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 3rd 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 2nd 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 find the 10-yr at 2.59% and mortgage prices better by .125.