As always there is a lot going on with lenders, ranging from the new 1003 all the way to President Trump calling off his plan to impose tariffs on Mexico. With the move down in rates and lenders raising their margins, in general the mood out there is good. But there are always some things that far-sighted people are mindful of.
The old days
Julian Hebron with The Basis Point reminded me, “People forget there was a couple decades of full doc vetting of Sandler’s option ARMs, and they were financially beneficial to those who understood them and could afford them.”
A veteran originator from a “sand state” penned, “As I recall, the old World Savings option ARM began in 1993, or at least the early 90s. It was a World Savings portfolio product. For the newbies, that means they did not sell the loan in the secondary market. It was their money that funded the loan, not someone else’s money, with no Wall St. dim wit to sell it. [Editor’s note: dim wit can either be one word or two.]
“The original option ARM program required good credit, good income, 1 year of cash reserves, and had a maximum LTV of 80%. This is a far cry from the crap that came later with NO income, NO credit, NO cash and 100% LTV.
“While I am on it, the original stated income loan was for self-employed borrowers. It had a 75% maximum LTV and the borrower had to have excellent credit with 1 year of total debt in reserves. As long as the stated income made sense for the type of employment (i.e., a doctor makes $20k a month, not a casino blackjack dealer) the loan was “a go.” These loans made sense.
“’NO NOTHING’ loans, where everything is stated or waived, did not make sense, and we all know what it caused. I hope that federal and state regulations are in place to keep banks, Wall Street, and naïve loan people from causing the next major economic collapse.”
Comment on the general business environment
From out in Northern California long time industry vet James Johnson relayed, “Rob, your ‘bulled up’ term in Wednesday’s commentary is a good way to put it, and that is exactly what is happening. As you may recall, I have been bullish on bonds since late December. My reasoning was not quite right, but this big drop in rates does not surprise me at all. Many owners think they are out of the woods, but I do not believe that to be the case. Volumes and margins will be better, but not great.
“So, how is all of this going to play out? I have no special clarity on rates, so let’s just assume things stay about where they are today, a 2.10% ten year. Will this be a case of ‘A rising tide lifts all boats’? I think that will be the case. I am expecting a refi opportunity starting very soon, but I do not think the smaller independent mortgage bankers (IMBs) will capture a big share of that volume. The consumer direct shops will benefit, and the big services will defend their portfolios and get a big share as well. For smaller and medium sized IMBs, maybe the best case is an improvement in margins, and that would be huge for them. What if margins widen out by 10-20 basis points? That will be a big jump in profitability for those companies.
“It will be interesting to see if volume increases and to what extent? Recently volume has been down slightly from 2018, and I don’t see the big upside for IMBs as more volume. Compressed margins have been the big problem for the last year or so, but maybe better margins are on the horizon? If you look back as recently as April, I would give the rest of the business a grade of about 4 on a ten-point scale, maybe even a grade of 3. Today it is already better, maybe a grade of 5 and headed to a 6. For company owners ‘the glass is now half full, rather than half empty.’
“But we still have too much capacity and with this drop in rates, people will not be leaving the business. As a company owner told me a few weeks ago, ‘Unfortunately, we are in an industry where most people are overpaid.’ If he is right, then capacity will not shrink, especially with a 3 handle on mortgage rates.”
James wrapped up with, “Many company owners are in the process of developing amnesia and forgetting how close they came to absolute disaster over the past year or so. I am encouraging them not to let those lessons go to waste. The tough times are not over, and I am doubting that this coming refi opportunity will pack enough punch to relieve the pressure. At least that will be the case for the smaller IMBs and some of the middle size companies as well. The bigger companies and banks will no doubt benefit from this next round of refi business, but to some extent that will be offset by big MSR valuation adjustments. Net, net this is no doubt a positive development, but don’t expect things to go back to an 8 or 9 any time soon.”
Fun with trillions of dollars of securities and ARM loans
The Federal Reserve-backed Alternative Reference Rates Committee is considering whether legislative relief is needed to help facilitate the transition from Libor to other interest rate benchmarks on certain existing products. “There may be no solution for some of these products,” said ARRC chair Tom Wipf.
On 31 May, the Federal Reserve-sponsored Alternative Reference Rates Committee (ARRC) released recommended benchmark fallback language for securitization contracts in anticipation of the retirement of the London Interbank Offered Rates (Libor) after 2021. The language provides a standardized approach for securitizations to follow and for participants in other markets to consider, increasing the likelihood of consistency in Libor transitions across structured finance bonds, assets and hedges.
Most believe that the adoption of the ARRC’s recommended language would be credit positive for new securitizations with Libor exposures because inconsistency in transition mechanisms across derivative and debt sectors heightens certain risks. In particular, inconsistencies would likely expand the risk of diverging cash flows in structured finance transactions, as well as the risk of reduced market liquidity negatively affecting securitization sponsors or their underlying borrowers.
