TRID for the Public; Primer on Hedging: Changes Facing Residential Lending; Builders to Merge

A recent MBA "Chart of the Week" bears repeating since it reminds us just how much a borrower pays for a home loan when it closes. (Think about how much it costs for a car loan or furniture loan!) Independent mortgage banker production expenses in the first quarter of 2015...total production expenses reached $7,195 per loan for independent mortgage bankers and bank subsidiaries. This is the highest level since the beginning of the study in 2008, and this quarter exceeded the first quarter of 2012 by $1,600. The expenses include loan originator commissions, compensation for sales, fulfillment, post-closing and support staff, occupancy and equipment, technology, outsourcing and other miscellaneous expenses and corporate allocations. The high production expenses in the first quarter indicate a shift towards greater loan originating costs.

Want an easily understood explanation of TRID to pass along to Realtors, title companies, and the public? Here's the latest piece from reporter Dan Goldstein about why loans will probably take longer to close after August 1^st.

Brandon Case, EVP Capital Markets at First California Mortgage Company, sent along:

Before the financial crisis, when I worked as a hedge manager at Tuttle Risk Management, we had a few flavors of hedging models. There was the delta model, the adjusted RSI model, and the pullthrough model. In those days, before pullthroughs stabilized courtesy of the LO Comp rule changes that got rid of incentives for originators to take their business across the street, nearly everyone was on a model that would adjust quickly to market moves. In fact, roughly 60% of the clients were on a delta model, an option-theory based model that would hedge the "in-the-moneyness" of every loan.  It worked rather well because loans were much commoditized and originators had low switching costs to take a loan to another lender. On that model, the beginning coverage for locks on the first day was about 50%. To oversimplify, that model has an agnostic view that the market has the same chance to rally as it does to sell off by the time the lock funds or falls out.  

Fast forward to today, and you have an interesting phenomenon: People became so risk averse after the financial crisis and subprime debacle that they got off of these delta models, and have almost exclusively, seemingly at every third party hedge provider, moved to a nearly static pullthrough model. While I will concede that the pullthrough model is a good model for preserving the expected gains and losses of the pipeline, which conveniently happens to be the objective of hedging, I ask, does a hedger NEED to preclude other models from consideration?

Consider this for a moment: The delta hedge starts coverage at roughly 50%; traditional pullthrough hedging starts and keeps coverage in the high 70's or low 80's. If the market drops, the pullthrough hedge will outperform a delta hedge which has to ramp up coverage to 60, 70, 80, and then 90%. But what if the market is flat? Or rallies? The delta hedge will outperform, and dramatically outperform respectively in those instances. If the market remains flat, you will save roughly 30% of the cost of carrying the hedge, or 9 bps per month. In a rally, it will be more.

My own bias is that if management and your balance sheet can stomach some earnings volatility, you may want to move to a hybrid model that hedges the margins on locks. Let's say for instance that you need to make 2 points of margin on every loan. If you have an 80% pullthrough, you can essentially build a model that has lower coverage (50%, 60%, etc.) when any given loan's margin is greater than 2 points, and the model will ramp up coverage to the pullthrough model as the margin on your loans decreases if the market starts selling off. In essence, you are taking a 2.5 or 3 point margin loan and betting with that extra margin that the market might stay flat or rally. It's a calculated move that just might make you more money over the long run. I have implemented this hybrid strategy at FirstCal and have had some success. If you have any questions, you can contact me or your own hedging advisor.

And Paul Miller, the Mountain West Regional Manager for Academy Mortgage where he oversees 32 branch offices in Utah, wrote a piece titled, "Bask in the Rays of Change."

What is the current state of the mortgage banking industry? Popular opinion would dictate that the current state of mortgage banking is exactly what we want it to be. It's like the adage that "one man's junk is another man's treasure," or "where one man sees obstacles, another man sees opportunities." Mortgage banking is what we want it to be. 

Mortgage banking-is it an art or a science?

Get this right, or you may be out of compliance.

LO comp is a pain in the butt,

And Fair Lending causes pains in the gut.

Now, be TRID ready, or you'll be in defiance.

When one of my sons was quite young, he asked the question which was larger, the sun or his hand. In all my knowledge and experience, I told him that the sun was many times larger than his hand and, in fact, was many times larger than the planet that we live on.  Of course, my correct answer to the question prompted another question from him about why then, when he held up his hand, did the sun go away? The only answer I could think of was to go ask his mother. 

In retrospect, this simple question is one that has plagued us all in this industry, and in all industries, over the years. Why, when faced with small challenges (although they seem large and insurmountable at the time), do we let these hurdles burden us down with doubts and worries that tend to get in the way of seeing the bigger picture-our mission of helping as many people as possible attain their dream of homeownership? 

