More on EPO; Divining Industry Trends from Bank Earnings, Radian Results, & Green Tree's Broker Biz Exit

By: Rob Chrisman •

The CFPB is expected to spend a lot of time in 2014 on the closing process, and it has a round of public comments due February 7. It was put out early last month, and has only 17 questions. Make your voice heard.

Besides the CFPB's influences, what's going on out there in the industry? Darned if I know, but maybe we can learn something from the collective bank earnings announcements. Most of the large mortgage originators, including the likes of Wells Fargo, J.P. Morgan, Bank of America, Citi, BB&T, PNC Financial, SunTrust, U.S. Bancorp, and Fifth Third Bancorp, have reported 4th quarter, 2013 results. Mortgage banking earnings declined, as one would expect, by meaningfully lower mortgage volumes partially offset by stronger than expected gain-on-sale margins. In fact, for "the big boys" total originations were down roughly 40% from the third quarter. Mortgage applications were also down about 33% on average (for the companies that reported them) which doesn't bode well for the 1st quarter of 2014.

We saw a lot of interest rate volatility during the second half of 2013. That makes it difficult for mortgage companies to effectively hedge their pipelines. But for some good news, rep and warranty costs and repurchase demands were lower in 4Q for most banks, driven by mortgage-related settlements some of the larger banks made with the GSEs. Mortgage Servicing Rights were all over the map, with some companies showing increases in MSRs and others taking hits.

Most expect mortgage banking profitability to trend down in 2014 driven by further declines in mortgage volumes. (The 40% drop was certainly higher than the 27% forecast by the MBA.) What I am continuing to hear is smaller lenders increasing market share at the expense of the big banks, especially on the purchase side. And if anyone's business model banked on the volumes and margins of 2012 and the first half of 2013 continuing indefinitely, well, I've got news for them...

Speaking of earnings, mortgage insurance company Radian announced its fourth quarter and full-year 2013 financial results. (Radian is the largest MI company with $161 billion in insurance in force.) It had net income of $36 million and achieved MI operating profit, saw $47 billion of new MI business in 2013, a 27% increase from 2012, announced a shrinking legacy MI book (71% of MI portfolio represents business written after 2008), and a shrinking legacy FG book (79% decline since the company stopped writing new business in 2008).

Continuing on with MI ramblings, more GSE (government sponsored enterprise, e.g., Fannie & Freddie) are carrying private MI. Although Fannie Mae and Freddie Mac securitizations dropped significantly in the fourth quarter of 2013, the share that carried private mortgage insurance continued to increase, rising to 24% in the most recent quarter (up from 17% in the 2nd quarter of 2013). If you'd like to pony up for the report: "fourth-quarter use of private mortgage insurance."

As promised, let's continue yesterday's Early Pay Off (EPO) penalty discussion with some notes from trained professionals - these are not actors!

Here's a note from a broker in Northern California: "We got hit with a $12,000 EPO penalty in 2013 when one of the loans we sent to a wholesale lender was paid off prior to the six-month seasoning period.  We had nothing to do with the refi that paid off the loan, so the penalty was very painful.  We agreed to pay the penalty nonetheless b/c we know we agreed to do so in our broker agreement, and b/c the wholesale lender had to pay the penalty to its investor.  We agreed to pay even though we no longer do any business with the particular wholesale lender hitting us with the penalty; we don't want to be known as the company or broker that does not honor its agreements."

I received this from a senior manager on the West Coast: "You should mention that, as the industry evolves with lower profits and more and more small servicer lenders, it does not take a rocket scientist to figure out lenders are going to enforce stiffer penalties on EPOs especially as F&F are enforcing penalties. In some cases a YSP is just a fraction of what could be owed. I always tell my loan officers if they can't control the borrower they should pursue the refinance directly. At least in those circumstances we can capture some if the list revenue on the new deal. A rather fair renegotiation practice is important, as no lender wants to close loans in illiquid coupons only to see them EPO in a month or two."

Donna Beinfeld with Donnashi Enterprises, Inc. contributes, "Predatory Lending guidelines were issued by Fannie Mae several years ago. Many states (i.e., New Jersey) adopted the policy which included refinance churning, product steering, and bait & switch. As time went on, these guidelines were rolled into UDAP, and as of 2013, CPFB established guidelines for fair advertising and information passed onto the borrower about a mortgage, which is called UDAAP. UDAAP refers to:  Unfair Deceptive Acts and Practices which includes the above three items as well as: deceptive advertising. I agree that you cannot control a consumer's desire to lower his/her interest rate. As an industry we cannot require a consumer to continue paying a higher price for their loan, if rates drop in a way that can represent a lowering of one's payment. The FHA, however, does indirectly enforce a 6-month rule for refinancing. The policy requires that the borrower make at least six months of mortgage payments in order to qualify for a streamline refinance. Lenders and Servicers would be best to pay attention to requests for payoffs, and work directly with the consumer in lowering their interest rate. All of the agencies have some kind of a streamline refinance program. This would by-pass churning by an originator; it would by-pass penalizing a broker or lender who is not involved in the borrower's refinance. The six-month rule is a good one, but it should not be created to punish a company that helped a borrower get a lower rate, and has nothing to do with the current payoff and new mortgage."

