Mar. 29: Letters on the MI biz, changing LO business models & demographics, and LOs acting as real estate agents

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...

As usual, there is a lot going on out there, and I have a received a fair number of comments, suggestions, and information on a variety of topics. Here we go!

 

“Last week we heard of a 7th grader (not the one that set up shop in front of the marijuana store) who sold 18,136 boxes of Girl Scout cookies in 7 weeks.  When asked how she did it she said, ‘You have to have the time, the commitment, and you have to ask everyone you see to buy cookies.’ Something this simple can explain why some originators are having a great year and some are curled up in a corner in the fetal position. I should hire this kid.” So contributed Steve Sherwood, President of Alerus Mortgage.

Overall, the industry has flipped to purchase business. A while back one manager wrote to me saying, “While I agree with focusing on purchase business is a great strategy, it’s likely a little late to create a purchase strategy and these LOs are now part of a herd of ex-refi mongers chasing a relatively small pool of borrowers. LOs shouldn’t totally ignore refis because with rates up, the interest rate rational to refi might have diminished but improvements in some borrower’s credit profile might help you review your declined and cancelled loans. Time helps job stability, credit quality, and recent run ups in equity can’t hurt. Plus recent changes some guidelines (the hay in the bottom of the stable that was covered in _ _ _ _, might now be spun into gold). Volume is down and underwriters might have the time they need to really look at a marginal file.  I’d never say there is a correlation between taking higher risks when volume is down, but let’s face it, great loans are easier to underwrite/process/close. Lastly, the competition that only focused on the lowest rate has just left the building. You might be surprised at the amount refinance business that is still out there and how few lenders are chasing it, especially a lender with 5-7/1 ARMs.”

 

Yes, the term “joint venture” is never to be uttered in front of a regulator, but “affiliated” has taken its place. Jim C asks, “My questions for you are fairly straightforward. Is there any clear interpretation regarding Mortgage LOs who also act as Real Estate Agents? It is clearly allowed in CA, but I am not clear of the other states’ interpretations. And could you also please clarify for me the proper interpretation of ‘Secondary Employment’ regarding FHA approved lenders? I work with a broker currently. Simply put, I want to know if I can offer Real Estate services and Property/Casualty insurance services to my prior client base (not current loan clients as I have no desire to wear multiple hats on one transaction) without any conflict or issue as I don’t want to even randomly approach the 3% comp issue.”

 

I went to b-school and not law school so I sent them along to attorney Dave Medlin of Medlin & Hargrave (www.mhlawcorp.com). Dave responded with, “This touches on two related, but slightly different, HUD/FHA rules. First, HUD/FHA requires that the primary business of an approved mortgagee be mortgage lending. An approved mortgagee is allowed to have other business, but with related fields or those involved in settlement services such as real estate sales, no one individual should have multiple roles in one transaction. Second, HUD/FHA requires that employees of an approved mortgagee may not have outside employment in the mortgage, real estate, or related fields. So, subject to the above rule, there would be no problem with a company, through its employees, concurrently engaging in these related fields.  However, an employee of an approved mortgagee could not concurrently be employed in one of these related fields by another company.  Nor could an employee of an approved mortgagee concurrently be self-employed in one of these related fields.  Unfortunately, HUD/FHA has provided little to no guidance on what is considered to be a related field.  Generally, I tend to think of it as any business which would be considered to be a settlement service business under RESPA – so, generally speaking, that would be any business typically related to or involved in purchase and sale transactions and/or refinance transactions.” Thanks Dave!

 

And on the shifting demographics of loan originators, from Illinois Tranh P. writes, “The thoughts about LO automation are interesting. I don’t think all LOs will be gone (particularly the elite ones). But I think people are kidding themselves if they think LO jobs are safe. Floor traders and car salesman probably used to think they were pretty safe too. One person assumes that humans are better at sales than a computer. If mortgages were more differentiated, I would agree. Due to various factors (namely regulations) mortgages, however, are essentially a commodity now. Price will be even more of factor behind the buying decision. A computer and algorithm will be better at advertising prices to the masses, and continue to get better at it. If call center companies like Quicken gain market share in the purchase market, that would be confirmation. Call centers are where LOs are essentially paid to take applications. With better technology, there will be less LOs.”

 

Tranh’s note continued. “Another person assumes that people want somebody that ‘cares’ and explains to them why they got denied. That is interesting because LOs don’t get paid when their applicants get denied! His logic seems better suited as an argument for expanding the credit counseling industry. One question I might have for these people would be how old are they? Perhaps what they are saying applies more toward people in the 40 and up age group. I am turning 32 in a couple months. I have refinanced several times and gotten multiple mortgages. I basically relied on the internet to find a rate and used it again to double-check that I wasn’t being ripped off. Most of friends have done the same.”

 

Finally, loan officer Charlie Koontz contributes, “I have been in the mortgage business for over 40 years & have seen the good & bad in our industry. Most lenders are truly great people & they do what is best for the industry, community & their clients. But many were, and still, are not, and greed is the prime motivator of the bad guys. The press has already shone light on the bad guys in the industry: banks that wanted unbelievable profits, appraisers, Realtors, builders, relocation companies, attorneys, LOs, and underwriters loosening criteria, rating agencies, insurers, Wall Street, government regulators that looked the other way – there is plenty of blame to go around. I’m sure everyone has heard the term ‘subprime’ and the theory that it collapsed the economy but the term ‘affiliated business relationship (AFBR)’ has rarely been heard of or talked about in the media. There is a good reason for the secrecy: big banks & other entities have based their business plans on AFBRs. It encompasses the entire Industry with greed.”

