Sep. 5: Letters about MSAs, MI pricing for credit unions, investing in the Agencies, and lending in a CFPB world

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...

Recently this commentary posted a link to a video on the CFPB’s website about a lending scam. Bruce Calabrese with Equitable Mortgage writes, “I loved your story on the doctor that got ripped off by a mortgage company in the CFPB video. I am an immigrant too. I own a mortgage company. What I liked about the USA is that we had rules and regulations that allow you to open, grow thrive in a free market economy with protections from scam artists like one’s who stole from this doctor. I have been in the business for 31 years.

 

This sample that the CFPB used has nothing to do with lending. It was a police matter and this man was stolen from. The CFPB just acted as a division of the police. The question I have to ask is I have never done anything to anyone. If anything, I am guilty of giving too much away. Why are my business and my ability to do business being destroyed by the CFPB? I can’t hire the people I want. I can’t train them to originate like I want them to. I can’t pay them the way I want to pay them. The CFPB regulates every process that worked very successfully and legally when they were not here.

 

“The reason the system failed in 2008 was not because of what happened to that doctor, but because the government allowed lenders to lend to people with 420 credit scores. I choose not to make those subprime loans back then and am here now to talk about it. Why am I being punished with regulations that do not do anything, but make it impossible to do business and grow? That is the reality of the situation.

 

“I missed asking that question of Richard Cordray because I had to take my son to his first day of college and could not attend the Q&A luncheon in Columbus. Can you ask Mr. Cordray that question now or does he even care what Mom and Pop companies he destroys under the guise of consumer protection? Again, that matter illustrated was a police matter. It was no different than responding to a robbery. So should every person that walks down the road not be allowed to, because one person was robbed? That is what Mr. Cordray is doing to my Company. He has stripped us of the ability to grow and expand our businesses and allowed the big companies incredible competitive advantages over us that will eventually put us out of business.” Thank you Bruce.

 

And I received this note about the CFPB’s customer service. “Rob, I wanted to share something with you. I reached out to the CFPB to turn in and or really question how a loan officer who has been convicted of real estate fraud is licensed in our business today. After 17.5 minutes, I hung up with such frustration and disgust and frankly just at a loss of how this organization could have full oversight over our business. When the gentlemen answered my call, I gave him some background on why I was calling and he said he is the one to help me file a complaint. When I began to share the situation, letting him know there is a licensed loan officer who have been convicted, started to talk about the BRE and he stops me and asks, ‘What’s that?’

 

“I responded, BRE/DRE, depart of real estate, he responds with I don’t know who that is and that they aren’t over real estate. Responding with, CFPB is the oversight for the mortgage business and loan officers hold one of two licenses, either DBO or BRE and if you don’t know what those are how can you possibly help me with a complaint? He went back and forth; I asked for a supervisor to help me, I got put on hold again only to learn there was nobody there to help me at this time. I let him know that I’d been on the phone with him for over 15 minutes, his response was, ‘Good thing you’re not calling an attorney’s office because you’d also be paying $150 per hour.’ Shocked, I said a few choice comments and hung up. It’s been a week since this happened, where do I go to report this person and or hold accountable how she is licensed? If you google her, her conviction is there for everyone to see along with borrower posts of bait and switch since then. Have you heard of anything like this? And where do I go to report her? Thanks for listening.”

 

From Alabama, Brandon Snider contributes, “I have a question for you regarding MSAs. There is an opportunity in the city of Huntsville, AL with a thing called ‘Real Estate Row.’  It’s basically a converted old building by a local real estate company, and they have the concept (which is probably not new) that it’s basically like a homebuilder’s show, but in a permanent location. A consumer would essentially walk in the door and find everything they might need for a real estate transaction. The reception is staffed by two licensed Realtors (not sure from what company, or if it varies), so when a consumer comes in they are taken over to a lounge area with a coffee bar while they wait to be greeted by a Realtor. There are several local new home builders set up with spaces and displays that can feature their new developments and floor plans, there are insurance providers, property management companies, Realtors that specialize in vacation homes and lake homes,  home decorators, and of course….lenders.

 

“This is where we might come in. We have the opportunity to be ‘on-site’ and can take the client through a pre-approval process right then and there. We would have an on-site office space and conference room with privacy. I’m not sure how many ‘on-site’ lenders there are, or how many are even allowed, but we could be potentially one of them.  I do not think it’s exclusive to one lender. The vender fee is $1,500/month to be there. According to stats, they have been averaging 1.7 sales per day there since the opening.

 

“So does this sound to you like it would perk up the ears of the CFPB?  Clearly there is a direct benefit from be there as one of the on-site lenders since most consumers who come through there would clearly talk with one or more of the on-site lenders. You can click here to watch the advertiser video or click here to watch the consumer video.” Well, if there’s steering…

 

From Texas Mark writes, “Regarding the mortgage settlement deceit, we are seeing this scam weekly. Hackers are identifying realtor’s emails (typically not as secure as banks and title companies) and sending alternative wiring instructions to nonextradition countries. It is a huge scam that is not being talked about – but your readers should be fully aware of it.”

