Apr. 12: Will the FHA change the cost of its insurance? The cost of extending a rate lock; an argument for non-automated LOs

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...

A question that new originators have is, “Why does it cost money to extend a lock?” The basic answer is that, “A dollar now is more valuable than a dollar a month, or a year, from now.” And that adage becomes even more pronounced as rates move higher. Prices to extend locks are based on the MBS market, and if the price drop from one month to the next is increasing, LOs can certainly expect to see the cost of extensions increase. And sometimes if there is a lot of demand by investors for loans this month, and less next month, the price drop becomes greater (once again: supply and demand). Capital Markets departments encourage originators to do their best to correctly estimate the time it takes to fund a loan when it is locked.

 

If you’d like a dose of slang on the topic of price drops from one month to the next, here is something Thomson Reuters’ Adam Quinones wrote last week, tidied up a little. “Unexpected fallout can be costly for originators. Case in point: Class-A production dollar rolls spiked yesterday and then got even more expensive today, resulting in a short squeeeeeze! FNCL 4 drops are clearing just below all-time highs (14+, August 2010). Heck FNCL 3.5 rolls actually hit 13+ intraday. Wow – 43 basis points for a 30 day extension? Great news for well-positioned dealer desks but ‘ouch’ for originators. Lender allocations s/be done by 48hr day so the move yesterday and today was likely driven by fast money – but the Fed could help control emergency extension costs if they sold the roll now and again. Why the Fed stopped selling the roll last November is beyond me. Administrative issues? Repressing the basis? Either way, delivery shortages aren’t exactly new. The Fed is tapering QE but they still eat 2x lender supply.”

 

The lender should not be expected to “eat” the cost of extensions, but rarely should lenders view extensions as a means of making profits off of LOs or borrowers. Most will charge the approximate market rate for extensions. But certainly lenders have their own problems as the cost of processing and closing a loan continues to increase: http://www.housingwire.com/blogs/1-rewired/post/29448-the-cost-of-closing-mortgages-is-officially-astronomical. The article, using figures supplied by the MBA, reminds us that “The “net cost to originate” was $5,171 per loan in the fourth quarter, up from $4,573 in the third quarter.” As we know, these costs are passed on to the borrowers. Or if they’re not, the lender’s margins continue to be squeezed – are we having fun yet?

 

And we’re not done with the rising cost of lending money to home buyers, or to any entity that wants to borrow money. JPMorgan Chase CEO Jamie Dimon warned in his annual letter to shareholders that tougher capital and liquidity rules will increase borrowing costs. “Certain clients – for example, municipalities (which will see far higher costs for certain types of deposits and credit lines), clients with large amounts of trade, credit-only clients and specific types of financial companies – will experience far higher” costs, Dimon wrote: http://www.bloomberg.com/news/2014-04-10/dimon-says-banks-to-gain-as-crisis-era-rules-sting-poor.html.

 

“Rob, do you hear anything about the FHA program becoming more competitive, price-wise?” That is a timely question, and the National Association of Realtors (with its one million members) recently sent a public letter to FHA Commissioner Galante calling for a reduction of the Administration’s high annual mortgage insurance premiums and also elimination of the requirement that mortgage insurance be held for the life of the loan. In addition to sending the letter, NAR President Steve Brown said, ““Realtors understand the fact that FHA is under a tremendous amount of pressure to balance its mission of affordability with risk management. But, the high cost of mortgage insurance, and the fact that it is required for the full life of the loan, is unnecessarily shrinking affordability for homebuyers even though the MMI fund is on stable footing. In 2014, FHA fees make up nearly 25 percent of a monthly mortgage payment. On a $150,000 loan, at 4.5 percent interest, the mortgage payment is 13 percent higher today than it was in 2008. FHA can reduce premiums and still protect tax payers from unnecessary risk.”

 

Certainly the FHA stopped denying it was under financial strains, but things have improved. NAR’s letter, in part, notes, “Unfortunately, during the most recent economic crisis, FHA’s Mutual Mortgage Insurance Fund suffered significant losses. FHA has been under pressure to improve the health of the fund and reach a 2 percent capital reserve ratio. Increasing the FHA premium structure was one way the FHA sought to achieve this goal. Now that the MMI Fund is on a path to recovery, NAR urges FHA to lower the annual mortgage insurance premiums and eliminate the requirement that mortgage insurance is held for the life of the loan. This will slow the rate of prepayments that are having a negative effect on the fund. According to HUD’s data, full payoffs, with no subsequent refinance with FHA, were 81 percent of FHA’s prepayments. In 2012, only 50 percent of FHA prepayments were full payoffs. Prepayments in FY 2013 were at their highest level since the end of FY 2004. It is possible to increase the upfront premiums and lower the annual MIP and continue to replenish the MMI Fund. Achieving homeownership has become more difficult with current FHA mortgage insurance premiums. In 2014, FHA fees make up nearly 25 percent of a monthly mortgage payment. On a $150,000 loan, at 4.5 percent interest, the mortgage payment is 13 percent higher today than it was in 2008.”

