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Apr. 28, 2011: What is "hedge cost"? Mortgage hiring continues; Flagstar earnings; lots of investor/lender updates
Rob Chrisman
Fun with
numbers: Freddie Mac's mortgage delinquencies on single-family
homes declined in March from both month- and year-earlier
levels. March's delinquencies on single-family residences fell
to 3.63% from 3.78% in February, according to Freddie's report,
and were lower than the 4.13% rate reported for the year-earlier
month. The rate has now decreased for four consecutive months.
Before a two-month period of increases last year, the rate had
fallen sequentially for three years. Its mortgage portfolio now
stands at $2.14 trillion with single-family refinance-loan
purchase volume of $19.4 billion in March, reflecting 72% of
total mortgage purchases and issuances. A month earlier, volume
was $31.4 billion.
The hiring continues, this time on the risk
management side of things. Compass Analytics, a
leading provider of pipeline and servicing rights valuation and
hedging analytics and solutions, is seeking a seasoned
account/hedge manager with at least five years of hedging
and secondary marketing experience for Compass’ Washington DC
office (in Potomac, MD). If a reader is interested, or knows
someone who is interested, they should submit cover letters and
resumes to Lucy Poole at lpoole@compass-analytics.com. And you may want to
visit with them in New York in a few days.
And there are production jobs out there in the
wholesale channel calling on brokers. Nationstar
Mortgage is looking for wholesale AE's in Northern
California, Oregon, Washington, and Idaho. You can view their
website at http://www.nationstarbroker.com. The company is
owned by Fortress Investment Group and servicing $65 billion,
and lends in 48 states. AE's can contact Tim McAvenia at Tim.McAvenia@nationstarmail.com.
In the retail arena, mortgage banker iServe Residential Lending is continuing to
expand its national branching platform which is now in 18
states. The company is a direct lender providing loan servicing,
mortgage origination, and real estate under one roof. iServe is
expanding its network of retail branches, and is looking for
LO's AND branches in order to establish a "local branch
presence, leveraging established mortgage broker and loan
officer relationships." LO's and/or branch owners can visit http://www.iservelending.com/. For more
information on the Western US, contact Allen Friedman at afriedman@iservelending.com, and in the Eastern
US contact Ken Michael at kmichael@iservelending.com.
In Ohio, Chase announced that it will add
between 500 and 1,000 mortgage-servicing jobs to its Central
Ohio workforce when it moves into new office space in Gahanna
later this year. Chase already is the region's largest private
employer with 17,000 Columbus area workers.
Don’t be the last on your block to buy troubled loans from
Flagstar. Flagstar Bancorp reported that it lost less
money ($32 million) in the first quarter than it did in 2010’s 1st
quarter ($82 million). In the first
quarter of 2010, Flagstar unloaded $80 million in nonperforming
mortgages, taking the total down to $547 million at the end of
the quarter, certainly better than the $1.3 billion reported the
same time last year. (In November alone Flag sold over $400
million of nonperforming loans.) Flagstar decreased the amount
loan-loss provisions in the first quarter to $271 million from
$538 million one year ago and $274 million in the previous
quarter. But income from the mortgage origination department
remains down. Gains on loan sales totaled $50.2 million in the
first quarter, down from $76.9 million a year ago and $52.6
million in the previous quarter – probably due to the decrease
in interest rate lock commitments, lower originations, and lower
margins.
Not a day goes by
when someone doesn't walk up to me on the street and either tell
me to put my clothes on, or ask, "What is hedge
cost?" It is not an easy question to answer in practice,
but in theory it is pretty straightforward. Companies that only
sell loans on a best-efforts basis (where they will make the
best effort to fund that loan, and then it must be delivered to
the investor) are not really dealing directly with the hedge
cost - the investor is. (But don't worry - the investor passes
their hedge costs on to the lender.) By choosing to sell loans
on a mandatory basis (the investor expects that loan, or a
similar loan, and the lender is on the hook for it even if it
doesn't close) and therefore holding locks until they fund and
are eligible for sale, lenders expose themselves to both
interest rate and fallout risks. The interest rate risk (rates
go up, and you've guaranteed the borrower a lower rate) can be
hedged, primarily with mortgage-backed securities. But the very
act of buying and selling these MBS's adds to hedge cost. But
wait - there's more! There are several other factors that can
contribute to increased hedge cost, including mismanaged and
inaccurate loan and hedge data, inaccurate pullthrough modeling,
bad or out of date pipeline assumptions, and various other
operational issues that are not the fault of the old geezer
running Secondary Marketing.
It helps to know what one's margins are on your rate sheet. No
LO expects their company to not price a profit into the rate
sheet prices, but it is important for the calculation of hedge
cost to know exactly what this profit margin is. Pricing a loan
to an investor's mandatory price and delivering it via best
efforts, or visa versa, creates a pricing mismatch that is not
in the "cost of hedge" category since the price spread between
best efforts and mandatory is either added in or subtracted.
(And this price spread varies by day, by investor, etc.)
Companies know hedging costs will increase and/or secondary
marketing margins will decline if loan-level data is incorrect,
if loans are extended at no cost, if a loan is underwritten to
one investor but then it is forced to be sold to another
investor due to an underwriting oversight, locks are not entered
into the tracking system, estimating pull through incorrectly,
and so on.
What have some of the investors and originators been
up to lately?
Chase Correspondent updated its non-agency
distressed market counties. Bank of America
told its correspondents to switch to using its "Disaster Area
Policy" for Atoka County Oklahoma, and for 18 counties in North
Carolina. (We all wish the residents, and those in Alabama, the
best.)
