Jan. 8, 2013: More on the multi-billion dollar settlement; thoughts on LO's W-2 versus 1099
Rob Chrisman

There are so many statistics out there it makes one's head spin. For example, for the nation’s 115 million occupied homes: The median year these homes were built was 1974, with owner-occupied units being slightly newer (1976 compared with 1972 for renter-occupied).  The median size of single-family detached and mobile home units is 1,800 square feet, with owner-occupied units being larger (1,800 square feet) than renter-occupied ones (1,300 square feet). Newly constructed units are also usually larger, with a median size of 2,200 square feet. Most homes have three or more bedrooms (64%). New homes (those built in the last four years) generally have more bedrooms, with 74% of them having three or more. About half the homes have two or more bathrooms. Again, new units have more bathrooms, with 83% of them having two or more. More than eight in 10 units have a washing machine and clothes dryer. Here the source of these and thousands more stats about our housing market: http://factfinder2.census.gov/faces/nav/jsf/pages/wc_ahs.xhtml.

Did you know that the word, "hippopotomonstrosesquipedaliophobia" means "the fear of long words"? I wonder if there is a word that means, "the fear of big numbers"? $26 billion here, $8.5 billion there, $11.6 billion somewhere, and pretty soon you're talking real money. Honestly, I lose track of all the settlements and lawsuits out there, but yesterday’s multi-billion dollar settlement is noteworthy:
http://www.nbcnews.com/business/economywatch/banks-reach-8-5b-settlement-mortgage-abuse-1B7863650. The BofA settlement certainly wipes out most, if not all, of BofA's earnings for a second consecutive quarter, but hopefully allows it to “get on with things.” Here’s a nice summation from Bloomberg:



For those of you playing along at home, US banks agreed to pay out a total of $20 billion yesterday in two separate settlements.  In a separate settlement, 10 mortgage lenders, including BofA, Wells Fargo, JPMorgan Chase and Citigroup, agreed to pay more than $8.5 billion to settle regulators’ allegations that they were guilty of widespread abuse of the foreclosure system that allowed banks to seize homes from defaulting borrowers. As the Financial Times puts it, “The two settlements add to the tens of billions banks have already paid out in fines and compensation for loose lending standards in the run-up to the financial crisis and the lax manner in which they dealt with home repossessions.” And right or wrong, that is what the press and the public see. Will every home owner receive a check for $100k? They shouldn’t hold their breath.


Remember that, “Under an earlier settlement, foreclosures have been independently to determine whether the alleged abuses meant some borrowers were wrongly forced out of their homes. The reviews, conducted by external consultants, found no evidence of widespread harm to borrowers but the cost of examining extensive documentation meant regulators and banks decided it was better to agree a general financial settlement and cut the reviews short. The settlement was smaller than expected, however, after four lenders, including Ally Financial, refused to sign up to the deal.”


So we can ruminate on the Federal Housing Finance Agency’s approval of an agreement between Fannie Mae and Bank of America to resolve claims on mortgages sold to the GSE between 2000 and 2008. In addition, BofA agreed to sell over $300 billion in servicing rights to Nationstar and Walter Investment (Greentree). Both firms indicated plans to provide refi opportunities to the borrowers through HARP 2.0. The agreement also could lead to normalization in the business relationship between Fannie and BofA which has been strained for a couple years.


Yesterday this commentary discussed the VA web site problems, and potential loss of privacy. I received this note from an industry insider: "The Houston VARO told me we cannot register (re-register) at this time. We have to wait until VA contacts us and says the system is ready!!!  The person I spoke with did not have timeframe for the rebuilding of their system. She said you could call in to get case numbers for IRRRLs, but they cannot issue case numbers for purchases at this time." Thank you!

Yesterday the commentary also mentioned how the GAO attributed most small bank failures to commercial real estate problems (http://www.gao.gov/products/GAO-13-71). The commercial real estate market doesn’t make the headlines with the same frequency as the residential market, but the general consensus is positive: the commercial market has stabilized; construction and land development concentrations have declined, exposing lenders to less risk; and analytics have improved to such a degree that banks should have a much better idea about what they’re dealing with than they were before the crisis.  There’s been a trend towards looking beyond mere cash flow and collateral and factoring in the national and local economies, population, employment, consumer spending, interest rates, inflation, and sector supply and demand, which can only serve to better equip lenders to analyze transactions. That being said, there is some residual risk associated with the commercial market.  At present, the maturity pipeline is replete with loans on properties that are still worth 35% less than they were in 2007, which means that lenders will have their hands full with modifications and extensions.  Loan repayment capacity is by no means airtight, so it’s worth it to do a thorough analysis of any given borrower’s situation vis à vis their current industry climate in order to minimize credit loss.


I am neither an expert in LO comp or an attorney (I’ll leave that to firms like Medlin & Hargrave out in Oakland, CA), but I received this note: "Can a licensed loan originator be paid as a 1099 independent contractor? In my research, I've always found that it's  impossible, based on HUD, IRS, Investor, State and Federal, Franchise Tax Board etc., yet, why do we continue to see people paid this way in the industry? The majority I see  who pay this way are mortgage brokers but I've seen other small lender shops doing it for both licensed and unlicensed LO's. It is certainly tougher to recruit people who are being paid in a way I cannot compete with, and frankly, I am surprised some of these places have not been shut down."


