May 19, 2011: Voting on disclosure forms; implications of upstart correspondent programs; Do you like your LOS?
Rob Chrisman

"Rob, I continue to hear rumors about rumors of large established correspondent investors possibly questioning their practice of buying closed loans from smaller lenders who are also buying loans through newly established correspondent channels. Is this true, and will it impact the market for us little guys?" As an answer, let me say that I have heard similar "rumors about rumors" but I have seen nothing definite come out of any of the Big 4 investors. That being said, it is well known in the industry that a) many smaller lenders have begun correspondent or mini-correspondent channels, b) many of the 2nd or 3rd “tier” of investors/lenders are actively adding servicing or begun servicing their own loans, and c) the value of servicing to these smaller institutions appears to be more than it is by selling it to the larger servicers. Therefore, even if a smaller lender begins a correspondent channel, it may be to feed its own growing servicing portfolio and therefore a larger investor buying, or not buying, those loans may not be material.

For you "little guys," it should have little negative impact, and in fact could benefit you if the mid-sized investors actually pay higher prices for servicing. But keep in mind that investors, large and small, are focused on compliance, and the risks associated with failure to do so. The farther the end-investor/servicer is away from the loan source, the harder it is to monitor the entire chain of compliance, yet regulators will hold the end-investor ultimately responsible for the loan meeting all compliance guidelines. We could spend days discussing where the liability rests when a loan goes bad or a class-action lawsuit arises after, "Investor A's correspondent channel buys a loan from Company B, who bought it through its correspondent channel, who in turn agreed that it was in compliance with all rules and regulations but who funded the loan through its broker channel where the broker agreed that it was in compliance... and wasn't." And remember - this is a rumor, nothing more.

Switching topics, Loan Origination Systems are something that every mortgage lender has, to one degree or another, if they do more than a few loans a month. And it seems that at any given time, lenders are constantly updating their LOS or are moving from one to another. As one veteran LOS expert mentioned to me, “An LOS is like a beast that never sleeps.” Most IT folks agree that when it comes to preserving flexibility in the LOS used by a lender a key factor is whether the software’s architecture is strong enough to support variation in features and functions among many client-lenders who share the same code base.

I am not an IT expert, but LO users occasionally write in to say that “not all Software-as-a Service (SaaS) LOS vendors have done a great job of supporting flexibility and/or providing a functionally complete solution.”  Marketers are blurring the lines between the terms “Cloud” and “SaaS”, but lately “Cloud Computing” has come under increased scrutiny with the latest security breaches and how the financial industry might be impacted, such as http://www.wallstreetandtech.com/data-security/229403130. Len Tichy with STRATMOR wrote, “Cloud and SaaS are more like two sides of the same coin and have mainly to do with how software is deployed and maintained. What’s more important for business executives to worry about are your LOS provider’s and your own IT organization’s competencies, how well they work together as a team, and how clearly and logically they both communicate their ideas and action plans with you in business terms.”

He goes on to say, “If your LOS needs to be quickly built-out or enhanced in order to fill a critical functional gap, whether the software is hosted in your data center, or remotely in specified locations, or somewhere in the Cloud will only indirectly affect LOS flexibility.  Preserving LOS flexibility is, by far, more a function of the software’s design than it is of where the software is physically hosted.  It matters whether your LOS was well-designed by an experienced and qualified enterprise systems architect, or a programmer with an opinion. Too often it is the latter.” (If you want to get ahold of Len about IT business solutions, he can be reached at len.tichy@stratmorgroup.com.)

Redwood Trust was in the news, "...the illiquid private securities market would come back if the government winds down government-seized housing giants Fannie Mae and Freddie Mac." http://www.marketwatch.com/story/private-mortgage-issuer-urges-fannie-wind-down-2011-05-18?linkMW_latest_news

In keeping with American Idol, the public has the chance to vote on new disclosure forms, as mentioned in the commentary earlier this week. The two finalists can be found until 5/27 at http://www.consumerfinance.gov/knowbeforeyouowe/about/. I doubt if Steven Tyler or J Lo will be weighing in.

