June 24: Notes on Sindeo, wire fraud prevention, the interest rate climate, and builder price incentives Inbox x

Summer is upon those in the residential lending biz, along with everyone in the Northern Hemisphere, with its barbecues, travel, and people watching. With the demise of Sindeo and the disappearance of the Americash name, and the news of a $1 billion tequila company, plenty of folks are saying 2017 will be an interesting year for the economy and lenders. Julian Hebron sends, “Here’s an original take on Sindeo and the state of industry overall.”

The markets

No one has a crystal ball, and can predict with consistent certainty the future. But there are some educated observations about what is going on out there, rate-wise, and I received this note from Chris Bennett of Vice Capital Markets about how “Somebody’s wrong.” “I thought I’d share some recent market thoughts. After the butt-whooping of Nov and the first half of Dec, we’ve settled into a nice neat little range on the 10yr note we’ve lived in for the last 16 weeks – bounded by roughly 2.30% and 2.60% in yield. The nature of trading in any instrument, whether corn, oil, Yen, bonds, or hog futures, is that the longer something trades in a range, the more violent the breakout can be, as so many of the positions from that range get left behind and squeezed. We don’t know when this range will end, but when it does the ensuing move is more likely than not to be a swift one.

“Globally we’re in the 8th year of the greatest monetary policy experiment in history, and like mortgage guys in the subprime and Alt-A craze, or stock investors in the dot com boom, it’s easy to think of the current environment as just ‘the new normal.’ This global rate environment is not at all normal. In the US, our economy has had 77 consecutive months of job growth, and our unemployment rate stands at 4.7%, very low from a historical perspective, and consisting of mostly structural unemployment. Inflation, measured by the Fed’s favorite measure, PCE (personal consumption expenditures) just hit the FOMC’s long-standing 2% target, and CPI is running .5% north of that. While we aren’t chugging along at a 3 or 4% real GDP growth rate, by all measures their goal from setting Fed Funds to zero, QE1, QE2, QE3, and QE infinity have been achieved. The only thing holding our yields down now are the anchors of the ECB and the Bank of Japan, who took the term ‘greatest monetary policy experiment’ and shattered the belief that rates could never go below zero. At one point last summer, $13 TRILLION (35%) of global sovereign debt had a negative yield. $9 trillion of it still does. Why? Somebody’s wrong.

“That’s right – you agree to lend Japan money for 10 years, and they agree to give you back 98 cents of your dollar (technically 98 yen for your 100 yen, ten years later). Who would ever do that? It’s insane. Those who are doing it are doing it because short-term bonds have an even greater negative yield (how’d you like -.40%?  How much can I get ya son?), because they are funds that are required to have certain investments and certain yield curve placements and they are too scared to change their rules – AND because those who bought bonds at tiny yields like +.10% “made money” when rates went to -.10% and therefore the value of the bond they bought went up. But it’s stupid. This environment of the last year or two is going to be talked about in universities for decades, maybe generations to come, but it’s so hard for the market participants to see, because they believe it to be the ‘new normal,’ just like people thought earnings per share meant nothing in 1999 and it was OK to give a loan to a borrower with no money down, and no documented income or assets, and lousy credit, in 2005. You can’t see how silly something is when you’re in the middle of it.

“One day these times in Euroland and Japan will come to an end, and like a fire at a club, there is not going to be a door wide enough for all those bond buyers to get out of, and the anchor that has held our rates in the US down for so long will give way as well. A 2.30% US 10-yr yield as very attractive when competing yields are -.10% to +.30%, but when that policy is one day abandoned the usual front-running of central banks will result in some very bloody times in bond land.

“From 2011-2014 there were several times when the Fed would (through what is known as “the dots”) signal an expected series of rate increases, but the market (which we can measure using Eurodollars and Fed Funds futures) did not believe them. One would look at the disconnect and say, ‘somebody’s wrong.’ And each time the Fed was wrong, and we’d get another shot of QE (similar to methadone, which is used for heroin addicts trying to recover) instead of a hike. The market had a couple of solid freak-outs, but in the end, it would come back to this comfortable place of candy bars and stickers where nothing bad ever happens.

“The Fed has come right out and said to expect 2 more tightenings this year, 3 tightenings next year, and another 2-3 in 2019, and that the ‘long run’ Fed Funds rate should be 3.00%. Now, if the Fed is telling you the overnight rate is moving toward 3.00%, why would you want a 10-year note at 2.30%, or even a 30-year treasury bond at 2.97%? You shouldn’t. Somebody’s wrong.

“These times are going to be talked about and studied for a very, very long time.  At one point last summer, almost $80 billion in corporate debt had a negative yield. Yes, you loan money to a corporation, and agree to be guaranteed to get less money back in the future, if they don’t default in the first place. There were a few people with mortgages in northern European countries with ARMs who were getting paid interest. It’s abject silliness. Despite the nasty side-effects of zero and negative yields, and the ballooning of central bank balance sheets in QE maneuvers, it’s worked in the US, and is now starting to work in Euroland and Japan. I don’t know when, but it is only a matter of time before global bond buyers wake up and realize the party is over, and the cops are here now, and they’d better get the hell out if they don’t want to get hauled off to jail and have their parents come to pick up the pieces. Somebody’s wrong, and this time, it’s probably not the Fed.”

