Borrower Paid vs. Lender Paid Originator Compensation; Servicing Deals; Early Payoffs; LO Licensing Requirement Deadline
With the run-up in rates, and the holidays approaching, loan producers are going to have their hands full closing existing locks, and MBS traders will be looking at lower supply since most MBS sales have already been done. Many investors and wholesalers are already sending out preemptive announcements regarding end-of-year timelines. Fifth Third, for example, warned its clients, "Loans that are clear to close and received in closing by noon on December 22 will close and fund for the month; however, note that due to the holidays, it may be necessary to accelerate the timeframe based on capacity. Any loans received after noon on December 22 will be undertaken as capacity allows..."
The furor over servicing has died down somewhat, but that doesn't mean it has gone away. Certainly servicing continues to be transferred, whether it is from Chase to IBM, the packages that IMA has out, or the two deals that MIAC did. "MIAC successfully closes the sale of two Freddie Mac bulk mortgage servicing portfolios for almost $2.4 billion." Servicing is always bought and sold, with investors sometimes choosing the loans they'd like to keep out of a pool, or re-arranging their portfolio based on internal strategies. Or maybe the investor believes that a certain portion of their portfolio will pay off early, and want to rid themselves of it.
Originators sometimes wonder why they got socked with an early pay-off penalty, or even why investors want a loan on their books for many months. The answer is fairly simple: a particular investor bought that mortgage (a fixed income security) and set the price based on the expected cash flows for X amount of time. When that fails to happen, the investor loses money. Investors are very concerned about prepayment risk, which is why those figures (prepayment speeds) are announced, MBS investors take notice. We had a whole batch of them on Monday night, and the numbers indicated a slight increase in early pay-offs. This was especially prevalent in the lower note rates, causing some concern. The use of HARP as a streamlined refinance vehicle remained evident in the latest report, impacting recent production, and higher rates did not budge much. Some analysts believe that prepayments will continue to be slow in 2011 because of a diminished borrower response to rates, incrementally tighter underwriting, persistent origination capacity issues, and a low probability of government intervention.
Turning to the production front, the Florida Times-Union reports that, "less than 25% of mortgage industry professionals in Florida have applied to obtain licensing under new guidelines that will be implemented on January 1st. Any who fail to comply with the requirement will be ineligible to work. The requirement is part of Florida's participation in the new Nationwide Mortgage Licensing System, which is designed to strengthen regulation of brokers nationwide. Only 14% of the state's currently licensed mortgage companies and 23% of the licensed mortgage company branches have submitted applications, officials said."
I had quite a bit of feedback on the quote Monday about originator compensation and the broker business in general. One of the cleverer, in discussing how honest originators are paying for the sins of others who have left the business, was, "Otter: Ladies and gentlemen, I'll be brief. The issue here is not whether we broke a few rules, or took a few liberties with our female party guests - we did. But you can't hold a whole fraternity responsible for the behavior of a few, sick twisted individuals. For if you do, then shouldn't we blame the whole fraternity system? And if the whole fraternity system is guilty, then isn't this an indictment of our educational institutions in general? I put it to you, isn't this an indictment of our entire American society? Well, you can do whatever you want to us, but we're not going to sit here and listen to you badmouth the United States of America!"
"Personally I would prefer the "disproportionate" compensation go to the brokers than the bankers any day. The Bank lobby would love to see the brokerage community go out of business so that they can continue to increase their already fat margins. My sister is doing a cash-out refinance to pay off a HELOC and lower her payments. Several weeks ago she called her bank and they quoted her a 15 year fixed at 4.75% as a no cost loan. Another bank quoted her 4.625%. She went to a broker and closed the loan at 4.00%. Let the consumer chose."
READ MORE ABOUT ORIGINATOR COMPENSATION
SunTrust Mortgage told its brokers, "The Federal Reserve Board is amending Regulation Z - Truth in Lending (TILA) to regulate compensation paid to mortgage brokers, loan officers and other loan originators effective with credit packages received by lenders on or after April 1, 2011, with the stated purpose of protecting consumers from unfair or abusive compensation practices. While the new rule impacts the way loan originators' and brokers' compensation is paid, it does not impact the broker's ability to compete in the market place and does not prohibit brokers from offering a full spectrum of products and rates to consumers. In order to comply with the April 1 requirement for credit packages, SunTrust will provide two options for broker compensation effective with system changes in mid- February. STM's approach to the amended regulation will allow broker compensation to be paid in one of two ways depending on borrower preference.
