Nov. 9: Letters on monitoring debt prior to closing, RESPA, and trends in LO layoffs; recent earnings; 40 business days left til QM

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

Not only are yutes (http://www.youtube.com/watch?v=eNZ1O2KTOOg) not flocking into mortgage banking or real estate, but their education is some major coin. College graduates are struggling with student loans so much that it’s affecting the housing market – that’s according to the Federal Reserve Bank of New York, in its Consumer Credit Panel earlier this year. Student loan debt, including federal and private loans, totals about $1 trillion now, higher than auto loan, credit card and home equity debt combined. In fact, student loan debt is the second-largest form of consumer debt, after home mortgages. Also according to the N.Y. Fed panel, until 2009, having an education typically would result in higher earnings and increase the likelihood of buying a home. Recently, though, that phenomenon has shifted. In 2008, nearly 34% of 30-year-olds with student loans also had home loans, while only 29% of those with no student loans had a home loan. In 2012, the homeownership rate for 30-year-olds with student debt was just over 22%, compared to about 24% for those without student debt.

 

Interestingly, I received no comments about Castle & Cooke’s CFPB fine ($13 million for a company doing $100 million a month in volume), although I did receive a few suggesting that soon LOs would be fined individually in cases where they knew their company’s LO compensation plan was negligent.

 

Unfortunately for the residential lending industry, fraud, in spite of being in the past, continues to make the headlines. This time New Century was dredged up out of the depths. “Rob, in Southern California Eric Elegado was a HUGE realtor in San Diego.  Unfortunately greed caught up to him and his people through living life in a huge, very expensive way.  LOs should be aware of this as it could catch up to them as well.  I don’t have facts but I do hear about appraisers getting paid by LOs.  This one company advertises that they guarantee the home will appraise for whatever the purchase price is when every company was having value issues: http://www.loansafe.org/former-executive-of-new-century-mortgage-wife-plead-guilty.”

 

I received this note from a Director of Operations in the Midwest: “Rob, I keyed in on one of the comments in your daily write-up regarding the Undisclosed Debt Monitoring Solution as it is something that our company uses currently. The tool itself and the service it provides are excellent and it has already proven invaluable both from a risk stand point and from a position of being able to be more pro-active with our loan files. The downfall of the product from Equifax is that it only monitors new credit pulls which occur via the Equifax bureau not all the major bureaus. E.g. if someone goes to a finance provider that only pulls one bureau such as Transunion (which many do) it will not show up in the UDM and would only be discovered by ordering a refreshed credit report prior to closing. Ideally all the major credit bureaus would get together and provide this type of tool to lenders in order to actively monitor their production pipelines and avert last minute headaches or potentially adverse action responses for applicants depending on the scenarios involved. From a prudent lending stand point this would make so much sense but as far as I am aware there is no such solution as of now.”

 

This week I mentioned some research that Equifax did on QM, specifically related to credit reports pulled near closing and how this could impact DTI, and in turn create a non-QM loan out of a QM loan. (“Lenders need to be using a credit monitoring tool as it eliminates any gap. Monitoring also allows the lender to deal issues when they occur and not wait just before closing.”) Rachel Bell writes, “This is a good point as there is no cure for QM at this time (per CFPB at MBA Regulatory Conference), and we are not sure if this will change as real market issues play out. Regardless, it is important to remember that the ATR/QM Safe Harbor is achieved at time of consummation (when a borrower becomes obligated to the terms of the loan). If the credit pull (showing DTI issue) is after the signing of docs (post close QC) it does not affect the Safe Harbor (not dispositive of QM status).  Audits need to be performed before docs are signed. This is even more important as we come up on the new closing disclosure rule due out this month ($100 tolerance per Rich Horn at the CFPB). Secondary may still want these checks and balances pre-purchase, but the CFPB has made it clear that the ATR/QM test must be achieved and proven before consummation. I know many companies are running ATR/QM QC audits after close (pre-purchase) as we have always done in the past. There is a new timeline for compliance and most companies will need to change QC processes to meet the new rules. Consummation: The term “consummation” means the time that a consumer becomes contractually obligated on a closed-end credit transaction: http://files.consumerfinance.gov/f/201301_cfpb_final-rule_ecoa-appraisals-amendments.pdf.”

 

And we are reaching the point where an LO’s knowledge of compliance is more important than their referral list. Steve Lovejoy with SHUMAKER Williams (Maryland) writes, “I have two comments on your recent write-up on RESPA. First, it appears from the RESPA enforcement complaint against the Kentucky law firm that the CFPB is adhering to HUD’s 1996-1 Policy Statement on “Sham Controlled (read ‘affiliated’) Business Arrangements.” This may be good news because the CFPB appears not to be reinventing everything HUD published as guidance under RESPA. The 1996-1 policy statement is still available on HUD’s RESPA website page and details the factors that HUD, and now apparently CFPB, will take into account in evaluating whether an AfBA is legit or not.  To those conversant with that Policy Statement, the CFPB’s posture in the Kentucky case is no surprise.”

 

And, “Regarding the general discussion and hypothetical questions about referral fees under Section 8 of RESPA, it should be made clear that RESPA only prohibits payments in exchange for the referral of settlement services business offered in connection with a federally-related mortgage loan (as defined in RESPA).  So RESPA’s scope is limited to consumer mortgages. It does not prohibit payment of a referral fee to someone who refers a friend to a bank for other financial services, including any kind of loan so long as it is not secured by the borrower’s residence. The prudential regulators have some rules limiting what banks can offer as incentives to prospective customers that might apply here, but RESPA’s scope is limited to services offered or performed in connection with mortgages.” Thank you Steven.

