New Rep & Warrant Product; Citi Settles; What Wells' Earnings Tell Us; Adios Mini-Corr?

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AppId is over the quota

Sometimes it is hard to tell if things are legit or not, especially when it comes to legislation. In 2014 Congress has reminded us of how it is nearly impossible for the current batch of politicians to actually pass meaningful legislation, but that won't stop it from introducing headline-garnering proposals on housing reform. I would wager my cat Myrtle that Congress does nothing this year on GSE reform - too much vacation and election time coming up - but this and other proposals show us where Congress' heads are.

PHH seems to have a lot going on, and most recently announced that it has completed the sale of its fleet business for net proceeds of approximately $821 million. What does one do that those kind of dubloons? PHH says it intends to use up to $450 million to repurchase shares over the next year and retire $170 million in debt in 3Q14. Some would say that is a drop in the bucket given that financials show, including the net proceeds, PHH would have had $1.74 billion of cash as of March 31. PHH also announced several strategic initiatives. The company will deploy up to $200 million to re-engineer operations and support infrastructure, focusing on restructuring its Private Label business, reducing expenses, increasing efficiencies, and investing in technology. The company also intends to spend $150 million on growth initiatives to expand its target market for the Private Label business and to grow its origination volume through outsourcing opportunities. The company will also evaluate inorganic growth opportunities. (Hey, maybe buy a daily commentary service?)

Wells and Chase - does the comparison revolve around a domestic focus versus foreign interests, or mortgage banking performance? Wells' market value has come to dwarf that of Chase ($275 billion versus $210 billion based on price/book value). Chase, who normally leads off or at least ties for announcing quarterly big bank earnings, reports tomorrow. (In the first quarter Chase reported mortgage banking net income fell to $114 million in the quarter, a drop of $559 million from the year-earlier period, with mortgage originations falling 68% to $17 billion from a year earlier, and were down 27% from the fourth quarter.) But Wells' came out Friday, and it reported a 39% drop in mortgage revenue for the second quarter as lending volume dropped. Actually, mortgage originations increased for Q2, but they have been steadily declining since Q3 of 2012, and are certainly down year-over-year.

But compared to what analysts were expecting, WFC's mortgage banking results were good. Both mortgage volumes and applications were up materially, with origination volume up 30.6% to $47 billion from $36 billion, and apps up 20% over last quarter. WFC's gain-on-sale margin declined 20 bps to 1.41% from 1.61%. In fact, compared to some of the trends reported by the MBA's application index and industry estimates, the numbers were pretty strong. On the servicing side of things, WFC's MSR capitalization rate decreased 5 bps to 80 bps from 85 bps last quarter and the estimated multiple of the servicing fee decreased to 3.08x from 3.27x. of course, this is very interesting given that bulk and flow deals are trading at north of a point for solid counterparties selling servicing.

The gain on sale margin of 1.41% (verus 1.61% in the first quarter) was slightly weaker than expected. The primary-secondary spread was slightly wider in 2Q than 1Q, although the percent or retail versus correspondent production dropped (53% of mortgages originated through the retail channel versus 56% last quarter). Although the amount of loans from purchase transactions has grown dramatically, the overall size of the mortgage market thus far has been disappointing, and could set a subdued tone for the mortgage business through the rest of the year not only for Wells but other banks as well.

CitiGroup was also in the news, this time by resolving the huge majority of its outstanding residential mortgage issues with the government. CitiGroup/CitiBank/CitiMortgage and the Department of Justice announced that Citi will pay $7 billion in fines, including a civil penalty of $4 billion.

In Romeo and Juliet, Act II, Scene II, we find the quote, "What's in a name? That which we call a rose by any other name would smell as sweet." Does "mortgage broker" smell as sweet as "mini-correspondent?" As this commentary has mentioned several times last year and earlier this year, any business model designed to "get around" something is not a long term recipe for success. The CFPB has published guidance regarding mortgage brokers transitioning to a "mini-correspondent" lender model as it is concerned that some mortgage brokers may be shifting to the mini-correspondent model under the belief that identifying themselves as such would automatically exempt them from important consumer protection rules affecting loan officer (LO) compensation. The guidance that came out Friday sets out how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules regardless of how they may describe their business structure.

"Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer's interest," said CFPB Director Richard Cordray. "The CFPB's rules on mortgage broker compensation are intended to protect consumers from this type of abuse. Today, we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name."

Mortgage brokers connect borrowers with lenders who underwrite and fund loans. In contrast, a correspondent lender, as generally understood in the mortgage industry, processes applications, provides legally required disclosures, frequently underwrites the loans, makes the final credit approval decision, funds the loans, and sells them to investors.

"The CFPB is concerned that some mortgage brokers may be setting up arrangements with investors in which the broker claims to be a 'mini-correspondent lender,' when in fact the broker is still essentially just facilitating a transaction between a borrower and a lender. While some brokers may be setting up such arrangements because they intend to grow into full correspondent lenders, the CFPB is concerned that other brokers may simply be attempting to evade consumer protection rules. This guidance confirms that mortgage brokers who merely choose to describe themselves as mini-correspondent lenders are not automatically exempt from applicable consumer protection requirements.

"The guidance sets out some of the questions the CFPB may consider in evaluating mortgage transactions involving mini-correspondent lenders in order to understand their true nature. This evaluation involves examining how the mini-correspondent lender is structured and operating, for example: whether it is continuing to broker loans; its sources of funding; whether it funds its loans through a bona fide warehouse line of credit; its relationship with its investors; and its involvement in mortgage origination activities such as loan processing, underwriting, and making the final credit approval decision.

"The CFPB Director set a stern tone when he let the mortgage industry know the Bureau is taking official action on the increase of mortgage originating 'mini-correspondents' in recent years," said John H.P. Hudson, VP of regulatory affairs at Premier Nationwide Lending. "It would appear there is a push towards a 'you are either a mortage broker or a mortgage banker' environment."

Yes, we just had yet another proposal on Fannie and Freddie, and recently the House of Representatives overwhelmingly passed The Mortgage Choice Act (H.R. 3211), which makes important changes to the way "points and fees" are calculated under the Qualified Mortgage (QM) definition in the Dodd-Frank Act and ensures that consumers have greater access to mortgage credit and also more choices in credit providers. The MBA free grassroots lobbying effort, Mortgage Action Alliance, writes, "Now it is the Senate's turn to weigh in on this bipartisan legislation (which is referred to as S. 1577 in the Senate). Your support is needed to get this legislation passed. We need to you to contact your Senators to urge them to support this important legislation by asking the Senate Majority Leader to schedule a vote on it as soon as possible. This is an easy assignment. You can do it in two steps, both of which take no more than five minutes: step 1: Join the Mortgage Action Alliance (MAA), step 2, visit the MAA homepage and TAKE ACTION."

Rates continue to be up a little, down a little. We all know what the Fed is going to do every day in terms of QE and security purchases. And I don't see any big reason for huge lock days from lenders. So we're back to looking at scheduled economic news here in the United States, and we have quite a bit of it. I will just list it off - too busy preparing for the Western Secondary in SF to be clever. Tomorrow is Retail Sales, Empire Manufacturing, and Import Prices. Wednesday is the MBA's applications numbers - the announcement doesn't move rates, but instead provides information about the health of lending. We also have the Producer Price Index, Industrial Production and Capacity Utilization, some NAHB Housing Market Index number, and the Beige book. Thursday is Jobless Claims, Housing Starts & Building Permits, and then on Friday is the University of Michigan Consumer Confidence number and Leading Economic Indicators.

Some of that may tend to shift rates, but it is highly doubtful we'll be moving out of the range we've been in since the Spring. For actual numbers, we closed the 10-yr Friday at 2.52%. All is quiet this morning, rate-wise, with the 10-yr and agency MBS prices roughly unchanged.

Jobs

In the private sector, lots of companies are trying to bring new talent on board - some would say it is almost a recruiting war out there. The EMAC Group has announced the release of its EMAC Recruiting Academy 60 Day Mortgage Recruiting Boot Camp. "Learn how to attract your local talent. Join us for a special on-going training series '60 Day Mortgage Recruiting Boot Camp' starting Wednesday, July 16th at 3PM EST! The buzz is in the air and mortgage professionals at all levels are exploring their career options, and the question is, 'Are there prospects in your talent funnel?'"

