COMMENTARY

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

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WHO’S IN CHARGE HERE?

I never blame myself when I’m not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn’t my fault that I’m not hitting, how can I get mad at myself?
Yogi Berra

Let’s admit it: the tendency to pretend we’re holding somebody or some entity “accountable” for the mortgage crisis, when we’re really not, is just a fashionable avoidance of that unpleasant word: “blame.” Once that label sticks, it’s on to dealing with the nasty culprits!

Blaming is purported to be cowardly, even passive; and being held accountable is lauded as proactive and high-minded. So, the word “accountable” is now in vogue, instead of “blame.” Frankly, the word “accountable” in today’s world is merely politically-correct, euphemistic Newspeak for the fact that “you know you did wrong, I know you did wrong, everybody in the world knows you did wrong, but you’ll pay no penalties whatsoever for doing anything wrong.”

Although the tone-at-the-top mantra of the Obama Administration is “let’s look forward and not look back,” or the Bush Administration’s tactic of retroactively making lawful what was heretofore unlawful (or unconstitutional) remains beyond contest, or the on-going trading of opaque financial instruments seems to continue in an entirely unregulated market, or many government departments and agencies are still remaining reactive at best during a crisis – in the Newspeak of our times, we are assured of accountability, which now apparently means there’s nobody to blame at all, nobody held responsible for the meltdown, nobody to put in jail. Everybody’s free to go and, we’re admonished, it doesn’t do any good to blame anybody for anything, since we can’t fix this mortgage mess unless and until we all can get along, be bi-partisan, be post-partisan, and look to the better angels of our nature!

Accountability these days seems to mean no adverse consequences to the perpetrator and no blame for anybody. If you find a person to blame, that person’s not accountable; and if you find somebody who is accountable, that person is not to blame. While lobbyists, dogmatists, political catechists, and ideologues just make stuff up, they’ve found the culprit for sure, those bad actors portrayed as directly and indirectly culpable, the rapacious mortgage originators: they certainly should be blamed, reined in, re-regulated, and de-incentivized for having largely contributed to the worst financial crisis since the Great Depression!

Portraying mortgage originators as the culprit is a politically useful narrative meant for the consumption of low information voters; but, as we’ll see, there is plenty of blame in this game and, to date, not much real, old-fashioned accountability – the kind that has real world consequences – except, of course, for those who originated the mortgages in the first place.

Results are what you expect,
consequences are what you get.
Anonymous

On Tuesday, June 22, 2010, a Conference Committee met in Room 106 of the Dirksen Senate Office Building, in Washington, to reconcile Senate and House versions of H.R. 4173, known as the Wall Street Reform and Consumer Protection Act. That bill ostensibly was drafted to create a new consumer financial protection “watchdog,” bring about an end to “too big to fail” bailouts, set up an early warning system to “predict and prevent” the next crisis, and bring transparency and accountability to exotic instruments such as derivatives. Led by Representative Barnie Frank (D-MA) and Senator Christopher Dodd (D-CT), the conferees reviewed and voted on new regulations as well as additions, deletions, and revisions of existing regulations.

The list of new regulations and amendments to existing regulations, consisting of thousands of pages, read like the attenuated, convoluted, cross-tabulated Index Section of a Whodunit’s Guide to the Perplexed. Seated around a large, rectangular dais, the Committee’s politicians called one another out, speechified, postured, and legislated to protect their respective constituencies, absolved themselves of ever having allowed their own politics to contribute to the financial crisis, while the Clerk recorded votes, staff members raced around, and lawyers scurried about with various and sundry red-lined versions of financial reform legislation.

On Friday, June 25, 2010, all the backroom, sub rosa, deals were ironed out, all the special interests had their way or lost their sway, and the votes tallied up mostly across party lines: Democrats – Aye; Republicans – Nay. The Ayes had it!

Congratulations filled the conference chamber, Representatives and Senators praised one another, staff high-fived and hugged one another, and President Obama hailed the legislation as the “toughest financial reforms since the ones we passed in the aftermath of the Great Depression." Now only House and Senate approval was needed, and thence the President’s multi-pen signature, to become the law – which it did on July 21, 2010, just before noon. The legislation, now known as the Dodd-Frank Act, became the law of the land.

Among the many features of the legislation, the following was gaveled in:

• Requiring Lenders to Ensure a Borrower’s Ability to Repay: Establishing a “simple federal standard” (sic) for all home loans to ensure that borrowers can repay the loans they are sold.
• Prohibiting Unfair Lending Practices: Prohibiting the financial incentives for subprime loans that “encourage lenders to steer borrowers into more costly loans,” including the bonuses known as yield spread premiums that “lenders pay to brokers to inflate the cost of loans.”
• Penalizing Irresponsible Lending: Issuing monetary penalties to lenders and mortgage brokers who don’t comply with new standards by holding them accountable for as high as three-year’s interest payments and damages plus attorney’s fees (if any), and, protects borrowers against foreclosure for violations of the new standards.
• Expanding Consumer Protections for High-Cost Mortgages: Expanding the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Mandating Additional Mortgage Disclosures: Requiring lenders to disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Establishing an Office of Housing Counseling: Establishing a special office within the Department of Housing and Urban Development (HUD) to “boost homeownership and rental housing” counseling.

