Wholesaler Perspective on Originator Compensation; Empty Housing Units; TBW Impact on Delinquency Rates; Buying a Bank

A housing unit is defined by the Census Bureau as a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters. Recently it released its survey of "Residential Vacancies and Homeownership" for the third quarter of 2010. I've done some rounding, but there are 131 million housing units in the United States. 112 million are occupied - which means that 19 million are vacant. Should I repeat that? Seventy five million are owner occupied, and thirty seven million are occupied by renters. Here in Missouri, where the MAMP mortgage conference is tomorrow, Attorney General Koster posted foreclosure information for borrowers on his website.

There doesn't appear to be double counting going on there, as possibly what happens in mortgage origination (where when a smaller investor sells a loan to a large investor, and both count the loan). In a related issue, an industry vet wrote to me yesterday saying, "A similar practice has been going on within the Realtor community for years.  When one company sells a home listed by another company, both offices claim credit for the same sale.  When the government posts data for existing home sales, I wonder where it comes from.  Another case of over-counting?"

Regarding the high delinquency rates in Florida reported by Zillow, one person wrote, "The only reason Ocala has a much higher rate than the rest of Florida is due to the shutdown of Taylor Bean & Whitaker.  Over 1,000 people lost their jobs in one day and many had higher-than-average pay for Ocala.  Which means they bought houses they can't afford since they now work (if they were able to secure a job in Ocala) for less income.  What a mess..."

The FDIC was busy Friday brokering deals on three failed banks. Copper Star Bank (AZ) had its deposits taken over by Stearns Bank National Association (MN). Tifton Banking Company and Darby Bank & Trust Co., both of Georgia, and the FDIC entered into a purchase and assumption agreement with Ameris Bank, Moultrie, Georgia. But hey, if you're a decent-sized mortgage operation (with $6-10 million to invest), why not buy a bank? In the last year or two, brokers have become bankers, bankers have become larger by gobbling up branches, and others have either purchased a bank, or been acquired by a bank. Being part of a bank offers a sustainable source of funds - with the cost being about what you're probably earning on your checking account right now. There is some minor benefit of offering some type of portfolio product, although anything differing too much from current vanilla product is often frowned upon by regulators. Any mortgage bank who wants to lend in all 50 states has a good head start - but that certainly doesn't mean it can ignore state-specific guidelines and regulations. Cross selling is still relevant if a bank wants to service loans - it seems like not a week goes by without some piece of mail from whoever is servicing your mortgage. Historically banks have more value than mortgage banks, and it certainly helps in trying to attract new agents as the licensing requirements are different.

As we approach the April 1 TILA and compensation changes, investors are divulging information to loan agents and brokers. For example, recently Stearns Lending told its broker clients, "One point of confusion out there among brokers is that the yield spread premium (YSP) will become illegal. Currently this is not true. Lenders will still be able to pay YSP and borrowers will still be able to choose an interest rate that will earn a credit toward closing costs. However, lenders will not be able to pay brokers and loan originators greater compensation due to an increase in the interest rate. As of April 1, 2011, brokers and loan officers are prohibited from receiving compensation directly from a consumer and also receive compensation from the lender. This means that you may choose to negotiate directly with your borrower for your origination fee, or you may choose to be paid by Stearns Lending." Starting in April "you may not receive and Stearns Lending cannot base compensation on any term or condition of the loan except as a percentage of the loan amount. This means that if you chose to be paid by Stearns, your compensation may not be dependent on the loan program, credit quality of the borrower, or the interest rate chosen by the borrower but instead will be based on a percentage of the loan amount. If you chose to be compensated by Stearns, the percentage amount you are paid on the loan amount will be fixed for each loan closed and that percentage amount will run for a specific period of time. We are currently developing broker compensation agreements that can be tailored to your historical compensation history with Stearns."

Another reader wrote, regarding to a presentation he had attended given by several attorneys, "He stated that a branch manager of a retail mortgage branch cannot be paid commissions on his/her own loans and also get paid on the bottom line profits of the branch.  As you are aware, this will be very game changing if true. I don't know if others are interpreting this the same way."