 

But hey, remember when non-agency (mostly jumbo) mortgage backed securities began being issued again? As noted in this commentary and everywhere, those securities were filled with “cream puff” loans of sterling credentials: low LTVs, high credit scores, appreciating areas, and so on, in order to attract investors to buy non-agency pools. One would expect that the performance of the loans in those pools would be sterling as well, and sure enough, it is. Bloomberg reports that the rating agency Fitch’s research shows that, “RMBS: Four Years Later, Post Crisis Late-Pays near Zero.” According to Fitch, out of all the private-label securitizations done since 2010 (admittedly not a lot, but still 20,000 loans), there are currently a grand total of two (2) loans that are 60+ days delinquent. Is this a sign of the incredible over-tightening of residential mortgage credit standards since the crisis – and, indirectly, the difficulty in getting non-agency securitization going again? Or does it mean that the non-agency loans that are delinquent were the ones kept in portfolios? A healthy system doesn’t have the super-high defaults of 2007-2009, but a healthy mortgage lending system does have some default incidence.  Otherwise we’re not making or securitizing enough loans. Jody Shenn and Christopher DeReza write, “Of ~20,000 loans securitized since the start of 2010, two loans are currently over 60 days delinquent, and when including loans only one payment behind, total delinquency as percentage of remaining loans is only 18bps.” And if you’d like to see the delinquencies on other mortgage-backed securities, here you go: http://www.reuters.com/article/2014/04/11/ny-fitch-ratings-cmbs-idUSnBw115429a+100+BSW20140411.

 

Let’s switch gears to the origination side of things, and whether or not automation could replace an LO. From Oklahoma Bryan Carroll writes, “For more than 10 years, I have foreseen automated originators showing up on the national scene. I see no reason not for them to be here now. People currently complete applications online with loan originators pulling credit reports and doing automated underwriting online. Tax return verification, flood certification, and property values can be done online (through property inspection at this time requires a human and online valuations still have much room to grow). With employers using third party companies to do payroll or even verify employment and banking/investment entities, why can’t all of these points of interest be verified through automated underwriting system – gained by a signature, eye scan, DNA authorization, or some other pre-designed validation process done at the initial application. The system could approve the full loan in minutes, email closing instructions and document to the title company, wire funds to the title company, and eliminate the entire personnel change until the post closer. Final confirmation of the borrower’s identity would be at closing, where a live title closer or mortgage company representative could confirm identity, watch the closing papers signing, and disburse funds. You could take the LO completely out of the equation with kiosks in malls, banking/investments institutions, real estate offices, etc., not to mention home internet connections. The kiosks could be setup to offer mortgage programs from multiple entities which download rates, fees, and programs daily from their office. The infrastructure cost initially would be expensive, but labor costs would drop over time. Can you see it? It is the tech world we live in today – non-personal texting break-ups, firings, and loss.

 

“But I disagree with automated the LO role. I meet, in-person, with nearly all my clients once they have an accepted contract or decide to refinance. I offer internet applications through my bank’s website with emailed or mailed documents to follow or for them to meet me in-person at one of our branches. Nearly all want the in-person meeting. It is a very, very rare occasion they do not.  There is not a time, no matter the financial ability, that I did not mentor a client on some aspect of their opportunities regarding credit management, financial growth, or property care. I am extremely blessed enough to have the acknowledgement of the client thanking me for my handling of their file and, more importantly, the advice I had given them. Though their kinds words feed the ego, their consideration of things I have discussed based on 26 years of watching others’ failures and successes and using what applies to them is awesome and helpful to our society as a whole. Further, there have been many folks that I have helped who needed help in just understanding mortgage lending, credit and the use of it and how it affects their credit scores (mortgage, not pure bureau scores), and budgeting – tying everything together as it relates to them personally.

 

“A caring LO will teach, coach, mentor their clients in a way that helps them purchase a home and also cares for it long term by managing their finances for success.  Can these topics be taught by home buyer education classes? Yes, and in fact I am one of the instructors for a couple of non-profits locally. Does the mentorship always stick? No, but like school, the smaller the audience, the more questions are asked, and the more specific the instruction to person’s situation, the more the student learns, retains, and implements. When ‘SkyNet’ becomes self-aware, computers can do this.  Will all people need a personal touch? No, but why do I find more and more people seeking the inter-personal contact versus just the using the net?  I think we all seek a guide, teacher, or a companion when we venture into the unknown, whether the path is new or previously ventured.” Thank you Bryan.

 

But computers and data are critical to a modern lender, much of which results in HMDA data. Earlier this year the MBA’s Dave Stevens reminded a crowd that HMDA reporting institutions have dropped by about 1,000 in the last six years or so. The CFPB’s ‘Explore the Data’ page contains information, and there was an expansion of filterable material, including date ranges (currently ’10-’12), by loan location, by purpose, by lien, and even by lender ID (Don’t have the lender ID? No problem, the site contains an FFIEC tool to look up specific lenders). Mark Fowler writes, “Regarding HMDA analysis, Trey Sullivan of Trupoint Partners (http://www.trupointpartners.com/) has a pretty slick HMDA analysis offering.” (Editor’s note: I can’t vouch for the product, nor is this a paid ad, but I put this in for informational purposes.]

 

A couple was celebrating 50 years together.

Their three kids, all very successful, agreed to a Sunday dinner in their honor.

“Happy Anniversary Mom and Dad,” gushed son number One. “Sorry I’m running late. I had an emergency at the hospital with a patient, you know how it is, and I didn’t have time to get you a gift.”

“Not to worry,” said the father. “The important thing is that we’re all together today.”

Son #2 arrived and announced, “You and Mom look great, Dad. I just flew in from Los Angeles between depositions and didn’t have time to shop for you.”

“It’s nothing,” said the father. “We’re glad you were able to come.”

Just then the daughter arrived. “Hello and happy anniversary! I’m sorry, but my boss is sending me out of town and I was really busy packing so I didn’t have time to get you anything.”

After they had finished dessert, the father said, “There’s something your mother and I have wanted to tell you for a long time. You see, we were very poor. Despite this, we were able to send each of you to college. Throughout the years your mother and I knew that we loved each other very much, but we just never found the time to get married.”

The three children gasped and all said, “You mean we’re b-st-rds?”

“Yep,” said the father, “And cheap ones too.”

 

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.)