Feb. 2, 2011: Part VII of comp Q&A; MetLife weighs in on broker comp; mortgage hiring continue & overall mortgage business conditions
Rob Chrisman

By most accounts, mortgage companies made "a ton" of money in 2009. (By the way, $1 million dollars in $1 bills weighs about 2,200 pounds, or slightly more than one ton.) But is everyone ready for 2011? In the last quarter of 2010 Freddie Mac reported that 46% of homeowners who refinanced lowered their principal by putting in more money at closing, the highest cash-in percentage on record. Meanwhile, Freddie's cash-out borrowers fell to 16% of all loans, the lowest percentage on record. Combine that with the MBA is projecting residential origination will drop below $1 trillion (2002-levels, and a 35% decrease from last year), expecting new home purchases to rise 30% & refinancing activity expected to fall 66%, and we have a different market. Keep on top of those business plans!
 
At least rates are cooperating, somewhat. For anyone looking for research on whether or not the asset purchases by our government are working, the San Francisco Fed published a piece saying that they are. http://www.frbsf.org/publications/economics/letter/2011/el2011-03.html.

Some mortgage companies are continuing to grow, however, and increase market share. ClearVision Funding is prime example of that. ClearVision is a wholesale lender whose focus is on FHA and conventional product offerings. It opened in early 2010, has no legacy issues, and is licensed in multiple states. Brokers are often looking for a new outlet, given the change in focus in business channels of late. Headquartered in Orange County, California, ClearVision Funding is in search of DE Underwriters, Account Executives, and particularly Sales Managers with existing AE teams in place.  Please send inquiries to Jeremy Stewart at jstewart@clearfundings.com.
 
For some more good news, the MBA reported what lock desks everywhere already knew: last week mortgage applications were +11.3%. Refi’s were +11.7%, and purchase applications rose 9.5%.
 
I received this note from one loan agent. “If other producers spent half the time, effort, and worry into funding loans, or in doing a good job for the borrower 5 years ago, that they seem to spend focused on compensation, they’d be much better off.” But for most companies, mortgage lending is off to a slow start this year. There seems to be a lag in volumes between “low rates helping refinancing” and “a strong economy helping new borrowers qualify for loans”, and certainly “more lenient guidelines opening up the borrower population” have not kicked in yet. And we still have high unemployment, falling housing prices, tight underwriting guidelines and uncertainty about new regulations for loan officer compensation. The MBA forecasts refinancing will only be 25% of all originations in the second half of this year. But there is some thinking that lower volumes, new regulations on loan officer compensation, and state and national licensing requirements will reduce the ranks of salespeople, leaving more business for those staying around.

The Federal Reserve Board on Tuesday announced that it does not expect to finalize three pending rulemakings under Reg. Z, which implements the Truth in Lending Act, prior to the transfer of authority for such rulemakings to the CFPB. http://www.federalreserve.gov/newsevents/press/bcreg/20110201a.htm
 
The federal bank, thrift and credit union regulatory agencies, along with the Farm Credit Administration, announced that the NMLS and Registry are accepting federal registrations: http://fdic.gov/news/news/press/2011/pr11019.html.
 
On to Part VII of compensation Q&A - remember that company's individual policies may differ from these to some extent, as there is still a lot of interpretation. Many company's policies will vary as long as there is no ability or an originator to steer the consumer into a less favorable product and  that factors unrelated to the terms or conditions of the loan such as cost and expense of origination come into play.

Q22. Can the compensation paid to loan originators vary based on how the loan application was produced, for example, telemarketing, website, referrals, etc.? Can a lender establish different commission structures for loans that result from leads generated by the lender and for loans that result from leads that a loan officer generates?
A. Fed Response - Yes. To the extent differences in a lender’s costs exist depending on how loans are produced, they can be reflected in differing compensation to the originator.
Q23. A broker submits a loan application to a creditor, and has agreed to receive its standard compensation that will be paid by the creditor. The creditor reviews the application and determines that the standard broker compensation and standard creditor fees will result in the loan triggering one or more high cost loan laws, and the creditor does not make loans subject to the laws. May the broker reduce its standard compensation to avoid triggering high cost loan laws?
A. Fed Response - No. This amounts to the broker varying its compensation.
Q24. Reduction in compensation and credit to borrower. Same facts as the prior question, except that the broker will receive its standard compensation and provide a credit to the borrower to pay some of the creditor’ standard fees to avoid triggering a high cost loan law. Is this permissible?
A. Fed Response - No. This amounts to the broker varying its compensation.
Q25. What constitutes a loan with the “lowest interest rate” for purposes of the safe harbor provisions? Is this achieved by the loan with the lowest par rate or the lowest note rate notwithstanding that several discount points will be charged to the consumer for the rate?
A. Fed Response - For purpose of the safe harbor, the loan with the lowest interest rate is the loan with the lowest par rate available to the originator based on a published rate sheet or other document regardless of whether discount points are charged. For example, if one loan has 2.5 percent rate with 6 discount points and another loan has 3.5 percent rate and no discount points, loan with 2.5 percent rate is loan with lowest rate.
Q26. What is meant by the loan with the “lowest total dollar amount for origination points or fees and discount points?” Would a loan meet this requirement if it is way above par and carries a high note rate but has several negative discount points to make it a “no cost” loan (or even gives the borrower a refund at closing)?
A. Fed Response - The loan with the lowest combination of origination points, fees and discount points is the loan with lowest amount no matter what the rate.

