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May 24, 2012: Understanding your operation is critical to profits; recent lender/investor updates
Rob Chrisman
(There
aren't
many folks in the world who, on their death bed, would exclaim,
"I wish I had another day of work!" With that in mind, I am
biking around in the high country in Southern Utah, camping with
no internet, and Brad
Nease with Carrington is pinch hitting for a portion of
today's commentary - brought to you through the wonders of
modern technology. Thank you Brad! And there are still some
lender updates, and a little humor at the end.)
Let’s talk revenue.
Are you the CEO, President, CFO, or head of Secondary? If I
were to walk into your company, right now, and ask: What is
your company making (in basis points)? What is your gross or
top end number? What is your net or bottom line number? Do you
know? Would you be able to go directly to an excel spreadsheet
and point to your GOS (?); your gross and net numbers? Do you
know what it takes from a volume perspective to break even at
your current profitability levels? Do you know how many basis
points it takes to originate and fund a loan?
You would be surprised at how many people don’t know...
It is the job of the Secondary Marketing Manager (“SMM”) to
ensure that the profit margins given to him/her by the Business
Head are achieved when the loans are purchased. In most cases,
the SMM is responsible for the lock desk. They are responsible
for the pricing on the rate sheet. This means they are
responsible for making sure that the pricing on the rate sheet
has the necessary margin built in to achieve the profits the
Business Head requires.
After every loan sale, a spreadsheet should be produced that
provides Executive Management with the ‘Buy’ price, the ‘Sell’
price, the hedge gain/loss, and the net margin, at minimum. In
addition, if you are able to track expected margin within your
MIS (Mortgage Information System), this will provide the
Business Head with a perspective as to how the SMM is doing in
achieving his/her goal of bringing in the margin that was used
to build the rate sheet pricing. This spreadsheet should also
incorporate all trades month to date. The trade should be
listed in chronological order and the monthly weighted averages
should be tallied for each individual category.
In addition, the SMM is responsible for monitoring lock
extensions, renegotiations, and program changes. Leakage, for
purposes of this article, is defined as the amount of negative
differential (in basis points) between the margin used to build
the rate sheet and what was actually achieved when the loan/s
are purchased. This is the nemesis of all SMM’s. In a culture
where pricing on the rate sheet is changed ‘willy-nilly’ (a very
technical secondary marketing term) based on how
favorable/unfavorable a firm may look on a pricing comparison of
their competitors, is a Leakage based environment. Waiving,
willy-nilly, extension, renegotiation, and program change fees,
is a Leakage based environment. Whether you sell loans on a
Best Efforts basis or you hedge and sell on a Mandatory basis,
you are being charged those fees. You MUST recoup a large
majority of those fees. If you don’t, you won’t achieve the
margins the Business Head has prescribed and your job could be
at jeopardy. Are you delivering your loans on time? Or, are
you constantly asking for extensions from your investor because
your shipping/post-closing department is unable to deliver the
loans within the prescribed commitment period. The investors
don’t extend for free! This is Leakage.
Finally, are you reconciling your purchase advices with your
investor? You would be amazed at how many loan purchases are
done incorrectly, in your favor and out of your favor. Please,
please, please, begin a process, whether it’s in Secondary or in
Accounting, where you are reconciling the price the loan was
sold to the price actually received. People make mistakes.
When they do it creates Leakage. It is imperative as an SMM to
make sure that you are receiving what you expect!
So what is or what are the solutions?
First and foremost, the Business Head must be on board with the
changes you’re about to make. If he/she is complicit with the
culture of chasing a spot on a rate sheet comparison or allowing
the ‘willy-nilly’ fee waivers to occur, you have no recourse or
way to push back. If this is the case, you must be very clear
with your boss that there is no way for you to be held
accountable for the lack of profit margin.
If the Business Head agrees with the changes, here are some
specific ways to manage these processes. There must be in place
a directory of all programs and the intended profit margins the
company is to earn. This is a listing by business line
(wholesale, retail, direct to consumer, etc.) of the products
and the profit margins. In addition, there should be a
gatekeeper. This person is normally the one who issues the
rates in the morning and any intraday changes that might occur.
At the bottom of the directory, there should be signature lines
with the requirement that the SMM and the Business Head should
sign if there are any changes to the margins. Once a decision
has been made to change the margins, the signatures must be
obtained prior to implementation.
Next, it doesn’t matter if you are in a Best Efforts or
Mandatory environment. The waiver of lock extension and
renegotiations is a killer. For example, currently roll costs
of TBA MBS for a current coupon FNMA 3.5 is about 10/32. If you
divide 10/32 by 30 days, it costs the company that’s hedging and
selling on a mandatory basis about 1.04 basis points per day.
Let’s round to 1 basis point. Thus, to extend for 15 days, it
costs 15 basis points. In addition, there are human resource
costs in generating the lock extension. The lock desk personnel
that are performing the actual extension. . . The operations
staff member requesting the extension. . . These are actual
costs. If you’re selling on a Best Efforts basis, this is how
your Correspondent Investor is calculating the cost to extend
your Best Efforts commitment. Also, if you attempt to ask for
the extension after the lock has expired, all bets are off
because the mortgage banker that hedges or the Correspondent
Investor has lifted the hedge for the particular loan you’re
working on. Thus, there’s nothing to extend. The commitment is
gone!
