Underwriters & Processors Included in SAFE?; Mortgage Volume vs. Profits; Reader Quotes on L.O Compensation; Movement Seen in Commercial Sector

No one is saying that things are booming in commercial real estate, and any drive down "Main Street USA" will show the number of "for sale", "for rent", "for lease", or empty storefronts and offices. That being said, in the next few weeks banks including J.P. Morgan Chase, Goldman Sachs, and Citigroup are expected to launch offerings of commercial-mortgage-backed securities, or CMBS, totaling $1.4 billion. J.P. Morgan is leading a $650 million offering backed by properties owned by real-estate investment trust Vornado Realty Trust (NJ). And Goldman & Citi are rumored to be leading a $750 million CMBS issue which includes a $100 million loan that Citigroup is making to Flagship Partners LLC. If all this works, other big banks may come off the commercial sidelines partly because property values have started to stabilize after plunging more than 40% from the peak in August 2007.

The Dodd-Frank Wall Street Reform and Consumer Protection Act does many things. Among others, it permanently raises the current standard maximum deposit insurance amount to $250,000 from $100,000. The standard maximum insurance amount of $100,000 had been temporarily raised to $250,000 until 2013, but is now retroactive to October 3, 2008.

The Financial Reform Bill's impact is serious - there is no debate about that. Many loan producers have already "left the building", and those remaining are wondering if they are going to make more than minimum wage. (Of course, a fair number of processors, underwriters, funders, etc., have written to me saying that many agents were making too much money in the "golden years" anyway...).  HERE is a nice summary.

In Florida, it seems that processors and underwriters are being included in that state's interpretation of the SAFE Act - in other words, those two positions will be mandated to be licensed as Loan Originators. Although industry groups like the MBA support the National S.A.F.E. Act, they feel the Florida Office of Financial Regulation is taking the interpretation of the statues beyond the intent of the Federal Act...

"The SAFE Act is clear that it is intended to require licensure by the states of loan originators of state licensed mortgage lenders that work with customers and not processors or underwriters who do not communicate with the public. Loan processors and underwriters do not originate loans, do not work with customers and perform functions separate from loan originators on behalf of their companies. Unlike originators, who receive compensation on a per transaction basis, processors and underwriters receive a salary that is not tied to a particular loan application or specific action taken or attempted. (Some would disagree with that, off the record.) Requiring processors and underwriters to be licensed as loan originators places state regulated non-bank mortgage lenders at a distinct competitive disadvantage to depository lenders. Under the SAFE Act, employees of federally regulated depository institutions must register with the NMLS, but are not subject to the education and background investigation requirements necessary to obtain a license."

Anyone having concrete input is asked to write to mbaf@mbaf.org.

As I have mentioned, small loan amounts will be impacted by the new regulations. One reader from North Carolina wrote and asked, "Has anyone addressed the 5% High Cost Loan Cap for North Carolina?  Our sales prices have dropped to well under $80,000 to $100,000 in many areas, and with the new 3.5% USDA guarantee fee coming out of the 5% cap, as well as 2.15% for VA and 2.25% for FHA, we are unable to finance these lower loan amounts due to the cap and limit on fees!" MND has discussed this in detail HERE

Other quotes:

"The intent of the regulations is good, to cut down on loan steering, but a) the law will take a long time to implement, and b) it will indeed be subject to much interpretation. The new laws regarding Loan Officer compensation will hurt the consumer in several ways. Each loan is different, like a fingerprint. Forcing compensation to be the same for all loans means difficult loans will not be worth the effort and will not get done, nor will small loans be worth it given the percentage cap.  Also, brokers can locate the lowest cost source of funds for any given scenario, but it appears in the future there will be additional compensation for doing so. Not allowing compensation to come from both the borrowers' credit (YSP) and the borrower further limits consumer choice."

"It appears the mortgage bankers believe the new regulations will not negatively impact them and only impact mortgage brokers.  This new reform will impact everyone and the mortgage banker should be just as concerned as the average independent mortgage broker, if not more so."

