Basel III Vote Tomorrow; More Mini-Corr, Affiliate Relationships, Warehouse Lines, and Brokers

Bond markets are closing early on Wednesday, and we all have a day off Thursday (read more...). Thursday is the 4th of July. Everyone living in this country should know that on this day in 1776, the Declaration of Independence was approved by the Continental Congress, setting the 13 colonies on the road to freedom as a sovereign nation. Back then the population was thought to be about 2.5 million versus today's 316 million. There were 56 signers to the Declaration of Independence, ranging in age from 26 to 70 (Benjamin Franklin), including two future presidents (Adams and Jefferson). And where do all those fireworks come from? China. Last year we imported $227 million of them, and $218 million were from China.

This could be a big week for Basel watchers, and thus banks, and for those who watch the value of servicing. The Federal Reserve will vote on the finalized Basel III rules tomorrow. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. also must vote on the rules, which govern banks' capital requirements. The rules likely would as much as triple the amount of top-quality capital that banks must hold. And depending on where the risk-weighting of servicing rights falls, and how mortgage servicing rights (MSRs) are valued as a percent of Tier 1 capital, how the Fed votes could definitely impact the value of servicing, thus impacting rate sheets (read more...).

The issue of brokers moving into the "mini-correspondent" relationships being set up or already existing by wholesalers continues. Many folks have written in about it, as there is actually debate about the legality of some of the business arrangements - or if they will last past January. For example, the term "creditor" is defined by the FDIC, and that it is somewhat unclear about whether or not one can define "creditor" by who makes the credit decision. It seems to be clear that the compensation cap (3%, depending on loan amount) applies to loans that are table funded, which is not what a mini-correspondent is.

Section 1431 of the Dodd-Frank Act amended TILA to require that "all compensation paid directly or indirectly by a consumer or creditor to a mortgage originator from any source, including a mortgage originator that is also the creditor in a table-funded transaction," be included in points and fees. TILA section 103(bb)(4)(B) (emphases added). Prior to the amendment, TILA had provided that only compensation paid by a consumer to a mortgage broker at or before closing should count toward the points and fees threshold for high-cost mortgages. Under amended TILA section 103(bb)(4)(B), however, compensation paid to anyone that qualifies as a "mortgage originator" is to be included in points and fees for the points and fees thresholds for both qualified mortgages and high-cost mortgages. One can visit this page and press "control f" to find "1431" references.

And I received this note from a broker in the Mid-Atlantic States: "All this weight being place upon the affiliate business model is misconstrued. It is my view that the two major trade groups you note have thrown the mortgage broker and the wholesale lending sector out the window. Yes the brokers have their own trade group, but worse yet, one of these trade groups has put more emphasis on saving a small sector of its members total business model at the expense of a large portion of its members, wholesale mortgage originators. It appears to many whom I have spoken with recently that the wholesalers might consider their own trade group, and fast. Many wholesalers are pure non-bank mortgage bankers who sit in the wings and employee a large number of people (directly and indirectly) and supply liquidity to sectors of America that the typical banks, community banks, and bankers will not venture, both inner city, rural and where it is not a cost benefit for banks.

"Many wholesalers I spoke to have noted a growing number of small banks who are contacting them to broker loans. Although I am against the affiliate model, I find it revolting for the regulators to allow a company model to legally operate for decades and then say you have to operate at essentially no profit. The CFPB continually lays claim to 'a level playing field', but has never said who is operating on the upper hand. In CFPB meetings, many walk away with the perception from CFPB that the major banks have been operating at a disadvantage. To be clearer, it was $10,585 per employee in 2008, according to a 2010 SBA Advocacy Study. On the other hand it cost large companies $7,755 for each employee.  Anyone who has employees under the SAFE Act knows this has jumped in a  grossly disproportionate rate for small businesses, yet HUD had certified under RFA that SAFE would have no negative financial impact upon small business."

And this one: "The continued resistance of CFPB to openly give specific clarification on aspects of the Rules now finalized gives reason for unsettlement in the industry. The direct targeting upon the broker channel seems over the top, but prevalent.  As I see it at this point, in our area most mortgage bankers and some small banks operate as brokers to wholesalers. Looking at QM, this could change significantly. Currently most brokers and small bankers are using 7-12 wholesalers. As I'm sure you have seen there is a big push to get the 'mini correspondents' up and running. If I jump to that business format, I am not going to have the volume to continue to send loans to 7-12 companies; as a result I would only correspond with 1-3 wholesalers. This will cause the current broker channels to lose about 60-70% of their business in the first quarter of next year, assuming the worst transpires. Maybe it is time for the wholesalers, utilizing TPO's, as a group, speak up."