I threw this question out to a few folks. Up in New Jersey Brian wrote, “This has multiple issues. The first and most difficult is that many state banking laws have not been updated to correspond with the Federal Changes in over 5 years. As you noted in your prior email last Sunday, the SAFE Act was loosely based upon the Florida registry. In that registry, Broker Loan officers were 1099 independent contractors and others were salaried. I believe the NY banking regulations still allow it. DOL is completely against this practice, in fact the DOL has continually tried to mandate minimum wage rules on LO's. In my opinion DOL lacks an understanding of the LO's responsibilities and flexibilities.”


He goes on. “My opinion/contention has been that Licensed (not registered) LO's should be 1099's. Not for the competitive aspect, but because they would have more to lose. If the SAFE Act doesn't have a carrot and stick approach it will become useless. As you noted, unlicensed and unregistered originators are a problem. An auditor told me they didn't impact the consumer, I fully disagree. The auditors should look at the company’s returns and check for any 1099's. It is my understanding, the SAFE Act and the FRB Rule on compensation mandate all LO's be paid on W-2's. The FRB Rule and the proposed CFPB Rules have provisions for the salaried and the commissioned, but nothing for compensation as independent contractors. As such, it is my understanding that any compensation paid in the 1099 manner could result in a TILA violation and all the penalties associated with TILA. What I am not clear on, however, is with the CFPB set to merge RESPA and TILA (expected in the next few days) what the penalties will be with the proposed rule. Will the Rule have all penalties default to the TILA penalties, which are much more extreme than the RESPA penalties? We’ll hopefully find out.” Thanks Brian!


On to some quick vendor and investor news!


The StoneHill Group, yet another company of capitalizing a letter in the middle of its name, is expanding. I mention this, not because it is expanding, but because the company is gaining quite a following among clients: http://www.bizjournals.com/jacksonville/news/2012/12/21/atlanta-mortgage-firm-expands-to.html.


Jim Hecht, former Executive Vice President for National Retail and Builder Production at Nationstar, has joined Stearns Lending as the Executive Vice President of Strategic Development. Based in Dallas, Hecht will be leading and developing the consumer direct, builder, and credit union partner channels along with the marketing and recruiting teams.

360 Mortgage has launched its new VA IRRRL product, which requires a minimum FICO of 680 and permits LTVs up to 150%.  The product uses the AVM for value but allows brokers to use appraisals in cases where the AVM doesn’t value properly.  Borrowers must have stable employment, but income and asset requirements are minimal.  Non-credit qualifying FHA Streamline loans that allow unlimited LTVs are now available as well for borrowers with credit scores over 680; all prior servicers are acceptable.  For both products, loans are sold to the Agencies and servicing is retained by 360.  See www.360mtg.com for full details of the offerings.

As part of its 2013 initiative to expand its VA capacity, Allied Funding has announced that it will pay the $100 VA sponsor fee for the first 100 brokers to submit applications for annual approval.

In the wake of the new DU implementation, Clearpoint Funding is requiring all loans underwritten using DU Version 8.3 to have closed and funded by January 18th.  Loans underwritten by the old system that don’t meet this deadline will be required to run under Version 9.0 and will be subject to the new guidelines, and all loans that close after the 21st will be required to contain Version 9.0 approval. As a reminder, the updated version will require two years’ tax returns for self-employed borrowers, six months’ receipt for alimony and child support, and a minimum of six months’ reserves for 2-4 unit properties.  ARM LTVs and Limited Review for primary residences and condos will be reduced, and 30-day accounts will no longer permit employer reimbursement as a viable option to omit debt. 

With the markets dead in the water, volatility-wise, and rates & prices ending Monday about where they ended Friday, more of the focus was on the bank settlement news ahead of earnings releases (over the next few weeks). We also had the large block of Bank of America servicing being sold – does management regret it after finding out Basel III’s roll out has been changed and delayed? As Adam Q. (Thomson Reuters) noted, “BofA settling repurchase claims – it will pay Fannie $3.55 billion and buyback $6.75 billion in mortgages for a total of $10.3 billion in immediate outlays. So much for “Fast and Easy” eh? And that provides another explanation of why primary/secondary spreads are so wide. Besides new regulations, the industry is still accounting for potential buyback costs.”


Anyway, by the end of Monday 10-year T-notes (which lost over 1-1/2 points last week) improved about .125 and closed at 1.90% although mortgages improved about .125-.250, depending on coupon. Today we have another lack of scheduled economic news, although we do have the Treasury's auction of $32 billion in 3-year notes at 1:00 p.m. ahead of $24 billion more in 10-year notes and 30-year bonds over Wednesday and Thursday. So far the 10-yr is slightly better at 1.88% and MBS prices are a shade better than Monday’s close.

My inconclusive travel plans for 2013
I have been in many places, but I've never been in Cahoots. Apparently, you can't go alone. You have to be in Cahoots with someone.
I've also never been inCognito. I hear no one recognizes you there.
I have, however, been inSane. They don't have an airport; you have to be driven there. I have made several trips there, thanks to my friends, family and work.
I would like to go to Conclusions, but you have to jump, and I'm not too much on physical activity anymore.
I have also been in Doubt. That is a sad place to go, and I try not to visit there too often.
I've been inFlexible, but only when it was very important to stand firm.
Sometimes I'm inCapable, and I go there more often as I'm getting older.
One of my favorite places to be is in Suspense! It really gets the adrenalin flowing and pumps up the old heart! At my age I need all the stimuli I can get!
I may have been inContinent, and I don't remember what country I was in. It's an age thing.

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 the role of the IRS and REMIC’s in the current credit crisis. 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.




(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 2013 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.)


Copyright - Rob Chrisman