July 9: The cost of compliance is going up, volumes are going down; measuring is the first step to improving efficiency

Here in San Francisco at the CMBA’s Western Secondary conference, someone reminded me of my April 1 (April Fools) edition three months ago. “The MBA came out with a revised production forecast for 2013. ‘The good news is that many lenders will reach their goal of 70% purchases making up their volume! The bad news is that overall volume will be down by 90%.’” This particular comment, made in jest, went on to discuss lending on prefab yurts, but, that aside, some lenders are wondering if this statement could be truer than they’d like, sooner than they’d like. Of course last week was a holiday week, and the week before was the rush to close loans before the end of the month. (Maybe the CFPB could look into solving the monthly crunch issue – do closing a lot of loans at the end of the month due to interest calculations really help the consumer? See quick note below.) Seriously, as I recall a while back the MBA estimated that refis would account for 35% of applications by Halloween. The timeline may have been bumped up somewhat…


(Generally, as I understand it, a month-end close means buyers pay less prepaid interest, but skip only one subsequent monthly payment. Meanwhile, buyers who close at the start of the month pay more prepaid interest, but then skip two monthly payments. Either way, there are no interest-free days; so in effect, the difference is more about cash flow than savings. Should the CFPB educate the borrower on this?)


It will be very difficult, later this year, to know which issue caused volumes to drop as much as they might: rates increasing, the cost of compliance and regulation adding additional burden to the consumer, or the added expense of trying to do the perfect loan that does not result in a buyback or legal action years from now. Rates are a strong contender. Yes, monthly payments have gone up, but probably not enough to seriously dampen housing prices – especially if more people are working, and/or earning more money. The monthly principal and interest payment on a $200,000 mortgage with a 4 percent rate would be $955; at 4.5 percent the monthly principal and interest payment would be about $1,013 a month. At a 5 percent rate, it would be $1,074 – in other words, only about $60 per month per .5% per $200,000 loan amount.


The cost of compliance continues to mount every month, and those costs are passed on to borrowers. The CFPB is doing what it can to keep folks up to date on things, although the industry is dying to know about exam results, enforcement, and what actions result in fines. “Our goal is to provide a guide that can be used by institutions of all sizes to evaluate their readiness for the impending mortgage rule changes. The guide provides high level topics that institutions should consider as they implement these rule changes. We plan to update this guide periodically as rule clarifications and amendments are finalized and we identify new issues through the implementation phase.” The CFPB released the first version of the 2013 Dodd-Frank Mortgage Rules Readiness Guide. The guide’s purpose is to assist regulated entities in achieving compliance with the mortgage rules, highlight key issue areas that may be closely examined during a review, focus the industry and examiners on key elements of a compliance management system that may warrant review, modification, or other enhancement. Find the Readiness Guide here:  files.consumerfinance.gov/f/201307_cfpb_mortgage-implementation-readiness-guide.pdf.


And the clock is ticking for you to submit comments on a massive set of possible changes through the CFPB. Included are changes to the definition of loan originator, ability to repay, lending to underserved areas, credit insurance premiums, loans to manufactured home employees (where the heck did that one come from?), forbearance and loss mitigation plans, and so on. Don’t complain about it if you don’t comment, so here you go: http://www.consumerfinance.gov/pressreleases/cfpb-issues-proposed-modifications-to-mortgage-rules/?utm_source=newsletter&utm_medium=email&utm_campaign=Email%2B20130624%2Breg%2Bimplementation.