There are many other discussion points along these lines. I
hope this gives you at least some pause to begin to consider how
to ensure that the margin you’re supposed to achieve is at least
close to what is coming in the back door when the loans are
purchased. Have a Great Day! (If you'd like to reach Brad Nease,
of Carrington, e-mail him at Brad.Nease@carringtonms.com.)
How do Ops and compliance folks keep up with things? Here are
some somewhat recent
lender/investor updates. As always, it is best to read the
actual bulletin, but this will give one a flavor for what is
happening out there. In no particular order…
Stearns Lending,
which is involved in correspondent, wholesale, and retail
residential lending, announced that Gary Fabian has joined up as
Chief Financial Officer. Those who track these things know that
he most recently served as Vice President – Production Finance
of MetLife Home Loans.
Fifteen- and 30-day locks on Everbank refinance
transactions will only be made available after they have
received a “RESPA accepted” within the Everbank system. Loans
may be locked before being granted a “RESPA accepted” status for
45- or 60-day lock terms.
At the beginning of May, Everbank updated its FHA program
offerings, which now include a 5-year ARM and 15- and 20-year
fixed terms along with the existing 30-year fixed rate
high-balance offering for purchase and refinance transactions.
For the Streamline Refinance program, 5-year ARM and 15- and
30-year fixed rate high-balance options are now available.
Parkside Lending has
updated guidelines such that appraisers are allowed to give
value to home improvements completed without the necessary
permits from the property’s governing municipality—garages
converted to living space, accessory units and the like—so long
as they’re done in a professional workmanlike manner. These
home additions will be reviewed by the underwriter for health
and safety issues.
Wells has issued a
reminder that all Freddie Relief Refinance Mortgage transactions
under HARP 1.0 guidelines (that is, with loan submission dates
before February 6, 2012) are required to close/fund and record
by May 31, 2012. Those loans that don’t meet the deadline will
be denied and will be required to be re-registered and submitted
in compliance with HARP 2.0 guidelines.
The Client Tools section of the Broker’s First website now
features a new Rent Calculator, which uses the Fannie/Freddie
method to calculate rental income for properties on a 1040
Schedule E or Form 8825 for Partnership and S-Corporation tax
returns. Bear in mind that it’s ultimately Wells that
determines the final income/loss that is used in the loan
qualification.
Wells Fargo Correspondent
has revised Form 10, which is a notice about appraisals that is
required to be distributed to and dated by HomePath Mortgage
borrowers and included in the loan file. The new verbiage
states that Form 10 must now be signed and dated by all
borrowers at least five business days before closing to ensure
that they have enough time to act upon the form’s
recommendations. Wells Fargo Funding Compliance, which has
recorded a high incidence of problems surrounding Form 10,
reminds correspondent lenders to ensure that they have borrowers
sign and date the form by that five-day deadline and use the
up-to-date version. Section 842 of the Wells Funding Seller
Guide contains guidance on HomePath loans, including
documentation requirements.
Wells Funding is expanding its Mandatory and Best Effort options
for government loans and simplifying pricing. As of May 21st,
the Best Effort rate sheet will display a single government
price for FHA, VA, and Guaranteed Rural Housing loans being
locked so that sellers no longer have to select either GNMA I or
II. This doesn’t affect Mandatory commitments, which should
still be registered as either GNMA I or II trades. While
interest rates on FHA and VA 15-year fixed products may only be
adjusted in increments of 0.5% at present, the expanded
guidelines will allow adjustments in 0.125% increments, and the
High Balance FHA Loan program will allow the option of 15-year
fixed-rate transactions. The High Balance VA Loan program will
allow 15-year fixed-rate transactions, 30-year fixed-rate
transactions with amortization terms of 240-360 months, and 5/1
ARMs. Sellers should ensure that their internal processes
comply with the enhanced offerings.
Wells Funding reminds correspondent clients that the Agencies’
implementation of the ULDD on July 23rd will affect those
lenders who deliver directly to Fannie and Freddie but will not
have an impact on the WFF delivery process for loans apart from
affordable loans. When delivering an affordable loan (i.e. Home
Opportunities program, Fannie MyCommunityMortgage®, and Freddie
Home Possible® loans), sellers are required to provide
particular ULDD data elements via Wells Seller Guide Form 11,
which must be completed, signed, and included in the Closed Loan
Files.
Fifth Third has
issued guidance on the protocol for submitting HASP Open Access
loans using FHLMC HVE values and reminds correspondent lenders
and brokers that they must go through the proper process to
establish loan eligibility in pricing. This involves first
submitting the loan to Loan Prospector using an estimated
property value provided by the borrower, making sure that the
loan received an “Accept” decision, and then reviewing the LP
findings to calculate HVE availability and value. The loan
should then be resubmitted using the HVE value returned to
confirm that the decision is still “Accept,” and the final step
is submitting the credit file to Fifth Third using the HVE value
returned with both the first and second sets of LP findings.
Lenders are reminded that such values may be used for one- or
two-unit properties only. Three- and four-unit properties,
manufactured homes, and leasehold estates are excluded.
Correspondent lenders should ensure that the HVE value is at a
Medium or High confidence level and no more than 120 days old at
the Note date; in circumstances where the confidence level is
insufficient, either a 2055 or full appraisal must be ordered.
Question:
What is the ideal weight for a lawyer?
Answer:
Three pounds, including the urn.
If you're interested, visit my twice-a-month blog at the
STRATMOR Group web site located at
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