Feb. 10: Notes on blockchain, selling leads, churning FHA & VA borrowers; a primer on how mortgage pricing works

Guess who turns 50 this year? The big news this week, arguably, was the Government National Mortgage Association (aka, Ginnie Mae, Ginnie, GNMA) issuing a press release on additional actions they have taken to control churning, and that they notified those outliers. Is “outliers” a politically correct term, like the CFPB using “bad actors?” Regardless, it’s shape up or ship out for those companies. Named in a Bloomberg article were NewDay Financial, Nations Lending Corp., Freedom Mortgage Corp, LoanDepot.com LLC and Flagstar. And no, I don’t know the others, at least in writing.

There are two sides to every story, of course. Here is the full statement sent by NewDay Financial (including the part that Bloomberg didn’t publish). “As company policy, NewDay USA does not publicly discuss its interactions with regulators, including Ginnie Mae. The record, however, is abundantly clear that NewDay does not churn veteran loans.


“NewDay is an outspoken supporter of measures to end this shameful practice. We support bi-partisan legislation introduced by Senators Tillis and Warren that seeks to end loan churning and we urge its swift passage. Policymakers should also ensure that well-meaning efforts to end loan churning will not have the unintended consequences of denying veterans’ access to their hard-earned VA benefits.


“Roughly one out of four veteran customers tell NewDay they have been rejected by major banks while applying for the VA benefits they are entitled to receive. When veterans cannot access their VA financial benefits, they pay much higher credit card interest rates (plus 20%) or are forced to go to extremely high-interest, payday lenders.


“We all have a common goal: to ensure that our veterans, servicemen and women, and their families are treated with the respect, deference and the dignity they deserve. At NewDay USA, our mission is to help Veteran’s families access the valuable VA home loan benefits they have earned.”

Denise Rohan, National Commander of the American Legion wrote, “On behalf of two million members of the American Legion, I applaud the efforts of Ginnie Mae to curb misleading mortgage refinancing marketing targeting veterans and the unscrupulous practice known as ‘churning’ – the refinancing of a loan multiple times to generate profits for lenders at the expense of veterans. Aggressive home mortgage churning creates uncertainty for investors and higher interest rates for borrowers. Our veterans didn’t serve their country around the globe to be taken advantage of by unscrupulous lenders at home. The American Legion stands with Ginnie Mae and Senators Warren and Tillis as they work to protect veterans from predatory home lending and ensure veterans have an affordable pathway to home ownership.”

Primer on loan pricing, especially FHA & VA

In December this commentary offered up a primer on how mortgage servicing rights influence mortgage pricing every day to borrowers. (If you didn’t read that, it is worth checking out.)

Nearly every lender is grappling with declining margins AND declining volumes – not a great combo. I received this note. “I know that cutting margins is not a long-term strategy for success. But everyone is doing it, hoping to outlast their competitors. But how do lenders set margins?

Good question. The key to margins five years ago was capacity. Now it is competition. There are 5 points of pricing which vary in importance over time: demand (capital markets have a buyer – think specified pools), competitive position, margin need or budget (required return on asset for a bank), market share (are you gaining or losing), and capacity. When your capital markets team sets their pricing, they are balancing all the above.

And depending on the above, some lenders and products have had primary-secondary (P/S) spreading, and other’s not so much. What most articles are not considering when analyzing the P/S spread is the huge increase in costs – in the g-fee arena, increasing compliance, and the big one, servicing compliance and foreclosure costs. These costs, even though for prior funded loans, must be “covered’ by the current fundings and eat into margin and the spread.  Some companies have more, or fewer, costs, depending on their book of business.

Typically, it is not fair to compare revenue results from a pure FHA/VA shop versus a lender that originates a mix of products. There is more “meat” in government loans. Why? And what about high rate, premium, FHA loans – what is going on with the pick-up there? Brent Nyitray, Director of Capital Markets with iServe Residential Lending, did a fine job with explaining why. “A little background on how government loans are priced. Suppose a borrower wants to get a lender credit and is willing to pay a higher rate to do it. The TBA rate stock is used to determine the rate / fee that goes to the borrower. If a borrower wants a note rate between 4.25% and 4.625%, their loan will be sold into a 4% TBA, which is trading at 102.8125. The difference between par and 102.8125 +/- any lender credits is what pays LO comp, covers the cost of doing the loan, overhead, etc. The higher up you go in the rate stack, the more profit margin you have to play with, and therefore the bigger credit you can offer. If the borrower is willing to take a note rate of 4.75% to 5.125%, the baseline TBA price is 104.125 and that differential between the TBAs represents the increased lender credit the borrower can receive. Here is the problem: What happens if a borrower wants to go even higher and get a bigger credit? If there is no demand for the next TBA coupon (say 5%), then the increase might not be a point – it might only be half a point.  Note today that all the TBAs are down for the day except for the 5% note rates. That means those prices are stale and probably not real.