The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit is busy. Some suggest that they should be busy attempting to shorten their name, but instead they’re busy holding hearings. In their recent meeting they focused on the CFPB’s ability to repay/qualified mortgage rule, entitled “Examining How the Dodd-Frank Act Hampers Home Ownership,” attending and contributing to the hearing were representatives of state regulators, consumers and industry executives; these included James C. Gardill, Chairman of the Board, WesBanco, Inc., on behalf of the American Bankers Association, and Debra W. Still, Chairman of the Mortgage Bankers Association. In Ballard Spahr’s CFPB Monitor they write, “In their testimony, Mr. Gardill and Ms. Still sounded a common theme: that the QM rule will substantially limit mortgage lending because lenders will not want to face the risks associated with making loans outside the QM standard….Ms. Still asked Committee members to urge the CFPB to change the QM rule by raising the small loan limit for loans that can have more than 3 percent in points and fees and still qualify as QMs from the current $100,000 limit to $200,000.” Ms. Still’s MBA statement given at the hearing is worth a read and can be found here: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba15-wstate-dstill-20130618.pdf.


With volumes dropping, all lenders are looking to both cut costs and increase efficiencies. MBA president Dave Stevens wrote about it today: http://www.linkedin.com/today/post/article/20130709112815-5071230-learning-from-the-experts-adjusting-the-mortgage-business-model?published=t.


And as we all know, no one originates loans in a vacuum – pricing and margins are subject to competition, and so we’ve seen an increase in benchmarking, e.g., comparing your numbers versus those of other lenders. The MBA produces a quarterly report, for example. It can be found here (http://www.mbaa.org/ResearchandForecasts/ProductsandSurveys/PerformanceReport.htm) but be sure to page down a couple times and look at recent numbers released on June 26th.


The MBA surveys 300 independents and bank-owned mortgage companies to provide a range of performance – just like a teacher posting grades on the wall of the classroom. For example, in 2012 the average profit was 107 bps per loan, and in the first quarter of this year, it was 87 bps. Are you doing better or worse? So when anyone talks about a top performer or a highly profitable company, one has a standard.


Are all the metrics the same? They should be! For example, the MBA created MBFRF definitions (Mortgage Bankers’ Financial Reporting Form). Yes, the definition refers to other lines within in the form, but you’ll have the idea. “Secondary Marketing Gains/(Losses) On Sale” is defined as “GAIN (LOSS) ON LOANS/MBS SOLD WITH SERVICING RETAINED (EXCLUDING CAPITALIZED SERVICING)- The difference between the sales price and the carrying value of sales of mortgage-backed securities classified as trading securities sold with servicing retained and mortgages sold with servicing retained. Only the portion attributable to the mortgage loans or mortgage-backed securities should be included in this line item. Any gain or loss allocated to the capitalization of servicing rights should be captured in line item C310. Origination fees that otherwise would be included here per FAS 91 should be reported in line C210 for retail and direct marketing production or C220 for broker/correspondent production. Direct loan origination costs that otherwise would be included here per FAS 91 should be reported in the applicable expense line items. Exclude any premium to buy options (“option premium”) because option premiums are reported on line C380.


“C310 CAPITALIZED SERVICING ON LOANS/MBS SOLD WITH SERVICING RETAINED- The portion of any gain or loss recognized from the sale of loans and MBS with servicing retained that is allocated to the capitalization of servicing rights.”


“C320 GAIN (LOSS) ON LOANS/MBS SOLD WITH SERVICING RELEASED (EXCLUDING SERVICING RELEASED PREMIUMS) – The difference between the sales price and the carrying value of mortgages (net of any discounts or premiums that were not immediately recognized as income, if applicable) sold or securitized with servicing released. Only the portion attributable to the mortgage loans sold should be included in this line item. Servicing values should be excluded because they are reported separately on this form. Any gain or loss related to the servicing released premiums received should be captured in line item C330. Origination and other fees should not be included here because they should be reported in line C210 for retail production or C220 for broker/correspondent production. Direct loan origination costs should also be excluded here because they are reported in the applicable expense line items. Option premiums and other hedge costs should also be excluded because they are reported separately on line C380.”


“C330 SERVICING RELEASED PREMIUMS ON LOANS/MBS SOLD WITH SERVICING RELEASED- The portion of any gain or loss recognized from the sale of loans that is related to the servicing released premium received.”


