Sep. 6: Letters on vendor management, interest rate risk, the general industry, and Millennials (from a real live Millennial)

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...

Like the medical profession, aspects of residential lending such as secondary marketing, underwriting, you name it, are becoming a series of specialties. This includes vendor management. George Manolis with FormFree writes, “I found this article in American Banker interesting. From the eyes of a vendor, it is incredible lately what even small non-depository lenders want us to go through. This paragraph rings true to today’s environment: ‘There is a dark side to vendor risk management hysteria: compliance fears are sucking innovation out of the banking industry. When banks shy away from partnering with smaller vendors and start-ups, they ironically leave themselves exposed to more risk. If smaller ventures are unable to pass vendor risk management hurdles, they will go out of business or else be acquired by major players, creating concentration risk among the few remaining vendors.’ To move the quality bar higher, innovation is necessary over the old ways of doing things, it is usually the small tech guys who are innovating and they are making it difficult for lenders who want to use us to clear their own internal vendor hurdles. There is a disconnect present for sure.”

 

Servicing values vary by state, usually based on whether the state is a judicial or non-judicial foreclose state. I received this note from Jeremy Potter, General Counsel and Chief Compliance Officer for Norcom Mortgage. “In response to the judicial foreclosure stats from your commentary, we’re finding a lot of judicial foreclosure states in the Northeast are adding required mediation extending that timeline a minimum 60 days. In Connecticut, the legislature recently extended this program another 2 years. Many policy makers and regulators do not appreciate the additional cost these rules add to the marketplace. We’ve heard buyers of mortgage servicing rights turn down offerings that include these states particularly Massachusetts. If MSRs do include states with long timelines and additional burdens they are premium priced making these bulk deals harder to sell. The bottom line is an already expensive market to buy a home becomes more expensive. We often talk about the cost of compliance in origination and gearing up with the servicing standards. In addition, you have rising costs to offset the risk associated with these long timelines. Unfortunately it continues to put strain on an already costly transaction in MA and CT.” Thank you Mr. Potter.

 

We all know that at some point, rates will go up. After all, when they’ve been as low as they have been for the last couple years, there is nowhere to go but up, right? And the question arises, “What about all the trillions of dollars of fixed-rate debt that will take a hit in mark-to-market – are the banks ready?” Pierre Frediere writes in, “I think that your analogy of the present situation regarding bank balance sheets loaded with low-yielding long-term assets which could generate significant losses when (not if) interest rates increase to that of the Savings & Loans in the 80s/90s is only partially applicable.”

 

His note explains further. “In the early nineties, I worked for a department called Management Sciences at the Wells Fargo headquarters in San Francisco, and our responsibilities included Asset/Liability management; at the time we were managing a $5 billion derivatives portfolio and our duration gap was marked to market daily. So the interest rate exposure is actively managed to avoid interest rate risk (at the time Wall Street was also very pessimistic on us due to real estate exposure; worries were put to rest when Warren Buffett invested $700 Million in the bank). So interest risk will probably not apply uniformly across the financial industry. Credit risk is also much better managed than it was at the start of last decade. I think that the main danger lies in a gradual decrease in origination, eliminating a source of very lucrative revenues for large consumer banks, and making high fixed costs very dangerous for mortgage banks (I was an FHA-approved broker until 2008, I became branch manager for various banks, and I went back to mortgage brokering last year).

 

“As for Paul Volcker being held responsible for the failure of the S&Ls (and sinking the Titanic) and the likelihood that Janet Yellen will cause commensurate financial misery, we may both have an insight about her given that we received our MBAs from Cal in 1986. Janet Yellen was my first economics professor while at UC Berkeley (Go Bears!). I had just arrived from France and she was very receptive to students, entertaining and approachable, besides being very clear as an instructor. After sitting in a classroom environment in France where raising your hand to ask a question was barely tolerated, this felt me feel welcomed and appreciated.”

 

All of the chatter about Millennials nudged Louis Perwien to write, “I have a response regarding Millennial home purchases, or lack thereof. Most commentary on the weakness of Millennial housing purchases is very housing-centric, focused on things like tightening credit and changing preferences for rental vs. ownership.  I would posit that another, just as important factor has to do with the older age at which Millennials form family units.  I am 33, at the oldest cusp of what is considered the Millennial generation. I think my story is fairly typical: during my 20’s I bounced around to a number of jobs, then I went to grad school, 5 years ago I got a ‘real’ job and I just got married last year. This story should be familiar to any boomer who has had a 22 year old return home to sleep in their chilopod bedroom. Census data bears this out as the median age of first marriage has increased by about 2 years since 2000 and 4 years since 1980 (to 29 for men and 27 for women). I do intend to buy a single family home in the burbs in the next year or two to raise a family, but that was not needed when I was single. Similarly my brother (turning 28 next month) just got married and is closing on his first house next month. The average Millennial is now just 26 years old, I think you need to give us time.  I don’t think the dream has changed, I think it has just been pushed out.” Thank you Louis!

