July 6: Reader comments on HPML issues, and the viability of the mini-correspondent program

The reader comments continue to come in on various topics, such as high priced loans or the viability and legality of the mini-correspondent channel, etc. I apologize for the slightly longer commentary length today, but felt that the opinions warranted air time.


A couple weeks ago Doug J. echoed the complaints many have had about new regulations and definitions on high cost mortgages. “The issue of HPML testing is certainly one that I am concerned with.  Now that rates have increased quickly, I find that several of our loans now fail the test.  After a bit of research, I found that the APOR the week of 6-17-13 to 6-23-13 was posted at 4.04% for a 30 year fixed rate loan. Suspiciously, today, 6-24-2103, the rate posted for this week is 4.00%. So I looked up how the APOR is derived and found the definition as follows:


‘Average prime offer rate’ means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. The Board publishes average prime offer rates for a broad range of types of transactions in a table updated at least weekly as well as the methodology the Board uses to derive these rates.


“I would say that the APOR calculation from last week to this week is certainly suspicious. Every lender in the US has seen their rates increase in the last week and by quite a bit.   At a minimum, I would love to see the list of lenders that make up their “sample”.  Any idea who is behind the wheel on the APOR?”


This was sent out by a west coast lender to its clients. “High Priced Mortgage Loans (HPML) are a perfect example of unintentional consequences. Investors are alerting clients of continued problems. For example: We are seeing an increase in HPML High Cost Errors, and files that have to be restructured, or in some cases even rejected.  There are a number of factors attributing to this, including: Volatile rate environment, New MI Rules in place on FHA, and other factors. The bottom line is you need to take extra precautions to be sure your loans aren’t exceeding the Higher Priced Mortgage Loans rule which took effect 10/1/2009. It is a moving target, as the rule states that your APR cannot exceed 1.5 of the ‘Average Prime Offer Rates’, for first lien mortgage loans. Since the ‘Average Prime Offer Rates’, are published after a survey of lenders, they are not rising as quickly actual rates are and are contributing to the higher number of HPML High Cost Errors.  Also the higher costs and longer term of the FHA Mortgage Insurance premiums are driving up APR’s as well. Currently, (the wholesale lender) does NOT fund any loans exceeding the standard 1.5% tolerance addresses in the HPML.  We are however, reviewing our existing policy on HPML, and may allow additional options in the future. If you need more info about this Truth in Lender Rule, please read the following article, which also contains links to the posted Average Price Offered Rates:



The bulletin went on. “I have created a quick reference chart for your convenience below, which shows the most recent Maximum APRs, for loans locked in the most recent weeks and on the most common loan terms. How to Find the MAX APR: a) Find the week you locked (Monday’s date of that week)  b) Find the “Average Prime Offered Rate” for your Loan Program Term, Posted Here: http://www.ffiec.gov/ratespread/aportables.htm. C) Add 1.5%.”





And this from the Atlantic Seaboard: “As you know I am located in a state in where about half the counties are ‘High Cost.’ The new ability to repay will have a very negative disparate impact on the individuals that live within these counties. After extensive reading and conversations I do not believe CFPB has artfully crafted an effective interpretation of DF. The more I understand the implementation of the rules the more I believe that CFPB lacks an understanding of what many borrowers are seeking. When studying for my securities license the NASD book instilled that a mortgage is an integral aspect of an individual’s master financial plan.  To limit a borrowers’ options is to minimize their ability to success in meeting their financial goals. These are a highlight of the new Freddie Rules to be in compliance: ‘Mortgages must be fully amortizing (e.g., the Mortgages must not be interest-only or Mortgages with a potential for negative amortization), mortgages must not have terms in excess of 30 years (e.g., no 40-year fixed-rate Mortgages), and mortgages must not have total points and fees in excess of 3% of the total loan amount (or such other applicable limits for low balance Mortgages as specified by the CFPB final rule).’”


“Rob, in establishing their rules and regulations, do regulators understand the cost of living, and the cost of mortgages, varies in each state? It is very well documented: http://www.nydailynews.com/new-york/nyc-tops-new-living-expenses-article-1.1390134#bmb=1.”


Earlier in the week the commentary discussed more issues about how profit margin squeezes could easily dampen the trend toward mini-correspondent relationships, and the broker model in general. I received this note from David C.: “Matt Ostrander’s (CEO, Parkside Lending) example of the evolution of a mortgage broker into a banker is what it appears the regulators are striving for with the new regs on broker comp and QM.  Parkside has a great reputation with their brokers because they haven’t forgotten where they came from. Large broker shops with minimal ‘skin in the game’ will become a much more difficult business model next year.  Smaller, 2 or 3 person shops that do a couple hundred units a year should be able to make the numbers work.  The smaller shops doing mostly friends & family and referral business have never been a problem in the industry.  The big brokers that did any loan they could get away with and with relative impunity are perceived to have been major (rightly or wrongly) culprits in the meltdown.  Obviously this is a chicken and egg proposition, brokers only made loans that bankers bought and bankers didn’t have guns to their heads to buy these loans.  No it was a system that was wrong in not encouraging more responsibility in credit decisions.  I’m sure Matt lost an originator or two who came to him demanding a loan needed to be funded because if Parkside didn’t do the deal, the broker relationship and their loan would go to New Century.  Matt knew then it was a garbage deal and knew his capital was at risk and today is thriving in business, where’s New Century?”


