Sep. 15: Letters about risk, M&A and controlling costs; state-level lending law changes roll on

Last Saturday’s edition brought up the topic of risk. And there’s plenty of it for every lender. Just because rates have been stable, delinquencies declining, or the CFPB/BCFP becoming more “user friendly” doesn’t mitigate that. Michael Baker, Product Development & Distribution with Loan Originator Networks, LLC, sent, “Great topic, NQM and Agency delinquencies. Regardless of Agency or NQM, one thing is true: The risk model can support two layers of risk. Period. Keeping in mind that occupancy, loan purpose, and LTV are risk layers, conclusions I’m drawing are having lived through the last cycle and working through Agency Rep, Warrant, Make Whole demands. Losing a fortune personally in the form of massive dilution with a well-known public bank was an added ‘bonus.’ A Public Bank that did not offer a line of Alt A outside of the Agency offerings.


“Where the model went wrong and can go wrong again: Agencies reached for yield and desperation to ‘compete’ with the likes of IndyMac or Greenpoint or Countrywide in introducing more than two layers of risk.


“Risk Layer 1: 95% CLTV Conventional Purchase. 80% Conforming lien had what was considered an adequate LLPA 25BP’s to support the risk associated with the CLTV.


“Risk Layer 2: HLTV to 115%. Same loan. Yep, FNMA would support 80LTV, CLTV of 95% on a purchase, with an HLTV to 115%. A HELOC check book showed up with the first monthly payment booklet. Exception Texas, where max LTV/CLTV for any loan/ever with Cash Out is 80% LTV. A separate topic for another day.


“Risk Layer 3: No Equity Out in the title trail. Simply not a standard. Agency tries to mitigate this layer with an “Agency Cash Out” LLPA if a R/T refi of liens other than initial subordinate financing is added to the balance of a R/T refi.  Is the LLPA representative of the risk? Appraisal history only covers sale activity.


“Risk Layer 4: Geographic exposure to markets with greater than average annual appreciation. Overexposure is hard to define. Florida was 4% of the failed Bank’s production but represented 26% of the Bank’s reserves and charge offs. Some macro analytics w/respect to triple the average appreciation would have made sense. FNMA & aggregators can identify PMSR trends by geography, but arguably miss some important data points.


“Risk Layer 5: Absent title trail data, Aggregators are blind when it comes to identifying duplicate loan numbers and terms of the previous transactions. Who wants to be the third Cash Out for the borrower that funded 115%, then refi’d twice at 80LTV, Agency SIVA, taking additional Cash Out, each time. “We do!” says the retention “sales” manager. This is where the Net Tangible Benefit comes in to support current % of refinance production.


“Risk Layer 6: Agency disposition REO. Back to risk layer 5, clearly that borrower is a victim of foreclosure when valuation declines. So, when the borrower stops paying (he may have had an 800 FICO cash out refi number 3,) the borrower lives interest free, while taxes and insurance are paid to maintain a first lien. After three years, FNMA is finally in a position to dispose of the REO. IF “in balance” days on market is 180 days of inventory, it makes perfect sense that FNMA would price the REO at .61% of market to sell in 5 days, compounding the problem.


“Agency righted the ship to an extent, but did it go too far? Not sure. The LLPA’s at 150BP greater than the last time to support price that more closely matches the risk was a start. Not sure where those reserves are. Eliminating 100% EA3’s (560 FICO) at high LTV’s made sense. But the above represents six layers of risk that had nothing to do with credit score. Have the Agencies changed? Not sure: With a refinance, it’s still possible to input est. value multiple times to trigger AIW. The new FHLMC 100 has something I haven’t seen in ten years …HLTV (HELOC LTV) with no geographic restrictions outside of valuation warnings, provided one needs an appraisal.


Looking at the NQM products (we’ll still build a website for them for a price that supports the risk,) I’m not convinced we’re not headed down the same path of destruction as an industry. I’m naively optimistic that a secondary market for products with no more than two layers of risk will emerge. Until then, I’m not interested.  I am concerned for the Agency / GNMA aggregators that feel the need to ‘jump in’ without the appropriate risk measures in place. FHA is the new subprime. My thought would be to right size the company to support current lower Agency and Govt purchase volume vs incur the enterprise risk associated with NQM going all wrong, again.”

On the current M&A and cost control environment, Dr. Rick Roque, Managing Director of the Menlo Company, is seeing, “There is a lot going on in the M&A environment for retail mortgage lenders and the challenges on the horizon. For larger firms – $500M-$1.5B in annual retail volume are aggressively exploring options – Q4 and Q1 are staring at them starkly in the face, and losses amounting to 20-30bps on volume will destabilize the capital structure of most mortgage firms in this market segment. Loan Officer compensation is not lowering fast enough – competitive pressures are preventing this from doing so. Mortgage firms based in more conventional markets – downtown Atlanta, Georgia, Parsippany, New Jersey, Boston suburbs and other markets, like Chicago, are firmly heading toward a very bleak future.

“What can lender do? Adjust Loan Officer comp; adjust it for product mix – if a loan officer predominantly closes conventional deals, then his/her LO comp should be reflective of lower margin business. I am seeing lenders possibly test the waters by having a company-wide compensation level set for Bond or DPA programs (this admittedly is controversial, but many lawyers acknowledge there may be room to do this if it was consistent across all markets in the US).

“Other lenders are specifically targeting FHA markets – but lenders need to structure branch compensation strategies around varying branch margins between FHA and Conventional products. I am seeing some negotiate seasonal cost of funds terms with warehouse lenders to offset down months. Lenders strictly put in processes to control lender concessions and eliminate cost of cures. A lender should explore options for liquidation or partnering with a larger firm and merging with them on favorable terms commensurate to their volume and contribution to the company. The capital problem for mortgage lenders is as serious as it was in 2009 when warehouse availability was limited to clearly financially secure mortgage firms.


