Positive LO Compensation Feedback; The Impact of Foreclosure Numbers

I handed the teller at my bank a withdrawal slip for $400.00. I said "May I have large bills, please." She looked at me and said, "I'm sorry sir, all the bills are the same size."

What isn't the same size are the top 20 retail lenders in the 2nd quarter. There are certainly those out there that believe that DTC (Direct to Consumer) lending is not only coming on strong but will, at some point, pass retail channels. Per the MBA, internet-lending still accounts for less than 10% of mortgage lending. But in the meantime here are the top group of retailers: Wells Fargo, Chase, Bank of America, PHH Mortgage, CitiMortgage, Quicken Loans, U.S. Bank Home Mortgage, SunTrust, USAA Federal Savings Bank, MetLife Home Loans, PNC Mortgage/National City, Fifth Third Mortgage, PrimeLending, Branch Banking & Trust Co., Ally/ResCap (GMAC), Regions Mortgage, Mortgage Investors Corporation, DHI Mortgage, Navy FCU, and TD Banknorth Mortgage, per National Mortgage News.

Out in California, First Mortgage Corporation is expanding its operations. The Southern California Mortgage Banker is seeking an individual to develop a correspondent channel, it is hiring underwriters (in the Inland Empire area), regional production managers for Northern CA, AZ, NV, and TX, loan officers, and a corporate recruiter. The company has been around for nearly 40 years, and although it is primarily in California FMC also operates branches in AZ, NM, NV, and WA.  "FMC originates, funds, securitizes, and services the loans it originates, services approximately $3 billion, and is the 24th largest GNMA issuer in the country.  FMC continues to embrace the guidelines set forth by FHA and FNMA with little or no overlays." Please send resumes to Clem Ziroli, Jr. czirolijr@firstmortgage.com.

I continue to receive compensation feedback. "I am writing today in hopes of helping other wholesale broker owners not only survive but actually thrive in this new bank dominated environment.  After all, those of us that are left need to stick together.  I am the sole shareholder and President of an 11 year seasoned mortgage brokerage and one of the few broker shops remaining in our area - the others have all become net branches, etc.  I currently employ 6 loan originators (just hired an LO from a net branch), 2 processors and no longer originate loans myself; the latter being a first in our 11 year history. 

"With that being said, I can honestly say that this company is a better company today than in the previous 11 years; not in terms of overall volume but in terms of the people it employs (true professionals), how much revenue the company earns per loan and how much better expenses are managed - the reasons I can now focus the majority of my time building a better company for my LO's.  How is this possible?  As an office, we have simply chosen to embrace the new comp plan and take advantage of the price disparity that has arisen with this new "bank dominated" market.  To be specific, we have chosen a lender paid comp plan of 275 basis points with the originator earning 130 "bps" and the company earning 145.  This is only now possible for three reasons: First, the vast majority of our competition (banks) have substantially higher rates than wholesale which allows us to remain competitive, second, today's mortgage broker expertise is worth substantially more than 45 to 80 basis points - not to mention that loans are harder to come by and equally hard to close.  Third, and arguably the most important, we made a critical shift in our thinking in two areas.  One, our LO's have seen firsthand and understand what a broker shop must earn per loan in order to keep doors open and to provide the tools they need to succeed and two, we all, including myself, now realize that being transparent and honest with our fees and credits is actually what the consumer desires - thanks to the distrust that banks have created for themselves over that past few years.

In an example of how decision making works, "The Housing Policy Council of the Financial Services Roundtable (HPC) has made recommendations to the Federal Housing Finance Agency (FHFA), U.S. Department of the Treasury and the U.S. Department of Housing & Urban Development (HUD) in response to the request for ideas on reducing the Real Estate-Owned (REO) properties of the government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA)." "The Housing Policy Council supports the goal of reducing the inventory of REO properties of Fannie Mae, Freddie Mac and the FHA," said John H. Dalton, president of the Housing Policy Council. "The overhang of these properties is one of the factors preventing a full recovery of the housing market." The Roundtable's Housing Policy Council is made up of 32 companies that originate 75% of the mortgages in the US.

