Reverse Mortgage Changes; VA Benefits Changing; Producing Branch Managers Endangered?

By: Rob Chrisman • Tue, Sep 17 2013, 9:48 AM

I am really surprised at how many mortgage vets seem to have forgotten what a business cycle is (almost like how I was surprised in 1977 when a buddy told me that the Bee Gees were actually guys). Of course there are concerns about mortgage volume going down and every single deal for LOs being even more important. But it isn't as if we didn't see it coming, right? A look at the numbers show that we've seen the usual bell curve move this year with purchases; it is the refi biz that is down dramatically versus prior years. The industry built up capacity to handle the HARP programs and QE 1, 2, and 3, and pumped money into their infrastructure. Now there are fewer loans but the staff & systems stand ready to originate and process them. The first reaction is to demand that Capital Markets lower margins do more loans - but regardless of what your Secondary guy does to prices, there are fewer loans out there. And if the economy continues to improve, and mortgage rates go into the 5's, then what? Warren Buffett said, "We won't know who is swimming naked until the tide goes out."

There are some major changes to reverse mortgages coming up in a few weeks.

The market for servicing, both flow and bulk, is healthy. But any time someone sells $41 billion of anything, it tends to push values down. In this case, the news recently was about Wells Fargo planning on selling servicing - which, unless demand is very strong, may push prices down, which in turn impact the price of loans to borrowers. On a smaller scale, we have an offering from Phoenix Capital: a $306 million conventional bulk servicing offering, with the seller being a "well positioned independent mortgage banker." To give you an idea of what is important to institutions bidding on servicing, the loans are 100% retail, 94% FNMA / 6% FHLMC, CA (40%), AZ (38%), TX (4%), 99% Fixed / 1% ARM, average balance $232k, 88% 30 year term / 11% 15 year term, fixed 30 year Wavg IntRate 3.95%, fixed 15 year Wavg IntRate 3.15%, Wavg Age 6.13 months, Wavg FICO 760, Wavg LTV 88%, 99.7% current, 77% owner occupied. If you have some coin sitting around, buy it! (For more info contact Brady Dupuis here.)

"Rob, I heard something on the radio last week about the VA saying they will grant spousal VA benefits to same-sex spouses. Have you heard anything? Do you think Congress would have to pass some kind of legislature, or would the VA have sufficient authority to change its own regulations?" Here you go.

"Rob, a local mortgage banker is offering me a position and their comp plan is different for each loan officer in the office depending on the amount of compensation the officer wants to receive. As a result, a client could get different rates at different fees from different officers in the same branch location. I believe this is a violation of Fair Lending if not also the CFPB rule and I am concerned that I could be held liable for damages if I were to accept a position. Am I correct or way off base on this?" No, you are pretty much correct. Off the record, attorneys associated with the CFPB will say that the broadening definition of an originator brings the NPBM within the definition of an Originator for licensed activity. The CFPB definition cites an example of a bank teller speaking with a client about the great rates they offer in an effort to turn client over to a LO being defined as activity that requires a license. When one has questions, however, regarding LO compensation and multiple choices of rate sheets, compensation plans etc., it becomes a problem for both the employer and the LO as the CFPB would view it has compensation being related to the terms of the loan, specifically the rate. Check with an attorney - penalties for steering are an intended consequence!

In an associated issue, what about branch managers making money based on branch profitability, and producing branch managers? Steve H. writes, "Here's a link to the new regulations with a markup of the actual changes. The critical paragraph is copied and pasted here, and it seems to, in effect, prohibits branch managers from being paid based on branch profitability: 'Effective January 10, 2014, paragraphs (d) (1) and (d) (2) are revised to read: (1) Payments based on a term of a transaction. (i) Except as provided in paragraph (d) (1) (iii) or (iv), of this section, in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators.'" But once again, talk to your compliance department or an attorney!

