Mar. 12: Letters about the cost of TRID on lenders and consumers; the FHLB’s impact on capital markets

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...

“Rob, as a loan officer can I still do social things with real estate agents?” Let me get back to you on that one, right after I figure out what constitutes a “RESPA-approved” lunch bill and if LOs have to charge real estate agents for coming to their March Madness parties.

 

TRID continues to roil the industry five months after being implemented, compounding existing problems with the myriad of overlapping rules and regulations impacting lenders. I received this note from out West. “I hope you and others continue to make the reviews of TRID public. With past changes in the GFE we just rather absorbed them in a bit and went about business as usual. The TRID change is harder. I love that as a broker my commission is not showing on the initial LE, but that is about all there is to love about it. THE LE is not clearer than the old GFE. The CD is confusing because the consumer has a LE and now we ask them to go compare them. And the Alta settlement statement looks nothing like the two aforementioned forms. Saying consumers are confused is putting it mildly. I spend so much time reviewing these documents with the consumer; it is ridiculous when in reality on my files nothing is changing unless it is changing for the better. Multiple LEs and CDs just make for more opportunity to screw up something. I spend time making sure my LE is correct from the get go, but the lender can mess with the fees and send out multiple LEs over which I have no control, but in the end if there is a correction the money comes from ME not the lender.”

 

David Tandy from Texas’ Gracy Title contributes, “We had an inter-industry meeting recently sponsored by our state association. We had about 40 representatives from the title, Realtor, mortgage and banking industries, and here are some takeaways that might of interest to your readers and hopefully the regulators that read your commentary.

 

“Some lenders, particularly small lenders in smaller markets are struggling.  Many do not have the compliance and training to stay on top of all of the requirements or to implement good procedures. Those lenders are often ‘winging it.’  They are violating rules in how to complete the CD and meeting timelines. They send the CD to the borrower but do not send the CD to the title company until day of closing and often the CD received by the title company is different from what was sent to the borrower. Because they do not have good processes they often do not process fee quotes and invoices correctly and will send the CD out incorrectly even though the correct fees have been sent to them multiple times. These are the lenders that have borrowers sitting in the title company lobby but have not sent the title companies loan instructions, the CD or loan docs.

 

“Many lenders are making good progress toward efficient TRID processing. Some lenders already have excellent procedures in place. When I polled my 50 escrow officers, they mentioned seven lenders who are sending us the CD, Closing Instructions AND Loan Docs between 4 and 10 days prior to closing. And the CD is correct. Prior to TRID, title companies rarely if ever saw loan docs 48 hours in advance of the closing date, much less 4 to 10 days. That is proof that TRID is actually working and working well with some lenders. The spirit of TRID is to not only provide the borrower advance look at the CD (Know Before You Owe) but also the loan docs! The biggest concern with Lenders sending Loan Docs this far in advance is that some title companies sign up docs (seller docs in particular) in advance of the closing date which can create problems with investors.

 

“Of the seven lenders consistently sending the CD and Loan Docs in advance, some are regional mortgage companies, one is a credit union and one is a large bank. The common thread is a commitment to implementing tight procedures and great training starting with the LE (and even before the LE with borrower pre-approval). These lenders make sure there are no bottlenecks, particularly underwriting. A common statement from Realtors and title companies about the lenders who are struggling is that lenders often say the loan is ‘stuck in underwriting’ or has to go back to underwriting.

 

“Many lenders are failing to tell title companies the number of pages of the recordable loan docs. This makes it impossible to quote accurate recording fees.

 

“Portals were discussed. Unanimous commentary that logging into portals to update information is a poor and inefficient approach to collaboration. The industry needs to focus on building true integrations between lender and settlement agent production systems as quickly as possible and focus less on portals.”

 

Chris Carter sent, “You mentioned investors kicking back CDs with improper service providers. Be aware that MANY lenders are intentionally populating initial buyer disclosures (LEs) with service providers that are next to impossible for that buyer to use. These lenders show closing service providers that are either geographically or otherwise inappropriate for the buyer to use. They do this so their estimated costs won’t be held to tighter variances when the CD comes out.”

 

And a different reader sent, “I tend to think of the increased costs due to Dodd-Frank, not as reflected in things like lock extensions (as those can be required with or without regulatory issues), but as reflected in a myriad of other things.

 

Actual fee increases for things like doc prep (which has more than tripled since the early 2000’s), appraisals which have increased to at least 150% of their prices before HVCC/Dodd-Frank, underwriting fees which have dramatically increased since the early 2000’s (I remember paying about $495 plus a few small misc. fees as a broker; now, our company charges $1350), and more…in fact nearly every fee has increased and it’s not due to inflation. Can anyone think of a fee that has remained the same, lowered or only increased slightly due to actual organic economic reasons?

 

“In the same vein, the cost to originate and process a loan (at the local office level) has increased. While LO comp may create some leveling of the cost (it actually doesn’t but that’s a different economic issue), LO comp is a percentage not a fixed dollar amount. More workers are required to perform the work of originating and processing a loan than were required pre-Dodd-Frank. The simple economic fact is that, unless a consumer experiences a dramatic decrease in customer service (and that’s always an option but only to a certain point), the consumer will experience an increase in origination/processing costs. I used to charge $995 origination fee regardless of the loan size. The reasoning was that I could compete for larger loan sizes yet explain to my $50,000 loan amount customers that I simply cannot do their loan for 1% – for $500. Of course I made yield. But, the actual fee represented the work required to do their loan.