One has to wonder if the CFPB is "done" with QM, in spite of the broker disparity. Perhaps it is final (I have not seen any further comment period planned on it), or perhaps more work will be done on the affiliate side of things if HR 1077 gains popularity. And not to bring up all the pros and cons of the broker models, or the fact that there is plenty of blame to go around regarding mortgage problems in the last eight years, but consumer advocates have been against the broker model for quite some time. When the rule was rolled out one would expect to see a backlash from the brokers, and we did. And brokers legitimately say that brokering allows more flexibility in moving the loans to investors that better suit the client's needs - similar to an insurance broker finding the best company for their client.

Brokers have options. They can join a larger firm, or take advantage of the mini-correspondent programs that are sweeping the industry. Analysts believe for many brokers, staying inside the 3% QM cap, if they don't use affiliates for title, may work: 1 point for the originator and 2 points to the company.

TM writes, "The reason for mini-corr and non-delegated correspondent is represented seems to be to fill the void left by the stricter requirements of some of the bigger players, but in essence, the practicality appears to be a way to skirt the LO comp rules and dual compensation restrictions that have been placed on mortgage brokers.  By making them 'correspondents,' they are not subject to the same restrictions, including not disclosing yield spread. The FHA has fueled this to some degree by allowing anyone to originate an FHA loan as well. Here we go again!"

And, "Rob, wasn't there a definition of bona fide warehouse line awhile back that would contradict all the buzz regarding mini-corr? When LO comp first came out, a lot of lenders tried to go around it by offering sub lines to brokers and then closing loans in their own name. The term was deemed to mean that the broker had to be able to sell to multiple correspondent investors, not just those that offered them a line. I recall a presentation from the ABA earlier this year that an LO is subject to the LO comp rules, and therefore mini-corr may not insulate them from LO comp issues unless warehouse line is 'bona fide.'

Reviewing legal reviews sounds like a lot of work, so don't ask me to do it. But the last set of attorney slides that I saw noted that in a table funding, a creditor is a loan originator. And creditors are NOT loan officers if the creditor uses its own funds either via a bona fide warehouse line of credit, or via its own deposits. But in many cases it seems for LO qualification and LO disclosure requirements, all creditors are loan originators.

Speaking of compliance, who do brokers usually turn to for regulatory guidance? For the most part, they obtain compliance information from conventions, training, lenders, and even examiners. Brokers Compliance Group, which seems to be the first and only compliance firm devoted to brokers. It has rolled out three new plans to benefit the independent mortgage professional, and it is the exclusive compliance provider of NAMB+. The new plans are Ultimate, Platinum, and Evergreen. Each plan offers policies and procedures, access to experts, training, and other features. According to Alan Cicchetti, BCG's Executive Director, the firm offers a wide array of compliance support services to the independent mortgage professionals on affordable terms. More information HERE.

Rates spent last week improving, or at least stabilizing, after various Fed officials softened its stance through speeches. But we continued to see decent economic data on Friday with the Chicago Purchasing Manager's survey surprising to the downside, and the University of Michigan Consumer Confidence number coming in slightly better than expectations. By the end of the day the yield on the 10-yr was sitting at 2.48% - not great but certainly not its worst yield of the week.

This week could be interesting - although hopefully not. Don't forget the early security market close on Wednesday, and the holiday on Thursday! But we have other things to keep us occupied. Today we have ISM Index and Construction Spending numbers - both 10AM EDT and rarely move markets (later economic numbers usually don't). Tomorrow is Factory Orders. Wednesday, ahead of the early close, will be the Challenger Job Cuts, the ADP Employment Change (which does not include government jobs), the Trade Balance figures, and the ISM Services number. Thursday is baseball, hot dogs, apple pie, and Chevrolet. Friday is, gulp, Nonfarm Payrolls, the Unemployment Rate, and Hourly Earnings. Holy smokes! So far this morning rates have crept slightly higher with the 10-yr at 2.52% and agency MBS prices worse by about .125.