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Feb. 18, 2011: Why investors care about comp plans - it can get ugly; comp discussions around the country; QRM, MERS updates
Rob Chrisman
There’s
a saying, “We are born naked, wet, and hungry. And then things
get worse.” But perhaps, just perhaps, smaller mortgage brokers
and bankers won’t see things get worse with the Qualified
Residential Mortgage (“QRM”) plans. Dodd-Frank requires
lenders to retain 5% of the credit risk of any mortgages closed
outside of the guidelines – but what are the guidelines? Will it
be based on agency – effectively killing the jumbo/non-agency
market? What if the agency guidelines go away? Will it be based
on LTV, cutting into FHA or the MI company business share?
Anyway, the issue has been somewhat quiet, but recently the
Senate Banking Committee heard from FDIC Chairman Sheila Bair,
and she told members that regulators will soon release its QRM
that will determine how much risk loan originators retain after
securitization. Apparently it is targeted at larger
institutions. Per Ms. Bair the direction of the
rule will be focused on issuers and securitizations, not small
originators - which include community banks. Mortgage
brokers and bankers are hoping they’re also included.
Yesterday I
regurgitated the latest public information on comp from Wells
(wholesale) and GMAC. A well informed reader wrote, "I
have a good perspective on how the various lenders were
viewing LO comp. Unfortunately for anyone looking for
uniformity, their perspectives vary significantly.
SunTrust, for example, is clearly ahead of the curve in policy
implementation. Wells wants to micromanage everything a broker
does, and MetLife seems to be more like Wells than SunTrust. It
appears that Stearns will offer an anti-steering document that
is going to be required in every file. Whether it is to be
signed by the broker or borrower or both is yet to be
determined. Regarding oversight, most wholesale companies, at
this point, aside from a 'reps and warranties' addendum to the
broker agreement that the FRB regs were being followed, are
taking the approach that there would be no oversight. The
exceptions are Wells and MetLife, with Wells expected to produce
an 18-question form that would be going out to broker principles
very shortly that deals with broker compensation plans."
I receive a fair
number of questions along the lines of, "What if I don't have a
comp plan by 4/1?" or "Why are Wells and MetLife going to
require our comp plans - aren't reps and warrants like other
investors are doing enough?" It is not hard to see
why, given the possible financial liabilities of a foreclosure
or lawsuit, there is pressure to sign off on a comp plan.
Will anyone be watching? You bet: http://www.franczek.com/frontcenter-Dodd-Frank_Whistleblower_Protection.html
As I noted last week, "The maximum amount of any
liability of a mortgage originator to a consumer for any
violation of this section shall not exceed the greater of
actual damages or an amount equal to 3 times the total amount of
direct and indirect compensation or gain accruing to the
mortgage originator in connection with the residential mortgage
loan involved in the violation, plus the costs to the consumer
of the action, including a reasonable attorney’s fee.” Although
I could not find it, it is purported that penalty highlights
also include an increase in the rescission period, so “Penalty
highlights” (costs/fees/penalties) include the rescission period
increasing from 1 to 3 years, in addition to 3 times the MLO
comp received, penalties include all finance charges, interest,
fees, and legal fees, and unlimited rescission period for loans
in foreclosure. Much of this is paid for by the servicer out of
foreclosure proceeds.
In the event of a
foreclosure, scenarios show that the penalty reduces the
servicer recovery during the foreclosure/REO process, and for a
performing loan the penalty reduces the funds owed by borrower
if the loan is in rescission period, or the borrower’s UPB is
reduced if it is outside of the rescission period. So in terms
of numbers, loan size $450,000; interest rate 5.25%,
pre-paid finance charge $5,670; total interest paid for 3
years $70,875, originator comp broker 2.50% (estimate) x 3 $33,750, estimated attorneys’ fees $65,000, total penalty$175,295.
One can pick apart
these numbers all one wants, but the fact remains that large investors with capital on the line are
concerned about anything close to them. I will throw in my
opinion here, and say that I doubt that attorneys will be
turning a blind eye to any indiscretions, given the current
environment. And it would not take many “deals gone
bad” to cause severe financial damage to a thinly-capitalized
lender which is why large investors and servicers are
extremely cautious - whether this involves reviewing comp plans
or stringent reps & warrants. And lenders are spending a lot
of resources setting up plans. “Don’t do the crime if you
can’t do the time.”