 

While we’re on the “being fair” tack, I received this note regarding private mortgage insurance pricing policies. “Rob, it has recently come to my attention that credit unions receive significantly lower MI pricing just for being credit unions and this is true with Radian, Genworth, MGIC, Essent, and United Guaranty. My MI reps all confirmed that this has been tradition as credit union loans tend to perform better. I was competing on a loan at 95% LTV where we were priced at .89% with all the MI companies, and the credit union was receiving a price of .62% just for being a credit union. I was shocked to discover this and no LO I spoke to had been aware of this either. 20 years ago when you had to be a family member, government employee, etc. to be a member I think this would make more sense, but I would really like to see current evidence that credit union loans perform so much better. I am also quite certain that we send significantly more business to the MI companies than credit unions do. Perhaps there is a way for the big banks (B of A, Chase, Wells) to exert some pressure here. I believe that if one MI company were to agree to offer us the same pricing they would gain an overwhelming market share immediately. I wonder how many other lenders out there have been unaware of this situation which in my opinion is an unfair competitive advantage.”

 

Yes, it turns out that MI companies offer CU rates that are filed with the state, so it’s not an industry secret. Here are just a few, pretty well spelled out: Arch MI, MGIC, Essent, Radian, and NMI. And yes, the top credit union mortgage originators don’t change much throughout the quarters: Navy Federal, Pentagon, Kinecta, State Employees of NC, and Lake Michigan are usually near the top.

 

Yes, just like any other industry, pricing is important – although I will argue that service has overtaken price as the critical component in today’s residential lending world. “Mr. Chrisman, where would I find a history of all the G-FEE charges put on the mortgage industry? How many points in total are taxes since inception? In other words, if there were no taxes (G-FEEs) that aren’t related to mortgage insurance protections for FNMA & FHLMC, what would the interest rates be today with a 102 price point (for instance)? Did the extra tax just start in April 2012 or has this been going on longer? I believe it’s a 4x calculation per G-FEE, right? So if there is a 10 bps G-FEE there’s a 40 bps spike to rate premiums (costs), is that right?”

 

Both Freddie & Fannie have lender-specific gfees that make this problematic. This policy goes back to when I started in the industry back in the 1980s, since they are based on risk, volume, the safety and soundness of the institution, and so on. That being said, if you’re really interested in the answer there are documents which provide great detail on, for example, the g-fees for Fannie Mae. The FHFA publishes a gfee study annually and it is on its website. The historic data covers multiple years and it came out recently for 2014. Fannie Mae’ quarterly financials provide current and historic data, as do Freddie Mac’s. Look at the 2Q2015 issued recently and be sure to look at the credit supplement too. These are very long and detailed documents.

 

Speaking of the Agencies, plenty of people are interested in their stock price increasing. Is putting money into F&F a wise investment? No one, especially me, owns a crystal ball that can see into the future, and investing in anything should be based on fundamentals. It is certainly risky to put everything you own into them.

 

Both Freddie Mac and Fannie Mae have been earnings billions and billions of dollars for several quarters. As most know this income, due to their agreement with the government, becomes a preferred dividend that is paid to the U.S. Treasury. Fannie Mae reported a profit of $4.6 billion before preferred stock dividends, compared to $1.9 billion in 1Q15 and $3.7 billion in 2Q14. It had $2.6 billion of gains related to the company’s risk management derivatives and a loss provision benefit (partially offset by higher operating expenses). Credit continued to be very strong. The serious delinquency rate decreased to 1.66% from 1.78% in 1Q. Charge-offs were $2.1 billion, down from $5.4 billion last quarter. Given its net worth at the end of the quarter, Fannie Mae’s preferred stock dividend obligation to the Treasury totaled $4.4 billion.

 

Freddie Mac is certainly no slouch and it reported a 2Q15 profit of $4.2 billion before the payment of preferred stock dividends, up from $524 million last quarter and up from $1.4 billion in 2Q14. Credit continued to be strong with Freddie as well: the serious delinquency rate fell to 1.53% from 1.73%. Given its net worth at the end of the quarter, Freddie Mac incurred a $3.9 billion preferred stock dividend obligation.

 

There is little reason, at this point, given the long-standing gridlock in Congress, for our government to turn either one loose in spite of their need to do so. The government’s senior preferred stock investment in the GSEs stands at $189 billion. Including the expected 3Q15 distributions, the GSEs have now paid $239 billion of dividends back to the Treasury. What investor wouldn’t want that return?

 

Most of the commotion about taking them private again comes from Fairholme Funds, but a piece in the Wall Street Journal suggests that Fairholme “scoring even a small victory looks unlikely.

 

 

A funeral procession pulled into a cemetery. Several carloads of friends and family members followed a black truck towing a boat with a coffin in it.

A passer-by remarked, “That guy must have been a very avid fisherman.”

“Oh, he still is,” remarked one of the mourners. As a matter of fact, he’s headed off to the lake as soon as he buries his wife.”

 

 

Rob

 

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