May 18, 2013: Cut LO splits before company margins? Not likely. Reader input on QM, FHA premiums, and risk
I received this note from a CEO of a lender in Oregon. “Rob, when volumes stagnate or even slide a little, companies usually cut their margins to keep the “machine oiled” and loans flowing through. Are you hearing about companies cutting LO compensation or branch compensation, and sharing the pain?” Yes, I am beginning to hear rumblings about that, but nothing definitive. That is a touchy subject, to be sure, since the producers out there don’t want to have their pay cut, and companies don’t want to lose solid originators due to better splits from a competitor. It is almost as if it is okay for many companies to head toward break-even levels on production while the originators and branches continue to earn what they have been. Many companies have servicing income to fall back on. But no one wants to be the first to scale back splits.
I know a lot of LOs who think that Realtors all make a ton of money while showing up for work occasionally in their white Lexus SUV. And before we discuss Realtor pay, no, I don’t know the averages for LOs. Realtors saw an increase in their income in 2012 for the second year in a row after nine straight years of losing ground, per the National Association of Realtors (NAR). The NAR (not the NRA!) said that the median gross income of a Realtor was $43,500 last year compared to $34,900 in 2011 (+24.6%). Paul Bishop, NAR vice president of Research said the median income fell by 35% over the course of the housing downturn, "but with the help of sustained increases in both home sales and prices, it's recovered to the highest level since 2006." Realtor comp reached its peak in 2002.
Occasionally lock desk personnel and LOs want to know if pricing margins vary by L/O or branch in the same market area. During one of the initial Federal Reserve conference calls in late 2010 or early 2011, a caller questioned the Federal Reserve attorney by asking about varying margins within a market area. The attorney responded by stating that varying margins would be allowed within “sub-markets.” Sub-markets were not defined by the attorney. The answer can depend on where the lender is on the risk scale, but many experts say that varying margins are not prohibited by either Regulation Z or the Dodd-Frank Financial Reform Act (primarily the basis from which the attorney answered the caller’s question) but are prohibited and have been for possibly 20+ years under the Fair Lending Act.
From what I have heard, and I am no compliance expert, there is no prohibition under Truth in Lending against variances in pricing margins within the same market area. Regardless, of course, it is advisable that one perform a quality Fair Lending analysis to determine whether any practice, particularly any practice involving loan originator discretion over pricing (which is often present when margins are varying between LO’s), results in a disparate impact on a protected class in violation of the Fair Housing Act (FHAct) and/or the Equal Credit Opportunity Act (ECOA). Of course, there is HUD’s “Tiered Pricing Rule” in connection with FHA-insured transactions, which has been around for quite some time now. Here is the link to the rule: http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_36123.txt. And here is what a borrower may see from the FHA regarding loan charges: http://www.fha.com/fha_article.cfm?id=232.
Hedge funds have a long-standing compensation structure; although some investors hope the industry’s long-standing “2 and 20” fee structure may finally be beginning to crack. The industry, however, has been very good at maintaining its margin structure. This is a type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. If you’re not in the hedge fund business, this phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned.
Could something like this apply to loan originators in the mortgage lending industry? Perhaps, and perhaps the industry is heading toward something like this. With the ability to track loan production based on NMLS number (for non-depository lenders), it is not hard to see compensation mirroring loan quality, but one must avoid, of course, any appearance of steering.
Here’s a note I received on Qualified Mortgages and the rule’s impact on loan amounts. “Rob, there is not enough talk in the industry, and among regulators, on QM’s impact on lower loan amounts. It's going to be tough on rural markets, economically depressed markets, and lenders for showing they want to do CRA loans. Loans under $100k will not be economical on the conventional side and it looks like FHA will be very expensive for borrowers.” I agree, and my guess is that, given the political clout of many states with low loan amounts, and of the NAR, QM guidelines will be adjusted for loan amounts. No one wants to be seen as discriminating against low loan amount borrowers.
How about this idea? “I think the CFPB should get together with the Fed Reserve and set a national mortgage loan rate for each type of program - only for loans that are QM. That way we would have a stable interest rate. No more concerns about what any market is doing, every hour. At 9AM EST the CFPB issues its rate sheet to all lenders. We have that rate for a minimum of 1 day. As the markets currently stand, it is very disparate for consumers when rates are moving constantly since one guy gets a great deal because he locked 1 minute before another guy. All the loans locked and closed on that program are purchased by the Federal Reserve, and the Fed can securitize the loans or keep them on their balance sheet.” And interesting idea, and harkens back to subprime lending programs (where rate sheets would be produced once a month, maybe) and the VA base rate. Of course bond markets are not so simple, and probably won’t cooperate.
Nick Staker, CPA, MBA with Academy Mortgage Corporation wrote, “Rob, it would be nice for the FHA to allow reduced premiums for those putting more $$ down, say 5% or 10%. The reduction in MIP is minimal from 3.5% to 5%, but if the discount was raised it would encourage more borrowers to get more skin-in-the-game. Another idea is to raise the premium on those with the minimum invested, and then after a certain number of on-time payments, reduce the premium. Both of those might help the FHA from a budget standpoint. Generally, the budget’s condition might be helped with the thinking that ‘higher scores = lower risk, more down payment = lower risk’. And ‘lower scores or lower down payment = higher risk and higher MI’ until they prove they can make the payment.”
