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Jan. 28, 2011: Fannie & Freddie suggestions; 500 FICO feedback; Part IV of comp Q&A
Rob Chrisman
Given
the potential compensation fluctuations facing many in the
industry (“sometimes they fluc up, sometimes they fluc down,” to
quote a joke), it is important to remember what exactly
motivates people. If you have a few minutes to spare, and can
take your focus away from the amazing art work, this is worth a
view for any manager: http://www.youtube.com/watch?vu6XAPnuFjJc&featureyoutube_gdata_player
Yesterday the markets were concerned, in part, about S&P
cutting Japan's credit rating for the first time in 9 years to
AA- to account for their mounting debt. What about here in the
US - are we broke yet? Our deficit is over $14
trillion. This doesn't matter - until it does. But when
does that happen? When the Federal Government runs a deficit, it
has to borrow money, mostly be selling Treasury securities. And
it pays interest on that borrowing (just like you and me), and
continues rolling over the debt and paying interest
indefinitely. Most analysts look at the deficit as a percentage
of GDP. In the early 1980's, many thought that deficits above 3%
of GDP would cause economic pain. During the 1990's, thanks in
part to the tech boom, the deficit came down, but in the 2000's
it rose again. But investors, here and abroad (especially China)
stepped in and bought Treasury securities, helping to keep
demand high, prices high, and rates low. 'Round and 'round we
go, and where it stops, nobody knows - but few
argue that a high deficit helps our credit rating or our
borrowing costs, which in turn influence mortgage rates.
What happens over the weekend? For loan applications taken on or
after January 30, “lenders extending consumer credit secured by
real property or a dwelling must disclose certain summary
information about interest rates and payment changes in a tabular format. The disclosure must also state
that consumers are not guaranteed to be able to refinance their
mortgage in the future.” This is, of course, Reg. Z,
the implementing regulation of the TILA. It has been optional
for the last few months, but no more.
Yesterday I mentioned
a large bank’s retail channel offering FHA loans to borrowers
with a 500 FICO. A retail loan agent wrote to me saying, "Rob,
as an account executive on the wholesale side for the past 15
years I consistently had retail envy when I heard about these
sexy catch all programs that could be used by retail to gain
more market share. And frankly it was a big part of the reason
that I moved over to the retail division, and in the bigger
scheme of things I see offering these programs only internally
as a way for the bank to be able to actually control the
transactions to a tighter measure and provide assistance to a
certain group of borrowers that are currently being stopped at
the door. The appetite and potential quality of these
transactions from the TPO side could get out of control quickly
and hurt the overall image of the banks offering the programs
and therefore I get it as to why they'd want tighter control.
All of the banks are finally coming out of a massive refi boom
from the summer months and if Wells was to roll the 500 FHA
program out to the wholesale side, how many man hours would they
burn on these borrowers and what would it mean for all of the
740+ borrowers that are putting down 20% in means of turn
times?"
Regarding Freddie & Fannie’s mounting REO glut: "The
critical issue here is that the MBS Servicers interests are, at
times, not fully aligned with either the homeowner or government
policy. This is because the servicers, who are mainly banks, do
not have the credit risk associated with the loan since it has
already been securitized and sold. The GSE’s have the risk.
Maybe the GSEs should take over the servicing function for loans
that they wrap in their day-to-day G-Fee business. Since they
own the credit risk, they will be fully interested in the lowest
cost solution to delinquency.”
"Another pro-active
(foreclosure aversion) idea for the agencies would be that prior
to the home becoming REO the owner-occupied borrower, once
seriously delinquent, could be offered the opportunity to rent
the property at the current market rent. The government would
legislate a program that would permit investors to take these
loans off their balance sheet once the home is rented to the
borrower thereby strengthening these financial institutions and
freeing up their balance sheets so they can lend. As the renter
successfully makes 24-36 payments on time, they qualify to
purchase back the property at the then market value."
Another, on the Realtor side, wrote, "One of the biggest points
of Fannie & Freddie's REO congestion is the lack of brokers
they’re using. Their current system of using on a few listing
agents is ridiculously inefficient. Of course every Realtor in
the business wants to get in on this action, and there are some
very qualified folks out there being left out of the game.
Someone at Fannie & Freddie needs to recognize that they
need more hands on deck to move these homes. Basically, they
need to at least double the number of Realtors listing these
properties if they want to make a dent."
