Originator Compensation Conference Call; Reducing Fraud with Freddie; AOTs vs. Direct Trades; Fannie Mae Econ Outlook; New Relock Policies

By: Rob Chrisman •

"Why don't pirates ever buy houses? Because they hate YARRRRRRRdwork!"

Record low mortgage rates have not yet produced much of a lift for home sales: sales of both new and existing homes appear to have risen modestly following their sharp declines in July in the wake of the expiration of the homebuyer tax credits. With the declines, the supply of unsold homes remains uncomfortably high relative to sales. Sales normally weaken during the fall on a non-seasonally adjusted basis. Analysts believe that because sales are already so low, however, they probably will not fall as much as they normally would, which means the seasonally adjusted data may show modest gains.

Anyone looking for a very wide-ranging economic write up for a report or presentation should check out Fannie's "Monthly Economic Summary"

A "best practices" write-up has been produced on the security side of the business. "We recommend that all Treasury, agency debt, and agency MBS market participants incorporate best practices in their operations in order to promote trading integrity and to support an efficient marketplace." HERE it is

Broker and loan agent compensation won't officially be changed until April 1, but that has not stopped industry groups from trying to decipher and help their members evaluate the possible changes. Over the past month the Director of NAIHP Marc Savitt, has had a number of meetings with the individuals at the Federal Reserve who are dictating the new broker comp rules. In New Jersey, NJPMO.org has arranged a conference call on Monday September 20, at 2PM EST, 11AM PST with Marc Savitt. It's on a first come basis and members of NJPMO have priority, but anyone who is interested should contact info@njpmo.org.

Freddie Mac's latest bulletin highlights its commitment to reducing fraud in the mortgage market. Rather than paraphrase it, I will direct you to the OFFICIAL BULLETIN

GMAC Bank correspondents were notified of a change to GMAC's Relock Policy. "GMACB will relock expired lock commitments within a 30 day period past the expired lock date under the following conditions:

  1. GMACB will relock commitments which include Expired Loans, Late Delivery and Cancelled Loans up to a  maximum of 4 times for no greater than a total of 60 days, never to exceed the original lock window.
  2. All relocks are subject to current GMACB product eligibility guidelines. Ineligible loans will not be relocked or afforded extensions.
  3. Relock windows can only be taken in increments of 15 and 30 days.
  4. Relocks are calculated on a "worse case" pricing basis.
  5. A Relock fee of 5 bps will be applied to all relocked loans." There are several other "If" statements, but GMAC's changes are indicative of an industry-wide trend toward investors and lock desks just saying "ok" to any request.

And what exactly does "worst case" mean? In GMAC's case, "worse case" will be determined from several factors: the requested expiration date of the relock (15 or 30 days), the original base price, the current base price for the relock period (15 or 30 days), and current extension fees as posted on the rate sheet.

GMAC Bank also warned its correspondents that "failure to comply with the South Carolina requirements regarding the unauthorized practice of law can have very serious consequences, including denial of the right to foreclose on the property." "Clients represent and warrant in Section C102G of the Client Guide that each loan has been originated, closed, serviced and transferred in compliance with all applicable federal state and local laws. Clients are reminded that this representation and warranty includes compliance with laws regarding the unauthorized practice of law. Clients must ensure that all loans are closed lawfully in accordance with applicable state and federal law."

Lastly, Fifth Third told its brokers about improved pricing adjustments for its Freddie Mac HASP/Open Access and Fannie Mae DU Refi Plus programs. Nice to see, especially as other lenders are doing similar things with price adjustments. And BB&T CorrAdvantage has posted an update to its guidelines which applies to its DU Refi Plus & Freddie Relief Refi product line(s).

