Sep. 14: GNMA’s approval of FHLB Chicago; letters on LO comp and Fannie & Freddie; foreign humor

Times flies when you’re having fun. It was 5-years ago (9/14/08) that the US government declined to rescue 158-yr. old Lehman Brothers. It filed for Chapter 11 bankruptcy protection the following day, the largest bankruptcy in US history. If you think your company is too big to go out of business, at the time of the bankruptcy filing Lehman Brothers had $691 billion of assets.


“Rob, I see that the Federal Home Loan Bank of Chicago got its Ginnie approval. What does that mean?” Yes, the FHLB of Chicago is “teaming up” with Ginnie Mae. There are hundreds of companies around the nation that have their Ginnie approvals. Many companies are either waiting for their approvals (which seem to take about a year, and involve an outsourced audit by Deloitte), or want them. And Ginnie only wants to approve companies that are going to securitize – any lender who merely runs to the frame shop to put the approval on their lobby wall to show visitors is making a mistake.


The Chicago announcement noted that the FHLB will provide member institutions with easy access to the secondary market through the Mortgage Partnership Finance (MPF) program. “This product will allow participating members to be more competitive in their communities and to provide them better pricing to enhance access to affordable mortgage financing in the communities they serve,” said Matt Feldman, president of the Federal Home Loan Bank of Chicago.


The program is especially helpful to small lenders that do not currently have direct access to the secondary market. But someone, somewhere, still has counterparty risk, right? “The Ginnie Mae and FHLB Chicago partnership leverages the strengths of each of the institutions and will facilitate FHA, VA, and RD (Rural Development) lending by small banks, some of whom are operating in areas where borrowers have had limited access to government loan programs,” said Ted Tozer, president of Ginnie Mae. The MPF program is already active through Federal Home Loan Banks in Boston, Dallas, Des Moines, New York, Pittsburgh, Seattle, and Topeka.


Companies offering point banks are vanishing, although LO comp is still an issue out there, and a while back John L. wrote, “As I am starting to see mortgage brokers grow again, I realized that mortgage brokers have multiple ways of making more money or less money based on basis points they commit to each wholesale lender. It is not always based on what they commit to the borrower but the agreement they have with wholesale lenders. So how is this legal when they can EASILY bait and switch with clients? They can choose at any time after they’ve committed to a client to go with a higher comp plan or a lower comp plan. How is this legal when mortgage banking companies cannot allow our own LOs to do this?  My LOs get so frustrated that we are NOT allowing them to give up a part of their commission to save a deal or get a new loan: This is one of the reasons for the increase in broker business as they see this as a greater opportunity for them as mortgage banking companies become more conservative with LOs. Who is really pursuing mortgage broker companies?  CFPB?  States?  No they pursue companies with money to pay their fees.”


And Dan Shlufman, Managing Director of Classic Mortgage LLC in NJ writes, “I don’t read the CFPB Comment 36(d)(1)-(7) to permit a lender to reduce MLO compensation if things don’t work out with the original investor. I believe that this would still be prohibited under the provisions of both Dodd Frank and the Regulations since it would allow the MLO compensation to be affected by the profitability of a loan which is prohibited. The below section which you referenced in your commentary specifically relates to a ‘settlement cost’ which was unforeseen. This is a charge to the consumer and a specific quantifiable item.  It does not relate in any way as far as I read it, to the amounts the lender is making on a loan.


“’7. Permitted decreases in loan originator compensation. Notwithstanding comment 36(d)(1)-5, § 1026.36(d)(1) does not prohibit a loan originator from decreasing its compensation to defray the cost, in whole or part, of an unforeseen increase in an actual settlement cost over an estimated settlement cost disclosed to the consumer pursuant to section 5I of RESPA or an unforeseen actual settlement cost not disclosed to the consumer pursuant to section 5I of RESPA. For purposes of comment 36(d)(1)-7, an increase in an actual settlement cost over an estimated settlement cost or a cost not disclosed is unforeseen if the increase occurs even though the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate. For example: i. Assume that a consumer agrees to lock an interest rate with a creditor in connection with the financing of a purchase-money transaction. A title issue with the property being purchased delays closing by one week, which in turn causes the rate lock to expire. The consumer desires to re-lock the interest rate. Provided that the title issue was unforeseen, the loan originator may decrease the loan originator’s compensation to pay for all or part of the rate-lock extension fee.’


“A lender cannot have it both ways on MLO comp. That is, if the MLO is not sharing in any upside in profitability, they are not allowed to bear the burden of the downside either. I assume that if the appraisal came in higher than expected so that the compensation to the lender INCREASED by .25% or .5% there wouldn’t be any attempted argument that the MLO should get some of this? The amount of compensation for an MLO needs to be fixed and not tied to loan profitability or its proxy (which variations in amounts paid to the lender by specific investors clearly would be). This above exception, I believe, is limited upon its terms to allow an MLO to absorb a cost for a borrower, and one that is usually minor that has unexpectedly arisen in the loan process. I think lenders should be very careful on trying to drive a ‘truck size’ exception through this limited one. Variations in MLO comp are going to be continually and increasingly scrutinized by the CFPB. I think the CFPB gave a very clear example of what they will allow and this has nothing to do with investor payments to the lender.” Thank you Dan!



