Sep. 17: Western Alliance Bank Spotlight, Fannie and non-QM deals, audits and UDAAP safeguards; inflation in the headlines

Just over a week ago marked the 14th anniversary of the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in the wake of the nation’s subprime/housing crisis. The GSEs have helped the liquidity of the mortgage market, with the strongest segments of the market remaining in the middle, for loan sizes between $300k and $971k, supported by move-up buyers who had a previous home to sell and higher-end buyers who dropped down to less expensive homes. Fannie and Freddie have been mostly profitable since 2012 and many wonder whether the two will ever be released from conservatorship. That will happen as soon as Republicans and Democrats in Washington D.C. can agree on the terms of their capital requirements and a plan of action agreeable by both parties. In the meantime, more and more homes continue to be financed in the path of natural disasters. Nowhere is this more apparent than in California, where roughly 5.1 million homes now exist on the outskirts of cities, where houses and other development are built near or among flammable wild vegetation and where eight of the largest blazes on record have struck in the past five years.


Saturday Spotlight: Western Alliance Bank – Specialized Mortgage Services


In 3-5 sentences, describe your company (when was it founded and why, what it does, where, recent growth and plans for near-term future growth).

Western Alliance Specialized Mortgage Services, a national banking group within Western Alliance Bank, Member FDIC, delivers comprehensive funding resources to mortgage originators and independent mortgage bankers across the country. Led by experienced senior industry executives, the relationship banking team offers traditional warehouse lending, finances mortgage servicing rights (MSRs), a full pallet of Treasury Management products and services and working capital lines that are structured to meet individual borrower needs. Part of top-performing Western Alliance Bancorporation, with more than $65 billion in assets, the Specialized Mortgage Services group has the reach, resources and deep industry knowledge that make a difference for business partners. 


Tell us about what type of volunteer work employees are encouraged to engage in, or charities your company supports, and why.

People across Western Alliance Bank care deeply about improving the quality of life in the communities where we live and work, and our company has a strong track record for providing meaningful support for education, job development, workforce development, arts and culture, and so much more.  A key pillar of our involvement across the bank is hands-on volunteering. In just one example, each year Western Alliance works with Junior Achievement to provide financial literacy skills to students in Arizona, Nevada and California Title I schools. Hundreds of bank volunteers annually help give under-resourced students the knowledge and skills they need to own their economic success, plan for their futures, and make smart academic and economic choices.


What does your company do to help elevate your employees’ growth? Describe any mentoring programs, outside classes or training, in-house training. How does the company help people develop?


Western Alliance Bank offers a variety of resources to help employees grow in their current roles and build new skills, including online development programs and workshops, mentoring programs, and internal webinars that feature speakers from across the company. We encourage employees to invest 10-15% of their working time collaborating with colleagues within the Specialized Mortgage Services national business line and other areas within the bank (the internal customer). These activities and regular meetings with their manager and the senior management team are designed to encourage our employees to learn and grow skillsets in areas that interest them as part of consciously working on career development, planning and growth.


In addition, our executive-led Diversity & Inclusion Opportunity Council actively supports Business Resource Groups focused on the career advancement of diverse groups within the company, such as women, ethnic and racial minority groups, veterans and LGBTQIA+ employees.


Things you are most proud of that don’t have to do with sales.


We are so proud that Western Alliance Bank provides an environment that brings out the best in our talented workforce through two-way feedback, career development and ongoing opportunities for growth. Recognition initiatives, such as our quarterly Culture Champions award for those who demonstrate our values and expected behaviors, invoke pride within the company and a ‘succeeding as a team’ mindset.


Fun fact about Western Alliance Bank.


The Specialized Mortgage Services team regularly holds customer contests, many of which centers around holidays in specific seasons, i.e.: March Madness funding contests in the spring, best Halloween costume picture submissions in the fall. Our business partners really look forward to participating in these together with our team and helps us all remember that in an ever-growing world of automation and technology, it’s the people partnerships that build and sustain loan lasting business partnerships.


Fannie and Non-QM Deals



Fannie Mae announced its latest sale of non-performing loans as part of the company’s ongoing effort to reduce the size of its retained mortgage portfolio, including the company’s twentieth Community Impact Pool (CIP). CIPs are typically smaller pools of loans that are geographically focused and marketed to encourage participation by non-profit organizations, minority- and women-owned businesses (MWOBs), and smaller investors. The four larger pools include approximately 5,780 loans totaling $959.1 million in unpaid principal balance (UPB), and the CIP includes approximately 70 loans totaling $16.3 million in UPB. The CIP consists of loans geographically located in the Miami-Dade area. All pools are available for purchase by qualified bidders. Bids are due on the four larger pools by October 4, 2022 and on the CIP by October 18, 2022.