Builder incentives – against the law?

Nope, still not a RESPA violation if done correctly, much to the dismay of lenders trying to grab builder business from the “in house lender.” This commentary had addressed this a number of times, most recently here.

And this week Michael Pfeifer with Lenders Compliance Group addressed the topic. “We have an Affiliated Business Arrangement (AfBA) with a homebuilder. The builder currently discounts the purchase price of its homes if the buyer uses our company to finance the purchase. If the buyer chooses to use another mortgage company, there is still a discount, but it is lower. The builder, who is the majority owner of our company, now wants to offer discounts only to those buyers who use our company to finance the purchase. Is this a compliance problem?”

Mr. Pfeifer writes, “The issue of builder incentives and preferred and/or affiliate lenders continues to be a controversial one. There are two sides (at least) to the argument. On the pro-builder side is the assertion that a preferred lender or affiliated lender allows for better coordination between lender and builder, and thus a smoother, more predictable financing process, thereby improving the overall experience for the consumer. The counter to this argument is that, even if there is no express ‘requirement’ for the buyer to use the builder’s lender affiliate, as a practical matter the buyer is being “required” to do so, in violation of the ABA exception to RESPA Section 8 (12 U.S.C. §1024.15), one of the conditions of which is that, with limited exceptions: ‘No person making a referral has required (as defined in 12 U.S.C. § 1024.2) any person to use any particular provider of settlement services or business incident thereto…’ (12 U.S.C. §1024.15(B)(2)). Critics also argue that the builder is “steering” the consumer.

Wire fraud

The subject of wire transfer fraud is addressed by Steve Brown with PCBB. “The FBI warns wire transfer fraud is rapidly rising, as cybercriminals use a combination of sleuthing skills, social engineering and basic hacking to siphon money from trusting banks and business executives. According to an FBI report, hackers aimed to steal more than $2.2B through wire fraud known as business email compromise, in the last half of 2016. This amount represents more than 67% as much attempted wire-fraud thievery as was committed in the previous 2.5Ys combined. Further, the actual number of reported cases doubled, which points to more hackers seeing the benefits of this type of fraud, so all bankers should be on alert.

“In such scams, what appears to be a legitimate email from a top executive (often the CEO) arrives in the inbox of someone working in finance or accounts payable. The email indicates a wire transfer must be issued immediately and that the executive is in some situation that adds pressure to make things happen fast. As if that weren’t enough, the email address will usually appear as a legitimate company email and will often include references or details that (seemingly) would verify that the request is coming from the actual person. Such details are often gathered from the dark web, social media accounts, or the company’s own website. Then, with a directive in hand, from what appears to be a high-ranking company executive, the recipient will process the transfer as requested in the email. Once the money is wired out of the country it disappears into the mist.

“Meanwhile, another survey by the Association for Financial Professionals finds 74% of respondents reported their organizations were exposed to either attempted or actual payments fraud in 2016. This percentage is a record high since 2005, when the survey was started. The same survey also found that wire transfer scams topped the list, ahead of ransomware, tax phishing and tech support scams. Clearly, cybercriminals opt for this scam because it offers a quick, healthy payoff that is faster than ACH or check fraud. It also offers the criminals a very low risk of getting caught.

“Since these incidents can not only be costly, but embarrassing to the companies and executives involved, industry experts believe many of these scams go unreported. As a result, the FBI numbers may show only the tip of the iceberg on such crimes. We note as well that these wire transfer scams have also given way to similar scams aimed at gathering employee tax information or W2 records. In this way, fraudsters can file a fake return and collect refunds.

“Your bank and your business customers are of course not immune to such risks, but more can always be done. Certainly, making sure your staff is well trained on the protocols for any wire transfer requests AND follows those explicitly (about 95% of scams are due to human errors), will help protect you. Just as important is educating your business customers on these scams. It will help keep them out of harm’s way and reduce their risk profile over time. That is good for you too, because they likely are your biggest risk issue so arming them with information can be a good thing. Lastly, it goes without saying, but the least amount of personal information available on your executives, especially travel plans, the better. After all, you wouldn’t want to throw a life preserver to these criminals that help them float away with your money.”

Thanks to Bob W. for this one.

The rabbi and the priest met at the town’s annual picnic. Old friends, they began their usual banter.

“This ham is really delicious,” the priest teased the rabbi. “You really ought to try it. I know it’s against your religion, but you just haven’t lived until you’ve tried Mrs. Hall’s prized Virginia Baked Ham. Tell me when you are going to break down and try some.”

The rabbi looked at his friend with a big grin and said, “At your wedding.”

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Rob Chrisman