Dec. 10, 2012: Basic QC manual for dummies like me; FDIC institutions making some coin; the latest on MBA & LO wage lawsuit
Rob Chrisman

"Rob, I am on the board of directors of a bank. Is there a guide or manual that would help me understand what the QC gal is talking about during presentations?" Sexist comments aside, sure there is. But first, a message the industry needs to keep in mind. Counterparty risk is becoming more and more important. Opinions about "pointing fingers" and "Big Brother" aside, quality control is the name of the game at your shop, as well as others. If you have a big exposure to a company that doesn't have adequate safeguards in place, or a written, viable, comprehensive QC plan, you're putting your company at risk. Fannie's folks put out a decent guide last year that is still relevant and probably makes sense for you to take a look at, and it can be found at:


The mortgage banking industry lost a veteran Friday morning with the passing of Todd Hempstead due to cancer. I had the privilege of moderating a panel in July which included Todd on current trends in agency business. Todd had an extensive background in product development, investor channel development, and MBS asset acquisition strategies both in the public and private sectors, and served as SVP for Fannie Mae where he was employed for 25 years and then CMG Financial. A good friend of his wrote me, "He had an incredible sense of humor, a dry wit, keen intellect, great insights into complex issues, was  great karaoke singer (really) and lots of other wonderful things...Todd was heroic until the end, never drawing attention to himself." He will be missed by his family and the industry. If you wish, donations in Todd's name may be made to the Jimmy V Cancer Foundation at Nancy's email address is if you would like to drop her a note – a friend said the family has received many thoughtful and kind notes.


"Rob, why does a 1003 include the education of the borrower?" Darned if I know exactly, although one theory holds that a lengthy time in school may help younger borrowers show stability since they don't have the employment track record. But Kathy B. with FNB discovered, "Loan officers are expected to submit a complete and accurate application. Even omissions as simple as education level, or dependent information, can affect an underwriter's ability to establish an accurate borrower profile.  Does the income make sense? Salaries are often commiserate with experience, skill level, job responsibilities and education."


Speaking of income commiserate with education, there still seems to be a contingent of LO's out the quietly waiting for stated income loans to come roaring back. In my dubious opinion, in terms of mainstream lending, don't hold your breath. They could come back a) if they're not against Dodd Frank's rules and regulations, including the ability to repay considerations, b) investors are willing to match up the risk and return profile (like 5% above current coupon), and c) lenders actually need the volume to support their overhead (thanks to the government rates and refi programs, there is currently enough business without venturing down the documentation or credit curves too far).


Banks did their fair share of stated income loans, and are paying the price. But last week the commentary discussed how well banks are mortgage companies are doing, and as a follow up I received this note taken from the FDIC press release: "Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $37.6 billion in the third quarter of 2012, a $2.3 billion (6.6%) improvement from the $35.2 billion in profits the industry reported in the third quarter of 2011. This is the 13th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income and lower provisions for loan losses accounted for most of the year-over-year improvement in earnings. Also noteworthy was a decline in the number of banks on the FDIC's "Problem List" from 732 to 694. This marked the sixth consecutive quarter that the number of "problem" banks has fallen, and the first time in three years that there have been fewer than 700 banks on the list. Total assets of "problem" institutions declined from $282 billion to $262 billion. 'This was another quarter of gradual but steady recovery for FDIC-insured institutions,' said FDIC Chairman Martin J. Gruenberg. 'Signs of further progress were evident in a number of indicators, such as loan growth, asset quality and profitability.'" Over 57% of all institutions reported improvements in their quarterly net income from a year ago. Also, the share of institutions reporting net losses for the quarter fell to 10.5 percent from 14.6 percent a year earlier. The average return on assets (ROA), a basic yardstick of profitability, rose to 1.06 percent from 1.03 percent a year ago.


Continuing with the turnaround theme, for the first time in about 18 months Freddie Mac has come close to recording positive growth thanks to increased purchase and issuance volume.  Freddie’s portfolio did shrink by 0.8% in October, totaling about $1.97 trillion, but there’s a big difference between 0.8% and the 6% average decrease it experienced over the past year and a half.  The last time positive growth was recorded was back in February 2011, and even that was a quaint 0.1%. Freddie reported just over $50 billion in purchases and issuances in October, up $11 billion from September and up $17 billion from October 2011.  Of that $50 billion, $45.2 billion is attributed to single-family refinance loan purchases and guarantees.