And this note from an industry veteran in Reno on the legality of Qualified Mortgages: “Non-QM loans are not against the law. Really? Many states passed state-level regulations disallowing stated income/stated assets loans. It is against the law to provide a loan to borrower without verified income. Just because there may not be a federal law does not mean there are no state laws. And each state is different, in similar fashion to how the state foreclosure laws are different. For decades we had a fabulous mortgage system. Borrowers had to qualify for the loan program that they wanted. The system worked well as different types of loans came and went – but all of them required the borrower to QUALIFY.”
And another wrote, “When politicians, regulators, and the press focus on mortgage rates, they are leaving off half the equation. One must look at the mortgage price, and loan level price adjustments. The fact of the matter is that lending is a credit decision, based on the riskiness of the borrower. When one has an agency FICO penalty hit of 1.75 for a credit score of 680 and 700, or between 660-679 where the credit score hit might be 2.75, the consumers are not offered the super low rates they see advertised. When you consider all the other lender hits associated with a loan, then the actual origination and other costs, that ‘super low’ rate of 3.5% just went to 4.50%. Back in the day, 680 was considered a good credit score – not great, but good. That was level was moved up to 740, and in many programs even 740 has a .25 hit. The recent speech by a Fed Governor made little sense, talking about borrowers with credit scores of less than 620 seeing borrowing opportunities diminish. Does the Governor even know what a credit report looks like if you have a 620 or below score? There are usually foreclosures, a bankruptcy, collections, late payments, tax liens, and so on. Why would an A-paper lender want to make a loan to that person?”
Let’s move on to some vendor, personnel, and investor updates. As always, it is best to read the full bulletin for specific details, but these will give you a flavor of the trends out there.
Full service brand development firm Seroka was retained by Mortgage Capital Management for PR Initiatives. Folks on the capital markets side know San Diego’s MCM – it has been hedging locked pipelines, among other things, for nearly 20 years. Apparently MCM is interested in “expanding our outreach efforts and attracting new clients through a PR strategy that will help potential clients understand who we are and what we do” per Dean Brown, CEO.
And while we’re on MCM, it announced this week that long-time industry vet Robert Satnick is now on its executive leadership team in the role of national sales director. At 30 years in the business, he has a few business cycles under his belt!
Private MI company Essent Guaranty announced that it has been assigned investment grade insurance financial strength ratings by credit rating agencies, Standard & Poor's Ratings Services ("S&P") and Moody's Investors Service. The insurance financial strength ratings of Essent Guaranty are BBB+ with a stable outlook by S&P and Baa3 with a positive outlook by Moody's – which is pretty darned good given that Essent Guaranty was not previously rated. CEO & President Mark Casale observed, “These ratings reflect our strong private capital base and the high credit quality and profitability of our mortgage insurance portfolio. They also provide additional transparency and independent assessment for counterparties relying on our financial strength and the value of our mortgage insurance."
As part of its PiggyBack Buster program, US Bank has rolled out a new Jumbo LPMI 10/1 ARM product, under which lenders can offer purchases and rate/term refinances on 1-unit single family residences where the rate is fixed for up to ten years with no mortgage insurance required for LTVs up to 90% on loan amounts up to $750,000 and LTVs up to 85% on loan amounts up to $850,000. To be eligible, borrowers must have a DTI of 41% or under and a FICO score of at least 720. Mortgage insurance is ordered by USBHM.
In the interest of security and compliance, Franklin American is upgrading its email encryption technology, the changes to which will affect any messages with personally identifiable identification. This includes full legal names, Social Security Numbers, driver’s license numbers, birth dates, addresses, loan numbers, credit card numbers, or any financial account numbers. FAMC recommends against including personally identifiable information in subject lines and reminds users that faxed documents are not an acceptable substitute for encryption.
Parkside Lending has rolled out its new DU Refi Plus fixed rate product for properties in California, Oregon, and Washington. Conforming and high balance loans on owner-occupied single-family residences, condos, and PUDs with 15- and 30-year amortization terms that have received an Approve/Eligible from DU are eligible. LTV/CLTV/HCLTVs up to 150% are permitted so long as the borrow has a FICO score of at least 640 and a DTI of 50 or below. Second homes, investment properties, and any loans requiring mortgage insurance are not currently eligible.
(Parental discretion advised.)
A dedicated Teamsters union worker was attending a convention in Las Vegas and decided to check out the local brothels.
When he got to the first one, he asked the Madam, "Is this a union house?"
"No," she replied, "I'm sorry it isn't."
"Well, if I pay you $100, what cut do the girls get?"
"The house gets $80 and the girls get $20," she answered.
Offended at such unfair dealings, the union man stomped off down the street in search of a more equitable, hopefully unionized shop.
His search continued until finally he reached a brothel where the Madam responded, "Why yes sir, this is a union house. We observe all union rules."
The man asked, "And, if I pay you $100, what cut do the girls get?"
"The girls get $80 and the house gets $20."
"That's more like it!" the union man said.
He handed the Madam $100, looked around the room, and pointed to a stunningly attractive green eyed blonde.
"I'd like her," he said.
"I'm sure you would, sir," said the Madam. Then she gestured to a 92-year old woman in the corner, "but Ethel here has 67 years seniority and according to union rules, she's next."
If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, “Mortgage Backed Securities: Life After QE3." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.
(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)