Mar. 16: Notes on tiered commissions, moving offshore, cybersecurity; Agencies transferring risk
LO comp answers, outsourcing/offshoring, compliance, and credit risk are the topics du jour. Let’s jump in – the water’s fine.
On the topic of outsourcing or offshoring, company owners are drawn to sending non-customer facing jobs overseas, where other countries have more skilled engineers graduate every year from college than the U.S. has college graduates, and where checklist jobs can be done by contractors (versus employees) without benefits.
Lenders need guidance on why to do it, even the basics, and fortunately I received this note from Paul Campbell. “As a Co-Founder of Equilibrium Mortgage Solutions, I often receive questions about when a lender should ‘Outsource,’ which, leads into concerns about laying-off or reducing staff. I am often told the reason for not wanting to reduce staff is because a lender feels loyal to their people or have heard of poor outsourcing experiences from their peers and because lenders do not want to incur the reputational risk of being known as an outsourcer in their community, especially ‘off-shore.’
“The fact is that a solid loan fulfillment provider must partner with its ‘customers’ and must operate within their customers, LOS platform, using their policies and procedures, while ensuring compliant and consistent daily success. My first question to a doubting lender is always, ‘If you could become more efficient in your operations and dramatically reduce your variable loan fulfillment costs, would you?’ I also ask, ‘In becoming more efficient do you believe you could generate more monthly funded volume by re-allocating or passing loan fulfillment outsourcing cost savings to your company’s Sales, Marketing and Technology efforts?’ The answer is always, ‘Yes!’
“Generating more home loans creates a stronger local economic climate for the communities that you, as a lender, serve. For instance, 100 homes built and sold in a community will generate approximately $28.7 million in local income, $3.6 million in tax revenue and about 394 local jobs. How many of you work with builders? Note: real estate impacts over 10% of the US economy (job growth in insurance, construction, retailing, municipalities, etc.), and 70% of the United States GDP comes from personal spending (Home Purchase, Cash-Out Refinances, Rate and Term Refinances, Relocation, job improvement). An argument for off-shore support: Typically off-shore employees have advanced degrees and already work with your competition (nearly all large banks, all large direct lenders, and many large financial service providers), they speak and write excellent English, and more importantly will not typically engage your customers or sales force (Equilibrium will show you how).
“To conclude, we built Equilibrium Solutions because we saw that our fellow lenders were being marginalized and hand-cuffed by inefficiencies. The profit killer culprits appeared to be margin compression, LO compensation, and technology. We believe in more for less by providing efficient ‘end to end process’ in the market place so lenders can again share and become ‘Masters of their Universe.’ The increase in production through efficient loan manufacturing will create more for all communities served and more jobs for those members of your company’s families as well. If you are a small to middle lender, bank, or credit union, you deserve to be able to compete with the large banks and large lenders every day. This audience typically provides a greatest level of customer service in the industry as you truly know your customers very well. You all live around, socialize with and care for your customers daily!” Thanks Paul!
Last Saturday I had a note from Ken Perry at The Knowledge Coop on cybersecurity and all of the devices involved. The issue prompted Mitch Tannenbaum with CyberCecurity to send over, “The idea that restricting and managing devices is difficult and unrealistic, fortunately, is only partially true and becoming less of an issue all of the time. Many of our mortgage clients use Office 365 and are using Microsoft’s Intune mobile device management software. Intune allows an employee to self-register all of their device(s) that they use for work. Once registered, the company can set up security rules (like a requirement to have a strong password and MANY other features). Company admins can get reports on devices in use, software installed, etc. There are many competitors to Intune including JAMF for Macs, so there are lots of choices. And, the MDM software often runs on laptops and desktops too, so you can track all devices. For smaller companies, they may need a little help selecting the right product and rolling it out, but once deployed, they are low overhead.”
“Rob, I understand some of your readers have asked, ‘How is it possible, under the LO Comp Rule, to pay loan officers on a tiered volume-based commission program?’ The answer requires understanding how the LO Comp Rule treats loan size under its ‘proxy rule.’
“As everyone knows, LO Comp prohibits compensation based on the profitability of a loan. Likewise, using a ‘proxy’ for profitability to compensate originators is equally prohibited. Anyone familiar with (i) how mortgage loan revenues are directly tied to loan size, and (ii) how most distributed retail mortgage operations compensate their originators on a fixed commission rate, might ask, ‘So how is paying commissions on loan size not a proxy?’. While it is true that volume is a proxy for profitability, the Rule explicitly exempts loan volume (size or units) from being a ‘proxy’ as long as the loan originator receives a fixed commission rate on all of their loan production (setting aside other exceptions to the Rule).
