Apr. 1, 2011: Comp plan delayed (this is no drill); QRM comment site; 4 states account for 42% of foreclosures; unemployment numbers push rates higher
Rob Chrisman

Yes, the earlier commentary was the yearly April Fool's edition. But in the "truth is stranger than fiction" category, the U.S. Court of Appeals in Washington granted emergency motions from NAMB and NAIHP which argue the rule unfairly penalize brokers, who won’t be able to pay loan officers from consumer-paid fees. “The purpose of this administrative stay is to give the court sufficient opportunity to consider the merits of the motions for emergency relief and should not be construed in any as a ruling on the merits of those motions,” the court said in its order yesterday. The Appellate Court stay was granted, and a date of appeal was set for Tuesday, April 5. What lenders actually do with this information remains to be seen, however – you’ll have to figure that one out on your own. For example, Stearns Lending told its clients that it will be conducting “BUSINESS AS USUAL” until the Federal Courts issue additional rulings. One can view http://www.namb.org/namb/Default.asp  or what the press is reporting: http://www.bloomberg.com/news/2011-04-01/mortgage-brokers-win-appeals-bid-temporarily-blocking-fed-loan-fees-rule.html.

Today was/is the big day for many companies. If you're thinking about being devious, you may want to think twice. "The companies & loan officers that skirt around the comp Rule, will get caught. This was a well thought out and defined rule, from an enforcement perspective. Penalties are severe this time and easily enforced by every state that now has the power due to SAFE Act, to enforce Federal laws with state penalties. Competitors will turn them in. Not to mention that a comp plan violation is a TILA violation as well with now, individual liability on a loan by loan basis. Private right of action will be very painful to the LO that thought it was the “company’s problem if they over pay me”.  This FRB Rule with compensation and QRM lines make the last 3 years of changes look like stability in this industry. Profound business model changes are in the works and will reverberate for the next 6-12 months like a Tsunami."
 
Assuming the comp plans go ahead as planned, which is now open to debate, analysts are concerned that the mortgage origination business might experience significant turmoil as lenders are compelled to reconcile their just-released compensation programs in response to real world market conditions. As one STRATMOR executive wrote, “Will competitive forces allow originators to negotiate prices at the point of sale that are necessary to fund these new commissions’ levels?  We hear many lenders describing their backlog of recruiting candidates who have delayed their decisions until April 1.  Will we see major migrations of LO’s to new employers?  If so, which sectors will enjoy net gains and which will lose ground?  How soon might we learn something tangible and accurate about enforcement actions?”
 
Interestingly, STRATMOR Group has developed an originator compensation surveillance program targeted at a select group of mid-size retail mortgage lenders. For the first six months, it will provide market intelligence on the direction and amount of changes in commission rates, pricing trends, LO retention/recruiting, use of point banks, supplementary bonus features, LO and Branch Manager “satisfaction” readings along with periodic ad hoc alerts that deliver with legal and/or regulatory clarifications. “Our premise is that lenders will need accurate and reliable information (with hard data where possible) to make more informed decisions about how to react to the origination environment over the intermediate term.”
 
Turning to QRM, if you'd like to comment on the risk retention proposals, go to http://www.federalreserve.gov/newsevents/press/bcreg/20110329a.htm.
 
The question is floating out there about the QRM's proposal's impact on jumbo lending by mortgage bankers and brokers. It would seem that although jumbo/non-exempted loans may have higher rates than they do now, once private label securitization returns production should not be impacted. At this point in time, however, jumbo loans are being placed into portfolios. As best folks can tell, for residential mortgages the QRM definition should not preclude most clean jumbo loans from being securitized as the market starts up again, although the restrictions on monetizing excess spread may preclude smaller issuers from entering the market. (The risk retention changes also impact asset-backed and commercial MBS's, and the qualifying loan standards are much stricter than current origination standards.) Per the guidelines, the GSEs are exempt from the risk retention requirements as long as they are in conservatorship. Does that mean the industry wants to keep them there?

If I am thinking about buying a new house, this would catch my eye. This "shadow inventory" issue, plaguing the housing market, does not appear to be going anywhere fast and in fact may be growing. The number is made up of quantity of distressed homes, either on the market or likely to come on the market through foreclosure, divided by the rate at which distressed properties are currently selling. Think back to your supply and demand curves in Econ 101:  CoreLogic estimates shadow inventory to be at 1.8 million houses, which works out to a nine month supply. (The inventory is made up of houses with mortgages that are seriously delinquent, in some stage of foreclosure, or already in bank-owned inventory.)
 
CoreLogic has found additional loans, numbering around 2 million that are upside-down to the point that the owners have a mortgage at least 50% greater than the value of the home, possibly adding to the shadow inventory in the future and doubling it. Lender Processing Services (LPS) estimates that, given the backlog of foreclosure processing, there may be as much as 30x the monthly sales volume of already foreclosed homes.  The February Mortgage Monitor report shows that both delinquencies and foreclosures starts have declined steadily over the last year, but a major reason for the backlog is the steadily increasing amount of time loans are spending in the foreclosure pipeline.  The average time a loan in the 90+ day bucket has been delinquent by February was 351 days and those in foreclosure had been delinquent for 537 days.  In January 2011 those figures were 344 and 523 respectively and 12 months earlier, in March 2010, the figures were 278 and 426 days. A report from Mortgage News Daily indicates that 30% of loans in foreclosure have not made a payment in over two years.

While foreclosure is a national problem, it has not been evenly distributed across the country.  Four states (AZ, CA, FL, and NV) have suffered the highest foreclosure rate and account for 42% of the foreclosure inventory today. If one adds in the next tier, adding Illinois, New York, and New Jersey, that represents 60% of all foreclosures.
 
Until this morning Wall Street traders were noticing a significant lack of volatility in MBS prices, and in turn, mortgage rates. Volatility is the lowest it has been all year, which, when combined with higher yields/rates, light origination, and continued demand for agency product, mortgages have done very well relative to Treasury rates. (And very few originators would be unhappy with stable rates.) REITS and banks continue to be the big buyers of MBS’s. Yesterday Factory Orders fell .1% in February, as did the Chicago Purchasing Manager’s Survey results. At the end of the day MBS prices had improved, and the 10-yr yield closed at 3.45%.
 
Well, volatility picked up today after the unemployment data, and unfortunately for anyone waiting to lock a loan it moved rates in the wrong direction. Non-farm Payroll came out better/higher than expected, at 216,000, with 230,000 private jobs being created and the government losing 14,000 jobs. The headline Unemployment Rate dropped to 8.8% (the lowest in 2 years) but this is primarily due to the labor force not growing. Hourly earnings and hours worked were pretty stable. After the number we find that rates have crept up: early on the 10-yr is at 3.51% and MBS prices are worse by .250 or more, depending on coupon.