The Mortgage Bankers Association this week filed a brief in federal court in its appeal from a District Court decision in its case against the Department of Labor. MBA’s case urges that DOL did not follow rulemaking procedures in withdrawing its interpretation that loan officers could be exempt employees under the Fair Labor Standards Act. The brief filed Wednesday in the U.S. Court of Appeals for the District of Columbia in MBA v. Hilda Solis centers on MBA’s contention that the DOL's withdrawal of a 2006 interpretation on the applicability of FLSA to loan officers should not have occurred without notice and an opportunity for public comment. Under FLSA, covered employers must pay overtime wages to an employee who works more than 40 hours per week, unless the employee is exempted from overtime requirements. FLSA expressly exempts from its overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity[,]…or in the capacity of outside salesman,” as those terms are “defined and delimited from time to time by regulations of the Secretary [of Labor], subject to the provisions of [the Administrative Procedures Act.” DOL is charged with administering and enforcing FLSA and its regulations. Read all about it:


Last week the commentary discussed some of the differences between state and federal mortgage laws, and my cat Gusto and I received this note: "Creating a uniform foreclosure code sounds like handing the problem to the Federal government to fix. Based upon how they 'fix' other industries, no thanks.  It is one thing for states to work together to create an improved business environment, it is another to give the Feds control.  By the way, have you noted how ‘messed up’ California is? Maybe I am the last one to read about the 'Homeowners Bill of Rights' that takes effect of 1/1/13, but the rest of the nation hopes it doesn't spread."

We’re seeing an interesting dynamic in the market, something we haven’t seen since before BofA exited the market over a year ago in October 2011.  Correspondent investors are suing the term “excess capacity” again (namely Wells and Chase) and wanting to buy more volume to feed their machines.  As a result, both Chase and Wells have improved their correspondent AOT pricing over the last couple weeks.  This is also a sign that margins may be compressing the industry – things often flow from the top down.


The markets are still ruminating on Friday’s unemployment data – it was a "head-scratcher" once again.  The Bureau of Labor Statistics (BLS) reported that employers added 146,000 new jobs in November, well above the 90,000 that was expected, while the Unemployment Rate hit 7.7%, the lowest since December of 2008.  The Bond markets plunged after the data, but thanks to QE3 soon came back. Hourly earnings grew by 0.2% while the Average work week was unchanged at 34.4.  The fall in the Unemployment Rate was due in part to 350,000 people dropping out of the workforce.  And that big drop is the reason why the “Labor Force Participation Rate” fell by 0.2% to 63.6%, the lowest reading in over 31 years. So as we dig into the numbers, yes, the headline number was solid, but there is still some trouble in the labor markets. And lock desks and astute LO’s will tell you that home loan rates ended the week about where the closed the Friday before.


But during the week the rally in treasuries (pushing the 10-yr yield into the high 1.50% range) seemed to be fueled by expectations of a possible Fed announcement of a new bond purchase program at this week’s meeting. The thought is that when “operation twist” concludes, the next round of Quantitative Easing (QE) will be buying intermediate and longer dated securities without selling the front end like they have been doing during “operation twist”.


It’s a new week, and since the press can’t drone on about the election they will focus on the fiscal cliff and its impact on us. Globally, news to watch will be the fiscal cliff, the two day FOMC meeting (expectations for the Fed to announce they will be purchasing Treasuries once "op-twist" ends later this month), Treasury supply (3s, 10s, 30s), Europe (two day summit Thursday and Friday), and five Fed operations buying agency MBS. As I mentioned, last week, when all was said and done, mortgage rates ended about where they started. But this is a new week, with a new set of wonderful, exciting economic nuggets. Actually there isn't much scheduled to really move rates: today is zip, tomorrow is the Trade Balance, Wednesday is Import & Export prices along with the FOMC rate decision (my bet is that overnight rates remain near unchanged), Thursday is Jobless Claims and Retail Sales, and then Friday is the Consumer Price Index and the Industrial Production and Capacity Utilization duo.) The 10-yr closed Friday at 1.63%, but this morning is back down to 1.60% and we can look for a slight improvement in rate sheets.


We're entering the college football bowl season, so how about part 1 of 2 of gridiron humor? (Suitable for changing to any school - don't send me "you insulted my mama's alma matter" e-mails please.)
Ohio State's Urban Meyer on one of his players: "He doesn't know the meaning of the word fear. In fact, I just saw his grades and he doesn't know the meaning of a lot of words."
Why do Tennessee fans wear orange? So they can dress that way for the game on Saturday, go hunting on Sunday, and pick up trash on Monday.
What does the average Alabama player get on his SATs? Drool.
How many Texas A&M freshmen football players does it take to change a light bulb? None. That's a sophomore course.
How did the Georgia football player die from drinking milk? The cow fell on him.
Two West Virginia football players were walking in the woods. One of them said, "Look, a dead bird." The other looked up in the sky and said, "Where?"
A University of Cincinnati football player was almost killed yesterday in a tragic horseback-riding accident. He fell from a horse and was nearly trampled to death. Luckily, the manager of the Wal-Mart came out and unplugged the horse.
What do you say to a University of Miami Hurricane football player dressed in a three-piece suit? "Will the defendant please rise."
(Part 2 tomorrow.)

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at 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.




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