Now is about the time when you stop saying “Happy New Year,” either because it is no longer relevant, or you’ve forgotten who you’ve said it to. Lenders and vendors know that the “ability to repay” rules are both relevant and should not be forgotten, and attorney and Mortgage Musing blog author Brian Levy’s latest Musing’s discusses the importance of the Dodd Frank Act’s Ability to Repay Rule and how that keeps both lenders and borrowers from giving the housing industry the kind of hangover it had starting in 2008. Levy also discusses the CFPB’s recent Colony Ridge enforcement action involving, among other things, fair lending, LEP language exploitation, and violations of the Interstate Land Sales and Full Disclosure Act of 1968. Talk about mission-creep! While we’re on the CFPB, it’s HMDA season! 4-6,000 lenders out there have begun filling out paperwork: more below. (Today’s podcast can be found here, and this week’s is sponsored by the STRATMOR Group, the data-driven mortgage advisory. At STRATMOR, insights and knowledge are applied to guide mortgage clients to make sound strategic decisions and take actions that improve their success.)

Broker and Lender Services, Programs, and Software

Kick off the new year strong and join Rocket Pro TPO's IGNITE Live on Monday, January 8th at 4pm ET with EVP, Mike Fawaz. He will cover new products and technology - including one big announcement that you don't want to miss to take your business to the next level. On top of that, Rocket Pro TPO has just announced an upgrade to their innovative ONE+ by Rocket Mortgage product, now expanded to include Freddie Mac’s LPA which could mean a 16 percent increase in client eligibility! The lender will continue to cover 2 percent of the client’s purchase price as a down payment, now with a minimum of $2,000. Speak with your Account Executive about other updates. Rocket Pro TPO has also introduced a new 1 percent LLPA credit for Fannie Mae HomeReady and Freddie Mac Home Possible loans at or below $350,000. For lower loan amounts, the credit will provide no less than a $2,000 benefit. Interested in learning more about a Broker or Non-Delegated Correspondent partnership? Contact Rocket Pro TPO to learn more.

Ever wondered how to hedge a mortgage pipeline? Hedging one’s mortgage pipeline typically produces the greatest return over long-term macroeconomic cycles, which is why it is considered an essential step in the growth of a mortgage lender. In MCT’s whitepaper, Mortgage Pipeline Hedging 101, their experts explain what hedging is and why it is a valuable strategy for maximizing profitability in the secondary market. The whitepaper also reviews information on moving to mandatory loan sales, the strategy of hedging, the benefits of hedging, and how to determine if you are ready. Download the whitepaper or join MCT’s newsletter for upcoming releases.

The CFPB Runs HMDA

For 2022 there were 4,460 financial institutions reporting mortgage lending transactions in the United States. It is a safe bet that there will be fewer in 2023, but the numbers will tell the tale.

The filing period for HMDA data collected in 2023 opened on January 1, 2024, and must be filed by Friday, March 1, 2024.

“The HMDA Platform provides financial institutions an opportunity to determine whether their loan/application register (LAR) data comply with the reporting requirements outlined in the Filing Instructions Guide for HMDA data collected in 2023. Access the HMDA Platform to begin the filing process for data collected in 2023 here: https://ffiec.cfpb.gov/filing/. Users will receive a confirmation email upon submission of their HMDA data. The confirmation email will be sent to the email account of the user that has submitted the data.”

Testing is highly recommended by compliance, QC, and legal folks. “The Beta Platform found at https://ffiec.beta.cfpb.gov/filing/ will remain available on an ongoing basis for filers wishing to test their submissions. Please note that the Beta Platform is for testing purposes only. No data submitted on the Beta Platform will be considered for compliance with HMDA data reporting requirements. To officially submit your HMDA Data for 2023, visit the live HMDA Platform at https://ffiec.cfpb.gov/filing/.

“HMDA Platform Tools provide institutions with assistance in creating their HMDA LAR file. The Online LAR Formatting Tool helps financial institutions, typically those with small volumes of covered loans and applications, create an electronic file that can be submitted to the HMDA Platform. Filers can create their transmittal sheet and LAR rows, entering values for each data field, and use this tool to download the entire LAR file. Filers can also easily edit an existing file by uploading their file to the tool. The Online LAR Formatting Tool does not save any user data.

