Dec. 2: Letters about taxes, 2018 thoughts, eNotes & warehouse banks, discount point policies

I receive plenty of emails, some of them a little odd. (“Rob, I’ve been listening to the same Christmas music my whole life. I’m sick of the songs. Should I seek counseling?”) Let’s just jump in with what is on reader’s minds recently, mortgage-wise.

Discount points

This week I had news about regulators weighing in on discount point pricing, policies, and procedures. One industry vet from the Atlantic Coast noted, “Charging discount points and not lowering rates sounds like overage. These guys were running net branches/P&L’s. This will not stop the practice. Those that were responsible just leave and go to a new bank.”

TB wrote, “I’ve been in the business for 15 years, but I’m no attorney. My understanding, however, of the Dodd/Frank regulatory changes regarding overage were that LOs could no longer be compensated for the overage, but there was nothing that prevented the company from profiting the same way. I’ve worked several places and seen a common practice of pricing above par to line the company’s coffers. It appears to be a situation of following the letter of the law, rather than the intent. those employers did not compensate the LOs for that, so what used to be an overage split between the company and the LO back when overages were permitted, has now become all company profit. This practice certainly does the consumer no good.”

From Matchbox LLC’s Frank Fiore came, “Jonathan Yosha and I wanted to provide some thoughts on handling discount points. With over 100 Operational and Secondary Reviews under our belt, pricing policies and how they are imbedded into the LOS and PPEs has continued to be a focal point of ours. Although you would think this is simple math when a rate is provided under par to charge a discount, lenders have various approaches and policies. As noted, it all starts with a well written pricing policy (which for some is lacking) and then continues with how the policy is implemented into the rate sheet, PPE, LOS integration and ultimately onto the initial LE, revised LE upon Lock, re-disclosures for a CIC, and CD – not to mention a well-documented and compliant pricing exception process that doesn’t expose a lender to violations related to Fair Lending, LO comp, etc.

“Ensuring these pieces come together is no small feat and requires levering technology integrations, business rules within the PPEs and LOS, rate sheet structuring and then some. Even the best processes have challenges in recording data changes, change requests, and loan and lock history. This is where many lender practices for seemingly simple policies start to diverge and implementation practices are inconsistent from lender to lender. Every LOS, PPE and their associated integration points will vary so consistency amongst lenders is rare and exposure gaps are out there. Any lender without a clearly written pricing policy and tightly wound business rules to enforce them is at risk.

“Are there lenders who still think ‘I won’t be audited’? This feeling can only perpetuate with the shift in management over at the CFPB. We feel that many in senior management roles may not be aware of how the policies are written, and more importantly enforced.  Hopefully your readers took your commentary to heart and did not skim through this topic – it is serious.

“Lastly, some may indeed be running net branch P&Ls which is greatly concerning but many simply do not have the proper technology or workflow controls in place. This is not always intentional but without controls the loans can be updated without associated pricing adjustments. Changes can be made, and corporate pricing exceptions can be granted, but not well documented. There is great room for exposure in pricing and this not only a compliance concern but should also be a Secondary concern as without close management and reporting, these pricing policies and associated discounts/lender credits directly impact net profit for lenders.”

eNotes, e-notes, however they’re spelled

“Rob, with lenders moving toward using eNotes in their process, what are you hearing about warehouse bank acceptance of them?” Good question. I don’t have any formal polls of warehouse lenders’ policies on them, so I turned to a veteran warehouse lender. “There are 3 active, or somewhat active, warehouse entities accepting them. And one of these is under FBI investigation for a $9MM fraud loss. I would say that most of the main providers that you would recognize are in the process of becoming able to warehouse eNotes, but until all entities in the process are finalized the process is still a year if not 2 years away minimal. Some of those steps require, all investors, all title closing entities, all custodians etc. to be eNote capable. Then the acceptance into eVaults for the housing of these type notes is still under development. To my knowledge today, there are roughly 3 eVaults active. Of course, “active” is an interesting term as the total eNote closings in 2017 is around 200. Not that it won’t happen, but the assumption the world is ready to move that way is still a little premature.”

So, some might believe that the overwhelming majority are either accepting eNotes or will soon do so, with the exception of…Wells Fargo. That currently isn’t the case, but the industry is certainly moving that way and my guess is that eventually lenders will be directing their fundings toward warehouse companies that accept them and away from those that don’t. Just a guess.

This last week Texas’ Michael Jones sent along a bit of a promotional piece, “Have you heard about eCyber Monday? It’s a new day on the calendar commemorating the first fully digital (eNote and eClosing package) loan sale originated by Georgetown Mortgage, LLC and purchased by Land Home Financial Services, Inc., on America’s favorite shopping Monday of the year. A year in the making, these two companies have both fully embraced digital mortgage, and specifically Fannie Mae eNotes, to provide an exceptional consumer experience and to increase operational efficiencies across closing, post-closing, and purchasing departments.

“Over the last year, Georgetown Mortgage, LLC has originated over 100 eNotes representing $24M in loan volume and is poised to explode this volume in 2018. eNotes and eClosings offer the borrower a unique closing experience because they can close at their office, the Realtors office, or even in front of the home that they’re purchasing. Georgetown Mortgage, LLC can fund as early as 5 minutes after all docs are signed and received and there’s no waiting on the title company to scan documents back to the lender. Critical to this process has been Georgetown Mortgage, LLC’s relationship with Pierson & Patterson, LLP, Digital Delivery, Inc., and Merchants Bank of Indiana, who act as the closing portal and eVault provider for eClosings as well as the warehouse bank.” (Michael threw in, “For loan officers and branches who are interested in joining the digital age and providing their borrowers and referral partners with a truly digital lending experience, inquiries can be sent to me.”)


