Horizontal vs. Vertical Risk Retention; More Originator Compensation Guidance; Provident Pushing Mandatories

What are you doing for breakfast tomorrow? It is National Pancake Day (who knew?) and IHOP will be offering a free short stack of IHOP's buttermilk pancakes in an effort to raise awareness and funds for Children's Miracle Network Hospitals and other local charities. Ahead of that you can measure the value of your time waiting in line versus the cost of the pancakes: 7AM-10PM.

Only one bank was shut down Friday: Valley Community Bank (IL), and the FDIC, acting as receiver, set up a purchase and assumption agreement with First State Bank, Mendota, Illinois, to assume all of the deposits of Valley Community Bank.

Maybe some of those folks should give Peoples Mortgage over in Colorado a call. Owned by Peoples National Bank, Peoples Mortgage is looking for loan officers in Colorado, although the company, being a bank with a Federal Charter, has no licensing required at the bank's LO level, and can lend in all 50 states. (A Federal chart exempts LO's from state licensing, but not, in the soon future, NMLS.) If you're interested in People's, which doesn't hire that often, e-mail Jeff Garman at Jgarman@epeoples.com or call 1-866-573-9662 for inquires.

"Qualified Residential Mortgages" is not an everyday topic of conversation but perhaps should be. Who is going to have "skin in the game"? Here is one very educated note that I received. "Rob, I read that column in the NY Times...I bet the banks are so pleased to be portrayed as losing the battle. They are going to have a huge victory because what nobody is writing about is the likelihood that the skin requirement will be vertical and not horizontal. Under vertical, sponsors retain say 5% of each tranche, so 5% of the AAAs for which there is a 1.6% risk based capital requirement, on down the capital stack to 5% of the subs, which is really 5% of the bottom 6% or 7% of today's deals, which equates to 0.35% (assuming the subs are 7%), for which there is a dollar for dollar capital requirement, and under vertical, they will not have to consolidate the securitization. This is a huge win for banks, since under a horizontal plan, if they retained the bottom 7%, they would have to hold a lot more capital than vertical, and they would have to consolidate, a huge loss for the banks."

Did someone mention compensation? One note said, "This lender says if you select the borrower paid compensation model, the seller can pay for the broker's origination costs.  The credit must be sufficient enough to cover all our origination.  The borrower can then select a rate to cover all remaining 3rd party costs.  I found this interesting since I initially believed seller could not cover our origination."

Provident Funding, who has rolled out correspondent mandatory options to selected clients, sent out word that it will require the Broker Fee Agreement to be signed by the interviewer at Initial Registration beginning tomorrow. "However, the same agreement, or another copy without any change in terms, signed by the borrower will be required for the file to be prescreened as complete. A change in terms will require the loan to be withdrawn and a new application to be submitted," and sample forms are available on its website - make sure that the terms are consistent if you're using multiple forms.

Paramount Residential Mortgage Group (PRMG) released information on its comp plan for broker clients. "With the exception of the loan amount, you cannot be compensated by the lender on any other terms of the loan, such as program type or interest rate. PRMG will offer you several lender‐paid compensation plans based on a percentage of the loan amount for your selection. Our Wholesale Compensation Plans will be available for your review in the next few weeks. Your Account Executive has the statistical data on your average compensation from PRMG in 2010 and will contact you to help you establish your compensation plan for the next quarter." Broker owners are expected to set plans for their own LO's, individual plans may vary, and PRMG "will ask you to tell us how you will compensate your loan officers by the end of March and certify your compliance with the originator compensation requirements under the rule." Look for revised wholesale rate sheets in a few weeks. For Lender‐paid Compensation, "you cannot receive any form of compensation from another party; for example, origination points or a processing fee for a staff processor, you will not be allowed to credit any portion of your compensation toward your borrower's closing costs, any seller credit must be applied to third‐party costs," etc. For Borrower‐paid Compensation plans, "...the borrower may pay your fee in cash at closing or financed in the loan proceeds without regard to the terms of the loan, up to PRMG's 4% broker compensation cap." "PRMG will ask you to include a copy of your Offer Sheet to the borrower with your loan submission. For each type of loan in which the borrower expresses an interest, your Offer Sheet should present three options from lenders with whom you regularly do business: The loan with the lowest interest rate for which your borrower qualifies, the loan with the least amount of points and origination fees, and the loan that has the lowest interest rate for which your borrower qualifies and does not contain any "risky" features; e.g., negative amortization."

