Broker to Banker Chatter; Letters from the Trenches on QM, Eminent Domain, QC and Compliance

With the withdrawal of Wells Fargo from the wholesale channel, correspondent reps from the aggregators are receiving renewed interest from mortgage brokers looking to set up mortgage banks and sell to them through correspondent channels. Requirements vary with investor, of course, but it doesn't happen with the stroke of a pen. While correspondent reps politely answer broker questions, here, via the magic of cut and paste, are some of the answers from various aggregators - it is not hard to guess the questions.

"Yes, but to be considered for approval, your net worth must be in your company." "I would love to explain the AIR regulation to you, but I have a few actual mortgage bankers waiting to sell me a couple of hundred million today...can I get back to you on that?" "I don't know where everyone's reps and warrants and buyback provisions are posted on the web." "No, I don't have a warehouse bank in my back pocket." "Actually, I don't think that the personal line of credit your banker extended to you will qualify as a Warehouse Line of Credit." "Yes, you have to use an actual accountant for the financial statements." "I know it's costly to hire a Compliance or QC Officer, however as a mortgage lender, you really are required to set that process up in your company. Unfortunately, in contrast to your assumption, that's not the function of our loan purchase review group." "Yes, drawing docs and funding loans is one of the functions that differentiate brokers and bankers." "No, a haircut is not just something barbers do."

Why would a billionaire obtain a home loan? Well, for a variety of reasons, not the least of which it makes sense when the interest rate is below the prevailing rate of inflation. Inflation is low, but not that low.  Read more.

Ohio will no longer allow U.S. Bank (as the prepaid debit card provider the state uses for unemployment compensation) to charge fees for overdrafts on the card. Yes, the government can tell us what we can and can't do, which leads to some input from the trenches on some important issues in mortgage banking.

The CFPB's QM rules impact many things. "Rob, I wanted to raise an issue related to QM that you and your readers may find surprising. On Thursday, the House Financial Services subcommittee will hold a hearing on Dodd-Frank, with Raj Date of the CFPB scheduled to testify.  At that hearing, we expect some discussion of the CFPB's qualified mortgage (QM) rule and its impact on Habitat for Humanity.  A poorly defined QM rule could end Habitat's ability to work within the United States, meaning that thousands of families would lose the opportunity to become Habitat homeowners. Passed as part of the Dodd-Frank Act, the CFPB qualified mortgage rule seeks to prevent future housing market bubbles by standardizing how mortgage lenders document an applicant's ability to repay a loan.   But as the CFPB moves forward, it is critical that this rule is written broadly enough to both support the work of nonprofit lenders like Habitat, while still protecting the stability and integrity of the for-profit mortgage market. Habitat partner families - by design - do not qualify under standard underwriting guidelines used by banks and other private lenders, and there is concern that Habitat's successful mortgage model may not be included within the new QM ability-to-repay definition.  Banks and state housing agencies would then be precluded from partnering with Habitat affiliates since non-qualified mortgage loans would face significantly higher liability risks. I would be happy to provide you with additional information, or to put you in touch with a Habitat affiliate who can explain what a typical Habitat mortgage looks like and more on who a typical Habitat family is. (If you'd like learn more, contact John at jsnook@habitat .org.)

The eminent domain concerns continue. For an update, here is the latest from Bloomberg, but here is a note I received on the subject. "Something that the investors in mortgages in California are missing is that when that mortgage was originated, the lender could only look to the value of the property to start with. You have to start with an analysis of CA deficiency protection. If the homeowner were to stop paying, most of these mortgages would result in either a short sale or foreclosure. In both cases most CA residents are protected from the lender pursuing them for the difference. Did the investors in the mortgages not know this? Of course they didn't, as the private MBS securitizers did not tell them. The model is broken. The expected performance of an underwater mortgage does not follow any expected model. Once homeowners learn what their legal rights are, they are many times more likely to strategically default on that mortgage."

He continued, "If the lenders don't start paying attention and they fight this effort, they are going be stuck with these mortgages. The only difference in the imminent domain tactic versus foreclosure and or short sale is the homeowner is not displaced. It is this displacement of families that is killing the market. And with rates where they are, it is difficult to gain traction for the argument that borrower's rates and costs will go up." So noted Kevin Hardin, Director, Mortgage Mediation Group with Arboleda Brechner, Attorneys At Law.

And lastly, the role of QC and compliance in today's mortgage companies. "I've been concerned about a trend I've seen deepening lately.  We all know the organizational dynamics between groups like sales, fulfillment, QC, etc.  It takes strong leadership to attain the appropriate balance between groups (they are all critical); a good part of that in the clearly communicated charter/role for each group.  Some companies are successful in this, some aren't.