(Of course there are lenders out there that do not charge a penalty for EPOs.  I have no intention of publishing a list of those that do or don't, but, for example, Republic Mortgage Home Loans does not.)

And this note from a well-placed source: "In the real world, when FNMA receives an Early Pay Off from a cash window transaction, they simply debit the lender's FNMA trust account. There's of course a bill for accounting purposes, but it isn't a conversation - there is no pleading. It is funny how the whole investment community expects that an asset should last longer than just a couple of months. (Sarcasm font.)  I would bet that if there are lenders out there with longer periods, it's to account for the time that it takes the lender to purchase and to complete the loan sale and shipping process (up to 60 days plus FNMA's 120 would make 180 days, although most loans are sold much faster)."

And this from a money manager I know, "Lenders, and their originators, should not think that they can place a loan in an MBS security and have it escape the EPO metric. Wall Street regularly looks at the issuers of a security, and also at the prepayment that the particular issuer's securities have experienced in the past. There is a premium for securities sold by issuers who have good prepayment track records and a market price penalty for issuers whose securities pay off quickly."

There was this note from a servicer. "Talk to the lenders out there about the huge number of payoffs that they receive in day 12 through about 160. Brokers and originators know the various policies out there, and they engineer their closings to avoid the EPO recapture fees. That doesn't make it any less of a negative economic event for the investor who paid 1.25% SRP, expecting to get that .25% servicing fee for the next 6-8 years, and instead, they are only able to capture a whopping .125% for a loan that pays off at month 6.  For every loan that you appeal to the investor at day 117 on the basis of "come on... it was only 3 days....can't you give us a break because it was so close to the cutoff", there are probably 10 more that paid off on day 123. So if you're willing to have the investor come back to you for loans that pay off at day 123 (on a 120 day EPO period), then maybe an equitable arrangement could be met for your 117 day payoff."

And Robert Pieklo, SVP Secondary Marketing with American Financial Resources, contributes, "Remember that with Fannie and Freddie the LLPAs are not considered when paying an EPO. So, for example, if you have a loan with 275 bps of LLPAs, and you sold it to Fannie and the gross price on the commitment was 106, one would have received 103.25 in premium when sold. If it were to EPO, you would still owe 106."

We will see a lot of flux this year in the industry, and yesterday was a good example of that with news from Astoria and with Green Tree.

Astoria Financial Corporation, the holding company for Astoria Federal Savings and Loan Association, the second largest thrift depository in New York State will be expanding their correspondent lending footprint to include Northern California (San Francisco, Marin, San Mateo, and Santa Clara counties). Astoria Financial is a portfolio lender known for its "competitive ARM pricing and exceptional customer service." Please contact Chris Blake for further information: cblake@astoriafederal.com.

"After much consideration, Green Tree Servicing LLC has decided to exit the Wholesale mortgage lending business. This decision was very difficult for us as we value the relationships we have built throughout the years, but due to shifts in the current market and regulatory environments, we have decided to focus our business lending resources on concentrating and improving our core Correspondent lending channel. We will continue to support both delegated and non-delegated Correspondents. In addition to best efforts, individual mandatories, rate sheet forwards and live trades, correspondent customers will also have access to AOTs and bulk deliveries in the near future. As we implement this change, all wholesale loans in process must be locked on or before February 11, 2014 and closed and funded on or before April 16, 2014. Rate lock extensions may be granted, according to current policy, provided the extension does not exceed April 16, 2014. Green Tree will honor all loan commitments as it winds down its Wholesale pipeline of approved loan requests."

Rates have done well this week, and this year, so we shouldn't complain if they want to take a breather. The 10-yr. note and agency MBS prices all dropped/worsened by about .250-.375, and the 10-yr. closed at a yield of 2.62%. There is probably more focus on the weather than on the markets. This morning we've had the ADP employment data for January, always of questionable validity since it doesn't include government payrolls, that came in near expectations at +175k. (January has the largest seasonal adjustment factor.) The Mortgage Bankers Association released its weekly report on mortgage application activity - almost unchanged from the prior week. Later we'll have the January ISM Non-Manufacturing figures, as well as the details of the Treasury's Quarterly Refunding (next week's auction of 3, 10, and 30 year securities). For numbers, in the early going, the 10-yr is back to 2.60% and agency MBS prices are better by nearly .250.