- "Borrower Paid" is the option where origination and processing fees will be paid directly by the borrower, and STMPartners will validate to ensure the amounts charged do not exceed STM's 3.5% broker compensation limits. After you select a product, STMPartners will calculate the rate/price options for that product. Negative discount points may cover all valid, third party closing costs excluding the broker origination and processing fees. Broker compensation will not be added in the pricing. When "borrower paid" compensation is selected, you may not receive compensation directly or indirectly from any other entity in the transaction.
- "Lender Paid" is based on pricing negotiated between the broker and the lender. The negotiated payment will be used for all loans sent to STM and will be set-up prior to registering loans. When a loan is registered using the "Lender Paid" option, the negotiated fees will be added to the prices displayed for the product selected. The system will test to ensure compensation meets both the price caps and compensation floor. When "lender paid" compensation is selected, you may not receive compensation or fees from the borrower. At this time, we anticipate your negotiated compensation to berenewed or restructured quarterly."
No one will argue that volatility has increased recently in the fixed income (and therefore MBS) markets, and that only a few folks out there (traders) are enjoying it. Folks who locked prior to yesterday are pleased, but concerned about closing their loan prior to lock expiration. Anyone hedging a pipeline has a lot of coverage on now. Anyone who didn't lock is wondering if their entire pipeline is going to go away. MBS sales were nearly twice the recent volume averages, according to TradeWeb, 95% of them being 30-yr coupons. MBS prices closed worse by about 1.375 when the herd was done thundering through, and 4% securities (containing 4.25-4.625% mortgages) closed below 100 for the first time since June.
Why did rates shoot higher Tuesday? Traders say it was mostly due to the tax stimulus, and its potentially vast impact on GDP. Paul Jacob from Banc of Manhattan wrote, "We have a partial laundry list of drivers: An extended run of generally better-than-expected economic data, last week's disappointing employment #s notwithstanding, an absence (for now) of the Euro-scare bid for Treasuries, this week's auctions, into a December market with shaky liquidity, today's generous agreement on taxes etc., signaling an appetite for near-term fiscal accommodation from our newly-divided government, and from a technical-view-point the bond charts now look pretty 'crummy'."
Despite a languishing housing market and the weak employment data on Friday, for now the markets seem to want to focus on the underlying improving fundamentals as a whole (ISM, claims data, GDP, global inflation). Interest from buyers (like money managers or insurance companies) has been spotty during the week of heavy supply (treasury and Corporate) which has not helped. The auction yesterday went "ok", but is now underwater given the sell-off. We have another $21 billion to sell today (10-yr) and $13 billion in tomorrow's 30-yr, so we are not done with it.
That being said, Mr. Jacob points out that yesterday's close "puts the real 10-year rate (vs. 12-month trailing core CPI) at 2.55%; that's higher than 80% of the past decade. A 3.50% 10-year would put the real rate close to a 10-year high. The economy's looking better, but it's not strong enough to withstand high rates." The higher yields in the US, combined with euro-nervousness, have certainly helped the dollar. "Although there are concerns that the continued tax cut will bring a further deterioration in the U.S. budget deficit, investors are seeing the rise in yields as a positive for the dollar just now." The 10-yr yield hit 3.25%, but is now down to 3.20%, and mortgage prices might be a shade better on investor rates sheets, depending on how they reacted to yesterday's market.
Siamese twins walk into a bar in Canada and park themselves on a bar stool.
One of them says to the bartender, "Don't mind us; we're joined at the hip. I'm John, he's Jim. Two Molson Canadian beers, draft please."
The bartender, feeling slightly awkward, tries to make polite conversation while pouring the beers. "Been on holiday yet, lads?"
"Off to England next month," says John. "We go to England every year, rent a car and drive for miles. Don't we, Jim?" Jim agrees.
"Ah, England!" says the bartender. "Wonderful country... the history, the beer, the culture..."
"Nah, we don't like that British stuff," says John. "Hamburgers and Molson's beer, that's us, eh Jim? And we can't stand the English - they're so arrogant and rude."
"So why keep going to England?" asks the bartender.
"It's the only chance Jim gets to drive."