Thoughts on the Broker Business Model and Current Compensation; Wells' New HARP Policy

Well, this is the week that many Secondary Marketing folks have been dreading. It is the last week of the month after a sell-off, and there are plenty of LO's who are sweating those refi's closing on time. Extension policies will be sent out, or pointed to on websites, and bickered over. Not only that, but the upcoming weekend is a 3-day weekend. Look for operations to be partially staffed as folks take some summer vacation time or head off at the end of the week.

Here is a job a little off the beaten path. Advantage Credit Inc. is looking for a Sales Director for the Northern California region. Check out the firm's website for more information (advcredit.com), but the 20 year old national mortgage credit reporting agency, with a reputation for sharing knowledge and providing old fashioned customer service, continues to grow and expand nationally. The Regional Sales Director will be responsible for developing new customers in the mortgage financial market and acting as the customer's credit consultant and helping them grow their business. Candidates should send their resumes to Jim Kaiser at jim@advcredit .com.

And Opes Advisors, Inc. is currently seeking an internal Sales Support Representative to provide loan scenario support for the sales department. Opes Advisors, an independently owned mortgage banking and investment management firm south of San Francisco, seems to be growing by leaps and bounds. And it isn't like scenarios are becoming easier, so this role is critical! The role fields loan scenario questions, researches answers when issues arise, and responds to various situations as they occur from the production staff. And the person has to do things that I could never do: learn the specific guidelines for the product offerings of the mortgage banking division - become the "go to" expert in each of the products, offer 24 hour turnaround time for loan scenario questions, guide mortgage advisors, review credit reports, AUS findings etc. - a jack of all trades and a good entry into a good company. Confidential inquiries and resumes should be sent to resumes@opesadvisors .com.

And yes, I've taken to putting out commentaries on many Saturdays. But for most folks, Saturday is a day off - except possibly in the future under the CFPB's proposals. Attorney Brian Levy observed, "Buckley Sandler's summary of the new RESPA TILA proposed regulation and I was shocked to see that the CFPB intends to regulate Saturday right out of the mortgage business' weekend. 'Business day' is any calendar day except a Sunday or a legal public holiday (New Year's, Martin Luther King Day, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas day).  This is a change from Regulation X's current definition of 'business day,' which is 'a day on which the offices of the business entity are open to the public for carrying on substantially all of the business entity's functions.'" And what is the definition of an "application?" See this all in a portion of BuckleySandler's well written summary of the new CFPB Rule combining TILA & RESPA disclosures: stratmorgroup.com.

"Rob, is the broker business model dead? Many of the companies we sell to seem to be being squeezed. The agencies will probably cap sales volumes based on net worth due to counterparty risk. (I recently received this note: I attended a conference where Fannie indicated that newly approved sellers would be subject to a 20x net worth ANNUAL sales cap to Fannie.  They were also looking at how they were going to apply this methodology/philosophy to existing sellers.  Further discussions indicated there may be "some" flexibility in the 20x number... they had to start somewhere... but the message is clear that they are moving down the path of managing perceived counterparty risk through sales caps.) Servicing is going to non-depositories due to Basel III, investors have either exited wholesale or standardized their pricing, etc."

Nah, I don't think it's dead. I am not going to make a definitive list here, because every time I make a list it excludes someone. But suffice it to say plenty of firms have stepped into the wholesale business channel void left by BofA, Wells, ING, MetLife, and others. These easily come to mind without even thinking: JMAC, Fairway Independent, First Mortgage, Stearns, BofI, Maverick, Icon Residential, Sierra Pacific, MSI, Norcom, Pinnacle, Provident, Flagstar, FAMC, Kinecta, HomeStreet, Cole Taylor, REMN, 360 Mortgage, WCS, Stonegate, Parkside, Towne, USA Direct, Norcom, and so on. (Your best bet for a complete list is to consult the Scotsman Guide, or National Mortgage News.)

There is no doubt that the broker channel has gone through unprecedented change. Companies have exited the business. Others have increased their minimum net worth requirements, file documentation requirements, counterparty review process, and/or fixed their compensation structures. But Wells pulling out was greeted with plenty of firms going after its market share. (At $2-3 billion per month, divided among 30-40 wholesalers, the volume is welcomed, and many of those companies turn around and sell the loans to Wells anyway through the correspondent channel. But if you're Wells, would you rather deal with monitoring - and held liable by the DOJ - one counterparty who sells you $100 million per month or twenty counterparties selling you $5 million each?) Proponents of the broker model believe that it is a cost effective way for lenders to have their product seen by more potential borrowers, and that those borrowers have more lender options by using a broker (lender, price,  lock period, and so on). It is indeed an easy argument to say that the quality of the final loan product is a result of the income, credit, appraisal, borrower, and originator, rather than the channel through which it funds.

It seems to be a secret that lenders' margins are higher than they've ever been due indirectly, or directly, to the increased compliance and regulatory burdens. Who in their right mind would want to start a mortgage company when the first group you'd hire is the compliance team rather than loan officers? There is a lot of complaining about governmental involvement in the financial & lending system, which is justified. And certainly no regulator or government official can complain about "too big to fail" or "too much market share" when all of the hurdles they've put in place have the "unintended consequence" of limiting competition and bolstering margins at the expense of the consumer. LO's who say, "Why hasn't a Realtor's commission come under more scrutiny." First, it is transparent. But the problem is that the mortgage community is over-regulated, not that the Realtor community is under-regulated.  Just because Realtors have better lobbyists, don't begrudge them.  This is still a free country, if 5-6% commissions in a less regulated business sound attractive, join 'em.  The barriers of entry remain low for Realtors.