MetLife filled in its brokers on the comp issue. It “prevents the mortgage loan originator from: receiving compensation from both the consumer and another person or entity on any given transaction, steering a consumer towards any specific loan transaction based on mortgage originator compensation, and increasing compensation by raising a consumer’s loan costs.” “How a mortgage loan originator is compensated is the loan originator’s choice and can vary from one transaction to another.” “Consumer Paid Compensation” is where the mortgage loan originator negotiates compensation directly with the consumer. The amount of compensation can vary from one loan transaction to another. However, compensation cannot be based on a prohibited term or condition from a broker owner to the loan officer. The consumer can pay discount points to reduce the note rate. Compensation can be paid in cash or financed through the loan principal. However, it cannot be paid through rate. The broker can reduce fees, pay for tolerance violations, or offer various concessions.”
 
Under MetLife’s plan, for “Lender Paid Compensation”, “the amount of compensation is based on a percentage of the principal loan amount, and cannot vary from one transaction to another.
Compensation is paid to the broker, and must come from the lender only, no consumer compensation is allowed. A compensation agreement must be created for loan officers by broker management, which cannot differ from one loan transaction to another based on loan terms and conditions. The consumer must pay all third party fees with cash at closing or through the loan principal or interest rate. These may not be funded by the broker. Broker may not reduce compensation by offering concessions or paying for tolerance violations. The consumer can pay discount points to reduce the note rate. The consumer can use interest rate credits to fund third party fees, but not broker compensation.”

Lastly, MetLife’s memo discusses anti-steering changes. “In addition, anti-steering regulations prohibit the mortgage loan originator from steering a consumer towards a specific loan product based on receiving greater compensation. The regulation provides a safe harbor for the loan originator if the conditions outlined in the table below are met. The safe harbor is not mandatory; however compliance with anti-steering is mandatory. The consumer must be presented with loan options for each type of transaction the consumer expresses interest in. The loan options must be obtained from lenders the loan originator regularly does business with.

As the “flight to quality” concerning Egypt continued to ebb out of the market, yesterday fixed-income prices continued to worsen, pushing rates higher. 10-yr notes were worse by .5 (with the yield closing at 3.44%), and mortgage-backed security prices worsening by about .375. MBS sales also picked up a little, not a particularly good sign during a sell-off. Mortgage prices often trade as a spread to Treasury yields, and one trader reported that “spreads were about in the middle of their recent range, so not exactly enticing for money managers. Lower prices, however, helped and brought in some real money interest through the morning session; however, it was more than offset by modest supply and better selling.”
 
In terms of economic news, the ISM manufacturing number slowed in January, but still showed growth. The January reading was the strongest level since May 2004. On the flip side, Construction Spending fell 2.5% in December, and was 6.4% below its level in December 2009. This’s morning’s ADP number, with its dubious predictive power, was higher-than-expected. Currently the 10-yr yield is sitting around 3.40%, down from Tuesday’s close, and MBS prices are .125-.250 better.
 

Two tall trees, a birch and a beech, are growing in the woods.
A small tree begins to grow between them, and the beech says to the birch, "Is that a son of a beech or a son of a birch?”
The birch says he cannot tell, but just then a woodpecker lands on the sapling. The birch says, “Woodpecker, you are a tree expert. Can you tell if that is a son of a beech or a son of a birch?”
The woodpecker takes a taste of the small tree and replies, “It is neither a son of a beech nor a son of a birch. It is, however, the best piece of ash I have ever had.”