Compensation
discussions are happening around the country. In Northern
California, Comstock Mortgage announced two
panel discussions “examining the impact the Federal Reserve Loan
Originator compensation rules will have on our industry and on
loan originators.” Using a set of solid panelists, the purpose
of the panel is to give loan originators and their management a
chance to ask questions of mortgage industry professionals who
are actively engaged in studying the issues and implementing the
rules for their specific companies. The discussions are slated
for 2/23 in Dublin, CA and 2/25 in Sacramento, CA. For
information contact Casey Fleming at cfleming@comstockmortgage.com
or to register for the seminar, contact Kathleen Chothia at
(925) 484-1466.
Three thousand miles away, in Parsippany, New Jersey, NYLX is putting on a seminar on the same topic on
the 24th. “Join us at the Hilton Parsippany on February 24th
from 9am-12:15pm as we host an informative session with noted
experts that can help you achieve your 2011 compliance goals
without compromising your competitive edge. Find clarity and
direction amidst the confusion!” To start the registration
process, go to http://marketing.nylx.com/LO_comp/seminar/registration.pdf.
The compensation
issues, as well as others, have certainly caused those remaining
in the mortgage industry to band together. One such organization
that has sprung up is the Mortgage Action Alliance
which is a ”grass roots, voluntary, non-partisan, and free
lobbying effort to help make sure our voices are heard.” Per one
of the organizers, “Mortgage Action Alliance allows you to be
kept updated with the key legislative issues that affect our
business. One signs up online for MAA, and when there is a key
issue up for debate, a “call to action” may take place, in which
you will receive an email from MAA and be asked to “take action”
by simply completing a few steps online – the result is that
automatic letters will be sent to your Congressmen immediately.”
http://www.mbaa.org/Advocacy/MortgageActionAlliance/MAASignup.htm
Merscorp Inc., owner of MERS (and
the electronic-registration system that contains about half of
all U.S. home mortgages), will propose a rule change to stop
members from foreclosing in its name. MERS (which is easier to
say) has certainly been in the press, and it hasn’t helped the
industry that courts have issued different verdicts on whether
MERS, as an agent for the mortgage owner, has the right to bring
a foreclosure action.
http://www.bloomberg.com/news/2011-02-17/merscorp-may-stop-members-foreclosing-in-its-name-update1-.html
Looking at the markets, interest rates are behaving themselves -
whatever that means. Yesterday the Conference Board’s Leading
Indicators increased 0.1% in January after rising 0.8% in
December. Six of the 10 indicators in the leading index
contributed to the increase, led by the interest-rate spread and
the stock market. The Philadelphia Federal Reserve general
economic index rose to 35.9, the highest level since January
2004, having risen from 19.3 in January. But Treasuries
preferred, wisely, more on the rising tensions in the Middle
East, and an increase in U.S. Jobless Claims. The yield on the
10-yr hit 3.56%, the lowest level since Feb. 4th (and
much lower than the 3.77% Feb. 9 level). Today we have no
scheduled economic news. China stole the headlines by raising
reserve requirements in that country by 50 basis points to
further combat inflation. So far this morning we
find the 10-yr at 3.61% and MBS prices worse by about .250.
(When I was a kid, we
had both Lincoln's and Washington's birthdays off. Now we only
have one holiday, and it is Monday, and I will be taking it - so
there will be no commentary. Have a nice 3-day weekend.)
Here is one proposal
to stop the abuses in automobile sales: “Auto Sales Staff Honest
Operation of Local Emporiums.”
This is an act to eliminate abuse in automobile sales.
1. Anti-steering. When a customer enters an automobile
showroom, they must be asked which model car they wish to
consider. This must be recorded (within 3 minutes) and signed by
the customer before they can be shown any vehicles. No sales
representative may show, demonstrate, or offer a higher-priced
vehicle unless such vehicle is offered at the same price as the
vehicle originally requested.
2. Salesperson
Compensation. Sales persons may no longer be compensated based
on the cost of the vehicle or based on the options or add-ons
which are sold with the vehicle. No salesperson may be
compensated based on the price of the vehicle or the terms of
the sale. Permissible methods of compensation include per-car
fixed payments or payments based on the number of sales per
month. Under no circumstances may any sales person be paid
based on up-selling or by selling additional options.
3. When a customer agrees to purchase a vehicle, he/she must
first be given a comparison sheet showing the monthly payment
for two other vehicles. The purchase may not be completed until
at least 3 days after such disclosure is provided.
4. Safe Harbor. There will be no restrictions on method of
compensation if all vehicles in the dealership are offered at
the same price.
As soon as this new law is adopted and the auto sales business
collapses, a proposal for regulation of the electronics industry
will be published.
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