June 14: Latest NMLS originator stats; good news on future buybacks; Zillow’s accuracy; LO referral structures

I am fortunate enough to have a pretty heady bunch of topics today, including information on Fannie & Freddie new reps and warrants (and how they relate to buybacks), LO referral compensation, working with HUD and the FHA’s LEAP program, Zillow’s margin of error, disclosures, and the latest originator stats from NMLS. Let’s jump in!


Is the traditional mortgage banking model broken? There’s something to think about, and an executive at a firm building out a new platform funding model contributed, “Everybody is trying to sell themselves using the pitch of price, service, and efficiency…which only grinds down margins in a commodity business. The key to being successful in the mortgage business going forward, other than delivering to the agencies, will be to be able to partner with an investment manager that knows how to hold mortgages with less capital than that required by the banks or less capital than what it takes to buy the non-investment grade bonds off a private label RMBS.  Everybody is focused on the securitization model for non-QM.  I think it will take longer to get that market started than people believe. What is happening in jumbo land with Wells buying the market and stalling the Redwoods of the world will also happen in the non-QM market. Vehicles that can bid up mortgages and hold them for very little capital will gobble up the non-QM loans that will otherwise end up being securitized.”


LOs like keeping track of each other and many use NMLS stats to do so. But like with so many statistics and government/regulator numbers these days, there are serious issues with accuracy. Several weeks ago Sam Garcia with Mortgage Daily wrote, “One thing about NMLS registrations is that they increase throughout the year because even if someone exits the business, their registration remains active until the following year. The upcoming first-quarter 2014 report will be very telling. Here is more information on NMLS registrations from December.” And sure enough, here is the latest NMLS Registration Report.


From Texas, Gil B. volunteers, “Regarding consumer education and disclosures…While I agree that mountains of disclosures and closing documents can confuse and overwhelm borrowers, given the regulatory blitzkrieg and litigation our industry has been facing, it is foolish for anyone, including Richard Cordray, to believe that 50+ pages of documents will be replaced by anything except perhaps 100+ pages.  Just look at a prescription drug ad in a magazine, where one page of advertisement means two pages of fine print disclosures and disclaimers!  This problem isn’t going away, and it is up to all of us in the industry; lenders, originators, processors, closing agents, to manage form overload.  How many companies periodically exam their disclosure packages to look for duplication and potential reductions, or hold document preparation firms accountable for unnecessary forms?  Originators, do you simply dump 60 pages of disclosures on an applicant’s lap and tell them to sign them ASAP, or do you organize the forms by category, and explain them as they are signed?  Closing agents, do you include a one-page index with very simple explanations for each form? And maybe it’s just me, but I find it condescending when originators speak of their requirement to educate borrowers.  I expect a car salesperson to inform me, but I would run from the first dealership that felt the need to educate me.”


I am always the last to hear about these things… occasionally a real estate agent will write and complain about Zillow. Brent Nyitray, the Director of Capital Markets with iServe, scribed, “Ever noticed that the Zillow Z-Estimates rarely line up with where houses actually trade? It turns out that the Z-Estimates are within 5% of the actual value of the home just about half the time. Two years ago, Z-Estimates were too high, now they are too low. If you have a buyer who is stuck on paying no more than the Z-Estimate for a home, show them this article – the Z-Estimate is probably not realistic. Here is Zillow’s response to the article.”


MortgageDashboard recently published an article called “The Two Loans Lenders Lose Monthly [and How Technology Wins Them Back]”. If the average originator closes five mortgages monthly, the value of two extra loans cannot be exaggerated. This short article demonstrates two considerations lenders might use to generate more business. The first consideration illustrates how a digital strategy is a cost effective alternative to traditional marketing with a higher return. The second indicates how a customer relationship management platform retains applicants after pre-qualification. MortgageDashboard also released its 2014 CFPB Proposal Guide to Regulation C. “In a recent article put out by the CFPB, the Bureau announced new proposals concerning Regulation C. The following guide demonstrates the proposed exemptions, collected data, and loan application register reporting functions.”


To clear things up about dealing with HUD, Donna Beinfeld volunteered, “When applying to HUD to become a mortgagee, you will need to use their new on-line service. The ability to answer questions and provide documentation uploads seems to be running smoothly. At the end, you will need to pay your application fee and the system will re-direct you to Pay.gov. The Pay.gov system is used by HUD and VA (known as the VA FFPS System) to receive UFMIP and Funding Fees when FHA and VA loans (respectively) close and payment is due to them. Be sure you are registered with the Pay.Gov system before you start your application process or you will get a “null and void” when you are directed to the Pay.Gov system and you are not registered.


And Karen Garner from the Collingwood Group writes, “I just wanted to follow-up on Friday’s commentary on your paragraph about Mortgagee Letter 2014-09. You noted that the new LEAP system will be used for ‘post approval updates and business changes’. Collingwood often receives questions around changes in corporate officers – does FHA need to be notified?  The answer is yes – note the Mortgagee Letter 2014-09 and the Lender Approval Handbook 4060.1 REV-2.  The next question we receive is how you do that notification.  As you said in your article, this is where the new system is used.  I thought a reminder to your readers would be good.” Thank you Karen!