Brent Nyitray, CFA, Director of Capital Markets with iServe Residential Lending, wrote, “The NAR has released a study claiming that tax reform will hit real estate prices overall by 10%. The fear is that it will discourage homebuilding which will sap the economy of strength. It is true that economic growth has been tepid over the past decade as homebuilding contracted, but will the changes in the tax code matter all that much? I am skeptical that lowering the MID cap from $1 million to $500k will matter all that much, given the median home price in the US is under $250k. The median income in the US is under $60k as well and most people will be better off just taking the increased standardized deduction. While they may “lose the mortgage interest deduction,” it is a moot point – the increased standard deduction replaces it. But yes, I would expect to see some sort of effect at the top 10% of the market, but that should be about it. As far as homebuilding, I think the builders will shift their focus from luxury to starter homes, where the demand is. As a matter of policy, if you wanted to get rid of the mortgage interest deduction when it causes the least amount of economic pain, you would do it when the economy is expanding, and interest rates are low. Interest as a percent of your mortgage payment is the lowest in 50 years.”

2018, your thoughts…

Eric Egenhoefer, President & CEO of Waterstone Mortgage, opined, “The biggest issue of 2018 will be creating efficiency. With volume down slightly and competition increasing – which both create margin compression – driving down the cost to produce a loan becomes critical.”

Elliot Salzman, Chief Credit Officer of LoanLogics, opined, “Regulations and compliance remain the industry’s biggest issues heading into 2018. Most troubling is the new HMDA rules that require lenders to collect new types of data by January 1, 2018 and begin reporting it by March 1, 2019. The changes require 25 new data fields and the modification of 20 existing data fields. The problem is that over 80 percent of lenders aren’t prepared to make these changes and their LOS providers don’t seem to have a sense of urgency. Combine this with privacy concerns over the collection of additional data in lieu of data breaches, like the one at Equifax and regulations may be front and center again in 2018.

“On the credit side, origination risk is a major concern for 2018 because of an even bigger reliance on originations moving down the credit spectrum and relying more heavily on non-conforming products. We see some lenders lowering FICO score requirements for government products (FHA, VA and USDA Standard and FHA Streamline). We have seen an uptick with nonqualified mortgage originations as many lenders pivot to purchase money transactions to offset falling refinance revenue. Lenders are lowering their FICO requirements and turning to non-QM products. As just one example, one company’s non-QM mortgage volume recently jumped more than 250 percent year-over-year.

“Every day, I see new loan advertisements that suggest lenders are once again pushing the stakes. Many of these products rely on alternative methodologies to determine the borrower’s ability to repay, which inherently increases the risk. Watching our industry slowly creep down the credit ladder reminds me of a time in the not-so-distant past that we shouldn’t forget.”

Chris Castoro, EVP at Planet Home Lending, said he believes the biggest challenge for the mortgage industry next year will be to grow business in a predicted rising rate environment. “Mortgage bankers will need to have the right technology in place and secondary market relationships for the best executions. This will drive down the cost of loans, bring in a larger volume of business, and create economies of scale. For our part at Planet Home Lending, we’re growing our retail operations to give the company scale to leverage our direct Fannie Mae, Freddie Mac and Ginnie Mae tickets and using proprietary technology that enables the retail channel to find the best secondary market executions.”

Stanley Street, CEO of Street Resources, expects, “Non-QM products will continue to expand next year, especially with increasing willingness among warehouse lenders to fund increased portfolio limits. Overall, warehouse line utilization rates remain high at upwards of 60 percent, which indicates there is plenty of liquidity available for independent bankers. Considering current production estimates, however, I don’t expect more than a handful of new warehouse lenders coming online next year.


“A bigger issue, perhaps, is eNote adoption, which we expect will accelerate next year. Major lenders and a growing number of warehouse lenders are actively pursuing digital mortgages, which promise to transform loan quality and transaction efficiency. The only thing we’re missing is enough secondary market participants, at least outside of the GSEs. But as demand grows for eNotes, investors will start coming on board.”

(Thanks to Spencer D. for this one. Rated PG, I guess, for language & violence.)

A filthy rich Florida man decided that he wanted to throw a party and invited all his buddies and neighbors. He also invited Leroy, the only Redneck in the neighborhood. He held the party around the pool in the backyard of his mansion.

Leroy was having a good time drinking, dancing, eating shrimp, oysters and BBQ and flirting with all the women.

At the height of the party, the host said, “I have a 10-foot man-eating gator in my pool and I’ll give a million dollars to anyone who has the nerve to jump in.”

The words were barely out of his mouth when there was a loud splash. Everyone turned around and saw Leroy in the pool!

Leroy was fighting the gator and kicking it’s a$$! Leroy was jabbing it in the eyes with his thumbs, throwing punches, head butts and choke holds, biting the gator on the tail and flipping it through the air like some kind of judo instructor. The water was churning and splashing everywhere. Both Leroy and the gator were screaming and raising hell. Finally, Leroy strangled the gator and let it float to the top like a dime store goldfish. Leroy then slowly climbed out of the pool. Everybody was just staring at him in disbelief.

Finally, the host says, “Well, Leroy, I reckon I owe you a million dollars.”

“No, that’s okay. I don’t want it,” said Leroy.

The rich man said, “Man, I have to give you something. You won the bet. How about half a million bucks then?”

“No thanks, I don’t want it,” answered Leroy.

The host said, “Come on, I insist on giving you something. That was amazing. How about a new Porsche and a Rolex and some stock options in my company?”

Again, Leroy said no.

Confused, the rich man asked, “Well, Leroy, then what do you want?”

Leroy replied, “I want the name of the sumbich who pushed me in the pool!”

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Rob Chrisman