Here’s something you don’t see every day. Frankly, I hope that I never actually witness it: lightning hitting a river. Geez. While we’re on the natural world, and not talking about mortgages, every planet in the solar system is named for a Greek or Roman deity – except ours! The earth was named long before anybody even knew it was a planet. The name of Earth simply comes from the Old English word for “dirt.” (See? And you say you never learn anything in this commentary.)
The lending environment
The dog days of summer are here. It seems pretty quiet out there in residential lending, as companies strive to improve their processes and earn every basis point. But there also seems to be an undercurrent of great concern. Namely, as the “buying season” winds down, and mortgage applications continue to languish and could languish even more in the coming months, some lenders are worried that their hoped-for volumes won’t materialize. And if they don’t materialize, will the revenue continue to stay in business. Ah, smarter folks than me believe we will continue to see a lot of M&A in the 3rd and 4th quarters, along with lenders calling it quits. Remember, though, that most people want to own their own homes, and we help them do exactly that.
Disaster planning, and record retention
“Rob, what’s the industry take on whether mortgage lenders maintain and test a documented Disaster Recovery/Business Continuity Plan?” Definitely a good idea. My cat Myrtle has been working on one in case of earthquake and her grain free salmon kibble supple is interrupted.
Seriously, I asked Alan Ridenour with MQMR. “Yes, it is not only a best practice recommendation but also a requirement to be maintained and tested by many state regulators and the GSEs (Fannie Mae and Freddie Mac). A formal Business Continuity Plan (‘Plan’) should instruct employees who are the key contacts, what steps need to be taken, when to execute each step, where to go, and how to do so in the event of a significant incident or natural disaster that disrupts daily business. The Plan should include detailed steps outlining where employees relocate for business resumption. In many cases they may only need a computer and an internet connection. A phone call tree and how employees can access a list of vendors and contacts critical to keeping the business running should also be a part of the disaster recovery component of the Plan.
“The Plan needs to speak to the method utilized by the mortgage lender to ensure that, in the event of a data loss or security compromise to the main systems, the information is capable of being quickly recovered in the exact format as it was prior to the event. If a physical back up facility is used it is recommended to be at least 25 miles from the main office in case a natural or man-made disaster affects an entire region. At a minimum, the Plan should be tested annually.” Thank you, Alan.
And then there’s this issue. “We are going paperless, but we are unsure about retaining documents under the Truth in Lending Act, since we know that regulatory enforcement requirements may cause us to hold on to evidence. That goes along with our concerns about retaining paper copies, too, and we are still unsure of what evidence we need to retain to show compliance. What is the timeline for retaining documents beyond the required time required in case of regulatory enforcement against us? Also, must we keep paper copies as evidence of compliance?”
Lenders Compliance answered this one. “You have asked a complicated question about regulatory enforcement parameters, with respect to record retention. Because you have framed your question in the context of the Truth in Lending Act (TILA), this response will be narrowed to Regulation Z, the implementing regulation of TILA.
“Except with respect to advertising, creditors must retain evidence of compliance with Regulation Z for a period of two years after the date the disclosures are required to be made or action is required to be taken. Enforcement of TILA, however, may require the creditor to retain records for longer periods necessary to carry out enforcement responsibilities and administrative actions.”
Mortgage interest deduction
California’s Steve Kaye sent, “I’d like to comment on the Wall Street Journal’s article recent study that suggests that the mortgage interest deduction does little to promote homeownership by the National Bureau of Economic Research.
“This ‘study’ provides further evidence of just how misleading these type of data studies can be. While there may not be enough empirical data to support the benefit that a tax break has on home buying/ownership (well, at least in that real estate haven known as Denmark), the study misses two key points. First, the tax break allows some homebuyers the option of using the interest-deductions savings ‘up front,’ in their monthly take-home pay, by increasing their deductions to lower the amount that is taken from their paycheck. The trade-off being less of a potential tax refund. By doing this, it expands affordability for the buyer, as he/she can use this money to offset their mortgage payment which, without the added tax break money, may affect their affordability. People often dismiss this, or fail to consider it, when analyzing home ownership; and affordability.
“The other key point falls in the category of ‘perception,’ simply knowing that they will be receiving this additional write-off at year’s end – allowing for a tax refund or, in some people’s minds, a forced-savings plan that they rely on annually to cover the costs of home improvements, education, or simply vacations. This affects the mindset of the buyer/homeowner and does become a factor when determining the advantages of home ownership. We cannot overlook the emotion and human element that comes into play when considering the many values of home ownership, even, I’m sure, in Denmark.” Thank you, Steve.
But the tax benefit is not carved in stone. Yesterday a story was published which noted, “National Economic Council Director Gary Cohn…told members of Congress that almost everything, including changes to the mortgage interest deduction, would be on the table.