Venta Financial Group, based in Las Vegas, NV, is searching for a Controller. "We are a unique and growing mortgage firm. If you're an exceptional Controller who is looking for a meaningful role in a great culture of peers who play like champions, we can offer a compelling opportunity. If you have very sharp intellect, coupled with experience and are ready to move to the next level in your career we are prepared to offer an excellent package including an annual salary ranging from $90,000 to $110,000+ a year. The position involves preparing profit and loss reports and analysis, implementing monitoring & enforcing policies and procedures, monitoring budgets by establishing schedules; collecting, analyzing, and consolidating financial data, monitoring and confirming financial condition by reconciliations and daily cash reports, and providing information to external auditors. The ideal candidate should have a minimum of 3 years relevant experience, strong financial acumen, and excellent management & leaderships skills. Confidential resumes and inquiries should be sent to Christina Reyes, Human Resources Coordinator.

On the new product side, CastleLine has created a Certified Loan Insurance Program. "In an effort to protect themselves from losses associated with Representation & Warranty violations, lenders, aggregators and other loan purchasers are participating in the Certified Loan Insurance Program provided by CastleLine and its affiliates.  Under the program, CastleLine offers up to 100% coverage for defects (including, errors, omissions and fraud) that occur during the loan manufacturing process. All types of loans, including Non-QM loans, are eligible for coverage. The program provides meaningful protection to all participants and should provide a catalyst in attracting private capital into the secondary market.  Contact Justin Vedder, Executive Vice President of CastleLine Risk and Insurance Services, LLC to learn more.

And PHH Mortgage will be expanding its outsourcing product offering to serve the needs of regional community banks and credit unions. This will afford financial institutions the flexibility of multiple executions through direct marketing programs, private label, a financial wholesale option, and correspondent. "We look forward to the opportunity to bring value to our financial clients. It will complement our current correspondent partners in an evolving mortgage market of cost increases and regulatory changes", said Len Patton, Senior Vice President, Correspondent Lending. PHH Mortgage will post job opportunities for Regional Sales Directors and Internal Account Executives during the month of August for positions across the country.

Rob Chrisman began his career in mortgage banking – primarily capital markets - 27 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management... more

Differences Between Broker and Mini-Corr; Jumbo Deals; Lender Financing Alternatives

AppId is over the quota
AppId is over the quota

Some of the big topics here at the CMBA Western Secondary conference are margins, compensation, and compliance. Reports show that bank tellers earned an average of $25k in 2012 and other bankers earned 50% more. I have certainly heard my share of stories about how a lender noticed a pleasant, intelligent teller, and brought that person into residential lending with good success. How about techniques on compensating compliance personnel?

Non-bank LOs know that the NMLS Resource Center came out with its Release Notes for the July 28, 2014 NMLS Release (2014.2). They are focused on detailing general enhancements and System maintenance updates.

Vendor and counterparty vigilance is becoming the name of the game - it isn't enough to police your own company's activities and financial health; you must also do the same for key companies that your business relies upon. Law firm Buckley Sandler tell us, "On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor's debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank."

Ballard Spahr provided some elucidation on the recent CFPB/min-correspondent proposals, specifically with regard to the questions that brokers will need to answer. "To provide guidance, the CFPB sets forth a number of questions that it may ask to assess whether a company using a mini-correspondent structure is actually acting as a creditor, or is acting as a mortgage broker. The CFPB notes that the questions in the guidance are not exhaustive and that no single question is necessarily determinative of how the CFPB may exercise is supervision and enforcement authority. The questions reflect areas that likely are of concern to the CFPB, including whether the warehouse line arrangement that the mini-correspondent uses to fund loans is bona fide and whether the mini-correspondent is actually performing the functions of a creditor.  Among the various questions are the following. Is the warehouse line of credit provided by a third-party warehouse bank? Is the warehouse bank providing the line of credit one of, or affiliated with any of, the mini-correspondent's investors that purchase loans from the mini-correspondent? How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit? Does the mini-correspondent have more than one warehouse line of credit? Does the mini-correspondent's total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)? What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent? What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction? What entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?"

