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Nov. 18, 2010: Lots of info on producer compensation & improving efficiency - Wells weighs in; will PMI be deductible? VA servicing issues; new bank stress tests
Rob Chrisman
Basel 3, Quantitative Easing 2 - it is easy to get
confused. (At least the government programs during the
Depression in the 1930's had individual names.) If you have 6
minutes to kill until your next meeting, you can listen to this
humorous explanation of QE2 that is making the rounds: http://www.youtube.com/watch?vPTUY16CkS-k&featureyoutube_gdata_player
And if you don't have 6 minutes, but would like to see one
person's flow chart of their securitized loan (assuming you have
good vision) check out http://www.huffingtonpost.com/2010/11/16/mortgage-security-chart_n_784274.html
In the last few months, any time I am speaking in front a group
of originators, one of the primary topics is compensation.
I wish that I could tell everyone that until the large
retail shops and investors weigh in and set their own
policies, there will be a lot of misinformation, rumors, and
irate producers – and currently there are few definitive
proposals. A few weeks ago, I wrote some suggestions about
how things might work, such as paying agents an annuity similar
to how insurance agents are paid. I heard one of the owners of a
growing mortgage company tell his agents something that made a
lot of sense. "I like my business model just fine. It works - I
make money, you make money. I don't want that to change, and I
am going to do my best to see that your compensation doesn't
change. I don't want to walk into the office on April Fool’s Day
and have every loan officer's desk be empty."
The MBA is helping. Say what you will about the MBA focusing on
the needs of large originators at the expense of smaller
lenders, the MBA will be hosting its second seminar on
broker compensation. "Back by popular demand, this encore
MBA Workshop will cover the same valuable material as the sold
out November 10th Loan Originator Compensation Workshop in
Denver. It's a new world for loan officer and broker
compensation. Regulation Z and the Dodd-Frank Act could
significantly impair your ability to compensate loan originators
based on loan terms. What is permissible compensation for loan
originators and what is not? Discuss over twenty different
potential scenarios at this workshop. At the same time, the
Department of Labor's recent interpretation of loan officer
overtime could further discourage your top producers, while
potentially rewarding the others. Learn about ways to handle the
challenges of converting sales staff to non-exempt status.
Discuss arguments and supporting documentation needed to claim
an outside sales exemption." http://www.mortgagebankers.org/loc1210.htm.
And it seems that a large number of companies are a) having
fantastic years, but also b) wary of the future, and are
limiting overhead and hiring in spite of current capacity
issues. "We're busy now, but who knows about 2011?" Instead of
hiring new agents, many companies are bringing in outside,
or internal, business coaches to increase the efficiency and
"numbers" of their production staffs. I spoke to Kitty
Cole, one such loan agent coach, who said, "It is quite an eye
opener to see how an average, or an above average, loan producer
can increase their numbers in just a short period of time by
focusing on what they're doing that works, eliminating time and
energy on what doesn't work, and being more efficient." (If you
want to contact Kitty, write to her at kittybiz@gmail.com.)
The manager of Wells Fargo’s wholesale channel, which is
still a presence for brokers, told everyone, “I know that
specifically the new compensation rules issued by the Federal
Reserve effective April 1, 2011, are a key priority. At Wells
Fargo we have a team in place working with our Legal,
Compliance, Finance and Leadership groups to understand the
regulation and determine what changes must be made to comply
with the new rule and compensate you fairly. We are exploring
several different models to allow for reasonable compensation,
while also allowing you to continue to serve customers and
provide a viable mortgage origination channel in the communities
you support. We are confident that Wells Fargo’s final
compensation plan will enable you to receive fair compensation
without altering your business model. Our goal is to work with
you and support the viability of the Mortgage Broker industry. While
we don’t have the specifics yet, we will communicate our “go
live” plan in February 2011.”
And if
you want to check out the template for compensation, go to: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816d2.pdf.
Will private mortgage insurance be tax deductible after
12/31? My vote is "yes", as no politician wants to beat on
the housing market (mortgage bankers yes, property values no, or
at least not directly. The unofficial word that I have is that
the "PMI deductibility" is on tap for a vote in the coming
months, but that it is part of a larger bill. And we all know
what happens then: Congress will probably delay things until the
last minute. One authority wrote, "It is unclear how the “tax
extender” bill, of which the MI deduction is one of many
provisions, will play out. We are still assessing the impact of
the election, especially in the House of Representatives where
the Republicans took control and campaigned on aggressively
reducing the federal deficit. It is very unlikely that anything
will be passed this year. The provision will likely be applied
retroactively."