Last week the commentary repeated a note from a broker/banker saying, "Loan officers across the board have set their margins higher than pre-LO comp to ensure never making too little." I received this note: "This is happening, of course, because current lender-favorable market conditions allow such pricing latitude.  When the inevitable return to 'normalcy' occurs and pricing again becomes more competitive, LO's will no longer be able to price at will. The industry is enjoying an origination bull market which tends to distort behaviors, but we should not fall into the trap of seeing this as the new normal in mortgage banking."

L., and industry vet from San Francisco, wrote, "CFPB director Richard Corday told Congress this past January that he believes it is 'probably not useful' to try to define in advance what an 'abusive' lending practice is. Instead, he intends to use his enforcement powers to retroactively punish lenders based on his view of the "facts and circumstances" of each case. To me, this is Alice in Wonderland insane. The attitude is 'We are not going to tell you what the rules are but once we decide what they are we reserve the right to hold you retroactively responsible.'  The CFPB has reviewed some large mortgage lenders and will soon let them knew what unspecified rules they broke, if any. The irony is that one of the authors of Dodd-Frank (Barney Frank) defended the unsafe HUD mandated subprime lending practices of FNMA and FHLMC...In the Wonderland that is Washington we had government mandated subprime from FNMA, a defense of this when questioned, an enormous hit to the economy when this explodes, blame placed on the lenders who made the mandated subprime loans and a new set of not-yet-ready-for-definition rules to punish the miscreants for past violations of future rules. The situation created by Dodd-Frank is close to worst case. The regulating entities CFPB and the Financial Stability Oversight Council have unchecked power. That dog don't hunt. To be clear, I am by no means suggesting that government mandated subprime was the only factor to cause the mortgage mess. It was however the single most important factor in the destruction of FNMA and FHLMC. The government did not mandate the unsafe and unwise practices of entities such as Washington Mutual. People have been asking, 'Why aren't lenders lending?' A better question might be 'Why, faced with possible penalties from an unchecked entity which can make up tomorrow rules which applied yesterday, is anyone lending at all?'"

HARP received another blow Friday, this time by Wells Fargo's correspondent group. "Consistent with our decision to only purchase FHA Streamline Refinances of Wells Fargo serviced Loans, Wells Fargo Funding will begin purchasing only DU Refi Plus refinances of Wells Fargo serviced Loans...Wells Fargo will continue to purchase DU Refi Plus refinances of Wells Fargo serviced Loans. This policy change also applies to our retail origination channel. Note: Loans serviced by America's Servicing Company, a subsidiary of Wells Fargo, are not considered Wells Fargo serviced Loans." It takes effect on 9/24 for best efforts locks, on for mandatory: "The policy change outlined above is effective with Loans assigned to a Mandatory Commitment on and after November 13, 2012. DU Refi Plus refinances of non-Wells Fargo serviced Loans must be received and assigned to a Mandatory Commitment by Wells Fargo on or before November 9, 2012, and must be purchased on or before November 30, 2012."

In a quick bit of M&A news, Hudson City Bancorp (135 branches) is being purchased by M&T Bank for $3.7 billion.

Well, what do we have going this week besides LO's pushing and shoving to try to have their refi's close on time? Zippo today. Tomorrow we have another housing index (Case-Shiller 20-city index with its two month lag) and Consumer Confidence. Wednesday is the second stab at Q2 GDP and another housing index (Pending Home Sales). That afternoon is the Fed's Beige Book. Thursday is Jobless Claims, Personal Income and Consumption and the PCE Price Index. Friday is the Chicago PMI, Michigan Consumer Sentiment, and Factory Orders. In the early going the 10-yr yield, which closed Friday at 1.68%, is now at 1.67%, and MBS prices are nearly unchanged.

(Parental discretion advised, although somewhat edited. And no, this is unfortunately a myth.)
When Apollo Mission Astronaut Neil Armstrong first walked on the moon, he not only gave his famous "one small step for man, one giant leap for mankind" statement but followed it by several remarks, usual com traffic between him, the other astronauts and Mission Control. Just before he re-entered the lander, however, he made the enigmatic remark "Good luck, Mr. Gorsky." Many people at NASA thought it was a casual remark concerning some rival Soviet Cosmonaut. However, upon checking, there was no Gorsky in either the Russian or American space programs. Over the years many people questioned Armstrong as to what the "Good luck, Mr. Gorsky" statement meant, but Armstrong always just smiled.
On July 5, 1995 (in Tampa Bay, FL) while answering questions following a speech, a reporter brought up the 26-year-old question to Armstrong. This time he finally responded. Mr. Gorsky had finally died and so Neil Armstrong felt he could answer the question.
When he was a kid, he was playing baseball with a friend in the backyard. His friend hit a fly ball which landed in the front of his neighbor's bedroom windows. His neighbors were Mr. & Mrs. Gorsky.
As he leaned down to pick up the ball, young Armstrong heard Mrs. Gorsky shouting at Mr. Gorsky, "Sex! You want sex?! You'll get sex when the kid next door walks on the moon!"