“If regulators do
away with the Fannie and Freddie system and don’t replace it
with some form of implicit or an outright explicit government
guarantee, the ‘Law of Unintended Consequences’ will
strike. Ginnie Mae’s will undoubtedly price way better than any
private MBS and the government will be over-run with FHA
mortgages. Leave it to politicians to screw it up again. I say
again, because it was all this nonsense about lending to the
“underserved”, which is code for those that don’t qualify using
traditional credit risk principals, that was a primary reason
for the problems in the agency portfolios today. It is an
example of the ‘medicine’ being worse than the disease.”
Now we’re on to Part
IV of the LO compensation series, noting the Fed’s responses to
the MBA’s questions. Remember that company’s individual policies
may differ from these to some extent, as there is still a lot of
interpretation. Many company’s policies will vary as long as
there is no ability or an originator to steer the consumer into
a less favorable product and that factors unrelated to the
terms or conditions of the loan such as cost and expense of
origination come into play. That will be the ultimate deciding
factor.
Q12. Does Dodd Frank affect the treatment of
managerial compensation if a manager also
originates some loans? Some branch managers only manage an
office and do not originate loans, while other branch managers
both act as loan originators and have management
responsibilities. The latter branch managers receive
compensation as a loan originator for each loan originated, and
also receive compensation based on the production of the entire
branch.
A. Fed Response - Yes. If a manager originates loans, then the
manager cannot receive compensation based on loan terms, even if
such compensation would be limited to loans not originated by
the manager. Being a loan originator subjects all compensation
received by the manager to the rule, even compensation received
in the manager’s capacity as manager. The manager, however, like
other originators, can receive a fixed percentage amount of all
loans originated.
Q13. May employee loan originators generally, or
of a certain branch or group in particular,
be compensated in whole or part based on profit during a
particular period attributable to the branch or group? Profit is
determined based on standard accounting methods to calculate
revenue and expenses of the branch or group during the
applicable period.
A. Fed Response - No. Profit includes amounts due to the rates
and terms of loans and cannot be a basis for originator
compensation.
Q14. Are there a minimum number of loan
originators for a branch or group that would allow compensation
based in whole or part on profit?
A. Fed Response - No. Compensation to originators based on
profits of a branch is problematic no matter what the number.
Were such compensation permissible, it could lead to net
branches of one individual to circumvent the restrictions of the
rule.
Q15. An example of varying compensation between
two subsidiaries. Subsidiary A is a retail prime loan creditor
and Subsidiary B is retail near prime loan creditor. Loan
originators for Subsidiary A only work on and receive
compensation for loans for Subsidiary A and loan originators for
Subsidiary B only work on and receive compensation for loans for
Subsidiary B. Can Subsidiary A and Subsidiary B have different
commission structures for their respective loan originators?
A. Fed Response - Yes. The employees of each Subsidiary may
originate loans only for their respective Subsidiary and, thus,
their compensation would not vary based on a loan being a prime
loan or a near prime loan.
On to the markets!
After starting the day a little worse, we saw a little
improvement yesterday after the dismal economic data: initial
claims 454K, 49K higher than expected, continuing claims
3991K, 118K higher than expected, and Durable Goods order down
2.5% (expectations were for a 1.5% gain). Further improvement
was seen after a good 7-year Treasury auction after digesting
the Pending Home Sales number. MBS prices rallied/improved by
about .250 with our friend the 10-yr closing at 3.38%.
Today we’ve had the
final look at the 4th quarter GDP number, which, at
+3.2%, matched the old expectations but was lower than recent
expectations. We also had the Employment Cost Index, +.4%,
pretty close to where folks thought it would be. Later on we’ll
have the University of Michigan Confidence number and the
Chicago Purchasing Manager index. After the news the 10-yr is at 3.43 and MBS prices are worse by about
.125.
A married couple in their early 60s was celebrating their 41st
wedding anniversary in a quiet, romantic little restaurant.
Suddenly, a tiny yet beautiful fairy appeared on their table.
She said, "For being such an exemplary married couple and for
being loving to each other for all this time, I will grant you
each a wish."
The wife answered, "Oh, I want to travel around the world with
my darling husband."
The fairy waved her magic wand and - poof! - two tickets for the
Queen Mary II appeared in her hands.
The husband thought for a moment: "Well, this is all very
romantic, but an opportunity like this will never come again.
I'm sorry my love, but my wish is to have a wife 30 years
younger than me."
The wife and the fairy were deeply disappointed, but a wish is a
wish. So the fairy waved her magic wand and "poof" the husband
became 92 years old.
The moral of this story: Men who are ungrateful buffoons should
remember fairies are female.......
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