Why do people pay to go up tall buildings and then put money in binoculars to look at things on the ground? Speaking of looking at things, a “thank you” to Emily Stewart who sent this link along. It is a 1 minute and 42 second entertaining primer on the Federal Reserve: http://www.onlinemba.com/blog/fedreserve/.

Basel III has been postponed without an implementation schedule. This is big news, as it was/is, among other things, determining the amount of capital to be held for risky assets (including certain mortgages) therefore dictating the perceived value of servicing for depository institutions: http://www.federalreserve.gov/newsevents/press/bcreg/20121109a.htm. Of course, this has suddenly led other countries to cry “foul” since this arguably places our banks at an advantage over banks in countries that are complying. The US Treasury said that American banks are not yet ready to start the process of complying with the Basel III rules first agreed in 2010. The rules, which financial regulators in the US, Britain and Europe have signed up to, require banks to hold more capital and are designed to prevent governments having to bail out lenders again. Unfortunately, under the title of “unintended consequences,” the new rules impact things other than servicing: they discourage banks from making loans despite businesses struggling for funding as many economies see weak (or negative) growth. The rules require banks to hold loss-absorbing capital based on their risk-weighted assets – good intentions but if it cuts lending, or dramatically decreases the value of servicing, many believe that the U.S. should bow out or re-write.

Not covered by the Federal Reserve, Nationstar Mortgage (NYSE: NSM), one of the Top 10 mortgage servicers in the US, is further expanding its originations presence on the west coast by opening a new fulfillment center in Irvine, CA. The new center, located in the Irvine Spectrum, shall open in the first week of December 2012.  Nationstar is currently seeking experienced Underwriters, Closers and Funders to join the growing team. NSM offers competitive compensation and benefits. Interested individuals should send an email to careers@nationstarmail.com or attend its upcoming job fair on November 15th at the Hyatt Regency Irvine - noon to 8PM.  “Nationstar Mortgage is committed to growing its originations channel by investing in their people, technology, and quality relationships. They strive to have the best customer service along with a diverse mortgage product offering.  Nationstar Mortgage is a direct seller to Fannie Mae and Freddie Mac, as well as being a significant FHA lender and Ginnie Mae issuer.  Nationstar Mortgage LLC is an equal opportunity employer. Applicants are considered for positions without discriminating on the basis of race, color, creed, religion, national origin, gender, age, disability, genetic information, veteran status, citizenship status or any other characteristic protected by federal, state or local law. Nationstar Mortgage LLC is an equal opportunity employer. Applicants are considered for positions without discriminating on the basis of race, color, creed, religion, national origin, gender, age, disability, genetic information, veteran status, citizenship status or any other characteristic protected by federal, state or local law.”

Going back to Basel III, it is all about capital. Just ask MGIC Investment Corp., the mortgage insurer that breached regulators’ capital limits. Its stock declined after reporting a ninth-straight loss, and will pay $267 million to resolve a dispute with Freddie Mac. Its stock is down more than 50% this year. The third-quarter net loss widened to $246.9 million from $165.2 million a year earlier as claims costs rose. At least the Freddie deal doesn’t hit all at once: the agreement calls for a $100 million initial payment to Freddie with the remainder to be paid over 48 monthly installments. Still, back in August, MGIC said it had breached the 25-to-1 ratio of risk relative to capital that some state regulators require to permit the company to sell new coverage. Under the deal, Freddie Mac would allow an MGIC unit to cover loans it buys in states that have the capital rules. The deal requires the blessing of Wisconsin’s insurance regulator to make capital from that unit available to cover claims on older policies.

