Mar. 9: Why LOs should care about Basel; TMC’s temperature of the industry; vendors raising money; Saturday Spotlight: Change Wholesale

Food prices obviously factor into inflation numbers, and are often influenced by supply and demand and expected future price activity. Sushi has its proponents and critics. Sushi often has some sliced ginger on the plate, along with “wasabi” which is usually, in this country, a colored horseradish concoction offered as a substitute and not the real thing. Food prices are an important component of the consumer price index, and therefore a gauge of inflation, and sushi aficionados know that the demand for authentic wasabi out of Japan has increased, all while domestic production of the real stuff has declined. In 2022, Japan’s wasabi growers produced only 1,635 tons, which is down 26 percent over the course of five years. Wasabi requires clean water, cool environments, but can’t endure direct sunlight, so it’s a bit of a tricky crop. Even still, demand abroad is robust: For those keeping score, there are 187,000 Japanese restaurants outside of Japan as of 2023, up 20 percent over 2021.

Saturday Spotlight: Change Wholesale

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“Less Hassle. More Closings.”

Retired General Eric Shineski once famously said, “If you don’t like change, you’ll like irrelevance even less.” It seems that Change Wholesale has wholeheartedly embraced his advice. Can you tell us more about your “Changing” strategy? 

 

Our strategy is an extension of our mission to get capital into the hands of under-resourced and underserved creditworthy borrowers so they can become homeowners, which has long been a proven pathway for building strong communities and participating in the American Dream.

 

That pathway doesn’t always run smoothly, however. It can change, via government rules, regulations and guidelines, macro issues like rising employment, inflation and interest rates, and things like consumer confidence in the economy.

 

Our job is to do everything we can to keep that pathway open by providing viable lending solutions and workarounds that make sense for our broker partners and their clients. This keeps us nimble, relevant and in constant “Change” mode.

 

As examples, we recently introduced new asset depletion and P&L programs, implemented enhancements to our vast suite of existing products, and improved guidelines up and down our product lineup to make them more accessible and affordable. Further, brokers can now find us on more platforms, like Lender Price and Loan Sifter.

 

As a leading non-QM lender, you have used your leadership position to prioritize the growing housing affordability crisis. Can you address this a little more?

 

Making homeownership more affordable is part and parcel of our mission to broaden access to homebuying capital. The facts are, home prices are outpacing wages in 80 percent of U.S. markets, exacerbated by housing demand that has outstripped supply by 3.7 million units in the last decade. And these pressures fall disproportionately on Black, Hispanic, and other target groups.

 

Yet, we know investments in affordable housing contribute $1.8 trillion annually to our economy and that children living in a stable housing environment are 15 percent more likely to graduate from high school.

 

This recognition again is what drives our lending mission. Rather than penalize creditworthy borrowers who are self-employed, run cash-based businesses or fail to fit traditional lending models or norms, we want to reward their hard work and initiative with great, affordable loans.

 

How can Change Wholesale help brokers and their clients overcome the current interest rate headwinds? What are you telling broker partners? How can the two of you work better together?

 

The short answer is constant communication and education. First, higher rates shouldn’t necessarily keep your buyers on the sidelines. If rates continue to rise, then today is a good entry point, and if they fall, they can refinance. Second, we are constantly updating our broker partners on a host of flexible loan products and non-traditional borrowing alternatives available to their borrowers.

 

We listen, we adapt, we respond. The alternative to not responding to our partners and the greater market with better products and solutions is irrelevance.

(For more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)

 

Reality, the news, and property values

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I received this note from a veteran broker on the East Coast. “It’s funny how disconnected news outlets and reporters are from the real estate industry. ‘High rates are the cause of sales falling.’ Hmmm. I received a text from an agent in Northern New Jersey. They had an open house, and 150 families were lined up outside. I helped at an open house ten years ago in the same neighborhood which at that point was sketchy. Hardly had anyone. This time: a house was listed at $349k, my client wanted to offer $375k, the agent and I recommended offering more than $400k. The client laughed. The house ended up with 52 offers and sold for over $505k, all cash.

“The bottom line is that there is no inventory, and basic supply side economics tell us that house prices should be fine, especially with builders still taking their time. What’s the solution? Wait it out for 10 years? Increase the one-time deduction to $1 million for 24-36 months? Ban the DSCR loans or something to curb institutional investor loans? There is no easy answer.”

Basil, Basel, what’s the diff?

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“Hey Rob, I keep hearing something about ‘Basel.’ As an originator, does it impact my rates or my borrowers or how we sell loans?” At this point, unless something changes, the proposed capital requirements on big banks would mean fewer choices and higher mortgage costs. It impacts the large banks that often are correspondent investors, provide warehouse lines, or buy servicing packages from smaller IMBs.