Tony B wrote, "Something hit me about the LO Comp rule. First, we must assume the real motive for the regulation is to protect consumers and not to keep the mega banks from competing for talent, underpaying loan officers, and laughing in the board meetings. We all know a proxy of the loan may not be used to compensate a LO. Being paid by loan amount, however, is explicitly being pushed as the only acceptable way to compensate LOs. Well, the loan amount IS a proxy (the regulation does not think so, but it is). This is more damaging than no LO Comp regulation at all. This can be used to encourage people to be sold loans with lower down payments and possibly more debt than they need to carry. I have witnessed my competition telling people to put the least amount down and finance the max to save the cash in the bank. The consumer is being told they can always prepay the mortgage. Well, we just set up the whole system to encourage higher loan amounts and the CFPB says that is protecting the consumer. Secondly, let's look at the current methodology of disparate impact. The regulation has opened up an unintended consequence where the lower loan amounts are not being aggressively serviced and solicited. The entire regulation has gamed the system to where it is actually harming the lower end borrowers while benefiting the higher end loan amounts."

His note continued. "Maybe we should scrap the whole thing and get back to a free market system where the industry can compete for EVERY loan and all customers seeking a loan will be welcomed. I think we would reference this as reverse red-lining prior to Dodd-Frank. The CFPB needs to drop LO Comp and repeal every provision of it. If the 3% cap on points and fees is set in place, then things would be fixed by that alone. Let's get the NAR to take our side and push for this insane regulation to go away. It is not protecting any consumer and is costing companies thousands to comply. The only beneficiaries of this regulation are the mega-banks and their call center lending operations, the equivalent of mortgage sweat shops. Realtors need to 'wake up' - if they can regulate the mortgage industry's compensation then they will come for you next. That juicy fixed commission could be the next target."

Switching to more global issues, at this point, everybody and their brother thinks that the Fed is going to commence scaling back its daily asset purchases in October, and announce it this week. And it is pretty much priced into the market - but how much? How the Fed pursues its policy has significant implications for the financial markets and the economy. Researchers say that Treasury purchases have a less direct effect on markets than mortgage-backed security (MBS) purchases. Therefore, if the FOMC were to take a cautious path toward normalizing policy, it would reduce the pace of new Treasury purchases. Some research shows that while Fed purchases of Treasury debt did alter Treasury prices, there was little spillover into the private sector and therefore limited economic benefits.

But everyone from the CEOs of lenders down to the lowliest of LOs (are they still on your payroll?) know that MBS purchases have had a direct economic effect. Therefore, some say, the Fed is less likely to cut purchases of MBS if it seeks to reduce the initial impact of a scaling back of asset purchases. In fact, as production has dropped, on a percentage basis the Fed's daily buying has become increasingly large! Supply & demand dictate that the purchases have raised prices, and dropped MBS yields. But don't forget about gfee hikes on F&F product, loan level price adjustment hits, and other costs that are passed on to borrowers. Wells Fargo's economics team suggests that if the Fed pursues a more cautious tapering program, the purchase of Treasury debt is likely to be the focus of the early phase of tapering.

Yesterday what moved rates was the news that Larry Summers dropped out of the race to be the next Federal Reserve Chairman - it assumed due to political considerations, which is a pity. Regardless, the news caused a big rally in MBS markets which faded as the day progressed. As mentioned above, the sentiment is shifting toward more of a bias to reducing Treasury purchases rather than MBS. The laws of supply and demand being what they are, with the supply of new mortgages dropping if demand is constant it will really push mortgage rates lower.

Looking at the yield on the 10-yr., often a decent proxy for mortgage rates, we closed Monday at 2.87%, not as good as the 2.81% that started off the day, and only slightly better than the 2.91% that ended last week, and this morning we're at 2.84% - just not a lot of movement. This morning showed that inflation is still well under control, with the August Consumer Price Index coming in at +.1%, and the core rate (ex-food & energy for those that don't eat or use air conditioning or commute) also +.1%. After the news we find the 10-yr still at 2.84% and MBS prices perhaps .125 better.