Paul Jacob with Banc of Manhattan addressed an article
in Bloomberg yesterday, titled, “Home Ownership Gets Tougher as
Lenders Restrict FHA Mortgages”. Basically, what servicers wants
to service an FHA or VA loan if they lose more than they’re
expected to earn from doing it? Mr. Jacob points out that
“servicers have been getting even tougher on VA restrictions
than FHA -- not because VA houses are worse (in fact, they're
better overall), but because of the limitations of the VA
guaranty. VA premiums already prepay more slowly than FHA; this
development will reinforce that tendency.” You can read the
original article at: http://www.bloomberg.com/news/2010-11-17/home-ownership-gets-harder-for-americans-as-lenders-restrict-fha-mortgages.html.
There are 19 banks where the CFO's are going to be busy between
now and January 7th. They'll be putting in some OT, given that
the Federal Reserve announced that those 19 are required to
undergo new stress tests to show they can weather
another recession. Those that pass the tests can boost dividends
paid to investors, but even if the bank had no plans to do so,
they must pass the test showing they are in good financial
health and that they have adequate capital to absorb potential
losses over the next two years.
A
rough outline of the Fed proposal calls for banks to clear
three hurdles before increasing dividends and buybacks: 1)
pay back all government capital, 2) pass an updated stress test
based on a 5% Tier 1 Common calculation, and 3) achieve the 7%
minimum common equity to risk weighted assets under Basel 3. I
am sure they'll figure it out - after all, what is the Fed going
to do if our top 5 banks fail? Regardless, yesterday banks'
stock prices tumbled after the news came out: Bank of America's
by 2.68%, Wells Fargo's 1.21%, JPMorgan Chase's 1.09%, and
Citigroup's a little less than 1%.
Along
those lines, the National Information Center has just released
consolidated financial statements for bank holding companies.
The figures provide a good early estimate of changes in bank
assets and liabilities, and banks have been big buyers of
securities backed by mortgages. After allowing securities to run
off during the first half of 2010, the top 50 bank holding
companies added almost $50 billion of agency MBS in the third
quarter. Holdings of US Treasuries also increased by about
$41 billion, or an additional 23%, during the quarter. The
conclusion is that banks continue to increase their stock of
liquid assets in response to regulatory changes.
Unlike
the last several days, yesterday was relatively quiet in the
fixed income and equity markets. Sellers of MBS’s almost took
the day off, only selling about $1 billion – maybe everyone is
already 90% covered. Few on the origination side like intra-day
volatility, so yesterday was a good day. But the Irish situation
(is the country even solvent?) remains unresolved and talks with
the EU, ECB and IMF begin today but with no deadline for the
discussions. Yesterday’s decline in US annual core CPI inflation
to its lowest level on record suggests that the Fed will
continue on with QE2.
But
after taking a day off, fixed-income markets got hit again
overnight. This morning we’ve already had Jobless Claims, which
were practically unchanged at +2k to 439k from a revised 437k.
We still have Leading Economic Indicators and the Philly Fed
later this morning. But really, should the Philly Fed survey
mean anything to rates when Ireland or Greece is crumbling or
the entire world is questioning QE2? After Jobless Claims we
find the yield on the 10-yr back up to 2.91% and mortgages
worse between .125-.250.
Three
rednecks were working up on a cell phone tower: Cooter, Ronnie
and Donnie. As they start their descent, Cooter slips, falls
off the tower and is killed instantly. As the ambulance takes
the body away, Ronnie says, “Well, shucks, someone should go and
tell his wife.”
Donnie
says, “OK, I'm pretty good at that sensitive stuff, I'll do it.”
Two
hours later, he comes back carrying a case of Budweiser.
Ronnie says, “Where did you get that beer, Donnie?”
“Cooter's wife gave it to me.”
“That's unbelievable, you told the lady her husband was dead and
she gave you beer?”
“Well,
not exactly”, Donnie says. “When she answered the door, I said
to her, ‘You must be Cooter's widow.’ She said, 'You must be
mistaken. I'm not a widow.' Then I said, 'I'll bet you a case
of Budweiser you are.'”
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