And here’s an exchange on, you guessed it, LO comp & referrals. “Rob, I understand that an LO’s comps cannot be dictated by terms of a mortgage, what about relationships? You may have written on this before, but here is the scenario: 1. let’s say a company pays its loan officers: 100bps per loan. 2. Company attracts a ‘marketing relationship’ with a large real estate firm that in turns pays $10,000 a month for that real estate firm to market that ‘in-house’ company by way of a marketing agreement. 3. Loan officer for that company now has a comp agreement that says basically ‘on outside business you generate you get paid 100bps, however for the business through Real Estate company referrals you get paid 50bps’. My question is this, as much as the loan officer is not getting compensated from the ‘terms of the loan’ in essence isn’t the loan officer basically paying for the business by way of fewer bps which is paid through the mortgage company to the real estate company for marketing services a.k.a. referrals they wouldn’t have gotten if it weren’t for the ‘business relationship’?”


I sent this along to James W. Brody, Managing Member of the American Mortgage Law Group, who returned, “I think you hit the nail pretty much on the head in the last sentence – that almost regardless of whether the structure is compliant with loan origination rules, it seems likely to run afoul of certain kickback prohibitions in RESPA.  Keep in mind that as of late, many regulators are honing in on referral structures and scrutinizing them for prohibited payment structures.  As you noted in the third part of your question, the compensation is directly lowered due to a ‘referral,’ and this referral is an added benefit outside of the market rate that the lender is paying for he services rendered, a substantial kickback red flag.  As you alluded to, it could be argued that the cost to the lender is not actually $10,000, as the lower BPS MLO Comp for those transactions means the lender can actually ‘bank’ (earn) more on that transaction, thereby offsetting some of that $10,000 cost.  This would raise serious red flags for a regulator.  Even if we say that compensation structure does not run afoul of kickback prohibitions for arguments sake, you would also have to be very mindful of the ‘proxy for a term of a transaction’ prong of the LO Compensation rule.  If the loans coming to the lender from the real estate company (or other partner) have certain terms in common, then a regulator can argue that you are basing compensation on a proxy for a term of the transaction, violating the rules.  As the above indicates, your initial apprehension about this compensation structure was correct.” Thank you James.


Finally, here are some thoughts on loan sale agreements and buybacks from Brian Levy with

Katten & Temple, LLP. “You may already be familiar with the recent bulletin from Freddie (Fannie’s is the same) issued May 12 regarding repurchase liability for sales to Fannie and Freddie on loans sold after July 1.  I haven’t seen much analysis of the potential impact of these changes, but this new rep and warrant framework appears to be a significant step in the right direction for the industry on several issues. As someone who represents originators in numerous repurchase disputes, I particularly like (i) the relief from representation and warranty liability on loans that perform for 3 years (down from 5 years under the prior guidance), (ii) the ability to step into the shoes of terminated MI and (iii) relief on loans that have passed a QC audit. You may have heard my rant on repurchases in the past, but here’s my take on the 3 year issue:


“The numerous representations and warranties in loan sale agreements were designed to enforce underwriting discipline in credit decisions. They were not intended to shift the risk of loss back to the originator if anything in the file or underwriting was off, no matter how material or immaterial. The manner in which these provisions were enforced prior to 2008 was consistent with that view (and with the concept of a “true non-recourse sale” for the accountants in the group). After the ‘meltdown’, however, investors began to look for any way possible to minimize losses and the repurchase remedy began to be used extensively to shift losses back to originators. I have many clients who were aggressively pursued for losses based on origination defects on loans that performed just fine for years. In every case, it was impossible to identify a connection between the alleged defect and the cause of default or loss.


“Most experience mortgage bankers would agree that, barring fraud, if a loan performs well for 3 years, it is safe to say that the originator did a good job of underwriting. At that point, subsequent event such as job losses, life events, market declines and even poor servicing can result in default and losses, but whatever happens to the loan really can not, in fairness, be attributed to how it was originated. To demand repurchase of a loan based on an origination defect(s) after it has demonstrated good performance is simply an attempt to shift risk that the parties did not bargain for. Interestingly, despite the contingent risk repurchases pose to originators, investors are totally unwilling to share loan status information over the life of the loan with those originators.


“Mortgage bankers as a group can often be ‘once bitten, twice shy’, so I suspect that this news will not result in immediate loosening of any credit standards that have tightened out of fear of repurchases. Rather, I imagine there will be a slow recognition of the benefits of this relief as the industry sees it implemented over time and risks decline as it filters down. In that regard, a couple of things jumped out to me as areas to watch going forward. First, how tightly will the QC reviews be performed (i.e., will materiality matter)? Second, will a GSE’s notice of rep and warrant relief be shared with originators in addition to sellers? Will the changes in liability impact correspondent agreement terms (particularly the relief for loans with good payment history for 3 years)? And will eligibility and other reps and warrants such as compliance be elevated in their risk impact? Meanwhile, savvy correspondents may want to review their loan sale agreements to determine if their repurchase exposure to the investor can be limited in a similar fashion.” Thank you Brian!



For some timely, clever advertising, Ken & Bill sent along this cool soccer-related ad.





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Rob Chrisman