Apr. 23: Letters on helping borrowers under TRID, capital markets execution, early payoffs vs. MLO compensation rules
Between penalties, shifts in capital markets execution, a continued low rate environment, and continued questions about how to best help clients in the face of TRID, there’s a lot going on!
There was this regarding Wells Fargo’s $1 billion Department of Justice settlement regarding FHA loans. “If Wells Fargo admitted to deceiving the U.S. government into insuring thousands of risky mortgages and admits, acknowledges, and accepts responsibility for falsely certifying many of its FHA home loans, why does the U.S. government still allow them to participate in the program?
“Further, why are JP Chase, Bank of America, US Bank, and anyone else where the Department of Justice has levied penalties allowed to still participate in the FHA program? If they did what they obviously have admitted to doing – why isn’t the government demanding the CEO’s step down?
“Monetary penalties, even big ones, are mere speed bumps for these firms. The government is concerned about large companies being too big to fail, what about companies too small to pay penalties? If REAL penalties (termination of eligibility from FHA, Fannie, Freddie, Ginnie, or loss of job or even criminal charges) were assessed, we’d quickly find out who did what. Most of the executives who cave to the government will privately tell you that, while their firms made errors, they didn’t commit fraud. But, they settle because it’s easy. If REAL penalties were involved – they wouldn’t settle. They’d fight for the truth. And, if they really did commit fraud against the U.S. government – then a simple monetary penalty isn’t enough.”
Regarding current capital markets execution, I received this from a veteran capital markets person. “Regarding the bid tape process. Bid tapes have been popular for the last year or two. We don’t rely on them, however, nor let our hedge advisory company do our selling either (since it is my reps and warrants) and thus commit our own loans. On the bid tapes I have sent out, what I find is that the investor will give you a good price on 2/3 of your mini pool, and fade the price on the rest of the loans, so the net result is almost the same. I prefer to perform a best ex myself before obtaining a takeout commitment for a few reasons. The most important is the fact that we are only selling to four investors because of TRID. No two correspondent investors interpret a CD the same way, and the correspondent investor must have a culture that fits with your own organization. Sellers that think they can make money selling to the smaller aggregators using a bid tape method will have to explain the price fade to the accounting department 60 days later when their loan is finally purchased with an extension fee. I’d rather have the correspondent pricing transparency up front and a fast purchase time.”
And Brent Buckmaster with Flatirons writes, “The compression in the loan price versus the MBS price is extremely tight compared to end of year 2015. Obviously, this has reduced our client’s additional gains over Best Efforts. One of the ways to mitigate some of this compression is by selling in bulk. Bulk execution was very much in the shadows post mortgage meltdown, but has come back to life in the recent 6-12 months with the entrance of new buyers in the market. Most FCM clients have either transitioned entirely to this execution or are doing some sort of mix with AOT’s/DT’s. This is clearly a good thing for our client’s execution options. The process of selling bulk is, however, as it was back in the early 2000s. Secondary Managers can spend hours pooling loans, emailing out bid tapes, retrieving bids, and analyzing bids for best execution. FCM’s clients are taking advantage of our investor relationships, loan selling tools, and our best execution analysis to squeeze every penny out of every loan, thus freeing up valuable time for secondary managers!
“While hedging and loan sales are the core business product here at FCM, consulting with our clients allows us to dive deep into their overall processes. Investor pricing is somewhat irrelevant if a company is inefficient and imprecise with their data and business practices up to the point of a loan sale. While we certainly provide all of the granular analysis of clients’ pull through and their execution options, we also look to advise them on the need to establish solid lock, relock and renegotiation policies. These policies are the backbone of a secondary department and significantly add to the balance sheet over the course of the year. Again, this means digging into not just how many loans lock and close, but how quickly they can get those loans out to closing in an accurate and profitable fashion.”
Tom Farmer with MCT sent, “The market’s granularity on loan pricing is getting pushed out to the correspondent sellers. But the ‘push’ is really coming from the originating sellers. Today’s ‘Bulk tape pricing’ really means pricing multiple loans individually. This allows aggregators to be more specific on a loan by loan basis. They get to match the loan pricing to what they themselves receive for extra (or less) for specific loan features. MCTLive! and some other less capable secondary tools are provoking this move because you can ‘best-ex’ all options more efficiently within time constraints. This forces the aggregators and agency buyers to sharpen their pricing. We are on an accelerating arc towards a real-time secondary electronic exchange. Watch this space!”
With rates heading down and the chance of refinancing going up, a broker writes, “I keep wondering, and was asked again today, do the paybacks to a brokerage company on an early payoff of a loan violate the MLO Comp Rule? If it were to a banker, I’d say unequivocally no. But some view the brokerage company and the MLO as virtually the same. So on a lender-paid amount there might be an issue. So you have a contractual obligation to pay it back, but might violate the Rule and as such TILA.”