PennyMac Mortgage Investment Trust, however, has no such issues currently. It had strong third quarter results due to stronger-than-expected mortgage banking revenues and valuation changes in the distressed loan portfolio. PMT acquired $357 million of distressed whole loans in 3Q and correspondent fundings increased to $6.3 billion. Interest income increased to $11.4 million from $9.3 million in 2Q, and non-interest income totaled $79.5 million, up from $48.4 million in 2Q. (Per KBW, “non-interest income consists of several items: 1) valuation changes in the mortgage loan portfolio, payoffs, gains from mortgage banking – like origination fees, and other income like servicing fees.”) Fundings totaled over $6 with a gain-on-sale margins at 79 basis points. “Management sees increased opportunity in the correspondent
market as leading banks are exiting the channel and non-banks offer competitive alternatives to banks. Lock commitments increased to $8.5 billion from $4.6 billion which bodes well for 4Q origination volume.” On the servicing side, the MSR (mortgage servicing rights) asset grew to $65 million from $33 million in 2Q. The weighted average servicing fee for the quarter was 25.6 bps. PennyMac is capitalizing servicing at 1.07% (over a 4:1 multiple) which some think is a little strong for its mostly conventional portfolio.

PHH saw stronger-than-expected gain-on-sale margins, and expected rep & warranty losses above reserves fell. However, PHH disclosed two investigations in which state regulators allege past years' servicing violations. While the outcome is uncertain, analysts believe the risk is manageable given the high quality of PHH's historical originations. PHH reported 3Q GAAP EPS of ($0.74) and operating EPS of $0.87. Operating EPS excludes a negative $150 million fair value mark on the MSR, $8 million in derivative gains, and a $13 million early debt retirement charge. Pre-tax mortgage banking income increased to $122 million from $78 million in 2Q. Interest rate lock commitments (IRLCs) were flat at $6.8 billion. The gain-on-sale margin increased to 3.80% from 3.08%. Management noted that strong margins are likely to persist in 4Q. Correspondent volume declined to 13.4% of closings from 13.8% in the prior quarter.

The commentary can’t track all the personnel changes out there, but this one is notable. Amy Brandt, the former head of a General Electric Co. (GE) home lender, joined Prospect Mortgage LLC as Prospect heads into correspondent lending. “We see a tremendous opportunity to greatly expand our national correspondent lending platform” and fill “a void that currently exists in the marketplace,” Chief Executive Office Ron Bergum said in the statement. Prospect is already in the top 10 lender ranks, and joins Ocwen, Guild, First Mortgage, Nationstar, PennyMac, soon Redwood Trust, and many others in adding servicing economically through a correspondent channel. Returning to Ms. Brandt, she helped private equity firm Apollo Global Management create Vantium Capital (which owns a servicer of troubled mortgages), and previously led subprime & Alt-A lender WMC Mortgage.

Here are some hopefully valuable comments that I received regarding LO compensation, brokering, and steering through various interpretations of Dodd Frank.

Christie from Northern California writes, "In our office if a loan is brokered or if it is funded in-house, the Loan Officer comp is exactly the same. The LO comp has no difference from wholesale source to wholesale source.  The compensation agreement that we have with each specific wholesale lender may vary slightly, but the Loan Office comp is exactly the same."

Andy Harris from Vantage Mortgage Group wrote, “I am a broker exclusively and one should never set their comp margin different with any lender or any program.  This is a clear violation and of course will be viewed as steering – the same margin must be set for comp on all originators regardless if a broker or banker on comp.  We also save our rate sheets and compare multiples.  Bankers will now have to comply with anti-steering now with the proposed changes, but we all know they must steer the borrower to their lines for company revenue reasons and regulatory demands for assets which will get much tighter under Dodd Frank and the CFPB.  Originators just need to be more educated about the details and not rely on the recruiting and deceptive practices to steer beliefs. Margins need to be the same with all if lender or consumer paid, but this makes consumer paid really unnecessary.”