“C340 FEES PAID TO BROKERS- Include yield spread premium and other fees paid to brokers if not reported separately on this form. Companies that account for such fees as a direct adjustment to the gain on sale will include the amounts paid here. Other companies may account for such fees as an adjustment to the basis in the loan (thereby including the cost in the gain/loss on sale line) and not report the cost on this line. The amount entered must be equal to or less than zero.”


Anyway, I won’t go on – you have the idea.


And a couple weeks ago Richey May introduced a benchmarking report to its clients at RM’s annual conference.  In the report, loan margin compression was highlighted by a 50 Bps drop from the end of 2012 through Q1-2013.  Another change worth noting is the increase in servicing related revenues.  Servicing revenues accounted for approximately 204 Bps of revenue for Q1-2013 (including gain on sale and capitalized MSR values) compared to 70 Bps in 2012.  This highlights the importance of adapting selling strategies in a shifting market.  For more information on how to participate in Richey May Select’s quarterly benchmarking solution contact Trevor Reinhart – Trevor@Richeymay.com


Just like a spring that tends to bounce back if stretched too far, the fixed-income markets came back Monday on no real news. By the afternoon agency residential MBS had improved a point or more, resulting in a few price changes. But LOs should know that price changes are rarer in volatile “up market” for obvious reasons such as secondary managers trying to reduce hedge costs. This move may reflect a consensus in the market that while the Fed could very well taper off asset purchases in September (taking their foot off the gas, but not putting it on the brake), it is likely to remain on hold for much longer than is currently priced. Traders, and lock desks, saw barely any production, as expected, and the thinking is that mortgage production will drop as rates rise and incentives to refinance dwindle. Weekly mortgage rates and activity indexes have clearly defined the slide to underwritings and last Friday’s prepay reports displayed the current slowdown to speeds as well. Less supply is out there, just in time for the Fed to make a graceful secondary market exit perhaps.


The economic calendar for today is quiet again as there are no major economic releases scheduled. We have the Treasury’s $32 billion 3yr note auction 1PM EDT – that’s about it. In the early going the 10-yr yield is unchanged from Monday close of 2.64%, and MBS prices are also roughly unchanged although rate sheets could see some “catch up” improvements.



There are plenty of trivia buffs out there, and plenty of WWII buffs. Combining the two results in some interesting tidbits; part 1 of 2 is today.

1. The first German serviceman killed in WW II was killed by the Japanese (China, 1937), the first American serviceman killed was killed by the Russians (Finland 1940); the highest ranking American killed was Lt Gen Lesley McNair, killed by the US Army Air Corps. 2. The youngest US serviceman was 12 year old: Calvin Graham, USN. He was wounded and given a Dishonorable Discharge for lying about his age.  His benefits were later restored by act of Congress.

3. At the time of Pearl Harbor, the top US Navy command was called CINCUS (pronounced ‘sink us’). The shoulder patch of the US Army’s 45th Infantry division was the swastika.  Hitler’s private train was named ‘Amerika.’  All three were soon changed for PR purposes. 4. More US servicemen died in the Air Corps than the Marine Corps. While completing the required 30 missions, an airman’s chance of being killed was 71%.

5. Generally speaking, there was no such thing as an average fighter pilot. You were either an ace or a target.  For instance, Japanese Ace Hiroyoshi Nishizawa shot down over 80 planes. He died while a passenger on a cargo plane. 6. It was a common practice on fighter planes to load every 5th round with a tracer round to aid in aiming. This was a big mistake.  Tracers had different ballistics so (at long range) if your tracers were hitting the target 80% of your rounds were missing.  Worse yet tracers instantly told your enemy he was under fire and from which direction.  Worst of all was the practice of loading a string of tracers at the end of the belt to tell you that you were out of ammo. This was definitely not something you wanted to tell the enemy. Units that stopped using tracers saw their success rate nearly double and their loss rate go down.



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Rob Chrisman