRs on the balance sheets of many banks and non-bank financial institutions have risen and could be poised to climb even higher. Apparently I am not the only one with this view; "Higher MSR valuations will likely help offset weakening earnings from a slowdown in mortgage market activity," said Standard & Poor's credit analyst Jonathan Nus. “Following a surge in rates, MSR fair-value adjustments resulting primarily from higher mortgage interest rates varied between 11.2% and 18.4% of the MSR balance for some large U.S. banks and between 9.0% and 14.0% for some non-bank mortgage servicers.” However, the rise in MSR values could boost reported capital for many financial institutions, but the impact on U.S. banks could be suppressed by impending U.S. Basel III capital restrictions. These restrictions, which limit’s the portion of capital MSRs can account for, could encourage some banks into selling.

“Rob, what do you hear about banks having to write off losses on second mortgages or HELOCs? That issue seems to be dead or at least ignored.” Good question, especially since there was a recent article in Reuters about that exact topic.


American Banker selected Wells Fargo’s CEO John Stumpf as 2013 Banker of the Year. Contained within the interview and article posted at American Banker, is a lot of insight by an executive some consider to be the most influential banking exec today. One interesting quote to note was, “Wells, with its relatively small investment bank, has less at stake from trading restrictions than Goldman Sachs or JPMorgan Chase. But Stumpf worries about the possibility of regulatory creep for a rule that is still not finalized. "The headline is, 'We don't want gambling to take place in banking.' Well you know something? I don't either, but your gamble might be my legitimate risk," he says.


Training and webinars are alive and well.


Today JMAC Lending, Inc. is offering a training webinar on Qualified Mortgage (QM) & Ability to Repay (ATR). It is from 10-11AM PST. “Who should attend: brokers/managers, LOs, loan processors. Covered topics will include an Overview of Qualified Mortgage (QM) and Overview of Ability to Repay (ATR) rules".


The Texas Mortgage Bankers Association will be hosting the Southern Secondary Market Conference in San Antonio, TX on February 25th and 26th.   Sponsorship and exhibition opportunities are still available as well.


A few weeks after that, the California Mortgage Bankers Association will be hosting its 5th Annual Sales and Marketing Conference in Newport Beach, CA on March 3rd.  Key topics are regulatory changes and the market’s transition from refi to purchase.  .


Turning to rates, yesterday agency MBS prices were impacted by the gfee news: MBS were “buoyed” by the increase in guarantee fees on FNMA and FHLMC mortgage-backed securities, since it makes MBS less “callable” – borrowers are less likely/able to refinance. But Watt’s confirmation removed the gains: investors are worried that Watt will expand HARP in various ways including extending the cut-off eligibility date and offering principal forgiveness. That aside, investors are particularly interested in MBS sales trends, and current volumes are running at less than $1 billion a day, versus the $2-3 billion a day earlier this year.


And Washington continued to be busy – we had a budget deal. In what many are calling another “kicking the can down the road,” it will reduce sequestration effects by 37% and allow agencies to determine how to implement the remaining 63%. The new policies are evenly split between fees and spending cuts and keep government running through fall 2015. The overall $45 billion rise in government spending in FY14 should boost GDP by 0.275%, which sure beats austerity and certainly keeps us from another shutdown. But the markets don’t seem to care: stocks are pretty flat, the yield on the 10-yr, which closed Tuesday at 2.80%, is 2.82%, and MBS prices are worse about .125.