Mr. Harris continued, “People who choose to believe differently are putting their career and business at high risk for a ridiculous short term financial gain, in which is steering to the consumer as it has always been in the past to FHA for higher rebates even when the borrower may have qualified for a better conforming product. One last thing, we are all TPOs to the agencies and titles mean nothing. The term ‘broker’ or ‘banker’ will soon be dead and dead in my eyes.  Can someone explain the following:  If it is a violation of the MAPs rule for a non-bank mortgage provider (i.e. correspondent) to market themselves to the public as a ‘bank,’ how then is this not a violation when simply adding an ‘er’ to the end of it?  A bank is defined by a dictionary as a depository or loan servicer.  Our Federal regulators have also drawn a fine line in the sand and I’ll be interested to see how much longer the term "mortgage banker" will live on to confuse consumers and realtors as a non-baker to the primary mortgage market. I support all non-bank originations if done with integrity, but any owner or any person of these correspondents that bash the broker model - they have lost 100 percent of the arguments when actually talking and debating with exclusive brokers like me.  Brokering is powerful and a very good option to the consumer - especially now.  There are so few of us that the media is twisted and getting very inaccurate data on how our channel works NOW and the analytical view that people need to step back and realize before making judgments or titles.  Brokering is smaller than ever, but better than ever.”

Daniel M. Shlufman, the managing director of Classic Mortgage, wrote, “In answer to Joe's question about Dodd-Frank and anti-steering, there is no prohibition against a broker receiving a higher commission from one lender to another. What is prohibited is ‘steering’ a client into a loan where the broker makes more money (i.e. just for this purpose).  But Dodd-Frank, for all its other faults, understands the reality that some lenders cap their comp to brokers lower than others and is not trying to assure that all broker compensation is the same just that it is fair to consumers.  In addition, it also recognizes that there are other reasons for using different lenders at different times such as (I) turn times (ii) underwriting standards (iii) product availability, etc.  These are the reasons why Dodd-Frank created the ‘Safe Harbor’ which assumes compliance if the three loan scenarios are presented to the client.  A related and often confused provision of Dodd Frank relates to MLO comp, where, for all intents and purposes (subject to some adjustments and bonuses), the MLO must get paid the same commission percentage of loan amount on each deal. And, finally, as to where Dodd-Franks was aimed, the "bulls-eye" was clearly on the broker not the banker and this arrow had a poison tip since the vast majority of brokers have gone out of business after Wells, Citi and Bank of America exited the broker business after Dodd-Frank became effective. And, they became less competitive not more from a profitability perspective since the Anti-Steering provisions do not apply to any bankers whether correspondent (on loans they are banking not brokering where they do apply) or depository. But the MLO Comp restrictions apply to all.”

Lastly, KB from Nevada writes, "We do not charge higher LO comp for government loans.  All our comp plans are 1.5% on lender paid. I believe those brokers that have comp plans with higher fee for government loans will be in trouble with a CFPB audit. Possibly the confusion is FHA/VA requires a W-2 for any payments to LO on FHA/VA. But to have lender comp plans with higher comp for FHA/VA, I believe, is a bad interpretation - it sounds like disparate pricing to me. Regarding the anti-steering, you must show options for a particular program.  If the borrower requests or needs an FHA loan, then the anti-steering form is based on FHA rates and fees. The same is true for conforming and/or jumbo - you don't mix and match base programs. So it is all one or the other. For those lenders that have different comp plans for FHA and have to switch in the middle, they have a problem. As far as our company is concerned the quote for lender fees cannot change due to program change, but many lenders have a problem when they charge a 1.5% comp fee on an $800k jumbo and a $75k conventional. So, they do those as borrower paid, and thus they can charge a different fee. The borrower must pay directly and cannot use YSP to pay the lender fee on borrower paid. The biggest difference between broker and banker is still the YSP disclosure.  Broker MUST disclose YSP and give it to the borrower.  Bankers don't disclose and keep as additional profit.

The fixed-income markets are closed today in the U.S. We may see some rates based on overseas activity, erring on the conservative side.

Although officially Veteran’s Day was yesterday, many companies and institutions are observing it today. Here is one for the veterans out there: http://www.nragive.com/ringoffreedom/index.html.

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses some of the considerations facing the FHFA regarding Fannie and Freddie. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)