“Why would investors not be interested in buying the 5% Ginnie note rates? It has to do with prepayment speeds. If you are an investor, you are paying well over par (in this case, maybe 4 or 5 points over par) to get something that will give you par back at some point. In other words, you are paying 104 and once the loan pays off you are getting 100, which is a loss of 4 points. You are betting that you will get back that 4 points over time because the note rate is higher than what you could typically get for an instrument with similar credit risk. So, if you buy a bond over par it might take a few years to recoup that premium you paid. If the borrower refis in 6 months, you lose.

“Ginnie Mae investors have been burned over the past several years paying 105 – 106 for a security that pays them par in a few months when the borrower gets a VA IRRRL. Investors have become gun-shy at buying the higher coupon TBAs, and that affects everybody, not just the veteran who rolled a 1.5% funding fee into a new mortgage for a smaller monthly payment of a couple bucks and the right to skip a payment or two.


“The Elizabeth Warrens of the world will focus on the veteran who is paying a big fee for a refi that will take several years to break even, but Ginnie will be focused on some of the unintended consequences of this, and it really becomes evident when you look at how it affects the more marginal borrower.

“Ginnie Mae was created to finance the tougher credits – the first-time homebuyer, the cash-strapped buyer, manufactured homes, lower income / credit buyers. These homebuyers usually have risk factors that will translate into bigger loan level pricing adjustments and will often require a higher note rate to make the math work. If those higher note rates are not available, then it becomes tough to finance those people, and Ginnie Mae’s mission is to help get these people loans. Which is why Ginnie is very sensitive to the actual investors of Ginnie Mae MBS as well as the veteran. The behavior of a few rogue lenders really does impact the whole market and pretty much everyone who takes out a government loans.”

Selling leads through credit reporting

Veteran loan officer ER observed, “After what’s happened to me this week, I think the order of the day should be to either reign-in the 3 credit reporting agencies (Equifax in particular) OR find another way in which to obtain credit reports and FICO scores. Not 6 hours after pulling credit on two, refinance borrowers, a telemarketer called both of my borrowers and said she had their credit info and was ready to proceed with their refinance. When the borrower questioned the name of the company (which was very similar to mine), she told them that ‘we’re the same company.’ Luckily, neither client bought it and I was able to hang-on to the loans.


This business of selling ‘hot leads’ to anyone willing to pay their price must STOP. The CFPB tells me that the 3 agencies are private companies, not controlled by the government, and therefore have the right to make money any way they see fit. If anyone has found a better way around these crooks, I’d love to hear about it. Otherwise, BRAWL should be working on Equifax, in particular, to stop the theft of loans before they even get started.”


Noel Cookman with The Mortgage Institute wrote, “Hey Rob, forgive me if you’ve addressed this previously but, in your opinion, how will blockchain technology affect ‘the future of the industry?’ It appears as if technology (and specifically blockchain technology) will drastically shorten the distance between lent money and borrowing consumers.


“That is to ask, how will it (blockchain) affect or produce extreme transparency, the cost of the transaction (underwriting fees, escrow/title fees, etc. – i.e., closing costs), the speed of the transaction, customer service, customer retention, customer gathering, the number of people who work on a loan transaction, the underwriting process (automated underwriting > manual review of application docs), or the new technologies coming out (Maxwell, Day One Certainty, etc.)…are they a mere foreshadowing of what is to come…and at a lower, almost non-existent, cost?


“If I were a much younger man, I would take a hard look at any financial sector career that made its money by doing transactions…and, I think, I would have to try and envision exactly how speed-of-light transactions are going to affect how I make a dollar.


“Could it be that the biggest force that will keep money flowing in the ‘transactions business’ (loan originators, et al) is government compliance? If gov’t can continue their antiquated methodologies and policies, it could keep the relative transactional costs high – and mainly keep them cryptic enough so that the consumer doesn’t notice – and, thereby, keep originators and others employed. Basically, government could do what it’s always done so well – inflate the cost of doing business well beyond what it would otherwise be and keep a stream of consumer money flowing through an inefficient system. At that point, the bulk of the actual work of doing a loan will be compliance. Hell’s bells! It nearly already is.”

(A repeat, I know, but still pretty funny.)

Father Norton woke up Sunday morning and realizing it was an exceptionally beautiful and sunny early spring day, he decided he just had to play golf.

So, he told the Associate Pastor that he was feeling sick and persuaded him to say Mass for him that day.

As soon as the Associate Pastor left the room, Father Norton headed out of town to a golf course about forty miles away. This way he knew he wouldn’t accidentally meet anyone he knew from his parish.

Setting up on the first tee, he was alone. After all, it was Sunday morning and everyone else was in church!

At about this time, Saint Peter leaned over to the Lord, while looking down from the heavens and exclaimed, “You’re not going to let him get away with this, are you?”

The Lord sighed, and said, “No, I guess not.” Just then Father Norton hit the ball and it shot straight towards the pin, dropping just short of it, rolled up and fell into the hole. IT WAS A 420 YARD HOLE IN ONE!

St. Peter was astonished. He looked at the Lord and asked, “Why did you let him do that?”

The Lord smiled and replied, “Who’s he going to tell?”

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, “Servicing: All It’s Cracked Up to Be?” 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 2018 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.)

Rob Chrisman