Who actually closes the loan is important. Speaking of the closing process, my STRATMOR colleague Garth Graham has a great point on why it's so important to attend closings. Often, loan officers think they are too busy and that closing is a waste of time.  But the person who is NOT at closing is going to get blamed, and too often it's only the closing agents and the Realtors who are present at the closing table.  And it's also a great chance for getting referrals and reinforcing the relationship.  Read GET TO CLOSING for more insights.

Financing is all the rage! What happened to good old warehouse arrangements? America First Multifamily Investors announced that it has entered into a second long-term secured debt financing facility with Freddie Mac utilizing Freddie Mac's Tax-Exempt Bond Securitization or "TEBS" program. Proceeds from the TEBS Financing totaled approximately $94.7 million which was used to repay a portion of the outstanding balance due on the Partnership's Tender Option Bond facilities. The TEBS Financing is a securitization of 13 of the Partnership's mortgage revenue bonds and essentially provides the Partnership with a long-term variable rate debt facility at interest rates that will reflect prevailing short-term tax-exempt rates. The effective interest rate to be paid on the TEBS Financing is equal to the weekly Securities Industry and Financial Markets Association ("SIFMA") floating index rate plus certain credit, facility, remarketing and servicing fees (the "Facility Fees").

And lenders are setting up alternative funding arrangements. The latest news comes from PennyMac, which is entering into a $550 million loan repo facility with Bank of America to help fund newly originated mortgages. It sells the mortgages to BofA, for PennyMac to potentially later repurchase, in a deal fully guaranteed by PennyMac, for loan that Penny purchased from correspondent lenders and were pledged for sale and/or securitization, according to documents filed with the SEC.

Fannie Mae announced a $2bn risk-transfer deal - its largest risk sharing MBS sale to date. And BlackRock plans to auction off $3.7 billion, in an "all or nothing" deal, of legacy subprime mortgage-backed securities today. Redwood plans to sell its second prime RMBS of the year, Kroll said in a presale report, backed by high quality, prime jumbo mortgage loans. It will have an aggregate loan balance of $306 million, an average loan balance of $699k, with the top originators being Homestreet ( 21.5%), FRB (13.3%), and PrimeLending (9.9%). The servicers include Cenlar (81.9%), FRB (13.3%), and PHH (4.8%), with most of the production coming from California, Washington, and Texas. Interestingly, "only" 87% of loans fall under the scope of the QM. No one ever said non-QM loans are bad loans, and in this pool the weighted average LTV is 71% and the weighted average credit score of the mortgage pool is 768.

But wait, there's more! Credit Suisse is in the market with a new $368 million jumbo RMBS. These loans come from Quicken, First Republic, Caliber, and Sierra Pacific.

Up until recently there had been only about 50 prime transactions issued since the market "re-started" in 2010, with most of that volume placed over the past 24 months. Given the lack of commercial lending opportunities there has been strong portfolio demand for high quality mortgage assets, and challenging securitization incentives. But a growing source of supply in 2014 has come from GSE risk transfer programs, noted above. Both Fannie Mae and Freddie Mac have issued multiple transactions in 2014 and all indications suggest they will continue to be active for the remainder of the year. According to the Federal Housing Finance Agency's 2014 Scorecard for Fannie Mae and Freddie Mac, each is expected to execute credit risk transfers on residential mortgages of at least $90 billion of unpaid principal balances. This represents a three-fold increase from last year's scorecard.  In addition, the GSE's are encouraged to explore other transactions types, which can include a senior/sub structure or other alternatives. We're also seeing very strong demand for non-traditional mortgage transactions, including non-performing loans, re-performing loans, and single family rental securitizations.

Investors have little to complain about, as the performance of the pools has been excellent. Heck, they're filled with creampuff loans, right? The most recent stats I saw said that of the 20,000 loans securitized since 2010, only one loan is currently more than 60 days delinquent. Recent issuances contain higher FICO scores (771), lower combined loan-to-value ratios (68% versus 70%) and more loans that are fully documented (100% versus 64%) than deals that came to market prior to 2005.

