Revisiting Originator Compensation Options; Mixed Bag of Bank Earnings, Updates from Mortgage Insurers; Lender Bulletins
It used to be we moved clocks back on the last Sunday of October, which is this weekend. A few years ago, the time change was moved to the first weekend of November. In fact, up until the railroads started crisscrossing the US in the late 1800's, different locations set their own time. Daylight Savings Time first sprang up in WWI, and again in WWII, and was finally standardized by the government in 1966.) Prior to that, it was still left up to regions. Anyway, leave your clocks alone this weekend.
Loan originator compensation is still a big question mark out there. The goal is for a broker or agent not to steer the borrower into a higher rate. But basic bond math dictates that, all things being equal - especially risk, an investor will pay a higher price for a higher yield. That's pretty simple. There are lots of ways to pay a loan producer that are being discussed under the proposed changes coming up next year. They can receive a salary, a flat fee for units, a quality bonus, a portion of the servicing, income based on pull through percentage, a quarterly bonus, matching their 401(k). Loan officers can receive additional marketing money, be paid by the hour, a percent of originations, money based on their "compare score". How about giving originators income based on the long-term performance or servicing of their loans, like insurance agents? After all, insurance agents develop an annuity over time - couldn't the same be applied to loan officers? READ MORE
U.S. banks, like other companies, have been releasing earnings. And for banks, they've virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they had set aside to cover loan losses. The 18 commercial banks with at least $50 billion in assets earned an adjusted $17 billion in the third quarter - almost half of which came from reducing their loan-loss reserves and bringing their profits up. Of course, when the banks set aside money for losses, they booked the losses. Optimistic analysts say that the reductions in loan-loss reserves illustrate how banks' economic forecasts have improved in recent months; pessimists say that the foreclosure mess and buyback lawsuits will be with us for years to come.
Fifth Third Bancorp earned $238 million in the third quarter after releasing $500 million from its loan-loss reserves. KeyCorp earned $219 million after releasing $263 million from reserves. CitiGroup saw 92% of its earnings come from released reserves, Capital One 82%, Huntington Bancshares 65%. Others' losses would have been much worse. Marshall & Illsley lost $144 million in the quarter, but released $128 million. Zions Bancorp in Salt Lake City lost $47 million and released $51 million. SunTrust earned $153 million after releasing $75 million from its reserves.
MetLife, mostly an insurance company but also making waves in mortgage banking, earned $286 million in the third quarter, mostly from improved investment income and strong U.S. annuity sales.
Fidelity National Financial (the largest U.S. title insurer) canceled a requirement for lenders to guarantee proper foreclosure procedures amid "heightened review" processes by banks, and will no longer require an indemnity agreement before insuring individual foreclosed properties. It will continue the arrangement with Bank of America, but apparently other title insurance companies did not follow its lead creating a disadvantage.
PMI, the 3rd largest MI company, posted its 13th quarterly loss. The news pushed the stock prices of all the MI companies down. MGIC and Radian (#1 & #2) saw their stocks drop, although for all of 2010 MI company stocks have done very well. PMI said that uncertainty about the foreclosure process faced by many U.S. banks must be eliminated for it to return to a profit. PMI's CFO stated that PMI would not be responsible for paying interest expenses incurred during the moratorium period if the delay is self- imposed by the lender.
Genworth Financial, based in Virginia and another insurance company with a mortgage presence, made $83 million last quarter. But that was lower than expected, and its stock price dropped 10%. Operating losses at the U.S. mortgage-insurance unit widened to $152 million from $116 million a year earlier as the insurer set aside more reserves. In general, mortgage insurers, which pay lenders when homeowners default and foreclosures fail to recoup costs, have lost money over the past three years.
MGIC, insured 97% LTV loans for first-time homebuyers only, but starting Monday MGIC will insure 97% LTV loans to current or previous homeowners as well as first-time homebuyers. There are some basic requirements, of course, such as the loan must be in a non-restricted market, involve a purchase transaction, have a maximum loan amount of $417,000, and a minimum credit score of 700.
