Mar. 24: Gender study survey; notes about $0 money down, MI biz, blockchain, and LO comp criteria

Lots of stuff going on, as usual, providing back stories to hundreds of thousands of people trying to help borrowers buy or refinance homes. I certainly appreciate the notes I receive about various topics.

I received this note from Elaine Zundl, Research Director at the Center for Women and Work at Rutgers University. “Rob, a mortgage professional directed me toward your daily commentary. Would you be willing to post information about my study on gender in financial services? I am trying to get a sense of the programs and policies that are used to promote gender equity in your industry. The purpose of this research is to determine how stakeholders in the finance industry perceive barriers to gender parity within the industry and aims to understand how stakeholders have sought to address equality with programs or initiatives, and whether these interventions have been successful.

“One can participate in this study by clicking this link, and takes about 15-20 minutes. This research is anonymous. No information identifying you or your firm will be collected. There will be no linkage between responses and your firm that could be used to identify you. This study is being conducted in partnership with the Gender Parity Council of New Jersey. The data collected will be used to inform policy recommendations directed at stakeholders in New Jersey.”

Race to the bottom? Not so fast

Thursday the commentary mentioned the Massachusetts $0 down program. Dottie Sheppick checked in. “I wanted to comment on your position regarding the No Money Down Program being offered by MassHousing and why it is NOT the same as fifteen years ago. The affordable housing program loans that were offered by my company always outperformed a matched book. If you compared a govy or conventional portfolio and matched it up to the same product, term and rate as a non-affordable book, the affordable outperformed in DQ, default and FC.

There were many reasons, but some of the most important are there was NO subprime underwriting and they were ALL full doc, not the no doc or low doc loans being offered in conjunction with 100% financing. Many were manually underwritten and not overly reliant on a credit score. Most of the programs required home buyer education which studies have shown have a positive impact on performance. Finally, there is something in the “trusted advisor” position that is taken by housing finance agencies that offer affordable housing programs.

“During the credit crisis, I took many, many calls from housing agencies that had been contacted by borrowers requesting their help to contact their lending institution, the borrowers were reluctant to go direct, but trusted the housing agency to act as intermediary. This is an option that those without an affordable housing program did not have and therefore, may not have had access to the many loan modification programs that become available. As we all know, there is plenty of blame to go around about the housing crisis. It is not fair to call out affordable housing programs as a risky concern that mirrors the mistakes of the past.”


Cyber & digital news

Regarding this item:

Recently the commentary noted, “Title insurance companies in the U.S. are concerned that blockchain would reduce the need for title insurance, threatening that multibillion-dollar business.” Most LOs and real estate agents wonder about the expensive role of title insurance in the process anyway. “In a blockchain data structure, transactions are created and shared among a network of computers. There is a unique digital record of every transaction, which is grouped into a “block.” Any changes or additions to the block would need to be verified by most other participants on the network, making it hard to alter information stored on the block.

The paragraph prompted Mitch Tanenbaum, Partner at CyberCecurity LLC, to write, “Blockchain is a piece of software. How, exactly, is a piece of software going to provide insurance and pay a claim? Is the blockchain going to become a licensed insurance underwriter in each state? I don’t quite understand that.

“Could blockchain be used as a tool in the real property title chain process? Sure, it’s possible. Replacing one database technology (the one the title companies are using today) with another database technology (blockchain) doesn’t seem like much of a stretch if there are reasons that make sense to do it. Do you have the money to convert 200 years of records in say 3,500 recording jurisdictions from today’s databases (and in some cases, still on card files)? Even First American or Fidelity isn’t going to do that. The economics don’t work.

“The whole purpose of title is to search the title chain and then provide financial assurances that the search was done right. Home buyers do not understand the purpose of title insurance. Like in the car loan industry, the lender wants to protect his interest, so he forces the requirement for auto insurance. If the car owner gets in an accident, no matter whose fault (assuming he or she has the correct insurance), the car gets fixed.

“The same thing with title insurance. Could Wells or Citi be self-insured for that? Sure, but that also means that when there are title claims, they would need to have the staff of experts across the country (or vendors like, oh yeah, title companies) to deal with those. And of course, that doesn’t even talk about the difference between lender’s policies and owner’s policies. If the owner has a $200k mortgage and the property appreciated to $300k and there is no owner’s policy, the lender, if it is self-insured, can eat the $200k and walk away from the deal, maybe, but if the owner has a non-saleable property because of title issues, can the owner afford to hire attorneys and experts to fix that problem at the owner’s expense or does the owner declare BK and walk? And, if the lender has released its lien and walked and the owner BKs, I guess the property would be auctioned as part of the BK, but then the new buyer would need to fork up the dough to clean up the title.

“Only large entities would be willing to take the risk that the title could be cleaned. Those entities know that and would bid $0.05 on the dollar. The creditors are likely not in a position to clean the title, so they wouldn’t bid on it. Just seems like a mess.

“Who should be worried are the thousands of clerks and recorders and their staff. Basically, their job is to manage a big distributed database (sounds a lot like blockchain). Assuming the real property laws were changed in those 3,500 or so jurisdictions to allow for technical recording (remember the MERS battle?) as opposed to government recording, recorders could, technically, be replaced. I don’t think that is likely in my life.”