"My interpretation is that once I've established with my borrower my expected markup/margin, I can "reserve" this as a "Loan Origination Fee" or as "Compensation From Rebate" on the 2010 GFE. What's changed is that my profit is locked in with this disclosure, i.e. I can't commit to a rate lock and then play the market for a larger rebate - I can't earn more than this percent of the initial loan amount, disclosed on the GFE as a dollar amount. And that disclosed dollar amount remains fixed even if the loan amount is increased (increased loan amount doesn't constitute a "changed circumstance"). And as I see it, one can charge both an Origination Fee plus part or all of the rebate, as long as you disclose Compensation From Rebate. Loan officers will be forced to be upfront about this markup - they won't be able to play the market."

Let's look at mortgage-related income news lately.

MGIC just reported its first operating profit in three years, which was and is good news for the MI industry - especially as they "compete" against FHA product lines (if that is the term).

Bank of America lost $1.5 billion on its residential mortgage business in the second quarter with credit charges remaining high and loan production barely rising from the first quarter. BofA funded $72 billion in first mortgages in Q210, up from $69.5bn in the previous quarter.  But the home loans and insurance division losses were driven by an $802m increase in representations and warranties expense, combined with lower margins from a drop in refinance activity. "Less than favorable" results from the mortgage servicing division also added to the drop. Lower production expense in the home loans and insurance division were offset by increased costs related to default management staff and loss mitigation efforts.

Wells Fargo, which was the nation's largest originator last year at $427 billion, said its residential loan production was down about 35% from the same quarter a year ago, but still enough to rank #1. Wells had $143 billion in mortgage applications in Q210, up 14% from $125 billion in the previous quarter. According to the bank, 58% of those applications were refinances. The Wells unclosed pipeline of applications increased 15% to $68bn, the highest mark since the $90bn reported in Q209. At the end of 2009 Wells was also the second largest servicer with $1.7 trillion.

From the viewpoint of any lender, especially smaller ones (and everyone is smaller than Wells and BofA), higher volume without higher profits makes no sense. In fact, the more loans a company funds, the more it is exposed to re-purchases and on top of that has to maintain overhead. In addition, too few companies actively set their origination goals based on the amount of cash that it has. So rather than continue to push for higher volume, many firms are "working backward" and starting with an analysis of their maximum volume given the amount of liquid assets that they have in the bank. And they are doing this prior to verbally "beating up" their warehouse bank.

Half the e-mails I received yesterday were from investors improving their rates. Mortgage-backed security prices containing production coupon mortgages closed the day better by .375- .500 in price, and the 10-yr hit 2.89% - the lowest since April 2009. Bonds rallied after Federal Reserve Chairman Ben Bernanke's "uncertain" economic outlook supported the notion of low inflation and low interest rates for a long time.

The U.S. economy faces "unusually uncertain" prospects, and that the central bank was ready to take further steps to bolster growth if needed according to the Chairman. Bernanke said policymakers believe the U.S. economy is still on a path to recovery, but for now, he said the Fed expects economic conditions will warrant an exceptionally low benchmark federal funds rate for an "extended period". Bernanke indicated inflation is not a concern.

Mortgage prices set new highs yesterday. Traders reported that "buyers outnumbered sellers" throughout the session, and investors have plenty of reasons to own them - not the least of which is the high quality now being originated. Mortgages are also attractive on carry, supply, and prepayment fronts. $2.3 billion of new origination was sold, with a smattering of 3.5% securities but mostly 4% & 4.5% securities. One trader opined that investors have become "immune" to the high prices, as in the past these would have caused a refi boom but now, given credit and property constrictions, this is not happening.

Investors continue to adjust their prices and programs. Flagstar Correspondent changed its pricing for High Balance, Super Conforming, DU Refi Plus, Relief Refi Super Conforming & Open Access Super Conforming product lines. BB&T CorrAdvantage updated its guidelines for its Non-Conforming product line. Plaza will begin accepting applications to conduct FHA business from brokers not previously FHA approved, as well as from previously approved TPOs that did not complete their recertification with HUD.

Roy (Rogers) and Dale (Evans) were out camping and when they awoke they saw that a mountain lion had snuck into camp and had eaten Roy's brand new cowboy boots!

Aggravated, Roy hopped on his horse, Trigger, and rode out of camp holding his rifle, intent on bagging the boot-eating feline.

Hours later, Roy rode back into camp with a dead mountain lion across the back of the saddle.  Dale said, "Pardon me Roy, is that the cat that chewed your new shoes?"

(Sorry.)