And now that Congress is back in session, and plenty in Congress will try to make a name for themselves in proposing changes to Freddie and Fannie, Joe Nocera wrote, regarding President Obama’s stance, “In his Phoenix speech he stated his ideas for reshaping the country’s housing finance system. He called for the housing finance market to be primarily driven by private capital, with a ‘limited’ federal role. He said that the 30-year fixed-rate mortgage should remain a mainstay of the mortgage market. And he essentially endorsed a recent bipartisan Senate bill — a complex piece of legislation that calls for winding down Fannie and Freddie over five years.


“Let’s just call this what it is: capitulation. Ever since the financial crisis, Republicans have insisted that Fannie and Freddie — private companies that also have a government role and that guarantee and securitize mortgages — were the root problem. According to their theory, the two companies drove the country off the subprime cliff, primarily because of their federal mandate to help make it possible for low-income borrowers to own homes.


The truth is pretty much the opposite. When the banks first jumped into subprime mortgages, Fannie and Freddie hung back. Only after they began losing significant market share did Fannie and Freddie decide, belatedly, to get into the game. Because they were so thinly capitalized, they had almost no cushion when the losses began to pile up. And after the George W. Bush administration put Fannie and Freddie into conservatorship — propping them up with a $185 billion bailout — they had no defenders left. Republican demands that Fannie and Freddie be put out of their misery became the sine qua non for any discussion about reshaping — and reviving — housing finance.


“There is no question that Fannie and Freddie were deeply problematic companies in their heyday. They bullied anyone — members of Congress included — who tried to rein them in. They had implicit government backing that they either played up or denied, depending on the circumstances. And in addition to their guarantee business, they owned a gigantic portfolio of mortgages that many feared would bring them down.


“But they also did something truly vital. When Fannie or Freddie guaranteed a mortgage, it meant that they were taking on the credit risk from the lender. That entailed two skills. The first was underwriting. Until they lost their heads in the subprime bubble, Fannie and Freddie had high underwriting standards that banks had to adhere to get a mortgage guaranteed. Second, they had to have a highly skilled hedging operation that could maneuver adeptly as interest rates changed.


“And that ability of Fannie and Freddie to take on credit risk is what made that staple of American housing finance — the 30-year fixed-rate mortgage — possible. So much can happen over the course of 30 years that no bank wants to take on that risk — and no system of private capital is going to continue making those loans, at least not without some kind of government backing.


“Which is why all this talk of ‘winding down’ Fannie and Freddie, as the president put it, makes so little sense. In conservatorship, the two companies have been doing exactly what the country needs from them: guaranteeing prime mortgages and propping up the housing market after private capital fled. The Senate bill under consideration does backward somersaults to kill off Fannie and Freddie while retaining a government role in the mortgage market, including the creation of a new agency to serve as a backstop to the securitization market. It is incredibly complicated, untested and probably unnecessary.


“In five years as wards of the government, Fannie and Freddie have actually shown the kind of role they could play. They are no longer bullies. They don’t really function as private companies anymore — nor do they have a mission to help people gain the American dream. Their portfolio is supposed to be gradually unwound. They have more capital.


“In other words, their sole role now is to guarantee and securitize mortgages. And they are making huge amounts of money — much of which is going to the government. Fannie Mae, for instance, recently announced a quarterly profit of $10.1 billion, and said it was making a $10.2 billion payment to Treasury. ‘At the current pace,’ The Wall Street Journal reported, ‘over the next year, Fannie and Freddie are likely to repay the government more money than they borrowed.’


“Does housing finance need reform? Yes. Do we need private capital to return? Of course. But the easiest and most sensible reforms would take advantage of what we already have — two companies that know how to handle credit risk — instead of trying something new and untested, purely because Fannie and Freddie are political poison. In the meantime, we should be thanking Fannie and Freddie, instead of tearing them down.”



Who knows what is going on overseas? With that in mind, I have a repeat. John Cleese writes…

The English are feeling the pinch in relation to recent events in Syria and have therefore raised their security level from “Miffed” to “Peeved.” Soon, though, security levels may be raised yet again to “Irritated” or even “A Bit Cross.” The English have not been “A Bit Cross” since the blitz in 1940 when tea supplies nearly ran out. Terrorists have been re-categorized from “Tiresome” to “A Bloody Nuisance.” The last time the British issued a “Bloody Nuisance” warning level was in 1588, when threatened by the Spanish Armada.


The Scots have raised their threat level from “Pissed Off” to “Let’s get the B–stards.” They don’t have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.


The French government announced yesterday that it has raised its terror alert level from “Run” to “Hide.” The only two higher levels in France are “Collaborate” and “Surrender.” The rise was precipitated by a recent fire that destroyed France’s white flag factory, effectively paralyzing the country’s military capability.


Italy has increased the alert level from “Shout Loudly and Excitedly” to “Elaborate Military Posturing.” Two more levels remain: “Ineffective Combat Operations” and “Change Sides.”


The Germans have increased their alert state from “Disdainful Arrogance” to “Dress in Uniform and Sing Marching Songs.” They also have two higher levels: “Invade a Neighbor” and “Lose.”


Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels.


The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.


Australia, meanwhile, has raised its security level from “No worries” to “She’ll be right, Mate.” Two more escalation levels remain: “Crikey! I think we’ll need to cancel the barbie this weekend!” and “The barbie is cancelled.” So far no situation has ever warranted use of the last final escalation level.


And as a final thought – Greece is collapsing, the Iranians are getting aggressive, and Rome is in disarray. Welcome back to 430 BC.



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Rob Chrisman