Fannie Mae also announced the results of its twenty-seventh reperforming loan sale transaction. The deal, announced on August 11, 2022, included the sale of approximately 6,060 loans totaling $986.4 million in unpaid principal balance (UPB), divided into three pools. The winning bidders were Pacific Investment Management Company LLC (PIMCO) for Pool 1, DLJ Mortgage Capital, Inc. (Credit Suisse) for Pool 2, and Sutton Funding, LLC (Barclays) for Pool 3, each awarded individually. The transaction is expected to close by October 26, 2022. Reperforming loans are loans that have been or are currently delinquent but have reperformed for a period of time. The terms of Fannie Mae’s reperforming loan sale require the buyer to offer loss mitigation options to any borrower who may re-default within five years following the closing of the reperforming loan sale. All purchasers are required to honor any approved or in-process loss mitigation efforts at the time of sale, including forbearance arrangements and loan modifications. Interested bidders can register for ongoing announcements, training, and other information here. Fannie Mae will also post information about specific pools available for purchase on that page.


Change Lending is preparing to issue a $465.1 million MBS backed by non-qualified mortgages, the largest offering yet from the Community Development Financial Institution. The transaction also suggests the secondary market for non-QMs is getting back on its feet after extreme volatility earlier in the year. Not only is the security one of the largest expanded-credit MBS deals of the year, but the collateral has seasoned for just two months. All of the mortgages, which lack income documentation, were originated by Change. The lender can originate so-called “no ratio” mortgages because, as a CDFI, it’s not subject to the Consumer Financial Protection Bureau’s ability-to-repay requirements. DBRS assigned preliminary AAA ratings to the MBS. The firm noted “robust loan attributes as reflected in credit scores, combined loan-to-value ratios and liquid reserves.” The average credit score on the loans is 736, the average combined LTV ratio 73.1%. Borrowers have 39 months of reserves on average.


Audits and UDAAP Safeguards



As noted above, mortgage lenders remain active in selling loans to the secondary markets, agencies, and investors. These sellers typically require a review of an independent and statistically sound sampling of loans each month by a QC function, generally post-funding after the loan has closed. The QC function may be completed internally by designated personnel or through an external vendor. If performed internally, the QC manager and function should be independent of the loan production function. The QC process designed to effectively alert management to any deficiencies that may have existed in recently completed loan originations and should also detect fraudulent transactions so management can effectively address the causes and report perpetrators to the proper authorities.


When it comes to double-checking consumer data security, mortgage companies can implement safeguards like limiting who can access customer information, requiring the use of encryption to secure such information, and designating a single qualified individual to oversee an institution’s information security program, who reports at least annually to the institution’s board of directors or equivalent governing body. Multi-factor authentication is a security enhancement that requires multiple credentials (factors) before an account can be accessed.  Separately, most of us know that unauthorized use of passwords is a data security issue. Did you know that username and password combinations can be sold on the dark web or posted for free on the Internet? Once in the hands of criminals, this information is used to access accounts held by the consumer or employee. And use software vendors regularly update software to address security vulnerabilities within a program or product. When companies use commonly available software and do not install a patch that has been released for that software or take other mitigating steps, they neglect to fix a security vulnerability that has become widely known.


Inflation in the Headlines



Inflation continues to dominate the headlines. Major inflationary reports dropped this week, as August’s Consumer Price Index (CPI) and Producer Price Index (PPI) were released. CPI came in worse than expected, rising 0.1% from July to August and 8.3% from August 2021. Inflation for consumer core prices, which excludes food and energy, rose 0.6% month-over-month, more than the expected 0.3%. Fortunately, PPI dropped for the second straight month, this time by 0.1% from July to August, as producer core goods prices rose 0.2% as global supply chain issues have begun to sort themselves out. All of this will be part of the conversation at next week’s FOMC meeting, at which Jerome Powell and the rest of the Fed are expected to substantially raise rates once again. Just how big is a matter of debate. 0.75% is a safe starting point, but 1.00% will be on the table. Additionally, the Fed’s efforts to reduce its balance sheet holdings continue to add to the volatility in mortgage rates.


From the capital markets ranks, BJ Necel sent, “August’s CPI surprised economists as inflation was hotter than many expected despite a significant pullback in gasoline prices. Core CPI, which removes volatile food and energy prices, has increased at a 6.5 annualized rate over the last three months which is higher than the 6.3 percent annualized rate over the last twelve months. Consumers continue to spend on household goods, apparel, medical, and recreational goods which all saw price increases during the month. On the services side, personal care, medical care, insurance, and tuition continue to get more expensive while there is a glimmer of hope that rent increases may be near their peak. The data immediately changed market expectations for future Fed policy with a 75-basis point rate hike now expected for September and the potential for higher than expected rate hikes through the end of the year. It is more likely that inflation will remain elevated for some time leading to a prolonged period of higher interest rates than those to which we have grown accustomed.”


Three fraternity brothers are walking down the street when they see some

tracks. The first one said “I think they are dog tracks”, The second one said “I think they are cow tracks”. The third one said “I think they are Dodo bird tracks”. What happened next?

They all got hit by a train!


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Rob Chrisman