State-level lending & processing laws continue to change

Governor Murphy of New Jersey signed into law revisions to the N.J. Residential Mortgage Lending Act, the law regulating licenses of residential mortgage lenders and brokers. The law adopts transitional licensing allowing a registered originator to act as an independent lender or broker for up to 120 days upon filing an application for licensure. The law also permits a licensed originator from another stat to transition to a New Jersey license for 120 days upon filing an application. These transitional licenses have restrictions that should be noted.

The law includes other amendments as well including: fees permitted for licensees acting as lenders, exempts not for profit entities under IRS Section 501 c3, clarifies license requirements for a branch manager and other significant provisions.

Illinois has amended provisions to House Bill 5176, regarding notice of sale requirements under the judicial sale procedures of a foreclosed property.

The modified provision affects foreclosed properties situated in counties with a population of more than three million. Notices of sale must now be published in two different newspapers that circulate to the public in the county in which the real estate is located. One of these newspapers must be published in the township in which the property is located.

Illinois Senate Bill 2615 has amended provisions under its Residential Mortgage License Act regarding mortgage loan advertisements. Under the new provisions, all advertisements for mortgage loans must reference the Nationwide Multistate Licensing System and Registry’s Consumer Access website unless exempted by the Secretary.

Illinois has modified provisions under its Residential Mortgage License Act, House Bill 4404, regarding licensing requirements. Under the new provisions, entities exempt from licensure as independent loan processing entities are required to annually apply to the Secretary through the NMLS for an exempt company registration for sponsoring one or more individuals. An independent loan processing entity is not subject to examination by the Secretary.

Ohio has established an affirmative defense to a tort action brought against a covered entity because of a data breach through Senate Bill 220 (the “Act”).

The Act defines “covered entity” to mean “a business that accesses, maintains, communicates, or processes personal information or restricted information in or through one or more systems, networks, or services located in or outside this state.” To meet the requirements for the affirmative defense, a covered entity must have a compliant written cybersecurity program that contains certain safeguards that may personal and/or restricted information.  The Act sets requirements for cybersecurity programs and identifies approved cybersecurity frameworks with which covered entities must reasonably conform with.

In addition, definitions for “electronic record and “electronic signature” have been amended to include blockchain technology; “a record or contract that is secured through blockchain technology is in an electronic form and to be an electronic record.” and “[a] signature that is secured through blockchain technology is in an electronic form and to be an electronic signature.”

Maryland amended its regulations relating to fees a notary public may charge for travel to perform notarial acts that went into effect August 13, 2018. Previously notary publics could charge a fee of 31 cents for mileage reimbursement if they were required to travel to perform their notary duty. The new amendment allows a notary public to charge a rate indexed to the prevailing rate for mileage as established by the Internal Revenue Service for business travel. This fee is allowed only if the notary is required to travel to perform the notarial act.

In the State of Texas, all state agencies automatically cease to exist every twelve years unless they are continued by the legislature. The Texas Sunset Commission has recently released its report, which recommends abolishing the Texas Department of Savings and Mortgage Lending (SML) and transferring its regulatory duties to the Texas Banking Department.


The Texas Mortgage Bankers Association, the Texas Bankers Association, and the Independent Bankers Association of Texas have all taken public positions opposing consolidation of these agencies. Key arguments against consolidation include: 1) there is no tax payer benefit, as the department is completely self-funded by the regulated entities, which have mostly indicated that they do not desire this change, 2) consumer protection responsiveness frequently suffers with larger agencies focused on broader agendas, 3) Banking Department current fee schedules are equal to, or higher than, SML fees, with no commitment for projected cost savings to go to those paying the required fees.


A vote on the report will be taken by the Commission during their August 29-30, 2018 scheduled meeting. More details on how interested parties can become involved in this process are available from the respective trade associations mentioned above. Hearings are going on now and lenders will have the ability to contact their Representatives and express any concerns before that time.

The State of South Carolina has recently enacted House Bill 4628 regarding the state’s Telephone Privacy Protection Act (“SCTPPA”). The Bill defines “telephone solicitations” and lays out a list of restrictions that apply to solicitors. Restrictions include time of day, required identification of solicitor including name, company, telephone number and address and true reason for the call without misrepresentation regarding the origin and nature of the call or text message. In situations where a live telephone solicitor is not available to speak with the consumer answering a telephone solicitation call within two seconds of the completed greeting, the telephone solicitor must play a prerecorded identification and opt-out message. Any request not to receive telephone solicitations must be honored for at least five years from the time the request is made. Finally, A telephone solicitor may not initiate, or cause to be initiated, a telephone solicitation to a telephone number on the National Do Not Call Registry maintained by the federal government pursuant to the Telemarketing Sales Rule.

The South Carolina Department of Consumer Affairs adopted miscellaneous provisions under its Consumer Protection Code, which include public complaints and requests for information, delinquent notification filing and fee payment, and filing and posting maximum rate schedules. These provisions are effective immediately. The provisions discuss the two ways in which the public may access the department of consumer affairs. It also states the public may make requests for including any final order, decision, opinion, rule, regulation, written statement of policy or interpretation formulated, adopted or used by the Administrator on the discharge of his functions or any other matter to which the public has access by the Freedom of Information Act.

The provisions then disclose the Department’s penalties regarding delinquent notification filings and fee payments. Finally, the provisions discuss the filing and posting of maximum rate schedules.

My wife and I took our 6-year-old nephew with us on a trip to Rome. We were visiting one of the churches and I pointed up to the cross on the wall and asked, “Do you know who that is”? 

He looked right at me and said, “How would I know, I’m not from around here”!

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Rob Chrisman