MI trends

From California Bob writes, “Rob, I recently lost a deal to a large well-known lender because its BPMI was 40% cheaper than the lowest quote I could find (ARCH). I called a couple of MI reps and they explained exactly what you described (the well-known lender pooled a bunch of loans and put the BPMI out to bid). This was a high balance conforming loan, so the 40% savings was meaningful. The MI Reps I spoke with were from ARCH and MGIC. They both assured me that their companies did not play this game but neither wanted to share with me the name of the MI company that they suspected was the culprit.”

And B had some valuable thoughts. “Rob – there are other aspects to the ‘bid PMI’ debate that should be mentioned. First, why should private mortgage insurance be immune to capitalism? Where else is ‘one price fits all’ appropriate for our economy? Second, and much more practically, there is sound economics behind the MI’s who participate. Roughly 30% of an MI premium is absorbed through selling and administrative costs. It turns out that those MI sales men and women, who are securing policies one by one, office by office, loan officer/processor/underwriter by LO/processor/underwriter is an expensive exercise. So, if an MI can bypass that and secure large amounts of high quality policies, without having to pay selling or administrative costs – then the premium reductions more than make sense.

“MIs are ROE driven (as they should be). The ROE calculation is simple: ((Income less expenses) / Equity). If the reduction in income (premiums) can be offset by the reduction in expenses (selling costs) then the ROE targets are maintained. And, if the MI can attain scale through these transactions, ROE can go up as the marginal benefit of additional premiums begins to dilute fixed costs on a per unit basis. Those who squawk for socialized pricing should be cautious. Maybe the next target will be LO compensation…”


Attorney Steve Lovejoy with Shumaker Williams reminds us, “Loan size is the one loan term that may govern variations in compensation. That is the reason why compensating a MLO based on bps times loan amount is almost universally the norm. Management can also ‘cap’ and ‘floor’ the compensation. So long as the comp is not keyed to the profit margin attributable to the loan, or any other loan terms, it is perfectly permissible to have a different bps for a larger vs smaller loan. This is done all the time for jumbos.”

Consultant Joe Garrett observed, “One of the issues we see is not so much that LO commissions are too high but that they are not set in a rational way. LO Jack could be more profitable at 135 bps than LO Jill at 90 bps. Jack does almost all FHA, hasn’t asked for a price concession in three years, has the highest pull-through in the company etc. etc. Meanwhile, Jill at 90 bps does lots of bond loans, gets price concession on almost half her loans, etc., etc. The manager should stop focusing just on the commission. They need to look at the overall profitability per loan officer.”

LW sent, “A comment on the LO comp issue. Even without reduced comp, lower volume is already hurting loan officer earnings. LOs are not being given raises during great years – the company is keeping that – so why would LOs be expected to share in ‘margin compression’ by reducing LO comp? Are these companies also reducing wages for everyone else in operations – starting with upper management? Most important, it is management’s job to plan for, and budget for, business fluctuations (which are a long-term certainty – in all industries) so that layoffs & pay cuts are not necessary…at least that should be one major goal. The reduction in loan volume for 2018 has been expected for quite some time and is predicted to decrease about 5.5% (per MBA). If a lender was not ready for this type of fluctuations the why not? So yes, I expect corporate to absorb all the margin compression.”

This note from New Jersey. “I saw your blurb on MLO Comp. The NE guy is correct (opening paragraph here), basically, it might be both about lowering some comp and also about just releasing the guys who don’t produce.

“Then there was the quote of the individual who receives comp tied to loan amounts that appears to violate DF. This is not the first time I have heard this issue come up in recent weeks. What bothers me, most state auditors know little to nothing about the CFPB regulations. Enforcement seems to remain on the state level regulations only. With The ‘new CFPB,’ what we really have is a visible trap. The new Director, contrary to media reports, has NOT changed any regulations. All that has changed is a level of enforcement and nothing in the Federal Register is different. So where do we all stand in 3 or 7 years with a new administration? Will they be looking back to 2018 for enforcement; i.e., PHH vs CFPB?

“Initially, as I recall, the CFPB acknowledged that the MLO Comp Rule would be anti-small business. Regardless of the SBA Advocacy Letters to the FRB on the MLO Comp Rule, the subsequent CFPB SBREFA Panels, and all the industry input, the CFPB proceeded full force to implement a bad Rule. At no point does this Rule clarify compensation of the consumer, it clearly muddied the waters farther. The current administration has done nothing to modify any of the troubling aspects of the CFPB Rules on MLO Comp, TRID or QM. Do we have any mortgage brokers or small bankers on the CABs? Frankly little has changed, and I fear the industry is being lulled into a false sense of security.”

And on taxes, LO comp, and deductions, Todd sent, “Look at the big picture because you will get more tax deductions with the new tax plan! It’s not deductible because they are given a higher standard deduction. They receive a higher deduction than they did before the new tax plan!!”

(Thank you to Stephen S. for this one on jury duty and work.)

Judge: “Is there any reason you could not serve as a juror in this case?”

Juror: “I don’t want to be away from my job that long.”

Judge: “Can’t they do without you at work?”

Juror: “Yes, but I don’t want them to know it.”

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Rob Chrisman