Jan. 30: Why the 10-yr T-Note is relevant, QRM, REITs’ setback, managing borrower complaints, and a correspondent’s view of TRID rollout

Given my capital markets background I am often asked about the link, or lack thereof, between Treasury securities and mortgage prices. So this note from James Hedvall was timely. “There’s a book which you will find on 99% of secondary marketing desks across the land. It’s called ‘Mortgage Backed Securities,’ and it’s written by a guy named Frank Fabozzi. It’s in the tall-weeds with respect to details. The vast majority of secondary marketing guys like myself kept a copy on our desks mainly to use it as a coaster for our morning coffee, as well as to impress women who happen to pass by…..which has never happened, but that’s not to say it couldn’t.

“I can summarize the relationship between mortgage-backed securities, Treasuries, and rates by saying that MBS are the vehicle used to securitize individual mortgages. So the relationship, although not 1:1, is directly proportional. When MBS (known as TBAs in the future markets – “to be announced” since the pool specifics aren’t known yet) rally, rates drop. When TBAs sell off, rates rise.

“The 10-yr T-note is still relevant for the mortgage industry mainly due to duration and credit risk. Where treasuries represent the full faith and credit of the US Government, MBS represent the full faith and credit of whomever you underwrote and gave money. Historically your average 30-year mortgage is going to prepay in about 10 years (or sooner), so when mortgage backed securities are sold to investors the question for them becomes, ‘If I’m going to receive 10 years’ of cash flow from both securities, how much more yield am I going to receive by purchasing an MBS as opposed to purchasing a virtually risk free investment backed by Uncle Sam?’ This credit spread moves around, but is a nice indicator since the spread has historical parity. In a nutshell, that’s why we still pay attention to what treasuries are doing.” Thanks James!

“Rob, whatever happened to that big discussion about QRM?” Good question. Despite what many say, non-QM lending has not skyrocketed for several reasons as anyone with blemished credit watches the availability of home loans diminish. Dodd-Frank’s laws contained a “Credit Risk Retention Rule” whereby the sponsor of a securitization (which some read to mean originator) of a residential mortgage-backed security, not backed by QM loans, must retain “a collective retained interest in the securitization of not less than 5%.”

Of course small lenders/originators can’t keep cash on hand equaling 5% of all their loans that are securitized. In fact it pretty much leaves mREITs (real estate investment trusts), hedge funds, and banks to hold the 5%. Compliance became mandatory on Christmas Eve. But wait! After all of this Dodd-Frank, Qualified Residential Mortgage, Qualified Mortgage chatter, the six regulators running the show aligned QM and QRM guidelines. We dodged a bullet – kind of. In order for a securitization pool to qualify for the QRM exemption from the 5% risk retention, the loans in the pool must exclusively consist of QRMs and not delinquent. And these rules don’t apply to whole loan trades.

Just like subprime loans, a market is simmering for non-QRM pools mostly from hedge funds and REITs. And of course banks put plenty of non-QM loans on their own books – the CFPB has never said that these are “bad” or risky loans. They mostly have higher interest rates to compensate lenders for the potential legal risks and credit costs.

Speaking of mREITs, last week news broke of the Federal Housing Finance Agency (FHFA) releasing its final rule for Federal Home Loan Bank (FHLB) eligibility. In turn Isaac Boltansky with Compass Point Research & Trading, LLC summed things up nicely. “The final rule drops a provision included in the proposal that would have required FHLBs to ‘maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.’ We view this change as an incremental positive for current FHLB members and mortgage credit availability but we note that this change was widely expected.”

His note goes on, however. “Mortgage REITs lost this round. The final rule maintains the prohibition on new captive insurer admission to the FHLB system and a five-year sunset for covered insurers admitted before September 2014. Similar to the proposed rule, the final rule prohibits captives operating under the five-year sunset provision from either holding advances in excess of 40% of their assets or renewing existing advances beyond the sunset date. The final rule expanded on the proposal by limiting the sunset provision for captive insurers that gained access after September 2014 to only one year. The FHFA notes that 20 of the 25 captive insurance members with mortgage REIT parent companies gained access to the FHLB system after the proposed rule.

The FHFA explains: “This trend has become a matter of growing concern to FHFA, as it has become increasingly clear that captives are being promoted and used as vehicles to provide access to Bank funding and to other benefits of membership for institutions that are legally ineligible for membership.” The FHFA continues by detailing a litany of structural and operational concerns with the admittance of captive insurers into the FHLB system including the potential for firms without significant housing operations to gain membership, the statutory contours of the Federal Home Loan Bank Act, and the ‘dramatic increase’ in captive insurer membership applications.”

“Rob, does Quicken Loans have a wholesale channel for brokers?” Quicken Loans has plenty of things. You could start by contacting Quicken Loans itself, but skimming its “Family of Companies” page is an eye-opener – there are a lot of very cool things. And regarding your question, you could probably find something Quicken labels Quicken Loan Mortgage Services that describes partnering and many would say pretty much fits of some derivation of “wholesale.” Like I said – if you have questions contact the company directly.