 

A while back the commentary repeated story that an LO had regarding a credit inquiry from DirectTV, and the ludicrous nature of what ensued. (“…The new policy is to pull a new credit report just before we fund a loan…The updated credit report showed a credit inquiry from DirectTV. Common sense would indicate that there was a 99.999% chance that DirectTV made an inquiry because he was getting DirectTV in his new home. I am not aware that DirectTV is in the business or pulling credit for any purpose other than to know that their clients will pay them on time…”)

 

The note prompted Joshua Erskine, CEO of San Diego’s OnTrust Home Loans, to write, “In this, I think there is confusion with company-driven policies versus those of the Agencies/Gov’t entities. I have not heard of companies out there re-running credit reports before close. The guidelines of the Agencies as well as Gov’t Entities are clear on how long a credit report is good for. Yes, there are checks put in place by utilizing available software prior to closing to ensure there are not any major changes. But I do not understand the actual full credit pull. We do not do this, nor does anyone that I personally know in the business.

 

“In addition, the discussion on documenting large deposits, this is clearly company driven.  Fannie Mae just did an update to their Seller Guide on May 27, 2014 that addressed much if this and the issue surrounding unsourced assets. Regardless, if this company feels that $1,000 is the threshold or not, the debate over what is a ‘meaningful’ amount of money needing to be sourced has been going on for 10+ years, this is not new. The reality is this is going to be different from borrower to borrower based on the amount of money they make, their assets, as well as their spending habits that are being evaluated.

 

“Personally I do not agree with many of the changes, however, I have heard companies blame the agencies for guidelines that are not the Agency’s, they are that company or their secondary market partner’s overlays. In addition, the part about borrowers being reluctant to finance quite honestly should not be a concern of anyone in the industry. Banks and Investors are reluctant to put money out there because everyone is in a state of fear from over regulation. I am not aware of any other country in the world where consumers are looked at as being children or not competent enough to make financial decisions on their own. Business is business, and the socialist direction of this country and over-regulation is to blame for the hoops that borrowers have to jump through, not the lending industry. The reality is if this regulation continues many banks and investors will seek safer alternatives to mortgage lending because it is becoming a position where consumers now know they have the upper hand when it comes to not paying mortgage debt. I personally would be ashamed to not pay a mortgage, regardless what the situation is. It is pride, and that is what we have lost as a country.

 

“If borrowers want to complain about what they have to do to get a loan, tell them to read about why they have to do this and write their government officials letting them know to back off. It is not the lenders, it is the government regulation. Nobody wants to be asking for DirectTV inquiries, but the overregulation aimed at protecting the consumers has become downright scary for lenders and if it continues, it will only get worse; soon we will be doing blood tests.  You see Mr. Karen’s explanation on all of the power others have against lenders, that is the reason why you not only in the future will be explaining the inquiry of the DirectTV inquiry, but borrowers will be providing  their heating/cooling bill, cable bill, kids school tuitions, restaurant receipts, local bar receipts, grocery receipts (with pictures of the inside of the refrigerator and freezer to ensure that food is actually there), as well as a calculation of fuel consumption based on distances from their employment, kids schools, and anything else out there.

 

“You want to change this; find a way to change the government and the overall thought process of the country because that is where this is coming from and more suits brought against lenders will create more documentation. A utopian solution, all lenders pack together for as long as it takes and layoff all their people, stop lending for a week, month, or, as long as it takes to resolve the issue which is over regulation by the government and the lack of accountability for their actions by consumers. Another way: make it a rule for every consumer to sit through 20 hours of education prior to receiving a loan as well as a psychiatric exam to ensure they understand the parameters of the loan and the obligation they are entering. That eliminates all of the onerous regulation and puts the burden on the consumer’s shoulders who are the ones that clearly need to be protected. They can be taught all details of their loan and cleared to be competent enough to make a decision, and then they are held to that decision and if they want to take out an interest only loan, let them. That will cut costs and lower rates for consumers overnight because lenders will not have to spend what they do digging through the b— s— regulation and making changes every other day to comply or at least think they are complying with laws and bills that are written by people who have no understanding of the business.”

 

 

THE JEWISH ARRANGED MARRIAGE

A good Hassidic family is most concerned that their 30-year-old son is unmarried.

So, they call a marriage broker and ask him to find their son a good wife.

The broker comes over to their house and spends a long time asking questions of the son and his parents as to what they want in a wife/daughter-in-law.

They give him a long shopping list of requirements.

The marriage broker takes a long time looking, and finally asks to visit the family again.

He then tells them of a wonderful woman he has found.

He says she’s just the right age for the son.

She keeps a Kosher home, she regularly attends synagogue and knows the prayers by heart, and she’s a wonderful cook.

She loves children and wants a large family.

And, to crown it all off, she’s gorgeous!

After hearing all this, the family is very impressed and begins to get excited about the prospects of a wedding in the near future.

But the son pauses and asks, “Is she also good in bed?”

The marriage broker answers, “Some say yes, some say no….”

 

 

Rob