Pete Mills with the MBA spelled out the situation. “In July, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) unveiled a proposal to increase capital requirements for banks with $100 billion or more in assets by about 15 to 20 percent. The rules had been in the works as a fine-tuning of current capital standards, but the size of the proposed capital increase appears to have been an overreaction to the high-profile bank failures earlier this year. In short, the proposed rule is the wrong medicine for the wrong patient at the wrong time.

“The proposed rule, known as the ‘Basel III endgame,’ refers to a panel convened by the Bank for International Settlements (BIS) in Basel, Switzerland, which establishes an international framework for bank supervision. This latest iteration of standards and mandates proposed by U.S. regulators to implement the endgame framework would directly affect every bank with assets of more than $100 billion, institutions that play significant roles as mortgage lenders, servicers, aggregators, and in warehouse lending and mortgage servicing rights financing. Consequently, the rule will impact banks and nonbanks alike, small and large institutions, and every delivery channel for real estate finance.

“The proposed rule would increase the risk weights for single-family mortgages by 20 percentage points above the levels recommended in the Basel Committee framework. Such a hike when banks are adhering to pristine mortgage underwriting practices and single-family mortgage delinquencies are at an all-time low makes no sense. Ultimately, the proposed rule would make it harder for borrowers with smaller downpayments, often first-time buyers, low- and moderate-income families, and minorities, to secure mortgages. More capital required on a given asset class will mean higher costs, less lending, or a combination of both.

“The rule also disregards the vital role private mortgage insurance plays in reducing risk for lenders and opening a path to homeownership for people who cannot come up with a 20-percent downpayment. For a mortgage loan with a loan-to-value (LTV) ratio higher than 80 percent, the rule would subject banks to at least 60 percent risk weight to cover possible credit losses, even if they are already insured against credit losses. Banks typically require borrowers on high LTV loans to carry mortgage insurance to mitigate risk and make the loans eligible for sale on the secondary market. Because the rule ignores the benefits of reduced credit risk exposure, borrowers would be burdened by the insurance premiums as well as higher capital costs that banks would pass onto them.

“The proposed rule would also increase capital charges for warehouse lending facilities, putting pressure on depository institutions to pull back on lending to independent mortgage bankers that provide more than 60 percent of single-family mortgage lending and 80-90 percent of government-insured loans that serve first-time, low- and moderate-income, veteran, and minority homebuyers. Warehouse lending is critical to ensuring there is enough liquidity in the mortgage marketplace to meet the needs of borrowers. It would be counterproductive to handicap lenders and borrowers already struggling with interest rate hikes over the last year.

“The Basel III proposal also takes an illogical approach to mortgage servicing rights (MSR). MSRs are created whenever an institution originates a loan for sale into the secondary market. The MSR is an asset that represents the income stream received for collecting payments, passing them through to the investor, and setting aside taxes and insurance premiums in escrow accounts. However, mainly due to the punitive treatment of MSRs imposed by the current capital rules, many banks have exited this market segment.

“The proposed rule further increases capital requirements on MSR assets for large regional banks, driving banks further away from the mortgage market. This will further suppress bank demand for MSRs. With less demand for MSRs, they become a less valuable asset for banks and IMBs. The result is less liquidity in the housing finance system, banks pulling back even further from making and servicing loans, and reduced opportunities and choices for mortgage borrowers. This regulatory excess is a dagger at the heart of the housing market.

“Given the potential harm to lenders, consumers, and the broader economy, the Basel III proposal should have been backed up by a robust economic impact analysis. Instead, a scant 15 pages of impact assessment was included in the more than 1000-page document. The analytical shortcomings might partially explain the lack of unanimity in the vote to issue the proposed rule.

“Banking agency regulators stress that they provided an extended comment period and a three-year implementation period. A phased-in approach would not make up for the proposal’s negative impact. It would be better if regulators withdrew this ill-advised proposal and took some time to conduct a much-needed impact analysis.

“The Endgame revisions to Basel III were supposed to be a fine-tuning of the framework, but the proposal from U.S. regulators is a major departure that would have significant consequences. The banking agencies’ proposed rule would weaken the agility and diversity of the mortgage banking sector and put upward pressure on already-high interest rates. That is the last thing aspiring homebuyers need, especially those with modest incomes or in minority communities – constituencies the Biden Administration regularly champions. It is critical to get regulatory policy right, and MBA will not relent in pressing its case.” Thank you, Pete.

The temperature of the industry

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The Mortgage Collaborative (TMC), the nation’s largest independent cooperative network serving the mortgage industry, announced the completion of its “Pulse of the Network” survey for 2024. (TMC was founded in 2013 and is singularly focused on creating an environment of collaboration and innovation for small to mid-size mortgage lenders across the country to reduce cost, increase profitability, and better serve the dynamic and changing consumer base in the U.S.)