"Regardless, what I've seen lately is an isolated approach of a trifecta including QC, Compliance and Credit Risk. Unchecked and unwilling to be part of the solution. I recently worked with a large regional lender who couldn't figure out why their quality wasn't improving. The CEO was confused because he had been given tons of data, KRI trending, heat maps, etc. from the three groups.  Short story, I sat in as an observer at his next monthly business review meeting (which included the SVPs/EVPs of these groups, plus fulfillment, sales, etc.). The animosity in the room was amazing and unfortunate. The risk groups felt their sole responsibility was to report/escalate/disengage and no one had told them differently.  Fulfillment hadn't asked for assistance because the pattern had been reinforced by exec management through their inaction. And Sales was stuck in the middle.  No one was thinking about the impact to the borrower.

"After talking with individuals later it was clear that the fatigue of the past 6 years had compromised their ability to maintain a productive environment.  It was battle fatigue, entrenched.  We've all seen dysfunctional shops, and this one was truly impaired.  It was difficult for them to see because the environment had changed over the 6 year period of buybacks, overlays, credit squeeze, additional regulations, etc. What's that analogy about turning up the heat slowly on a frog in a pot of water?  They had forgotten how it should work.  Behavior, group dynamics, defined roles, balanced approach, really basic stuff. It made me think about how much our industry has gone through.  Most of us muscle through it and go onto the next challenge, not taking a moment to see it all in context. Those who pause and recalibrate will be successful." So observed Debora Aydelotte, president of Titan Capital Solutions (debora.aydelotte@titanlenderscorp .com).

By the way, last month, the Consumer Financial Protection Bureau issued a report covering consumer complaints received against mortgage lenders over the last year. Between July 21, 2011 and June 1, 2012, the CFPB received approximately 19,250 mortgage complaints. The majority of these complaints have been sent to companies for review and response, with the remaining mortgage complaints being referred to other regulatory agencies. The most common type of mortgage complaint remains problems encountered by consumers when they are unable to pay, such as issues related to modifications, collections, or foreclosure. Hmmm...is that the lender's issue, or the borrower's?

And speaking of reports and numbers, HUD released statistics on the single-family operations for April 2012. FHA endorsed 108,954 total loans totaling $20.3 billion. There were 58,716 purchase money mortgages and 45,643 refinances, of which 2,285 were on existing FHA mortgages and 27,260 were streamlines. 74,530 or 71.4 percent of all endorsements for April were processed using FHA's automated underwriting system. Average credit score was 699 and LTV decreased by about 0.9 percent. As of the end of April, servicers reported 707,330 mortgages in serious delinquency (90 days or more) for a default rate of 9.4 percent. So far in this fiscal year, FHA has insured 672,333 single-family mortgages for approximately $122 billion.

Looking briefly at the markets, on Tuesday Federal Reserve Chairman Bernanke had his comments, tones, and body language sliced and diced and rated. Bernanke kicked off his semi-annual congressional testimony and caused the monetary policy narrative to evolve slightly, although he pretty much reiterated what everyone already knew from recent economic numbers. Put another way, don't look for any changes from the 8/1 meeting but maybe from the mid-September meeting. What is really going on with this market?  More of the same.  Investors continue to debate many of the same themes: 1) earnings season (so far not so bad); 2) economic growth (cooling); 3) the state of Europe (quiet); and 4) policy responses.

Tuesday's agency MBS volumes were below the recent averages, but still closed worse by about .125 in price. Our 10-year Treasury notes fell/worsened about .375 and closed at 1.50%. Some attention was paid to home builder confidence, which jumped 6 points to 35 in July, its largest one month gain in nearly a decade and its highest level since March 2007, per the National Association of Home Builders. The Consumer Price Index was in line with forecasts in June (no change, core rate +.2%). Industrial Production was slightly above expectations in June (+0.4%). For news later this morning (still pretty early here in Denver) we'll have Chairman Bernanke repeat his testimony before the House Financial Services Committee, the MBA's Mortgage Applications numbers, Housing Starts and Building Permits for June (expected at 745k and 765k, respectively), and at 2PM EST the Fed will release its Beige Book of economic anecdotes from around the 12 Districts in preparation for the July 31-August 1 FOMC meeting.

Every once in a while I don't have a joke here, and instead have some trivia or something honoring our troops. (Of course, there are some folks who think I never have a joke here!) Today we'll all learn something mildly interesting, like why we use "k" or "m" for thousand and "M" or "mm" for million. To begin, "k" (lowercase) is not a Roman numeral but is actually shorthand for "kilo," which represents the 1,000 multiple of a given unit. When it comes to using "M" or "m" for thousand, on the other hand, the Greek's used "M" to mean "mega" or 1,000,000. But the Romans used "M" to mean 1,000. Over the years this has only added to the confusion as people have used "M" or "MM" to mean one million more typically, so using it to mean 1,000 is confusing. And while it is accurate to use the Roman numeral "M" for 1,000 "MM" actually represents 2,000 and not 1 million in Roman numerals. Back then, 1,000,000 would be represented by an M with a horizontal line drawn above it (indicating the reader should multiply the number by 1,000). At some point general usage switched to using "mm" to mean million (vs. the older style "M"). So at this point most use $1k (lowercase) to represent $1,000 and use $1mm (also lowercase) to represent $1,000,000.