The securitization of FHA, VA, and conventional loans continues unabated, but as the potential for securitizing other loans (such as jumbo) increases it is important for secondary market managers to look at potential trade execution strategies. Having more options "on the backside" leads to more profitable execution with a higher gross price and lower hedge costs. Last week I talked about the decision to release or retain servicing - many companies are creating or adding to their servicing portfolios since investors are generally not currently paying up for it. And in order to retain servicing, the lender must have agency (primarily Fannie or Freddie) approval - mortgage investors rarely, if ever, let a smaller originator keep servicing.

Hedgers will typically have a bias for either "direct trade" or "assignment of trade", for example. Firms who begin hedging and who are new to mandatory sales (as opposed to best efforts, where the pull through risk is transferred to the investor by giving up some amount of price) usually don't have a preference. Don Brown with Secondary Interactive notes that, "With the clients the preference is to sell direct trade, what we typically find is that they don't have the analytical mechanisms in place to be able to efficiently manage the AOT process. In a direct trade best execution, you are managing the buy up/buy down variable as well as the "which investor" variable.  With the AOT execution, you add an additional set of variables that results from determining which TBA trade is best to assign and when is the best time to assign the trade.  Because each investor has its own pricing workbook, the multiple spreadsheet analysis becomes daunting. Or secondary staffs often spend considerable time making sure the market data, investor eligibility and pricing data as well as their pipeline data is all current in the system - it can be overwhelming."

SI's opinion is that from a pure execution standpoint, AOT execution generally provides a better overall structure. First, it enables bankers to avoid the bid/ask spread on the offer side of the TBS transaction. Second, it provides for a more steady cash flow. There is no need to factor in the consequences that come from the disjunctive cash flow of a direct trade strategy where part of the revenue stream is coming from the investor and the other gain/loss must be settled with the broker/dealer based on the monthly settlement date.  In addition, AOT delivery enables bankers to manage the timing of their assignments to take advantage of par rate changes. With AOT execution, however, and to some extent direct trades, because trades must be assigned in specific increments it is important to be able to match to loans to the trades in a way that minimizes any unfilled trades amounts. These "tail pieces" can be a problem if not monitored.

Hedging firms give their clients primers to cover many of the strategic and tactical considerations originators face in selling, pooling and delivering loans and to how to best utilize their tools to support originator's objectives. Don't be shy in asking for them.

Ah, back to the markets. Yesterday a sell-off in fixed income securities, which of course include mortgage-backed securities, resulted in investor price changes for the worse. The longer end (like 30-yr bonds) in particular was hit in part from Japan's currency intervention as investors expect the BOJ to buy in the shorter end of the curve. By 3PM EST the 10-yr was down 0.5 in price, and by the close, current coupon MBS's were worse by .375 although slightly higher rates (like for 4.75-5.125% 30-yr mortgages) were worse less than .250 with $3.5 billion being sold - a real pickup in sales volume.

(Warning: parental discretion advised.)

Her Diary:

Tonight, I thought my husband was acting weird. We had made plans to meet at a nice restaurant for dinner. I was shopping with my friends all day long, so I thought he was upset at the fact that I was a bit late, but he made no comment on it. Conversation wasn't flowing, so I suggested that we go somewhere quiet so we could talk. He agreed, but he didn't say much. I asked him what was wrong; He said, 'Nothing.' I asked him if it was my fault that he was upset. He said he wasn't upset, that it had nothing to do with me, and not to worry about it. On the way home, I told him that I loved him. He smiled slightly, and kept driving. I can't explain his behavior I don't know why he didn't say, 'I love you, too.' When we got home, I felt as if I had lost him completely, as if he wanted nothing to do with me anymore. He just sat there quietly, and watched TV. He continued to seem distant and absent. 

Finally, with silence all around us, I decided to go to bed. About 15 minutes later, he came to bed. To my surprise, he responded to my caress, and we made love. But I still felt that he was distracted, and his thoughts were somewhere else. He fell asleep - I cried. I don't know what to do. I'm almost sure that his thoughts are with someone else. My life is a disaster.

His Diary: 

Boat wouldn't start today. Can't figure it out, but at least I got laid.