“Your readers should always consult their own attorney to determine if any particular compensation program is allowed under the LO Comp Rule, but a program that pays a loan originator a commission rate that varies based on the amount of each loan would likely fail that test because that would not be a fixed commission rate. On the other hand, a program that establishes (in advance) a fixed commission rate tiered to total volume produced (amount or units) over a period (monthly/quarterly/etc.), would not raise the same concerns. Likewise, a quarterly or annual volume “bonus” fixed at the beginning of the period should also pass muster. (Brian can be reached at firstname.lastname@example.org.)
Agencies shifting risk
In the secondary markets both Agencies are doing deals, laying groundwork for a single security, and transferring credit risk away from taxpayers to willing buyers. MLOs should know that all these, and other securitizations, help rates for their borrowers. (And this year the secondary markets, and with them the primary markets as beneficiaries, can look forward to the single security!) What’s Freddie been up to?
On March 6, Freddie Mac priced a $837 million offering of Structured Pass-Through K-Certificates (K-F59), backed by floating-rate multifamily mortgages with 10-year terms, with the deal expected to settle on or about March 15, 2019. There will be one offered class of pricing in the deal, a Class A offering of $837.5 million with a weighted average life of 9.64 years, a coupon of 1-month LIBOR + 54, and an even dollar price of 100.00. Aside from the unrated senior principal and interest class, there will also be one interest-only class, and one class entitled to static prepayment premiums. The K-F59 Certificates are backed by corresponding classes issued by the FREMF 2019-KF59 Mortgage Trust and guaranteed by Freddie Mac. The Class B, C and R Certificates issued by the trust will be subordinate to the classes backing the K-F59 Certificates and will not be guaranteed by Freddie Mac. K-Deals are part of the company’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the unguaranteed subordinate bonds, featuring a wide range of investor options with stable cash flows and structured credit enhancement.
On February 22, Freddie Mac priced a $732 million offering of Structured Pass-Through K-Certificates (K-1510), which are multifamily mortgage-backed securities that settled in late February.The K-1510 Certificates are backed by corresponding classes issued by the FREMF 2019-K1510 Mortgage Trust (K-1510 Trust) and guaranteed by Freddie Mac. The K-1510 Trust will also issue certificates consisting of the Class X2-A, X2-B, B, C and R Certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-1510 Certificates. The three offered classes are as follows. Class A-1 has principal of $46 million, weighted average life of 8.72 years, a coupon of 3.56%, and a dollar price of $101.99. Class A-2 has principal of $262 million, weighted average life of 11.82 years, a coupon of 3.72%, and a dollar price of $102.99. Class A-3 has principal of $424.69 million, weighted average life of 14.71 years, a coupon of 3.79%, and a dollar price of $103.00. K-Deals are part of Freddie’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the unguaranteed subordinate bonds. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
On February 20, Freddie Mac announced its first Seasoned Loans Structured Transaction (SLST) of 2019, backed by a pool of approximately $1.3 billion seasoned re-performing loans (RPLs) that were modified to assist borrowers who were at risk of foreclosure to help them keep their homes. The SLST program is a key part of Freddie Mac’s seasoned loan offerings which reduce less-liquid assets in its mortgage-related investments portfolio and shed credit and market risk via economically sensible transactions. The servicing of the loans will be in accordance with requirements that prioritize borrower retention options in the event of default and promote neighborhood stability. The transaction involves a two-step process. The first step is an auction of the right to purchase the subordinate, non-guaranteed certificates backed by the RPLs, subject to the terms set forth in a securitization term sheet. The winning bidder will be chosen on the basis of economics, subject to meeting Freddie Mac’s internal reserve levels. In the second step, the SLST Trust will issue both senior and subordinate certificates. Freddie Mac will guarantee certain senior certificates and may initially retain some of such certificates. The winner of the auction will purchase the subordinate certificates at issuance. To date, Freddie Mac has sold $8 billion of non-performing loans and securitized over $48 billion of RPLs consisting of $29 billion via fully guaranteed PCs, $16 billion via SCRT transactions, and $3 billion via SLST transactions.
Freddie Mac made three large announcements on November 15. They announced pricing on a new $620 million offering of Structured Pass-Through K-Certificates, backed by floating rate multifamily mortgages with ten-year terms, settled after Thanksgiving. The notional principal amount of $620.745 million includes a weighted average life 9.60 years and a discount margin of 43bps.
The second large announcement was the pricing of the $546 million SB55 offering, a multifamily mortgage-backed securitization backed by small balance loans underwritten by Freddie Mac and issued by a third-party trust. Their eleventh SB Certificate transaction of 2018 settled around Thanksgiving. Freddie Mac Small Balance Loans generally range from $1 million to $6 million and are backed by properties with five or more units. In addition to the seven classes of securities guaranteed by Freddie Mac, the trust will issue certificates consisting of Class B and Class R Certificates, which will not be guaranteed by Freddie Mac and will be sold to private investors. The Small Balance Loan origination initiative expands the company’s continuing effort to better serve less populated markets and provide additional liquidity to smaller apartment properties through a specialty network of Seller/Servicers and SBL lenders who source loans across the country.