United Wholesale Mortgage (UWM) also spread the word to its brokers about the comp changes. UWM will be offering two compensation options: Lender Paid or Borrower Paid. UWM mentioned that, "The Borrower Paid option is more of a "business as usual" plan and compensation is unrestricted as long as it is within applicable high cost and Fair Lending tolerances. With Borrower Paid all compensation including origination and processing fees will be paid by the borrower. Brokers will be allowed to negotiate directly with borrowers. The YSP/ Borrowers Credit from the rate chosen may cover all third party closing costs including our Lender Underwriting fee. Seller's Concession can cover the Broker's Origination and processing fees. Selecting the Borrower Paid option will allow the Brokers to charge different amounts on
each loan, but all of the compensation to the Broker must be paid by the Borrower." Under its Lender Paid plan, UWM states, "Broker Compensation will come directly from UWM and will be negotiated between the Lender and Broker Owner prior to any loans closing under this new regulation. The Broker cannot adjust any fees during this process. Brokers will always be paid the negotiated amount on each loan closed and never less or more. Broker credits will not be allowed and Seller's Concessions will not be able to cover Broker Compensation. The Lender Paid Compensation can be negotiated with UWM quarterly."

UWM also posted a list of frequently asked questions, including, "I am hearing that it is better to work as a Broker than work directly for a Lender, what is UWM's opinion?" UWM's answer: "In our opinion Broker will have much more flexibility in how they are paid. For example a Broker can negotiate directly with a borrower to be paid or be paid directly from the Lender. Brokers will also be able to have several agreements with multiple lenders, and choose which situation best fits each individual Borrower. Loan Originators for Lenders/Larger Banks will most likely only be able to receive lender paid compensation and will not be able to work directly with the borrower for compensation. Keep in mind for brokers, the pricing for Borrower Paid will stay the same as it is now and will be adjusted accordingly on Lender Paid."

And here is another from UWM: "Can I be paid more on difficult loans or Borrower's with worse credit?" "This would depend if the Borrower chooses Lender Paid or Borrower Paid. Creditors cannot compensate you more for a more difficult loan, consumer's credit score, debt-to-income ratio, LTV or even family connections with the Lender Paid option. However, Borrower Paid loans will give you the ability to negotiate directly with the borrower for your chosen compensation."

And more per UWM, "Broker Owners can pay their Originators based on a fixed predetermined percentage of each loan amount; the percentage cannot vary per loan. Percentage also may not vary based on transaction's terms or conditions. Minimum or maximum dollar amounts may not very per loan. Bonuses maybe given based on loan originator's overall monthly loan volume delivered to the creditor (i.e., total dollar amount of credit or total number of loans originated).

Broker owners may also choose to pay Originators on an hourly base rate of pay to compensate the originator for the actual number of hours worked during the pay period." Also, if the broker does business with less than three creditors, "(The Safe Harbor) element would be satisfied, and it would be considered satisfactory if the options are obtained from all creditors with whom the originator does business. The consumer does not have to be presented with all loan options that the originator obtains, as long as option presentation element is satisfied. (i.e. the consumer would not qualify for that specific program, lenders requirements, time restraints could not be met, etc.) Loan originators must believe in good faith that the consumer likely qualifies for the options presented."

Interest rates are... doing ok. Friday trading volume was a little lower than the recent average, and the 10-yr note's yield closed around3.42%. Although the trend in rates seems to be higher, it was a good week as the 10-yr's price improved by about 1.25 and MBS prices improved nearly a point (.125-.250 on the day). In fact, on Friday stocks improved, the dollar rallied, and Treasuries improved - all on one day!

This week we have a full platter of economic news. Today we've already had Personal Income and Personal Consumption/Spending (+1.0% and .2%, respectively); later we have the Chicago PMI and Pending Home Sales. Tomorrow is Construction Spending and February's ISM Manufacturing Index. Wednesday is the ADP number and the Fed's Beige Book, Thursday is Jobless Claims and some productivity and ISM numbers. And then on Friday we'll see the latest unemployment data points, with Nonfarm Payrolls expected up about 180k and the Unemployment Rate to move to 9.1% from 9.0%. One can still expect markets to be subject to events in Africa and the Middle East - the situation is still very volatile. Tomorrow and Wednesday Ben Bernanke will give his semi-annual monetary policy report to the Senate Banking Committee and the House Financial Services Committee. The 10-yr is currently unchanged at 3.42%, and MBS prices are also about unchanged as well. HERE is the full economic calendar for the week ahead.

While shopping for vacation clothes, my husband and I passed a display of bathing suits. It had been at least ten years and twenty pounds since I had even considered buying a bathing suit, so I sought my husband's advice.

"What do you think?" I asked. "Should I get a bikini or an all-in-one?"

"Better get a bikini," he replied. "You'd never get it all in one."

He's still in intensive care.