‘They’re willing to ruffle some feathers,’ said one attendee of Monday’s meeting. ‘Everything was on the table,’ including capping the deduction that the Trump administration has said it would preserve. No final decision has been made yet…”
Correspondent vs. brokering
“Rob’s, what’s the quick ‘down and dirty’ on the ‘correspondent versus brokering’ discussion these days? Especially regarding a depository bank. I keep wondering why more local banks don’t create correspondent relationships versus the broker relationships, when the brokering side is fraught with all sorts of liability. It seems less so in a correspondent relationship where the investor is buying closed loans. Although they could underwrite them.”
The answer is that underwriting is a huge issue. Who has the ultimate fiscal responsibility if something goes wrong? Small local banks prefer the wholesale channel because they control the whole process – compliance, processing (sometimes), underwriting, closing and funding – basically they “know what they are getting”. The margins are also stronger than in the correspondent channel.
“The correspondent channel has to be very competitive in pricing (therefore low margins) and they often sell the loans before they know what they bought. When correspondent agreements are negotiated, the seller always makes sure they are “off the hook” when the loan is sold
(except for origination fraud). The lender could end up buying several loans back unless they have excellent due diligence up front.
Garth Graham, a senior partner with STRATMOR, had his thoughts. “Depository banks are far less active in wholesale than they are in the correspondent channel. In fact, many banks are not in wholesale at all. They only buy loans from correspondent providers, mostly due to fact that they want a better capitalized counterparty. Of course, a lender could have more control to have a wholesale delivery versus a correspondent relationship if you are a bank buying loans. Two that jump to mind are MB Bank and Flagstar Bank who feel that way. Nearly all other depository banks have exited wholesale at any scale.
“Part of that is that the correspondent channel margins have been solid and thus you can just buy the loan and make the same money than when you have to do more work for wholesale. Now, that is NOT normal, and often the correspondent channel is a rapid race to the bottom during tough market climates. So, there is a lot to this. Participants in the MBA / STRATMOR peer group program have access to data that help expose the difference in margins between the channels.” Thanks Garth!
Down Payment Assistance
L shared, “I thought I’d share some cool industry news. I’m a Millennial with student loan debt who’s renting, but despite those factors, my husband and I just closed on our first house! One of the biggest challenges leading up to homeownership was definitely saving up the money. We had basically nothing saved up, and we certainly didn’t have the coveted 20% down payment. But since my husband is a Johns Hopkins employee, he learned about this program called ‘Live Near Your Work.’ We went through the program and received $17,000 in grant funds toward down payment and closing costs. We even had some left over so we took out a smaller loan and bought down the interest rate! We have been telling all of our friends, ‘Get a job at Hopkins! Apply for LNYW!’ It’s an amazing program and it’s giving good, hard-working Americans the upfront cash they need to buy a home in the beautiful, yet struggling, city of Baltimore. Feel free to pass it along!” Thank you, L!
Women in lending
Kristin Messerli, Founder/Managing Director of Cultural Outreach, sent a note regarding a white paper she published on the topic of women in leadership. “I authored a white paper on the topic of women in leadership in the mortgage industry in collaboration with Alterra Home Loans to bring greater awareness to the fact that there are few women in executive positions and bring insights into how we may be able to make progress on the issue as an industry.
“Alterra volunteered to be a case study for this paper after realizing they had a serious lack of female representation in management positions and that it limited their ability to best serve their market. Over the span of one year, they moved from 2% women in management roles to 25% and half of their new management hires were women. Alterra hopes that through their transparency and sharing insights from their fast and significant progress, they can inspire and drive more action to create positive change in the industry.
“The paper outlines a few challenges that many companies are not aware of in attempting to recruit female talent. As cited in the paper, women are three times as likely as men to say that being a working parent makes it difficult to advance in their careers. Valerie Madiedo, Alterra’s Co-Founder and EVP, says many women are unsure they can handle the work-family balance if they take a leadership position. ‘They need support from leadership who understands their needs as women and encourage them to take that step.’
“Through interviews and industry research, this white paper should help executives better understand the needs of women in the workplace and how to recruit and retain strong female leadership.”
An elderly couple learned to send text messages on their mobile phones.
The wife, a retired college English instructor with emphasis on the Classics, was an unapologetic romantic; her husband, a retired salty Navy chief petty officer of thirty years’ service, was a no-nonsense guy.
One afternoon the wife went to the local Starbuck’s to meet a friend for coffee. While awaiting her friend’s arrival, she exercised her new skill by sending her husband a romantic text message:
“If you are sleeping, send me your dreams.
If you are laughing, send me your smile.
If you are eating, send me a bite.
If you are drinking, send me a sip.
If you are crying, send me your tears.
I love you.”
The husband responded: “I’m on the toilet. Please advise.”
Almost brings a tear to my eye.
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Does Everyone Want a Job?” 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.
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 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.)