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

Bill Coppedge is ON VACATION and OFF THE GRID. 

The news clips portion of this blog returns Tuesday, September 7.

Earlier this month I mentioned that buybacks are, and are expected to be, a big issue for many originators regardless of size. Two of the most common reasons for repurchase are the discovery that the borrower has debts that were not disclosed to the lender/investor, and problems with appraisals. Buybacks tend to flow from Fannie and Freddie to the large investors and accumulators, and then down through mid-sized and smaller lenders.

The buyback problem is either dealt with "in-house", which has its own set of issues regarding time, expense, and dedicated personnel, or out-sourced to a company specializing in helping companies deal with them. Pyramid Quality Assurance, for example, specializes in "M/I Rescissions and Repurchase Defense." Companies like Pyramid bring in experienced underwriter-analysts to review and analyze each loan file subject to a rescission or repurchase demand then formulate a response. And they have a good sense of what is working for other companies in dealing with buybacks. (If you need more information, contact Scot Baker at sbaker@pyramidqa.com 

Few people feel that mortgage banking is a non-profit proposition. And even though we still have seven months until the compensation rules change/may change, loan officer pay seems to be on the front burner for many originators. For example, Nationstar, a wholesale company calling on brokers, just told their clients that starting last week it will "cap the Broker’s Net Yield Spread Premium (YSP) to the following: Fixed-rate loan products – 3%, ARM loan products – 2%. Nationstar is defining Net YSP as the following: Gross YSP less any and all investor and Nationstar price adjustors. If brokers want to credit fees for the borrower, the fees must be deducted from the broker’s Max YSP of 3% on Fixed-rate loan products and 2% on ARM loan products."

It is believed that the Federal Reserve’s mandate guts yield spread premium, at the risk of borrowers using a little higher rate to cover some of their closing costs. Eternal bond math, however, tells us that an investor will pay more for a higher yielding fixed-income security, all else being equal (including risk). The rule will all but ban YSP’s, which are paid to the broker or loan officer for originating a loan with a higher interest rate (sometimes in exchange for lower up-front settlement costs). But the Dodd-Frank Act, which call for an outright ban on yield-spread premiums, allows regulators (like the Consumer Financial Protection Bureau) to make exceptions and resolve any issues.

Kate Berry, in an American Banker article, states that "To make mortgage costs more transparent, the Fed rule will let lenders pay yield-spread premiums only in cases where the borrower is not paying an origination or other fee to the lender. In practice, such cases are unlikely, since the lender typically charges borrowers some form of origination fee." She writes that, "Small brokers may be forced to quit the business if they only earn 1% of the loan amount, which may not be enough to cover their own costs. Both brokers and retail loan officers may end up joining mortgage banks and correspondent lenders that pay a salary, a commission or any other incentive based on factors other than the interest rate or loan terms. Correspondent lenders said they may take secondary market profits and use that gain-on-sale income to pay loan officers, particularly high producers that currently earn 4% or more per loan." Either that or the borrowers will be charged up to 2 percentage points in origination charges or up-front fees, compared with about 1 point these days.

Of course, banks and the owners of originators could end up pocketing most of what they had previously paid to loan officers and brokers on top of (potentially higher) points and fees collected from the borrower and secondary market gains from the sale of loans. Or they may tweak the pay to reflect performance measures like pull through and volume. Others are screaming "bloody murder" and asking why Realtors can still earn a fixed commission of 5-6%.

Just as the industry is dealing with Southwest Securities either entirely or severely cutting warehouse lines, words comes from MetLife Bank that it is finally gearing up a warehouse line. MetLife hired two former Sovereign Bank executives (Charley Clark and Paul Chmielnski) to get the ball rolling, and supposedly MetLife will be hiring warehouse personnel during the 3^rd quarter

Flagstar alerted brokers doing business in North Carolina that starting Wednesday "the state points and fees percentage limit for North Carolina will be lowered to 4% (currently at 5%)…Please note that FHA MIP, VA funding fee, and PMI are currently included in North Carolina’s points and fees calculation." Also this Wednesday Flag will begin accepting FHA TPO applications from brokers and correspondents seeking its sponsorship to originate FHA loans and the application and requirements will be available on its website on that date.