David W. observed, “I cannot help but chuckle about all the commentary surrounding mini corr.  I have been contemplating doing this for several years and have finally started the process.  Licensing, bonding, increased E&O, application fee, audited financials, warehouse approval…the whole bit.   Seems like as soon as I start spending money, the chatter about the legality or sustainability of this channel begins to get louder. Our firm has been in business since 1984 as a pure broker and although we have been licensed as bankers in the past, we have never funded our own loans.  I feel like I need to continue to diversify my business model so that I am always able to offer my customers access to the most competitive loan products available. With QM and the 3% cap and the potential for smaller loans to fall into the high cost mortgage category, it appears that pure brokers will face serious challenges with respect to making the types of loans they have always made.  I know some will say “well the loans were not always good loans” and point to the mortgage crisis as proof but we also know that the bad loans (no doc, options arms, neg am, etc.)  that were made in the mid 2000’s are not available and have not been for 5+ years not.  The loans booked today are high performing loans and every performance comparison I see from my investors that offer retail/wholesale/correspondent, consistently shows the TPO business out performing or at least in line with the other channels.”


Matt T. from Pennsylvania notes, “I have previously been employed at two companies that employed a mix of mini correspondent and standard correspondent lending.  In both cases, the mini was used initially to bring the company from our first loan all the way to a legitimate small to mid-size lender. The relationship is often then retained for the purpose of making niche loans, such as Jumbo and more extreme HARP loans.  Mini correspondent can be a wonderful thing if the partner is any good.  Countrywide/Bank of America had the best one and it’s a shame they shut it down. That program was fantastic at bringing a new lender’s operations up to speed, from underwriting through post-closing and delivery.  It also allowed us to keep costs low.  Since the investor was performing the underwriting and streamlining the post-closing, we needed fewer people and didn’t need to cycle payroll with market fluctuations.  This made up for the loss of margin.  Both of my experiences eventually led to full blown wholesale divisions and funding upwards of $100 million per month.  We were far from the only company, too. Don’t underestimate how key a role mini-correspondent has always played in the growth of new mortgage companies. The problem arises when the partner doesn’t have a clue, which is common.  Having mini-correspondent clients is not the same as having wholesale clients.  Many second tier wholesalers attempt to open mini-correspondent operations without making any adjustments to their underwriting or delivery departments. As a consequence, closing is frequently painful (due to the partner attempting force their own closing policies through the underwriter’s closing instructions), excessive post-closing conditions and slow turn times purchasing the loan. The cost savings, which are critical to the relationship, wind up getting thrown out the window. The relatively small, though captive, warehouse line can become overloaded. All of these things prevent the mini-correspondent from learning anything and from turning a profit, so they never grow.”


Mike B. from Northern California writes, “Hey Rob- after the last few months of building and rolling out a national mini and small correspondent program I have a few thoughts … I see the overall concept of mini-corr as good for the existing broker industry and overall mortgage industry because they now have a viable alternative to profitably staying in business yet having a higher accountability as a loan originator. They have more “skin in the game” as a warehouse borrower (signing personal guarantees and warehouse lender scrutiny etc.), more in-depth background/credit checks and signing a much more stringent Investor agreement (repurchase, EPD, EPO etc…). I believe in the long run they will become better lenders producing quality loans for the industry. I agree many because of low net worth will not be able to buy a loan back yet the higher level of accountability will drive positive long term results. Yes- they can make more income but because of the aforementioned they have more accountability so it is justified- they also will have more work to do as responsible for disclosures etc. … and don’t forget they also have the option of going the net branch retail route and maintaining their broker status on loans they can make enough income to justify … sounds like all good news to me!”


But lastly, S.T. writes, “It blows my mind that there are so many net branch companies and small brokers right now doing correspondent lending, funding their own loans still, when we all know with the new FHFA review regulations to review files within 6 months on FHLMC and FNMA that there are going to start being a very high number of repurchases due to the agencies not previously ever reviewing files that were put into servicing after the 2010 LQI requirements.  We are seeing loans currently that are being required to be repurchased due to borrower fraud now due to the agencies being required to look at the fast audit of the LQI and debts popping up prior to closing that did not previously when the lenders pulled the LQI’s.  For large lenders with buyback clauses in their agreements this won’t affect them much because they will just push the loan back on the correspondent lender to repurchase for fraud.  However for the small community banks, net branches, and small mini-correspondent brokers this will either close down some mortgage divisions being the board at some banks will not want to take on these loans at a 30 year 3% rate or it will put the brokers out of business being they will not be able to stay afloat with more than just even one repurchase. The liquidity requirements are very lax with a ton of lenders and I am very surprised that so many funding options have been available to some brokers in this business.  I have sent out some information on this to educate my current correspondent clients but have found no other lender is talking about this.  I pride myself in being a risk manager for my accounts because I want them to be able to grow their business so I am able to grow with them and it seems the larger lenders are just ignoring what is about to start happening in July, and in some instances what is already happening, and allowing their clients to believe nothing has changed.”



Top Ten Things You’ll Never Hear from your Consultant

  1. 1.    You’re right; we’re billing way too much for this.
  2. 2.    Bet you I can go a week without saying “synergy” or “value-added”.
  3. 3.    How about paying us based on the success of the project?
  4. 4.    This whole strategy is based on a Harvard business case I read.
  5. 5.    Actually, the only difference is that we charge more than they do.
  6. 6.    I don’t know enough to speak intelligently about that.
  7. 7.    Implementation? I only care about writing long reports.
  8. 8.    I can’t take the credit. It was Ed in your marketing department.
  9. 9.    The problem is that you have too much work for too few people.
  10. 10.  Everything looks okay to me. You really don’t need me.




Rob Copyright 2013 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