Wells Fargo's wholesale channel has been busy in
recent weeks - and (editor's opinion) don't ask me how
brokers can keep up with this. Wells has sent out updates on,
“Appraisal Disclosure Changes for USDA Rural Development, FHA
and Conventional Loans, Appraisal Orders for USDA Rural
Development Loans, Requirements to Use Job Loss Insurance, an
expansion of its non-conforming Debt-to-Income Ratio to 40%, an
enhancement for Owner Concentration Increases for 2-Unit
Condominium Projects, LTV Increases to 95% in Florida and
Nevada, 3-4 unit Condominium Commercial Space Allowed to 35% in
New Jersey, Compensation and Anti-Steering: Reminder – New MBFD
Process and Tools & appraisal fees, an updated conventional
Borrower Appraisal Disclosure Form, a WFHM/WFHE Market
Classification List Update, changes to Property Insurance Loss
Payee Clause, a reminder of Hazard and Flood Conditions, a
reminder of the FHA MIP changes and that FHA Loans with Case
Numbers Assigned on or After April 18 are not allowed with
Amortization Terms of 15-years or Fewer and LTV Equal to or Less
Than 78%, seven FHA Refinance Credit Policy Changes (effective
on the 18th), a note that Arkansas Amends Usury
Limitations, a 3-Day Rate Lock Extension Added, notes on how to
use the Pricing Calculator to Determine Compensation, Appraisal
Order Functionality Change on RESDirect, on how a Workaround is
Required for Accurate Annual MIP Calculations on the Broker's
First Website, HVE Expiration Date for the Freddie Mac Relief
Refinance Mortgage Program, New Rules for Same-Lender Refinance
Recording Tax Exemption in Fairfax County, VA, a note about Fee
Validation in Blocks 3-7 and Block 8 of the GFE on Lender-Paid
Transactions and a Change in Compensation Calculation for
Government Loans, a reminder that Appraisal and Credit Report
Invoices Required for VA Loans, Best Practices to Avoid Loan
Delays, and Clarification for Properties with an Unexpired Right
of Redemption. Holy smokes!
Real Estate
Mortgage Network (REMN),
a national mortgage lender, announced the opening of an office
near San Diego, CA.
Gateway Funding (PA) rolled out a
free Home Warranty & Job Loss Protection plan on select
purchases. The home warranty lasts for one year, and the job
loss protection plan makes the borrower's mortgage payment for
three months following a 30-day period after a job loss.
CitiMortgage reminded its
correspondent clients that it performs post-purchase due
diligence on a sample of loans. “Among other check-points, this
process identifies defects or instances of non-compliance with
investor policies, procedures, and quality expectations, and
regulatory requirements. Our post-purchase audit process
includes compliance with RESPA and TILA disclosure
requirements.” Citi’s bulletin goes on to provide its clients
with a checklist and list of tools to help them comply with
RESPA and TILA disclosure requirements.
Stearns Lending told brokers, "You are now
eligible to select a flat fee option in addition to a percentage
of the loan amount for your Lender Compensation. You have a
choice of zero (no flat fee), $350, $500 or $750 or $950. The
maximum income on each transaction is 4% of the loan amount
which must include the flat fee." Stearns Lending also stated
that it has been notified by its investors that "we must limit
our Broker Compensation Plans to one compensation rate
(percentage) for all programs to our brokers. This change is
effective with new locked loans and/or submitted loans starting
May 7."
GMAC released a set of additional guidance
guidelines to its correspondents to determine second home
eligibility, including items such as “Often located in a
vacation/resort area, the property must be suitable for
year-round occupancy, the subject property should not be located
in the same market area as the borrower’s primary residence” and
so on. GMAC also adjusted their policies on deferred student
loan and timeshare debt payment underwriting.
Direct Mortgage is now allowing
cash-out to 80% LTV on Super-Conforming Fixed with an LP
approval. A 720 FICO, with compensating factors, is required.
Affiliated sent out a series of revisions to
checklists, programs, underwriting checklists, appraiser and
settlement agent lists.
Pinnacle Capital Mortgage has updated its
underwriting guidelines including such areas as 2055 & 2075
appraisals are now eligible per DU findings for conforming
loans, for enhanced DU Refi Plus loans allowing 2nd
homes and NOO to 125%, no limit on the number of financed
properties the borrower may own, regardless of occupancy, etc.,
Standard DU Refi Plus, HomePath, and jumbo changes (Second Homes
are now available, one full appraisal required on loan amounts
<$1mil).
It was another
low-volatility day in the markets Wednesday, although 10-yr
Treasury notes dropped by about .375 to a yield of 3.37%. Agency
MBS prices were worse by about .125. As most expected, the Federal Open Market Committee’s statement was
uneventful, as was the press conference afterward.
“Information received since the Federal Open Market Committee
met in March indicates that the economic recovery is proceeding
at a moderate pace and overall conditions in the labor market
are improving gradually.” This is not “stop the presses!” news.
The Fed will complete its $600 billion in Treasury purchases as
scheduled at the end of June. Most economists are not expecting
the Fed to increase overnight rates until the end of 2011 at the
earliest. Finally, the statement did make its obligatory comment
on housing saying "the housing sector continues to be
depressed."
Today is a new day,
however, with Jobless Claims and the 2nd reading on
the 1st quarter’s GDP number – a downgrade is
expected. Later in the morning we’ll see yet another housing
number, this time Pending Home Sales, and a $29 billion 7-yr
note auction.
Off to New York for
the MBA secondary conference!
Gallagher opened the
morning newspaper and was dumbfounded to read in the obituary
column that he had died.
He quickly phoned his best friend, Finney.
“Did you see the paper?” asked Gallagher. “They say I died!!”
Finney relied "Yes I saw it. Where are ye callin’ from?"
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