On November 13, Freddie Mac priced a new $614 million offering of Structured Pass-Through K-Certificates (K-W07) backed by fixed-rate mortgages on multifamily properties affordable to working households earning low-to-moderate incomes, which settled around Thanksgiving. K-W07 was the seventh K-Certificate issued under the K-W series, involving properties which generally have rents that are affordable to individuals earning 80 percent or less of their area median income, excluding high cost housing markets.
On November 8, Freddie Mac priced a new $358 million offering of Structured Pass-Through K-Certificates that are backed by underlying collateral consisting of supplemental multifamily mortgages, settled on November 19, 2018. The K-J22 Certificates are backed by corresponding classes issued by the FREMF 2018-KJ22 Mortgage Trust and guaranteed by Freddie Mac. The KJ22 Trust will also issue certificates consisting of class B-FL, class B-FX and class R certificates, which will not be guaranteed by Freddie Mac and will not back any class of K-J22 Certificates. This deal consists of an A-1 class of $135 million with a coupon of 3.45% and a dollar price of $99.99, while the A-2 class is $207 million with a coupon of 4.09% and a dollar price of $101.99.
On the 9th, Freddie priced another new offering of Structured Pass-Through K-Certificates. The company expects to issue approximately $703 million in K(-1508) Certificates, which settled in mid-November, 2018. K-Deals are part of the company’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the unguaranteed subordinate bonds. K Certificates typically feature a wide range of investor options with stable cash flows and structured credit enhancement.
On November 9, Freddie Mac priced a $1.95 billion securitization of reperforming loans, their fourth SCRT transaction of 2018 and ninth SCRT transaction overall, bringing their total to $16 billion in both guaranteed senior and unguaranteed subordinate securities. The SCRT securitization program is a key part of Freddie Mac’s seasoned loan offerings to reduce liquid assets in its mortgage-related investments portfolio and shed credit and market risk via economically reasonable transactions. Series 2018-4 is expected to issue approximately $1.80 billion in guaranteed senior certificates and approximately $151 million in unguaranteed mezzanine and subordinate certificates and settled on November 15. The collateral backing the certificates consists of 9,782 fixed- and step-rate modified seasoned re-performing loans modified to assist borrowers who were at risk of foreclosure, but have been performing for at least 12 months as of the issuance of the certificates. To that date, Freddie Mac has completed sales of $7 billion of non-performing loans and settled $45 billion of RPLs consisting of $29 billion via fully guaranteed PCs, $14 billion via SCRT senior/sub securitizations, and $2 billion via Seasoned Loan Structured Transaction offerings.
Freddie announced the pricing of a $1.3 billion Structured Agency Credit Risk (STACR) Trust 2018-HRP2 transaction, their third and largest STACR HARP (SHRP) transaction which includes mortgage loans refinanced through the Home Affordable Refinance Program (HARP). STACR 2018-HRP2 has a reference pool of single-family mortgages with an unpaid principal balance (UPB) of approximately $26.2 billion, consisting of a subset of fixed-rate, single-family mortgages with an original term of 241 to 360 months funded by Freddie Mac between April 1, 2013 and Dec. 31, 2016. The reference pool includes loans refinanced under Freddie Mac’s Relief Refinance Program with estimated loan to value (ELTV) ratios greater than 60 percent and less than 200 percent or, if the loan does not have an ELTV, an OLTV greater than 80 percent and less than 200 percent. As with STACR debt, a hypothetical structure of classes of reference tranches has been established which is backed by the mortgage loans in the reference pool. Since 2013, the company has transferred a significant portion of credit risk on approximately $1.2 trillion of UPB on single-family mortgages.
(Warning: Rated R for sexual situations. Don’t read if easily offended. Just don’t.)
The doctor comes in and says, “Ah, I see you’ve regained consciousness. Now, you probably won’t remember, but you were in a huge pile-up on the freeway. You’re going to be okay, you’ll walk again and everything. But your “male part” was severed in the accident and we couldn’t find it.”
The man groans, but the doctor goes on. “You have $9,000 in insurance compensation coming and we now have the technology to build a new ‘male part.’ They work great but they don’t come cheap. It’s roughly $1,000 an inch.”
The man perks up.
The doctor says, “You must decide how many inches you want. But understand that you have been married for over thirty years and this is something you should discuss with your wife. If you had a five incher before and get a nine incher now, she might be a bit uncomfortable. If you had a nine incher before and you decide to only invest in a five incher now, she might be disappointed.”
The man agrees to talk it over with his wife.
The doctor comes back the next day, “So, have you spoken with your wife?”
“Yes I have,” says the man.
“And has she helped you make a decision?”
“Yes,” says the man.
“What is your decision?” asks the doctor.
“We’re getting new granite counter tops.”
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