"REO properties should be sold in a timely fashion, and in significant blocks based on local market conditions," said Dalton. "Purchasers of the REO properties should have the flexibility to sell, rent, or demolish if necessary to enable the local real estate market to begin to recover. Additionally, these properties need to be sold 'free and clear' to purchasers." According to the letter, an effective REO disposition program should address these factors: The GSEs should not become landlords. The sales of the REO properties should be on a free and clear basis; Price for the REO properties should be maximized by limiting the conditions attached to the sales; To the extent possible the efficiencies of large scale should be a factor in determining the size of the blocs of properties that are sold, but size should be balanced with the potential impact on values in key markets; Utilize contractual terms to ensure that the sales are conducted appropriately and the properties are administered in a manner that meets responsible standards; and so on.

"It is important that Fannie Mae, Freddie Mac or FHA do not remain landlords in the REO process," said Dalton. "We share the desire of HUD and FHFA to reduce, in a responsible fashion, the amount of REO currently on the books of the GSEs and FHA. The overhang of that property and of the REOs held by the private sector has reduced the pace at which the housing industry can recover from its downturn. Creating effective programs to reduce the GSE and FHA REO inventory is one step in the right direction."

In a similar vein, Bank of America is ramping up its foreclosure processing again, having sent out far more notices of default to borrowers in August than in previous months. Delays in processing artificially lowered foreclosure numbers over the past year due to the "robo-signing" scandal; the new surge likely addresses loans that have been long delinquent. Analysts believe that this will tend to keep values down in many markets for 6+ months.

But do foreclosure numbers tell us anything? The press sure makes a big deal out of them, especially the recent slowdown. Barclays Capital quantified the lengthening of timelines, and discussed recent trends. First, liquidation timelines have risen across all sectors, especially in the subprime and negative amortization sector, where timelines have increased by approximately 10 and 12 months, respectively, since 2008. "Liquidation timelines understate the true severity of foreclosure delays because they provide information only on loans that have advanced to liquidation. Once we include loans that have been frozen in the delinquency or foreclosure stage, the actual amount of time required to process a delinquent loan is much longer. Judicial states always had longer timelines, and they also experienced a much greater increase in processing times than loans in non-judicial states after the robo-signing issue came to light. Among judicial foreclosure states, New York and Florida have experienced some of the longest foreclosure delays. As a side effect of longer timelines, stop advance rates have risen and servicers have offered more loan modifications to distressed borrowers in longer timeline states."

Barclays goes on. "Our expectations of a prolonged slowdown from last year have materialized. Now we believe the situation is close to a point where improvements in trends should start to emerge. There has already been some improvement in 60+ to foreclosure roll rates, and we expect an improvement in foreclosure to REO roll rates once the composition of loans in foreclosure shifts to loans without documentation or filing issues. In particular, Countrywide- and Citi-serviced loans have recently experienced a pickup in 60+ to foreclosure roll rates. Although there may be a lag in the timing of when different servicers and states start to see improvements in timeline rolls, we expect further improvements in coming months. That said, improvement in rolls should not automatically result in lower timelines on future defaults right away. The average number of months delinquent for the 60+ and foreclosure pipelines is very high and unless most of them are liquidated over the next 12-18 months, timelines on defaulting loans will not show signs of improvement."

The MBA has expanded the number of participants in its applications survey and the firm says it will capture about 75% of retail and direct mortgage applications, up from 50% previously. And the indexes were re-benchmarked as of January to reflect the new sample. Using the new numbers, which should be more indicative of the industry, apps were up last week .6%, with refi's +2.2% and purchases -4.7%.

The Fed sends out the results of its meeting today. "Operation Twist," also known as "Operation we don't have any new tools so we may-as-well pull out the same old hammer" is certainly garnering its share of time in the press. "Forward guidance," was unveiled at the Aug. 8-9 meeting: the Fed pledged to hold the benchmark rate near zero at least through mid-2013. The odds-on favorite to debut at the conclusion of the two-day meeting is an effort to extend the maturity of the Fed's portfolio, with the goal of lowering long-term interest rates. Critics argue that changing the maturity of the debt on a balance sheet does nothing to change the size of the Fed's balance sheet.

Mortgage prices may, in some indirect way, be helped, but I have not heard anyone complain about mortgage rates in a very long time. Yesterday prices ended the day worse by a shade while the 10-yr closed at 1.95%. The markets are expected to remain focused and reactive to the events out of Europe and Greece, as they await the FOMC's decision. Currently the 10-yr is around 1.91%.

Lars asked Ole, "Do ya know da difference between a Norvegian and a canoe?"
"No, I don't," said Ole
"A canoe will sometimes tip," explained Lars.

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog takes a look at the recent news concerning REIT's, and the possible tax implications. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.