The Federal Home Loan Bank of Seattle reported third-quarter income of about $10 million after losing $144.3 million a year earlier and another $93.8 million in the second quarter. It said lower credit-related charges recorded on private-label mortgage-backed securities helped boost third-quarter earnings. But they're are still losses, and the Federal Housing Finance Agency, its conservator, still deems the bank undercapitalized.
In a story from Reuters, Flagstar Bancorp said it priced a common stock offering at $1 a share, a 57 percent discount, wiping out half of the company's market value and causing the stock to drop 47% yesterday. Flagstar received $267 million in bailout funds. "Proceeds from the offerings, expected to be about $367.3 million, would be used for general corporate purposes including potential dispositions of non-performing assets, or potential restructuring of the balance sheet. Earlier this year, Flagstar saw investment from Greenlight Capital, a hedge fund run by investor David Einhorn, which bought 33 million shares in the bank."
Yesterday Flagstar Bank lowered the Fannie Mae High Balance and Freddie Mac Super Conforming price adjustments, improving the hit by .375. Flag also told clients that announced its policy for allowing, in addition to all previously exempt veterans, additional veterans to fall under the exemption from paying the VA funding fee. "Veterans who were in receipt of compensation, but, either because they re-enlisted or were recalled to active duty, are receiving active duty pay in lieu of compensation". VA continues to require veterans to complete the VA Disability Questionnaire, and Flagstar requires veterans to initial each of the responses with a "yes" on any of them leading to other requirements.
Wells Fargo's wholesale channel adjusted its 2nd appraisal policy for brokers for the FHA Property Flipping Waiver. A second appraisal, "verifies that the seller has completed sufficient legitimate renovation, repair or rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser provides appropriate explanation of the increase in property value since the prior title transfer."
Mountain West Financial followed Fannie and Freddie's "Appraiser Independence" requirements that are replacing the HVCC. "At this point, the requirements pose no significant changes to the policies and incorporate language to clarify questions that arose during the implementation of the HVCC." MWF suggested clients see the Fannie, Freddie, and Fed announcements for details:
Fannie: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/sel1014.pdf,
FHLMC: http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1023.pdf,
Federal Reserve: http://www.federalreserve.gov/newsevents/press/bcreg/20101018a.htm.
Blackstone reported a 23% rise in third-quarter profits to $339 million, helped by gains in its real estate portfolio, the value of its private equity portfolio and a strong performance by its GSO credit-investing arm. "Blackstone is looking to take advantage of changes in US law that would limit banks from trading with their own capital."
Over the last few weeks rates improved, and then moved higher earlier this week. Folks got nervous, whereas others thought that the market felt oversold and the price action was turning. Sure enough, rates have improved slightly after the auctions, especially after a nice $29 billion 7-yr sale yesterday. Following the better-than-expected auction traders saw buying from money managers, hedge funds, insurance companies, some originators (buying back hedges), and pension funds. MBS prices ended the day better by .250 - .500, depending on rate.
Look for volatility next week: we have the elections on Tuesday (viewed as a gauge of President Barack Obama's handling of the economy - and Democrats fear the worst already), Wednesday is the FOMC meeting and QEII, Thursday we'll have some prepayment news for mortgage investors, and on Friday the unemployment data! Phew!
How do witches keep their hair in place while flying? With scare spray!
Why don't skeletons ever go out on the town? Because they don't have any body to go out with!
Two men were walking home after a Halloween party and decided to take a shortcut through the cemetery just for laughs. Right in the middle of the cemetery they were startled by a tap-tap-tapping noise coming from the misty shadows.Trembling with fear, they found an old man with a hammer and chisel, chipping away at one of the headstones.
"Holy cow, Mister," one of them said after catching his breath, "You scared us half to death -- we thought you were a ghost! What are you doing working here so late at night?"
"Those fools!" the old man grumbled. "They misspelled my name!"