Last week Goldman Sachs (who owns Litton Loan Servicing) and JPMorgan Chase released further details about legal problems in their servicing units. JPMorgan said it was the subject of two lawsuits seeking class action status that accuse the bank of violating consumer fraud statutes related to its foreclosure practices, for example. A few large servicers suspended foreclosures temporarily after finding that employees had approved court documents without checking their accuracy. And now there is an investigation by the attorneys-general of all 50 states. Both Goldman and Chase, along with others, are grappling with demands by investors to repurchase mortgages that failed to meet underwriting guidelines.

Investors have been busy. BB&T updated its FNMA DU Refi Plus product line, as did Franklin American to its conforming 10- and 20-yr fixed and DU Refi Plus lines. U. S. Bank Home Mortgage Wholesale Division revised its guidelines for VA IRRRL products that are not refinances of existing USBHM VA loans. Starting today, for loans in all states regardless of loan amount, USBHM will "require a full appraisal with interior and exterior inspections and does not have to be done by a VA appraiser but must meet Appraisal Independence Requirements. Appraisal fee may be charged to the Veteran. The maximum LTV will be restricted to 100% of the new appraisal."

Friday was not a good day for both the equity and the fixed-income markets. MBS prices ended the day down (worse), between .625 and .75 in price, on about $3.6 billion in sales - about twice what has been average. Interestingly, prices for existing non-agency securities did pretty well. Weak Treasury auction results and concern about demand from foreign investors weighed bond prices down. It didn't help that some trading desks may have been thinly staffed with traders making it a four day weekend.

The Fed's QEII pushed rates lower in the weeks leading up to the Fed meeting. But investor concerns stopped them from going any further. Investors, like everyone else, are looking at an improvement in economic data pointing toward some growth, rising inflation concerns with the "double dip" concerns long gone, and the severe criticism of QEII from inside and outside the US. But the recent sell-off, many believe, is over-done, and the market is ahead of itself. After all, isn't unemployment supposed to stay well above 9% for all of 2011?

Unlike last week that had little news, and what little there was combined with some shoddy auctions & a holiday made rates jump, this week we have a large number of early morning releases. The Producer Price Index and the Consumer Price Index both come out on Tuesday and Wednesday respectively - and everyone seems to be hoping for some inflation now. Retail Sales already came out this morning. Industrial Production comes out tomorrow, Housing Starts out on Wednesday. Empire State, Jobless Claims, Leading Economic Indicators, and Philly Fed will round out the week.

Today's October retail sales report initially looks to be the most important new information, but any surprises from either the CPI or regional production surveys could also significantly impact the tone of the economic news. GDP forecasts depend on an accelerating pace of consumer spending, thus the importance of today's number which followed September's .7% increase. October Retail Sales were up 1.2%, ex-auto it was +.4%, although the "October Empire State Index" was down over 11%. (Apparently the "Giant 8" Cupcake Maker" and the "Christmas Lighted Polar Bear Trio" that I bought from the Sky Mall catalog helped the statistics.) The 10-yr Treasury yield is up around 2.86%, and mortgages are worse between .125-.250 versus Friday's closing levels.

How is company policy set?
Start with a cage containing five apes in the cage, hang a banana on a string and put stairs under it. Before long, an ape will go to the stairs and start to climb towards the banana. As soon as he touches the stairs, spray all of the apes with cold water.
After a while, another ape makes an attempt with the same result -all the apes are sprayed with cold water.
Turn off the cold water.
If, later, another ape tries to climb the stairs, the other apes will try to prevent it even though no water sprays them.
Now, remove one ape from the cage and replace it with a new one. The new ape sees the banana and wants to climb the stairs. To his horror, all of the other apes attack him. After another attempt and attack, he knows that if he tries to climb the stairs, he will be assaulted.
Next, remove another of the original five apes and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm.
Again, replace a third original ape with a new one. The new one makes it to the stairs and is attacked as well.
Two of the four apes that beat him have no idea why they weren't permitted to climb the stairs, or why they are participating in the beating of the newest ape.
After replacing the fourth and fifth original apes, all the apes which have been sprayed with cold water have been replaced. Nevertheless, no ape ever again approaches the stairs.
Why not?
"Because that's the way it's always been around here."
And that's how company policy begins.