May 10, 2012: CFPB to whack LO’s upside the head? QM thoughts; How much does it take to be a mortgage banker? Texas’ PrimeLending merger

May 10, 2012: CFPB to whack LO’s upside the head? QM thoughts; How much does it take to be a mortgage banker? Texas’ PrimeLending merger Rob Chrisman

You may not have known that May is Asian/Pacific American Heritage Month, which started as a Heritage Week in 1978, but got promoted to a month in 1992. And if you wonder what the Office of Management and Budget does all day, in 1997 it split the category into two: Asian, and other Native Hawaiian and Other Pacific Islander. Per the U.S. Census, in 2010 there were 17.3 million U.S. residents of Asian descent, 5.6% of the total population. California has 5.6 million, distantly followed by NY with 1.6 million; Hawaii had the highest proportion of Asians at 57%. And anyone in the real estate or lending business knows that this population is growing, shooting up 46% between 2000 and 2010 – more than any other major race group. How much money does it take to be a mortgage banker? That is a very good question, subject to lots of debate about specifics, but absolutely no one will argue that net worth requirements are dropping in the future. And given that CEO’s like to think of themselves as forward-thinking, the better question is how much net worth will it take in a few years to be adequately capitalized, have reserves for buybacks, be agency approved, be able to hedge a pipeline, post margin with broker-dealers, handle all the audits and compliance issues, and still meet payroll every month without sweating it? Well, currently agency approval is $2.5 million. There are many, many factors involved with being approved by the investors (policy & procedure soundness, servicing, history, etc.), but you’re looking at $500k – $1 million to be a small-time correspondent. And the aggregators have been warning of potential increases for quite some time as counterparty risk is on the front burner. Fannie has reminded the herd, however, that changes are inevitable. It, for one, is the one putting, or has or will put, the maximum sales cap on companies based on their net worth. Especially given the CFPB’s recent announcements, and counterparty concerns in general, it is not hard to see why Fannie did this. And if you’re Fannie, and some Congressman is asking, “You mean, if someone is approved with you and only has a net worth of $2.5 million, that company can sell you billions every year? And what if a few loans go bad?” (Supposedly HARP loans are excluded from ratios, which brings up the whole risk issue.) I have asked a few folks about what they’re thinking for a few years down the road, and the answer seems to be that a decent mortgage banker had better have at least $10 million, if not $20, in the coffers in order to sleep at night. Hey, don’t shoot the messenger.

But hey, Fannie Mae reported a profit in the first-quarter and does not need a quarterly infusion of money from us for the first time since the government seized it in 2008. A profit of $2.7 billion is nothing to sneeze at, and more than makes up for the loss of $2.4 billion in the fourth quarter of 2011. And as was discussed recently in the commentary, don’t forget that 10% dividend paid out to the government, rain or shine, even if sometimes it comes from the same U.S. Government – just from a different pocket. Fannie set aside $74.6 billion at the end of the first quarter to cover future losses, down from $76.9 billion at the end of last year. And, whether you want to attribute it to an improving housing market or to loans passing through the system, the percentage of Fannie Mae loans that were more than 90 days delinquent dropped to 3.7% at the end of the first quarter, the eighth consecutive quarterly decline. Fannie Mae has received about $116 billion in taxpayer money since its takeover, and has paid about $23 billion back to the government in dividends, lowering the overall cost of its bailout to $93.6 billion. Over at Freddie, taxpayers have pumped an additional $71 billion, which has paid about $18 billion in dividends back to the government. (Last week, Freddie Mac reported a $577-million profit for the first quarter, but requested $19 million from the government to bolster its finances and help make its $1.8 billion dividend payment.) Of course there is disagreement about how much the final tally of bailout will be, ranging from the Obama Administration’s $28 billion to the FHFA’s $220-311 billion.

The CFPB continues to weigh in on its stance on LO comp and many LO’s, especially those in lower-priced areas, may wonder why they took the time to study for their licensing. “Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan. I’m sure that consumer groups are happy about it – just wait until they can’t find anyone who’s going to do a $100,000 loan. Oh, and speaking of licensing requirements, the CFPB is suggesting that we make them the same for all originators (banks, thrifts, mortgage brokers, nonprofit organizations, etc.) Here is the write up: http://www.nytimes.com/2012/05/10/business/consumer-agency-to-propose-curbs-on-origination-fees.html?_r1. But all is not set in stone yet, I believe, but as best I could tell, the comment site is not up yet. You can look around for yourself at http://www.consumerfinance.gov/notice-and-comment/.

