Recently I gave a speech to a group of loan originators and Realtors in Sacramento. Of course the topic of compensation arose – maybe because I brought it up. Anyway, aside from a few rumored exceptions, most smaller lenders are waiting to see what the large accumulators (Wells, BofA, Chase, USB, Citi, GMAC, etc.) are going to do. Wells’ wholesale group, for example, announced that it would come out with a policy in February. Brokers are well aware that they will get paid either by the lender or the borrower - not both – with the goal, of course, being to prevent steering.

Many mortgage banks that are ahead of the crowd have already run numbers to analyze historical production for their loan agents - average loan size, buybacks, file completeness, FICO’s, etc., etc. - to get a good handle on what they can expect from their agents, and compensate them accordingly going forward. It is heavily rumored that the large banks, in looking at changing their LO compensation, are analyzing loan file stats - not loan stats. For example, how much trouble do they have with incomplete files and missing documents, were packages put together correctly, were locks closed in time, etc. Stay tuned…

And how is retail loan officer production out there? The STRATMOR Group, which works with mortgage companies in researching and assembling data, indicates that loans closed per loan officer for large lenders averaged around 4.5 loans per month during the first half of 2010. But given the upswing that companies have seen in the second half of 2010, the firm estimates that average production during the second half of the year it may come in closer to 8.0.

There is a lot of coverage in the press about the erosion in broker business. One vet wrote, “It is easy to see the reasons for the decline in broker business – it is an old, outdated model. Now there is a concerted effort to change two material structural problems with the mortgage industry. This effort starts at the regulatory level, but the legislators are being influenced by a very powerful bank lobby which believes that there were two fundamental problems with the old distribution model: accountability and disproportionate compensation.

The vet continued, “Accountability/Counterparty Risk - At the peak of the so-called “good old days,” somewhere between 60% and 70% of all loans were originated by independent mortgage brokers.  Many if not most principal brokers signed Loan Origination Agreements with little regard for liability, largely because they were allowed to maintain miniscule capital levels.  By design, it is very difficult, if not impossible to pierce the corporate veil that protects the principals.

“Disproportionate Compensation Relative to liability - The revenue potential on every mortgage is roughly between 3.00-4.00% when you add origination fees to the value of servicing.   (Loan amounts, programs and the sophistication of the consumer could obviously influence this range up or down.)  Given the level of competition at the wholesale level, it was very common for as much as 50% of the revenue potential to be earned by the originator and the principal broker leaving a thinner level of revenue for the mortgage wholesaler.  This made it difficult for mortgage wholesalers to increase capital levels through retained earnings.  The result was that a wholesaler’s off-balance sheet liabilities grew at disproportionate levels relative to their retained earnings. In short, when it became time to pay the piper, mortgage wholesalers could not. The massive closure of mortgage bankers left investors (mostly banks and servicers, and sometimes taxpayers) holding nearly all of the liability.

“In short, we had a prevailing lending model where 50% of the revenue was paid out to a counterparty that had zero liability. This model was rigged to fail, and it created an environment ripe for abuse, even if the participants were indeed “only giving the banks what they were asking for.

“Enter MDIA.  Enter FinReg.  Originators need to understand that there is a concerted effort to make sure that this doesn’t happen again.  The holes that don’t get plugged by regulation will be plugged by banks that will ultimately institute TPO policies that accomplish the same objectives. For us brokers - the light we see at the end of the tunnel is definitely a train!”
That all being said, let’s move on to some investor chit chat. I need to note a clarification on the IMA servicing package details that I mentioned Friday. Namely: "The $1 billion trade actually closed Nov. 30 and is 100% Fannie servicing.  The two deals you referenced are two additional offerings currently in the market and set to bid this week, Thursday, Dec 9.  We also have a California Fannie deal of $225mm Fannie that bids this week - tomorrow."
In a story from the Financial Times, “Bank of America has told US regulators that it has sold enough assets this year to meet the final condition that was set on its landmark plan to repay $45 billion in government bail-out funding. BofA was given until the end of this year to record the gains. US regulators believe the move will help build the bank’s equity as it regains its footing after leaving the government’s troubled asset relief program (TARP) in 2009. Apparently cutting back its stake in BlackRock and interest in China Construction Bank has BofA close to $3 billion. According to Treasury officials, 122 TARP recipients have now repaid all, or a portion, of their government aid.

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