GMAC also let clients know it updated some jumbo guidelines through its “Market Portal Update” system: Second Home transactions are not required to be submitted to the Market Portal tool and are not eligible for a market upgrade, two full appraisals are required only if the loan amount is greater than $1 million when using the Market Upgrade, and the appraisal report expiration date has changed from 90 days to 120 days of the Note date. It is best to check the actual guidelines for all details.
 
Stearns Lending updated its Lock Policy, offering a 7 calendar day free extension for 30, 45 or 60 day locks, and 3 calendar day free extensions for 21 day rate locks. (14 days locks are not eligible.) There are certain terms that must be met for the extension, all extension requests must be received PRIOR to the lock expiration date, and extension requests received after the lock expires will be subject to the worst of either current market or initial lock.

Back across the country, New Jersey’s Real Estate Mortgage Network launched its Menlo Park Funding Branch Division, a new branch opportunity for select independent brokers and bankers. Menlo Park Funding will be the fourth business channel in REMN’s existing wholesale, retail, and consumer direct divisions. Recently, REMN has opened eight Menlo Park Funding branches in the Northeast with more offices slated to open across the country during the second and third quarters of 2011. Those interested in branch opportunities can email Joe Amoroso directly at jamoroso@menloparkfunding.com.
 
Out in California Parkside Lending allows for broker/owners to select individual compensation plans for each of their branch offices.  This means one branch could be at 1.0% monthly comp contract while another is at 1.5% monthly comp –and so on, as long as they are under separate branches as recognized by DRE.

Southwest Funding, LP has rolled out a new website on the subject of its compensation program targeting branch managers and loan officers. The site is www.325bps.com and is about how to earn up to 325 basis points on a funded loan. One can also contact their business development manager Stuart Blend at sblend@southwestfunding.com for additional details.  They are headquartered in Dallas and are approved in 14 states.
 
After “behaving themselves” for quite some time, rates headed higher Wednesday. Markets never go in the same direction forever. In fact, about half the e-mails I received yesterday afternoon were investor intra-day price changes. In spite of the post-FOMC news conference after its meeting April 26 & 27, when its minutes were released at 2PM EST they showed discussion regarding “the process of removing accommodation.” In other words, a potential exit strategy from accommodative monetary policies at some point in the future, but not right now. But markets always try to be 2-3 steps ahead of things. The editor of Mortgage News Daily questions whether or not the Fed can unload its holdings of MBS’s ahead of rates actually going up at http://www.mortgagenewsdaily.com/mortgage_rates/blog/212144.aspx and suggests that the Fed may just hold onto its MBS’s.
 
So, in a nutshell, although no one expects the economy to pick up steam in the near future, the suggestion that it may sometime next year by the Fed pushed rates higher. The 10-yr dropped nearly .5 in price, closing around 3.17%, and current coupon MBS prices worsened .250-.375 on above-average selling. Today we have a full platter of scheduled news to chew on. We’ve already had Initial Jobless Claims, which dropped 29k to 409k with the 4-week moving average inching higher. At 7AM PST we’ll have Existing Home Sales (Apr.), Philly Fed Survey (May), and Leading Economic Indicators (Apr.) We also have the Treasury announcing details of next week's auctions of 2, 5s and 7s - estimated at $99 billion. The 10-yr is up to 3.20% and MBS prices are worse by about .125.
 

The Raise
 
Employee: Excuse me sir, may I talk to you?
Boss: Sure, come on in. What can I do for you?
E:  Well sir, as you know, I have been an employee for over ten years.
B:  Yes.
E:  Sir, I would like a raise. I currently have four companies after me and so I decided to talk to you first.
B:  A raise? This is just not a good time.
E:  I understand your position, and I know that the current economic downturn has had a negative impact on sales, but you must also take into consideration my hard work, and loyalty to this company for over a decade.
B:  Taking into account these factors, and considering I don't want to start a brain drain, I'm willing to offer you a ten percent raise and an extra five days of vacation time. How does that sound?
E: Thank you, sir!  I'll work harder than ever.
B:  Before you go, just out of curiosity, what companies were after you?
E:  The mortgage company, the electric company, the gas company, and the water company.

 
If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com . The current blog is new, and takes a look at the QRM proposal’s impact on our industry. If you have both the time and inclination make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.