 

Mr. Koontz’s note continued. “We now have the Consumer Financial Protection Bureau (CFPB). It has real power to do good, I hope, and to stop AFBRs & put a ‘Chinese Wall’ for good between industries. I have always been an advocate for free enterprise but AFBRs have proven that regulation needs to protect the consumer from greed and harm. We can convince the CFPB that these relationships are definitely wrong for America & the consumer. You can contact the Consumer Financial Protect Bureau by Letter, Fax or Email: Consumer Financial Protection Bureau (CFPB), 1700 G Street, NW, Washington, DC 20552 Phone 202-435-7000, Fax 1-855-237-2392, email- info@consumerfinance.gov.”

 

The mortgage insurance business is shifting. Maybe that is an understatement. One industry vet wrote me, “The staid world of MI should get interesting this year.  I am hearing rumors that 1) the GSEs will allow the financially stronger MIs to create programs where deeper MI replaces LLPAs (it brings ‘private capital’ in but takes away current income from the GSEs….I find it hard to believe the GSEs will willingly do this but it’s an active rumor), 2) Wells will not approve Arch as an acceptable MI (big blow to Arch as it gets rolling, if true), and 3) servicing bids and subservicing fees may get tweaked based on the MIs used.  This kinda/sorta makes sense…..as a servicer, wouldn’t you want to have loans with MI that becomes rescission proof, and therefore limits the repurchase possibility, sooner rather than later?  Bu what’s it worth?  And why pay for it if you don’t have to?  And will this be offset by the 12 months/36 months options of some MIs?”

 

Claudia J. Merkle, an EVP and Chief of Insurance Operations at NMI Holdings, Inc. (National MI) wrote in response to comments on Tuesday about standardized MI master policies, “I’d like to pass along an important distinction about National MI. A good analogy: BMW and Yugo are the same in that they are both cars, but there is a lot of variation between the two. I encourage lenders to be skeptical of any MI firm that openly brags that we are all the same. I have personally been involved with the GSEs and the FHFA through the National MI master policy development process, and although some firms would like to have the market believe that all of the policies are the same, there are some significant differences that will either save or cost the lender real dollars. Later this year, the new MI master policies will be similar to the extent that they all contain the general principles required by FHFA and GSEs, but they are not mandated to be entirely identical. This is important because a key tenet of National MI’s value proposition currently provides rescission relief after 12 months on every loan, both delegated and non-delegated. National MI does not have a 36-month standard for its delegated files. It is 12-months. Here is a link to National MI’s press release from December 2013 announcing relief after 12 months on every loan: http://www.nationalmi.com/wp-content/uploads/2014/01/National-MI-Offers-Rescission-Relief-After-12-Months-On-Every-Loan-Autosaved.pdf.”

 

And regarding the press, and many lenders changing minimum underwriting requirements, Daniel Perl with Citadel Servicing observed, “There is a big difference between Subprime and Non-Prime. As the originator of the term Non-Prime in its present context, this is a return to the old finance company model where the ‘3C’s’ matter (credit/capacity/collateral).  As one of the market drivers of this new philosophy, Citadel Servicing believes that a person(s) that can prove up all three deserve a loan….and we are willing to provide just that to those individuals. To that extent we have just widened the entry door on our Mini-Corr program and have warehouse financing available for those mortgage banks through a respected warehouse lender that would like to participate in the program. Having reviewed a number of correspondent packages, I am seeing companies that are not reducing G&A to conform to their current origination volumes, and thus losing money in big numbers expecting an upturn in 2014. It is kind of an interesting conundrum.  So they spend big money in boom times for line and sales personnel – and continue to pay those expenses in down times in addition to compressing margins?  A bad formula for success. I hope 2014 is not that Chinese proverb of, ‘May you live in interesting times’ but highly suspect it will be a scramble for the A sector crowd.

 

 

Time is like a river. You cannot touch the water twice, because the flow that has passed will never pass again. Enjoy every moment of life. As a bagpiper, I play many gigs. Recently I was asked by a funeral director to play at a graveside service for a homeless man. He had no family or friends, so the service was to be at a pauper’s cemetery in the Nova Scotia back country. As I was not familiar with the backwoods, I got lost and, being a typical man, I didn’t stop for directions. I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight. There were only the diggers and crew left and they were eating lunch. I felt badly and apologized to the men for being late. I went to the side of the grave and looked down and the vault lid was already in place. I didn’t know what else to do, so I started to play. The workers put down their lunches and began to gather around. I played out my heart and soul for this man with no family and friends. I played like I’ve never played before for this homeless man. And as I played “Amazing Grace”, the workers began to weep. They wept, I wept, we all wept together. When I finished, I packed up my bagpipes and started for my car. Though my head was hung low, my heart was full. As I opened the door to my car, I heard one of the workers say, “I never seen anything like that before, and I’ve been putting in septic tanks for twenty years.” Apparently, I’m still lost….it’s a man thing.

 

Rob

(Copyright 2014 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.)