Garth Graham, Senior Partner with the STRATMOR Group, offered up, “Rob – I was struck by your recent column about CFPB complaint database and the fear of the CFPB and their apparent advertising directly to consumers to try and get complaints into their complaint database. Lenders are appropriately scared about that, but there was not a lot of discussion about what to do about it, or how to mitigate the risk of such complaints.  It’s as if lenders just ‘hope’ they don’t get a complaint, rather than ‘change’ their process to try and limit their complaints.

“At STRATMOR we recommend to clients is to be sure to actively survey every single borrower after closing and make SURE that they are satisfied. A key is to survey FROM the CEO, not the LO, and to send reminders to borrowers if they don’t respond. We surveyed over 66,000 borrowers last year, and have found that roughly 10% are dissatisfied right after closing, but if a lender than reaches out to them to discuss WHY they are dissatisfied they usually can turn the perception around, and thus avoid the CFPB complaint in the first place. Often, the customer just wants to be heard, so the lender needs to have a process to ensure they are there to listen. Also, it’s important to mind the amazing data that comes from a structure borrower feedback system to begin to refine processes at the lender to reduce the dissatisfaction rate, and of course to increase the likelihood of getting referrals and repeat business from the happy customers.”

And this note on you-know-what. “I am a follower of your daily newsletter and felt compelled to write about all the complaints we have been seeing regarding TRID. I work on the project side for one of the top correspondent lenders. My role is to represent the correspondent channel as a subject matter expert and I have been involved in the RESPA-TILA CFPB project for well over two years. During those two years we have spent millions of dollars and thousands of hours revamping our systems, updating all our processes, updating all of our procedures, training, etc. etc. etc. During that time, we spent many hours talking with our lenders and it became very apparent that many were not preparing as we were for TRID.  We sent out communications, we worked with them directly and still many treated it as a ‘doc change’ and assumed everything would magically fall into place…..

“Now to my point, what we are seeing is what we expected to see: many lenders did not adequately prepare for the rule and doc changes and are now blaming the CFPB for their lack of planning. Too many of our lenders didn’t change their processes and are trying to apply the ‘old way’ of doing things to TRID. That simply doesn’t work.  I am not saying the CFPB didn’t make mistakes but I do think these lenders need to stop trying to fit a square peg into a round hole. One complained about ‘delaying income for loan officers, turning the moving truck away because of CD changes’, etc.  I found this statement really amusing, ‘…you won’t be closing on time either you must wait 3 days…’. The three day waiting period is part of the rule so yes, if you were prepared and there were no changes (other than borrower requested), you would be closing on time as 3 days is the new ‘on time’. Again, stop trying to apply ‘old thinking’ to the new process. If they were prepared, this wouldn’t be an issue. Things changed and the processes should have changed with it.”

And industry vet Guy Keith contributed, “I wanted to respond to a letter someone wrote you talking about how ‘terrible’ TRID is, LO comp being cut, no rebates allowed for the LO, etc. While I agree that TRID is just another in a long line of government regulations/laws/guidelines that have been put into place, our company has not had many TRID related issues when it comes to closing loans on time. We are at 30 days or less and things have gone pretty smoothly. Now whether we have violated the TRID requirements is yet to be seen, but we seem to be doing alright so far.

“We work in an industry that allows us to make a very decent income to provide for our families. Has that income gone down, sure it has. But I look at many of my borrowers, what they do for a job and what they make and see how lucky I truly am. There are very few people that have the ability to make over 6 figures a year doing the work we do.

“I also hear people complain all the time about all the problems they have with their loans and what a pain their job is. What they fail to realize is that we are PROBLEM SOLVERS! If there were no issues with loans, there would be no need for us and we would be out of a job. You can bet any consumer who could do a loan on their own would do it in a heartbeat if they could. So we should appreciate the issues we have to deal with and understand that this helps us stand above the crowd and keeps us employed.

Now to the lady who talked about the LO and processor being to blame if a LE or CD are wrong. I have been in this business for over a quarter of a century and always had to micro-manage my files. But, that is NOT my job. My job is to go out and get the loans. I structure them to make them work, but then it is the operations side that is responsible to close the loan. I am not supposed to be burdened with checking on the processor, underwriter, doc drawer, escrow company, title company, appraiser, etc. to see that they are doing their jobs (and getting paid good money to perform). But, that is not how things work these days. So I am forced to do the things this lady says LO’s don’t do or don’t care to do to insure that my loans close on time.  I hate this, but it is the reality of today’s heavily regulated environment.

“In a perfect world, I would submit my loan and it would fund and I would move on to the next deal. Unfortunately, we do not live in anywhere near a perfect world, so I am forced to micro mange my files to make sure they move forward in a timely manner so all the time lines set by the listing agent and seller are met and we close on time.”

A Sunday school teacher asked her little children, as they were on the way to church service, “And why is it necessary to be quiet in church?”

One bright little girl replied, “Because people are sleeping.”

Rob

(Copyright 2016 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.)