And lenders/investors are also pushing the envelope. AmeriHome Mortgage Company is rolling out a new Core Jumbo Product. For information on this product and other opportunities, visit Amerihome. I spent some time with AmeriHome yesterday at the CMBA conference, and they have a lot of expansion plans in the works!

Athas Capital Group has lowered rates and fees and expanded subprime guidelines. Some opportunities available for clients include OO LTV's to 80%, NOO to 75% with only a 650 FICO, 12 or 24 months personal bank statements available, Asset depletion program, and Stated income available for business purpose loans.

Cole Taylor Mortgage recent bulletin included Jumbo Loan Guideline Enhancements. Several helpful enhancements and clarifications have been updated which include: allow new subordinate financing, acreage over 10 acres up to 20 acres allowed in certain circumstances, increase in maximum LTV for specific programs and terms, and decreased minimum allowable FICO on some products.

Carrington Mortgage Services announced FICO Reduction to 550 on Government Programs.

Impac Mortgage Corp. Wholesale offers FNMA HomePath loans with credit scores as low as 620, up to 95% LTV for primary residences and up to 90% LTV for second homes and investment properties. "5-10 Financed Properties, Fixed Rate Loans - Fully Amortizing, No Appraisal Required- the Sales Price is Used to Determine LTV/CLTV/HCLTV. No Mortgage Insurance, gifts acceptable and condos allowed."

Lastly, on the earnings front, JPMorgan Chase reported second quarter 2014 net income of $6.0 billion on revenue of $25.3 billion. Mortgage banking net income was $709 million, a decrease of $433 million from the prior year, driven by lower net revenue and a lower benefit from the provision for credit losses, partially offset by lower noninterest expense. Mortgage application volumes were $30.1 billion, down 54% from the prior year and up 15% from the prior quarter. And period-end total third-party mortgage loans serviced were $786.2 billion, down 6% from the prior year and 2% from the prior quarter.

There is not much pushing rates one way or the other, resulting in another quiet day for rates Monday although MBS prices worsened about .125. There was no news, unlike today which includes the June Retail Sales number (expected +.3%), the July NY Fed manufacturing survey, and the June Import Price Index. Later we'll have Fed Chair Janet Yellen giving her version of Humphrey Hawkins testimony. The "benchmark" 10-yr closed Monday with a yield of 2.55% and in the early going is at 2.53%, and agency MBS prices are better by about .125.

Jobs

Private Mortgage Insurance company Genworth Financial is seeking a Product Manager located at its headquarters in Raleigh, NC. The Product Manager will be responsible for leading cross-functional teams to develop new products and modify existing products, using the New Product Introduction (NPI) process. They will be responsible for the on-going management of established products, ensuring products are positioned appropriately in the market by adhering to and improving upon the existing commercialization process, and working closely with Customer Experience, Account Development Managers, Finance & Risk to evaluate products and lead strategic initiatives to enhance performance and profitability. The ideal candidate will have 3+ years of mortgage industry experience, 5+ years of product management experience, and a background in developing and driving strategic business initiatives across multiple functions. Candidates should contact Kristin Miller or apply online at Genworth using job number GMI16788.

And Peoples Bank (KS) is searching for Loan Officers in Orlando, Tampa, Ft. Lauderdale, & Jacksonville. Peoples is a federally-charted (FDIC) community bank that was founded in the mid-1800's, has a solid mortgage banking culture which has evolved over 30 years, and which will close $1.5 billion in 2014 in all 50 states. Peoples Bank has Fannie/Freddie approvals, significant warehouse spread, proven and tested compliance practice, scalable state-of-the-art Information Technology platform and a solid back office which delivers consistently competitive service levels (like consistent 72 hour underwriting turn times). Combine that with company provided leads, a dedicated purchase division and aggressive compensation plans - and the questions remains: Please visit Peoples for more information and to submit resumes.

Rob Chrisman began his career in mortgage banking – primarily capital markets - 27 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management... more