U. S. Bank Home Mortgage Wholesale Division told its broker clients that it "will begin requiring that all Conventional and FHA appraisals, dated on or after September 1, 2010, meet the appraisal requirements per Fannie Mae’s Announcement SEL-2010-09 (06/30/10)" which include interior photos. "For our CUSB and Table Fund Lenders, that order through USBHM’s Appraisal Services web site, we have arranged for all applicable requirements to be followed."

If someone is going to buy a car, often they will take a gander at the J.D. Power and Associates rankings. Borrowers, however, either don’t have a choice in the company that eventually services their loan, or doesn’t consider the servicing reputation when choosing a lender. But JDP ranks loan servicers based on the responses from 4,500 homeowners in May and June of this year. (Considering how many borrowers are out there, some may argue this is a pretty small sample.) These days loan modifications, and the attitude and competency of the servicer’s employees, figure prominently into the rankings. BB&T (Branch Banking & Trust) ranks highest in customer satisfaction among primary mortgage servicers, followed by SunTrust Mortgage, U.S. Bank, Wells Fargo, and Fifth Third. http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2010171

Union Bank told its broker clients of a change to its credit score requirements for loan amounts above $2 million (yes, there are lenders that do loans above $2 million), raising it to a FICO of 700 starting today. And for its "Portfolio Express" line, the existing loan being refinanced must have been originated by Union Bank, but told brokers that properties located outside of CA, OR, and WA are also eligible.

The relatively flat yield curve impacts many aspects of mortgage banking. Not only does the spread between ARM and fixed rate mortgage rates decline, but for example Wells’ wholesale told it brokers, "Costs are down, and Wells Fargo is passing the savings along to you. The daily lock extension fee has been reduced from 3 bps to 2 bps."

Last week was a volatile week for mortgage rates, which rarely helps efforts to hedge pipelines, capped off by Friday’s big sell-off. $3.2 billion in mortgages were sold, as usual mostly 4% but also a good portion of 4.5% securities, which include 4.75-5.125% fixed-rate loans. We began with a downward revision to the 2^nd Quarter GDP number – but not as "downwardly revised" as most expected. And then came Chairman Bernanke’s speech at the Kansas City Fed’s Jackson Hole Conference. Bernanke said the central bank has the tools to prevent the U.S. economy from slipping back into a recession, is prepared to use them, suggested that there will be continued expansion as households rebuild their savings, banks increase lending and companies become more willing to hire (in 2011). After this stocks shot up and fixed-income prices went lower & rates higher. 30-yr bonds worsened by over 3 points, 10-yr prices dropped 1.5 points and yields shot up into the mid-2.60% range, and mortgage security prices dropped (worsened) between .5 and .625.

It’s a new week, and one can expect things to become quiet as we move toward Friday’s start of the Labor Day Weekend – at least after we find out the employment data on Friday. Estimates seem to call for Nonfarm Payroll to drop about 65k, with 115k census-related layoffs and +50k in private sector growth. Personal income and spending came in close to expectations, up 0.2% and 0.4%, respectively.  The Chicago PMI will be released tomorrow along with the minutes from the August 10 Fed meeting and one of the ISM survey numbers. Throw in ISM Manufacturing Pending Home Sales, ISM Services, Productivity, Construction Spending, Consumer Confidence, Jobless Claims, and Factory Orders, and one has a busy, potentially volatile, week. Ahead of all this we findthe 10-yr at 2.59% and mortgage prices better by .125.

A cleaning woman was applying for a new position.

When asked why she left her last place of employment, she replied, "Yes, sir, they paid good wages, but it was the most ridiculous place I ever worked.  They played a game called Bridge, and last night a lot of folks were there. As I was about to bring in the refreshments, I heard a man say, ‘Lay down and let’s see what you’ve got.’

Another man said, ‘I’ve got strength but no length.’

Another man says to the lady, ‘Take your hand off my trick!’

I pretty near dropped dead just when the lady answered, ‘You jumped me twice when you didn’t have the strength for one raise.’

Another lady was talking about protecting her honor and two other ladies were talking and one said, ‘Now it’s time for me to play with your husband and you can play with mine.’

Well, I just got my hat and coat and as I was leaving, I hope to die if one of them didn’t say, ‘Well, I guess we’ll go home now…..This is the last rubber.’"

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx. For archived commentaries, go to ww.robchrisman.com. Copyright 2010 Rob Chrisman.  All rights reserved.  This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.

The August commentary is an excerpt from Pat’s presentation, "Cradle to Grave:  The Economic Crisis and Recovery", given Sunday, August  22 at the Mortgage Bankers of the Carolinas Convention in Hilton Head, South Carolina.

In the this month’s commentary:

1. Reviving the Economy – To Push or Not to Push
2. Will the Economy Rise from the Dead?
3. Mortgage Markets in 2010 and 2011
4. Lenders with One Foot in the Grave

  >>> CLICK TO READ

Economic Commentary August 26 2010