 

And regarding the general LO layoff trends in the industry, Rick Roque with MenloCompany (www.menlocompany.com) writes, “I did an interview with Paul Muolo regarding why loan officers, for the most part are left unaffected by the layoffs in the mortgage sector; it was an interesting discussion as it relates to the DOL numbers and the recent terminations in back office staff in the sector. And the answer is quite simple: most companies look to outsource technology and reduce hardware/software costs as margins contract and production volumes decline. Secondly, training and support services such as branch and office administration get reduced from the workforce. The third group is executive level management – this tier gets thinned out if the first two options do not have an impact on the bottom line profitability numbers on a monthly basis. The fourth step is a steep reduction in processing, underwriting, closing and funding; and the last, the fifth is a cut in the sales force.”

 

Mr. Roque’s observations continue: “The sales force represents the lowest exposure to the organization given that many are either commission only or paid base/minimum wages. Their compensation and expense is rooted in the upside of doing more loans; that is of course, if they have a base salary, which many were laid off as we have seen in many depositories in recent months. As reductions occur, the last thing mortgage operations want to do is compromise service level and service execution (processing, underwriting etc.) but once they reduce this part of the company, sales tends to experience a sense of attrition naturally due to this being a leading indicator of cash problems within the firm.  The sales teams, barring nonperforming LOs, experience a reduction only as a last resort – as the market recovers (in 2015) it will be difficult to recruit back after having been reduced due to financial challenges. I spoke to one top 10 wholesale lender who indicated they will hold on to fulfillment and AE related staff until the end of Q1 2014 to see what the market does, but they admit that they are planning staff reductions for April as a result of anticipated volume levels. These dynamics have a deep impact on the industry especially as it relates to mortgage technology firms as their revenues revolve around loan officer related services and the number of closed loans per loan officer.  Investment banks looking to place cash infusions or investments in to mortgage technology firms highlight this as a significant area of interest to understand and watch in the coming months.”

 

Let’s keep playing catch-up with MI, investor, and vendor news to give us a sense of trends out there.

 

Radian Group reported a net loss for the quarter ended September 30, 2013, of $12.7 million, or $0.07 per diluted share, which included minimal combined net gains from the change in fair value of derivatives and other financial instruments and minimal net losses on investments.  Results for the quarter also included a $22.0 million incurred loss initially booked for the Freddie Mac Agreement announced in August and approximately $16.8 million of variable compensation expense directly related to the company’s stock price increase during the quarter. But CEO S.A. Ibrahim noted, “The $13.7 billion of new flow mortgage insurance business in the third quarter was the second largest amount ever written in Radian’s more than 35 year history. The high-quality business written after 2008, which represents 57% of our primary risk in force, is expected to generate attractive returns and position Radian for a return to sustained profitability.”

 

PennyMac Mortgage Investment Trust reported net income of $39.7 million for the third quarter of 2013, on net investment income of $86.1 million. The earnings per common share is down 34% from the prior quarter, net income down 27 percent from the prior quarter, and net investment income down 26 percent from the prior quarter. But the company has not been snoozing: among other things it acquired two distressed mortgage loan pools totaling $930 million in UPB during the quarter, completed $550.5 million UPB jumbo securitization, retaining $367 million in senior, subordinate and Interest Only securities, and saw its mortgage servicing rights (MSR) portfolio reached $23.7 billion in UPB. PennMac’s correspondent acquisitions of $7.7 billion in unpaid principal balance were down 11 percent from the prior quarter.

 

Carrington Property Services and Gorelick Brothers Capital announced their partnership with Carrington providing national property management services for Gorelick’s single family rental portfolio. Carrington will be managing Gorelick’s existing rental portfolio located primarily in seven major urban centers.

 

AgentGoals announced a new tool to help LOs with “Realtor relationships and the prized purchase transaction, Retention and maximization of your existing sales force, and Recruitment of additional productive originators.” It is a “white label, sponsorship program, specifically designed for retail mortgage companies, comes complete with streaming video interactive goals setting, cloud based storage and management and year round coaching, support and accountability – what is needed to energize your sales force.” For more information visit http://agentgoals.com/state_sponsorship or email Les Jenkins for a demo at Les@OpDeTop.com.

 

ISGN reminds the industry that it offers a mock CFPB audit program – timely given the Castle & Cooke news. “With the regulatory environment constantly in flux, mortgage organizations must have the proper action plan in place to help them fully understand and prepare for new regulations. Because this is a top concern for lenders, ISGN offers its mock audit program which won the Mortgage Technology’s 2013 “Release of the Year” award for having the broadest impact on the market – helping financial institutions and mortgage lenders maintain compliance with the changing regulatory environment, CFPB rules and Fair Lending requirements.” For more on this visit: http://www.isgn.com/CFPB/CFPB.html.

 

 

A man walked into the produce section of his local supermarket and asked to buy a half head of lettuce. The boy working in that department told him that they only sold whole heads of lettuce. The man was insistent that the boy ask his manager about the matter. Walking into the back room, the boy said to the manager, “Some jerk wants to buy a half head of lettuce.” As he finished his sentence, he turned to find the man standing right behind him, so he added, “And this gentleman kindly offered to buy the other half.”

The manager approved the deal and the man went on his way. Later the manager said to the boy, “I was impressed with the way you got yourself out of that situation earlier. We like people who think on their feet here. Where are you from, son?” “Texas, sir.” the boy replied. “Well, why did you leave Texas?” the manager asked. The boy said, “Sir, there’s nothing but “tramps” and football players there.” “Really?” said the manager. “My wife is from Texas.” “Get outta here!” the boy said. “Who’d she play for?”

 

 

Rob

Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)