The full report features lenders’ top five critical issues for the year, top 10 goals, and anticipated strategies for success. When asked to rank-order the top concerns of mortgage lenders today, respondents identified business development as their top concern. And while 37 percent of respondents have their sights set on expansion, three in five respondents said they were more worried about attaining or retaining profitability than growing market share.

 

Unsurprisingly, respondents identified growing volume as their top objective for 2024. To that end, they’re looking at recruiting processes (although the minority – 21 percent – are working with recruiters) and diversifying referral relationships to ensure their companies are set to take advantage of every opportunity. And while implementing new technology ranked relatively low among mortgage business objectives for 2024, respondents flagged customer relationship management (CRM) platforms as the one part of the tech stack they’ll prioritize evaluating this year.

 

“Based on this year’s survey results, lenders’ priority for 2024 seems to be getting better but not necessarily bigger,” said TMC President and CEO Melissa Langdale. (For survey information shoot her an email.) “The compounding effects of rising interest rates, low inventory and affordability challenges have battle-tested lenders over the last year, and with some measure of relief on the horizon in the form of expected lower interest rates, lenders are planning to use this breathing room to improve operations, maximize existing opportunities for new business and shore up reserves that may have been depleted in the pursuit of survival in 2023.”

(Two thousand mortgage lending executives from TMC’s lender member network of independent mortgage bankers, banks and credit unions across the United States were invited to participate in the survey. Of those who responded, 49 percent were independent mortgage bankers, 44 percent were banks, and the remaining 7 percent were credit unions. All respondents were key decision-makers, more than half of them holding C-suite positions or their equivalent (CEO, COO, CLO, President, or Head of Operations). All responses were collected between December 15, 2023, and January 15, 2024.)

Vendor tidbits

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AI and ChatGPT are grabbing headlines. But I saw one interesting quote, “ChatGPT and its brethren are constitutionally unable to balance creativity with constraint. They either over generate (producing both truths and falsehoods, endorsing ethical and unethical decisions alike) or under generate (exhibiting noncommitment to any decisions and indifference to consequences). Given the amorality, faux science, and linguistic incompetence of these systems, we can only laugh or cry at their popularity.”

Ginger Bell has created a Daily AI Newsletter called Daily AI Buzz. It’s a daily ChatGPT prompt and recommendations for AI Technology services from the Directory she created here. Both are free!

Let’s check in and see a random sample of who’s doing what in residential mortgages.

In February Candor Technology, Inc., a leading provider of automated underwriting technology and other technology enabled solutions for the mortgage industry, announced it had closed a Series B equity round to expand its Loan Engineering System’s capabilities and enhance the user experience. The funding was led by Minneapolis-based Rice Park Capital Management, with the support of Arthur Ventures, Assurant Ventures, and the management team, as well as participation from several other industry leaders. “Candor’s Loan Engineering System is the industry’s only patented software solution that assists a lender’s licensed loan officers, underwriters, and processors to produce a ‘decision ready’ loan file that complies with investor guidelines.”

Argyle has officially closed its Series C funding round of $30 million, bringing the total amount raised to date to over $100 million. “The company plans to use these funds to continually disrupt a rapidly growing industry and bring focus back to the end user. All of Argyle’s Series B investors (including Bain Capital Ventures) returned for this funding round and were joined by Rockefeller Asset Management’s Fintech Innovation Fund. (Argyle has onboarded more than 90 new customers in 2023, and its total customer count has risen to over 140 across the mortgage, personal lending, and background screening verticals.)

Exciting news! LendingPad is integrated with Tabrasa One, an all-in-one marketing solution for mortgage professionals. Tabrasa One combines a full-featured mortgage marketing and CRM product, market insights from Mortgage Market Guide, a robust loan officer mobile app, and an intuitive video marketing tool—all at a fraction of the cost of competitors. LendingPad customers can now enjoy a seamless, bi-directional integration with Tabrasa One, keeping your data in sync for effortless marketing and CRM automation. Plus, the first 500 sign-ups get the integration free —forever, saving $120/year with $0 initial setup. Immediate access is available here. at https://www.tabrasa.io/lendingpad. Elevate your mortgage marketing now!

Realfinity is revolutionizing loan origination and processing for entrepreneurs. Its technology & processing platform supports real estate agents in offering mortgage services, assists businesses in creating their mortgage arm, and enables loan originators to establish their own independent brokerages. Embrace the shift towards independence to get the most competitive pricing directly from wholesale lenders with no overlays due to corporate expenses. For details, contact Luca Dahlhausen.

Our friends or our enemies?

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. STRATMOR’s current blog is titled, “It’s 2024: Do You Know Where Your Servicing Is?” The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).

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(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is for sophisticated mortgage professionals only. There are no paid endorsements by me. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2024 Chrisman LLC. All rights reserved. Occasional paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman.)

 

Rob Chrisman