 

“Another consideration that I have not heard in the Dodd-Frank era is that, while previously, I could tell my customer that their loan took more work than I anticipated, sometimes due to their indigence. And, because of that, I was going to charge them more than what I had disclosed and they could pay it or go elsewhere but I simply would not do more work for the same pay. Here is the effect as a cost to the consumer: this offsetting of the labor costs because of extra work must now be anticipated and built into the cost. If I don’t do it, I can guarantee you, the lenders anticipate it – they have to because it shows up in their bottom line…you know, that decrease from an average profit of 97 bps (2012) per loan to as low as 7 bps per loan (4thQ 2013). Lenders don’t just take the hit without finding ways to move that 7 back up closer to the 97 or higher…I heard (from the MBA president) about 125 as the norm before Dodd-Frank.

 

“G-fees or Loan Level Pricing Adjustments (beginning <2004>) hide the costs to the consumers because, from the consumer’s perspective, the cost is in the rate which, aside from variations from lender to lender, are equally raised/lowered because of the ‘pricing’ hits. It is, nevertheless, a cost which the consumer pays. How much lower would their interest rate be without such ‘hits?’ I am in favor of these pricing adjustments so long as they go to actually offset (really, compensate for) risk in the secondary purchase market. I’m just making the point that it’s a different type of cost than the cost to extend a lock which is more subject to the management of the loan process.

 

Switching gears, with the news this week that the CFPB is encouraging complaints against “marketplace”/peer-to-peer lenders, Loren Picard writes, “I don’t see any successful residential (1-4 owner occupied) marketplace lending mortgage companies. The efficiencies are already baked into the mortgage market. As long as the government is involved in the mortgage market one way or the other, there won’t be enough playing room for a MPL to do well in mortgages (this is not just my opinion, but a widely acknowledged reality). Any of the firms out there are in essence building a mortgage bank from the ground up and has very low liquidity for its mortgages. If the market was more fragmented MPLs might be able to create a niche for themselves. But starting a REIT or hedge fund is like quantitative easing…it doesn’t really help build a sustainable model. And the conflicts of interest questions will always dog MPLs and the funds they manage.”

 

And Jonathan Foxx, the president and managing director of Lenders Compliance Group, sent, “Regarding your note about marketplace lenders – your readers might be interested in this piece.”

 

While we’re talking about capital markets, Steve Brown from PCBB wrote, “It seems the folks at FHFA listened and the result is a big win for community banks on multiple fronts. The first victory is FHFA-backed off a change that would have required all FHLB members to hold at least 1% of their assets in home mortgage loans on a continuing basis. FHFA Director Mel Watt says instead his agency can hold FHLB members to the statutory requirement to have a commitment to housing finance by monitoring asset levels, rather than having a bright-line test.

 

“The other win for community banks is a complete ban on FHLB membership for captive insurance companies. Such companies are those whose primary customers are its parent or sister companies, and are therefore easier and cheaper to operate. In recent years, real estate investment trusts (REITs) that were ineligible for FHLB funding, formed the captive insurers in order to get into the system. It’s possible that had captive insurance companies remained eligible, hedge funds and investment banks might have gotten in on the action as well.

 

“According to the Wall Street Journal, a total of 40 captive insurers, with outstanding borrowings of $35B, were FHLB members at the end of September. Watt says the change ensures institutions that are ineligible for FHLB membership can’t frustrate the intent of Congress. If Washington wants to amend the FHLB Act to make REITs and other types of financial companies eligible, it can do so, he says. It should be noted that the Council of Federal Home Loan Banks and the MBA both opposed the change.

 

And from a while back a different source opined, “One might conjecture that some companies originally got into conforming so they create their own credit risk investments by selling with recourse (to use an old school term). The thesis was they would take the first 1% of losses on their own loans that they sourced from good correspondents etc….and as a result of their ‘superior’ abilities in mortgage banking would end up with very good credit bets… and live happily ever after. Aside from not having any credit model to price the credit risk (which is kinda a big thing if you ask me), some have now shut down the confirming conduit but are still going to invest in credit risk? So they will be just another shop competing to buy pieces of Stackets and CAS deals?  Not much value added there unless they team up with a Wells or Prospect or someone else and those guys sell with recourse with certain companies retaining the first loss if the numbers work.  Securitization was the only thing they were good at and that market never came back and won’t for some time to come.”

 

[Due to extreme travel schedule, please excuse any temporary delays in communication.]

 

 

An acquaintance of mine who is a physician told this story about her then 4-year-old daughter.

On the way to preschool, the doctor had left her stethoscope on the car seat, and her little girl picked it up and began playing with it.

“Be still, my heart,” thought my friend, “my daughter wants to follow in my footsteps!”

Then the child spoke into the instrument: “Welcome to McDonald’s. May I take your order?”

 

 

Rob

 

(Copyright 2016 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.)