The adoption of ARRC’s fallback language also would be credit positive because it calls for relying on guidance from a relevant governmental body – namely, the Federal Reserve Board, New York Fed, ARRC, or a future panel similar to ARRC – for some steps in calculating new bond benchmarks, which would reduce legal and operational risks.
Randal Quarles, vice chairman for supervision at the Federal Reserve, has told the Alternative Reference Rates Committee the industry must move faster to switch to the Secured Overnight Financing Rate from Libor. “With only 2½ years of further guaranteed stability for Libor, the transition should begin happening in earnest,” he said.
The Wall Street Journal (tiered subscription model) (03 Jun.), Bloomberg (tiered subscription model) (03 Jun.), American Banker online (subscription required) (03 Jun.), Financial Times (subscription required) (03 Jun.)
The Federal Reserve’s examinations of major banks have added detailed questions about steps banks are taking to transition from Libor to another interest-rate benchmark, says Randal Quarles, vice chairman for supervision. “The largest firms should be prepared to see our expectations for them increase,” he says.
State law changes
The Georgia definition of a mortgage broker has been revised by House Bill 212 to clarify exclusion of those retailers or retail brokers of manufactured or mobile homes or a residential industrial buildings where their role is limited to compiling and transmitting applications to mortgage lenders and do not receive a fee from any person for assisting the applicant. Employees of those retailers or retail brokers are similarly excluded from the definition of mortgage broker where acting in the scope of their employment duties among other requirements.
The state of Washington has modified provisions under its Revised Uniform Law on Notarial Acts effective as of October 1, 2020. Several definitions have been added to explain significant terms relating to electronic notarizations. Some notable terms defined in this section include “communication technology,” “identity proofing,” and “remotely located individual.”
To perform a notarial act using communication technology for a remotely located individual, the notary public must first ascertain the identity of the remotely located individual. Identity can be determined through any of the following means: 1) personal knowledge; 2) verification on oath or affirmation of a credible witness appearing before the notary; or 3) verification of at least two different types of identity proofing.
The notary must also reasonably confirm that the record before him or her is the same record in which the remotely located individual made a statement or executed a signature.
Lastly, the notary public must make an audio-visual recording of the performance of the notarial act. This recording must be retained by the notary or an agent of the notary for at least ten years. The certificate of notarial act must also indicate that the notarial act was performed using communication technology.
The state of Colorado has modified provisions under Title 12, including those relating to its Mortgage Loan Originator Licensing and Mortgage Company Registration Act, effective as of October 1, 2019.
The modifications serve primarily to recodify and reorganize the articles within the Act, all of which are administered by the Division of Real Estate, the Divisions of Conservation, or the Division of Professions and Occupations.
The new provisions also incorporate statutes previously located in Title 24 relating to the creation, powers, and duties of the Division of Professions and Occupations in administering laws regulating professions and occupations.
A final change to the Act is the elimination of provisions that are archaic or obsolete. Other provisions of the Act have been repealed due to relocation within the Colorado Revised Statutes.
I decide to water my garden.
As I turn on the hose, I look over at my car and decide it needs washing.
As I start toward the garage, I notice mail on the patio table that I collected from the mailbox earlier. I decide to go through the mail before I wash the car.
I lay my car keys on the table, put the junk mail in the garbage can under the table, and notice that it is full.
So, I decide to put the bills back on the table and take out the garbage first.
But then I think, since I’m going to be near the mailbox when I take out the rubbish anyway, I may as well pay the bills first.
I take my check book off the table, and see that there is only 1 check left.
My extra checks are in my desk in the study, so I go inside the house to my desk where I find the can of Coke I’d been drinking.
I’m going to look for my checks, but first I need to push the Coke aside so that I don’t accidentally knock it over.
The Coke is getting warm, and I decide to put it in the fridge to keep it cold.
As I head toward the kitchen with the Coke, a vase of flowers on the worktop catches my eye – they need water.
I put the Coke on the worktop and discover my reading glasses that I’ve been searching for all morning.
I decide I better put them back on my desk, but first I’m going to water the flowers. I set the glasses back down on the worktop, fill a container with water and suddenly spot the TV remote control.
Someone left it on the kitchen table. I realize that tonight when we watch TV, I’ll be looking for the remote control, but I won’t remember that it’s on the kitchen table, so I decide to put it back in the front room where it belongs, but first I’ll water the flowers.
I pour some water in the flowers, but quite a bit of it spills on the floor.
So, I set the remote control back on the table, get some towels and wipe up the spill.
Then, I head down the hall trying to remember what I was planning to do.
At the end of the day:
– the car isn’t washed
– the bills aren’t paid
– there is a warm can of Coke sitting on the worktop
– the flowers don’t have enough water
– there is still only 1 check in my check book
– I can’t find the remote control
– I can’t find my glasses
– and I don’t remember what I did with the car keys.
Then, when I try to figure out why nothing got done today, I’m really baffled because I know I was busy all day, and I’m really tired.
I realize this is a serious problem, and I’ll try to get some help for it, but first I’ll check my e-mail.
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Are You Ready for CECL?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
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