Sure, there have been legitimate challenges over time that we have all had to deal with. For example, Loan Officer compensation was not an easy fix for anyone in the industry, especially for those who abide by the rules and do it correctly.

And what about Fair Lending? How much have we spent in making sure that we price our products correctly and in compliance with the law?  How much are we spending to make sure that the results of our pricing strategies and policies are indeed resulting in no discrimination against any protected classes? Today in our companies, we have compliance and audit departments that didn't exist a few years ago, or if they did, were not nearly to the scope and depth to which they exist today.

These days, a mention of compliance inevitably leads to a discussion about the implementation of TRID-the fast-approaching day when the mortgage banking world will be turned upside down.  Are we ready for these changes now or will we be ready for them by August 1?  Ready or not, the day is quickly coming, and we have all had more than ample warning to be ready in our own businesses and for training and educating our business partners.

So when asked what is the current state of the mortgage banking industry, the answer is really based on how we embrace the changes that are often forced upon us; how we evolve as industry leaders in promoting these changes; and how we create opportunities to utilize these changes to grow our business. Every day we need to tell ourselves that the "glass is half full" and that there are opportunities everywhere to inspire hope, deliver dreams, and build prosperity for our customers, referral partners, and employees. The survivors in this industry are those who look for solutions to the daily challenges that routinely surface. How we overcome these challenges and our attitudes toward them are the distinguishing marks that lead us forward on the pathway of success. 

It was Dr. Martin Luther King, Jr. who said, "The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy." Taking liberties with this statement, the ultimate measure of our industry is not where we stand in moments of comfort and convenience, but where we stand at times of challenge and controversy. We can either embrace change or back away. We can put up our small hands and block out the rays of the sun, or we can bask in the sunshine of meeting our daily challenges head-on, rising above them, and leading our industry forward.

Think all the way back to Friday. Our Producer Price Index was +0.5% in May and the University of Michigan Consumer Confidence number was "94.6" in June. But our rates were influenced more by a potential debt default by Greece. And so our bond prices improved and rates fell. Strong U.S. economic data are certainly raising expectations for the remainder of the year after a weak first quarter.

Yes, we're halfway through June. So much of our markets are being determined by overseas activity, but we still have a full platter this week of scheduled news in the States. Today is Empire Manufacturing, the Industrial Production & Capacity Utilization duo, and NAHB Housing Market Index. Tomorrow is another duo (Housing Starts & Building Permits), and Wednesday is the FOMC interest rate decision (look for no change). On Thursday the 18^th are Initial Jobless Claims, Consumer Price Index, and Leading Economic Indicators.

Jobs and Announcements

A mid-sized residential lender based in Arizona is seeking a motivated, energetic and experienced Servicing Manager to lead its Servicing team in efforts to grow our portfolio, while monitoring and tracking new laws and regulations that relate to mortgage servicing. At least five years' experience is preferred, and salary is commensurate with experience. This company closed $1 billion in 2014 and is on track to fund $1.5 billion in 2015. "Our goal is to provide a workplace that promotes employee engagement and development while forging lasting relationships. We pride ourselves on building a workplace environment that not only encourages employees' optimism, but also exhibits spirited fun. We encourage employees to learn and grow in our business, as we believe employees who are committed to their jobs will provide exceptional customer experiences." Please send confidential resumes to me; excuse any delays in response due to travel.

And National MI is hiring for 2 positions, an Account Manager in Maryland/North Virginia and a Customer Training Manager. Headquartered in the San Francisco Bay Area, National MI is a U.S. based, private mortgage insurer enabling low down payment borrowers to achieve home ownership. For the complete job postings, see National MI's careers page. "National MI seeks a dynamic Account Manager who utilizes their expert understanding of the residential mortgage industry and their existing relationships in the Maryland/Northern Virginia market. This individual will build strong relationships with key senior level client advocates and influencers, and assertively drive new business. He/she will meet with clients on a daily basis, clearly communicate the National MI value proposition, articulate industry and client trends, and use their superior presentation, communication and interpersonal skills to fearlessly develop opportunities, train and educate clients, and grow profitable market share within their assigned territory." And National MI is hiring for a Training Project Manager to "develop its customer training strategy and course content, assess training needs and identify opportunities, and implement and market new nationwide training programs for customers.  The ideal candidate will have a combination of sales, mortgage banking, loan origination, mortgage insurance, underwriting and/or real estate experience with expert understanding of the mortgage industry, and excellent written and presenting skills."

In other company news, like plenty of banks & mortgage banks, builders can merge too. In this case Standard Pacific and Ryland.