Keith G. Bilodeau, SVP in Freedom Mortgage’s Wholesale Lending Division, addressed this. “This is a good question and the answer is really based on the agreement between the origination company and the wholesale lender. There is no regulatory preclusion for billing an EPO penalty back to an originator. That obligation is part of the contractual agreement between the parties and not a part of the original loan closing. Reg. Z compensation governs how an originator is paid upon the consummation of the loan. What happens after closing is conditional upon circumstances that could not have been predicted when the loan was closed, and an EPO penalty is hopefully not any type of condition of the original loans closing. RESPA/TILA govern the way points and fees are charged and disclosed on the original loan, and again, don’t govern contractual obligations post-closing.
“It seems there is often an assumption these EPO fees are somehow unjustified. While it may not be common knowledge at the broker/loan originator level, most loans purchased by wholesale lenders are purchased at a net cash loss, and if they are a servicer, the only way to recover the loss is to own the loan long enough for the servicing revenue to cover the cost to acquire. IF the loan pays off early, the wholesale lender must write off the unrecovered portion of the loss. For wholesale lenders who routinely sell their servicing, they have the ability to recover these losses through the cash premiums from the sale of the loans servicing rights. There are no doubt circumstances that occur where there is a benefit to the borrowers to refinance, and sometimes that does happen early in the loans term. If the loan servicer can keep (recapture) that loan they can re-capitalize the unrecovered portion of the origination into the new loan and avoid the write off, aka ‘curtailment.’” Thank you Keith!
Six months into the “Know Before You Owe” rules going into place the industry is still talking about it. Bill Kidwell asks, “I wonder if anyone has seen the movie The American President, (1996) with Michael Douglas, Annette Benning and Michael J Fox. The reason I bring this up is your recent commentary mentioning some of the results of the STRATMOR Group’s survey. ‘There has also been a steady and substantial increase – from 85 to 91 percent – in the proportion of borrowers being contacted by their lender prior to closing. Increasing such contact was a key goal of TRID and has previously been shown by MortgageSAT to be an important factor affecting overall borrower satisfaction.’ And, per Dr. Matt, ‘However, TRID seems to be associated with a significant pickup in borrower satisfaction, despite somewhat slower application-to-closing times. At the end of the day, improving the borrower’s experience is a main objective of TRID.’
“In the movie, M.J. Fox and Michael Douglas are in a heated exchange about why the President (Michael Douglas) should or shouldn’t be fighting a character attack publicly. During the exchange Michael J. Fox states that when lost in the desert and someone sees a mirage they drink the sand because they need water so badly to which the President replies, ‘They drink the sand because they don’t know any better.’
“In my humble opinion the goal of the origination process should be to make it straight-forward enough that 1) it does not take 30 – 60 days to accomplish and therefore 2) constant follow ups and reminders are unnecessary. To embrace any sense of accomplishment by believing that customer satisfaction has improved because lenders have to share a five-page document three days before closing is to ‘not know any better.’ And, contrary to the statement about TRID goals, the goal of TRID has never been more contact with lenders just simplifying, clarifying, creating a more informed consumer, and reducing surprises at closing.
“While bankers bemoan the cost increase, the 12,000+ companies that have to deal directly with consumers and with lenders are caught in the middle in ways that increase confusion and increase anxiety, both consumer and broker, trying to get done what previously was accomplished in less time with less confusing documents.
“To show a consumer cash to close that includes money they have already paid is misleading and confusing. It requires a ‘trust me’ explanation, but more importantly it requires what should be an unnecessary explanation. The omission of Lender Paid compensation, while fulfilling the dreams of many that wanted a “level playing field” when omitted only on the early disclosure then presented three days before closing simply adds another layer of confusion requiring explanation. This is frustrating when the simple truth is how much an originator is compensated by the lender is superfluous information in the first place. TRID’s convoluted approach to title policies, especially in the cases of simultaneous issue and owner paying for the owner policy is so confusing even title companies can’t get it right and lenders argue over misinterpretations of the rule about whether or not the credit needed to properly state cash to close should be on the Loan Estimate or just on the Closing Disclosure.”
Bill’s note wraps up with, “TRID is not a help, it is a hindrance to its own goals. Industry should be formulating its own disclosure solution to offer post-November with fact-based and truly tested studies. Unfortunately, if the past is predictive, we will all simply let time heal the wound and wait for the next regulatory steamroller to arrive. If we (industry) accept that consumers are ‘more satisfied’ today than pre-TRID and use that to justify the insane change, we all need to rethink what customer-centric actually means.”
THE BLONDE AND THE LORD
A blonde wanted to go ice fishing. She’d seen many books on the subject, and finally getting all the necessary tools together, she made for the ice.
After positioning her comfy footstool, she started to make a circular cut in the ice. Suddenly, from the sky, a voice boomed, “THERE ARE NO FISH UNDER THE ICE!”
Startled, the blonde moved further down the ice, poured a thermos of cappuccino, and began to cut yet another hole. Again from the heavens the voice bellowed, “THERE ARE NO FISH UNDER THE ICE!”
The blonde, now worried, moved away, clear down to the opposite end of the ice. She set up her stool once more and tried again to cut her hole.
The voice came once more, “THERE ARE NO FISH UNDER THE ICE!”
She stopped, looked skyward! and said, “IS THAT YOU LORD?”
The voice replied, “NO, THIS IS THE MANAGER OF THE HOCKEY RINK!”
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.)