We encourage financial institutions to continue providing feedback on their experience using the HMDA Platform and to direct any questions regarding the HMDA Platform to hmdahelp@cfpb.gov or https://hmdahelp.consumerfinance.gov/.”

Hedging a Pipeline Has a Cost to Lenders, Passed to Borrowers

Home lending is one of the few industries where the customer can lock in a future rate & price. Put another way, if you went to the local gas station, or grocery store, and told them you wanted to pay now for a gallon of petroleum or milk two months from now, you can’t do it. But the futures market is alive and well with companies and individuals locking in prices now for things like bacon, orange juice, wheat, gold, and corn in the future, hedging any impact of prices on their profits. There is a cost, usually the bid/ask price spread, the drop in price from one month to the next, and commissions paid in actually trading the contracts.

I periodically receive questions about the “cost to hedge” for mortgage bankers with locked pipelines. Hedging is a loan level activity where each loan’s program, interest rate, lock period, etc., is analyzed every day, sometimes more often. Company policies like extensions and renegotiations enter into it. Specifically, extensions and renegotiations increase it, and while the production team is helped, the capital markets department usually incurs the expense. And the price drop in the securities market often changes during the lock period. And then there’s always the “what is the cost of a loan that falls out?”

Manufacturing loans faster, and bringing loans to market quicker, reduces a lender’s interest rate exposure to some degree. Thus, the reason bond loans can be an issue for some lenders.

Some will argue that hedge vendors look at the problem 2-dimensionally, when it’s a “3-D” issue. The problem isn’t necessarily all “speed-to-originate,” but rather “hedge model efficiency.” What assumptions are being made about the duration/beta of the hedge instrument, and pullthrough, broken down by product groups and cross referencing at what stage in the loan life cycle loans have fallen out in the past. Volatility in the To Be Announced (TBA) markets, which is primarily used in hedging, will kill a lender’s gain on sale. Lenders can be profitable in a rising rate environment, and profitable in a falling rate environment, but sudden swings in the bond market, and therefore interest rates, will kill you every time and all models break down.

The cost to hedge is constantly changing. Viewed in a vacuum, the capital markets team can say right now the hedge cost is around $X per loan, while the market is behaving rationally and pullthrough acts as it has historically. This is also assuming the company is selling loans into market at the right time, are using broker/dealers that aren’t trying to pick off additional spread, and all the while having a stable “best efforts to mandatory” spread. The hedge cost is always changing, and often runs .5 or more. The real value of originating the loan quicker is a reduction in your finance fees from your warehouse bank, and not necessarily on your hedge side.

Capital Markets

Financial conditions have eased, driven by a decline in interest rates, an increase in equity prices, and a depreciation in the dollar. The release of Wednesday’s December Federal Open Market Committee minutes, which had a more hawkish tone than Fed Chair Powell’s December press conference, revealed that the easing in financial conditions has reversed some of the tightening that occurred over the summer and much of the fall. Investors are once again reconsidering bets that the Fed will cut rates drastically this year. Fed funds futures have decreased the probability of a rate cut at the March FOMC meeting from nearly a 90 percent chance of a rate cut a week ago to around a 70 percent chance currently.

The U.S. economy is driven by jobs and housing, and their impact on the consumer. We learned yesterday that U.S. companies (private payrolls, not including government) ramped up hiring in December (+164k) the most since August, per the ADP Employment report. The report is consistent with an outlook for sustained economic growth and diminishing inflation. As wage gains continue to cool down, separate data showed initial applications for unemployment insurance fell in the final week of 2023 to 202,000, the lowest level since October. Continuing claims also declined.

Today brought the December payrolls report. Payrolls increased 216k in December versus 162k expectations and 199k previously although there were some back-month revisions. The unemployment rate is unchanged at 3.7 percent when it was seen ticking up to 3.8 percent from 3.7 percent. Average hourly earnings were +.4 percent when it was seen rising 0.3 percent month-over-month and 3.9 percent year-over-year versus 0.4 percent and 4.0 percent in November. Later today brings November factory orders, ISM non-manufacturing PMI for December, remarks from Richmond Fed President Barkin, and after the close and into the evening, the Agencies will release December prepayments. We begin the day with Agency MBS prices worse .250-.375, the 10-year yielding 4.09 after closing yesterday at 3.99 percent, and the 2-year is back up to 4.47 percent after all of the job data came out.