(Early next week I am in Ohio, speaking at the Ohio Mortgage Banker’s conference (http://www.ohiomba.org/), and was looking forward to hearing Richard Cordray. Unfortunately he has cancelled – duty calls – but given this LO news it might have been for the better…)

Law firm Ballard Spahr reminds us that among the most anxiously awaited final rules to be issued by the CFPB is the rule implementing the provisions in Title XIV of the Dodd-Frank Act that amended the Truth in Lending Act to create new ability to repay requirements. Under Dodd-Frank Section 1412, a loan that meets the definition of a “qualified mortgage” (QM) is presumed to meet the ability to repay requirements. A year ago the Federal Reserve Board issued proposed amendments to Regulation Z to implement those requirements. “Having inherited authority for this rulemaking in July 2011, the CFPB is now working on a final rule which it must issue by January 21, 2013 to avoid section 1412 from becoming self-effectuating on that date.”

The exact date and timing are up in the air, but Ballard Spahr continues, “The Fed had proposed two possible standards for a QM. The critical difference between the two standards is that, under one alternative, the origination of a QM would create a safe harbor that the lender has complied with the ability to repay requirements and, under the other alternative, it would create a rebuttable presumption of compliance. (See our earlier post on the alternatives.) Although the American Bankers Association and the MBA had each sent comment letters to the Fed in July 2011 urging adoption of the safe harbor alternative, the ABA and the MBA, along with 21 other trade groups and housing industry organizations, reiterated their views in a letter sent to Director Cordray on April 27, 2012. The letter asserts that a rebuttable presumption approach, because of the risks it would create, ‘can be expected to result in the exit of lenders-large and small-from the market and a reduction in credit from those remaining.’ “In an interesting twist to the QM debate, it was recently reported that the Clearing House Association, which advocates for some of the nation’s largest banks, had “changed its stance” on whether the QM definition should create a safe harbor or a rebuttable presumption. According to the report, after initially advocating for a safe harbor approach, the Clearing House Association had joined forces in March 2012 with several consumer organizations, including the Center for Responsible Lending, in making recommendations to the CFPB not only for a broad QM standard but also for a rebuttable presumption approach.” Mortgage investment Corporation (MGIC) said its sub MI company MGIC wrote $1.7 billion in new private mortgage insurance (PMI) in April.   MGIC, which recently reported net losses of $19.6 million in the first quarter of this year, also said today that its delinquent loan inventory decreased marginally during the month. Of course, PMI and RMIC aren’t even writing new insurance in any meaningful way, and PMI filed for bankruptcy. To give an idea of the magnitude, MGIC said it had a delinquent inventory of 160,473 loans at the beginning of the month and was notified of 10,134 new problem loans.  During the month it paid on 3,956 loans, had 236 rescissions or denials, and a total of 9,717 cures.  The inventory at the end of the month was 156,698 loans.

On the lender side of things, Hilltop Holdings and PlainsCapital announced the two Dallas-based companies have signed a merger agreement. For those playing along at home, PlainsCapital Corp. is the financial services holding company for PlainsCapital Bank, PrimeLending and FirstSouthwest, PrimeLending being the #19 originator based on volume per the National Mortgage News. All of that will become a subsidiary of Hilltop, a holding company: http://lubbockonline.com/business/2012-05-09/plainscapital-become-subsidiary-hilltop-holdings#.T6ufR-iJeSo.

Also in Texas, where I am for a few days, “Legacy Mutual Mortgage (operating name of Gardner Financial Services, LTD.), has announced that the company has sold controlling interest to Crockett National Bank.” For details on that, visit http://www.marketwatch.com/story/crockett-national-bank-acquires-legacy-mutual-mortgage-2012-05-09.

And out in California, the parent company of Pacific Western Bank has launched an unsolicited, all-stock bid to acquire First California Financial Group. This, apparently after a prior offer was rejected. Someone is going to end up hurt…

Turning to more transitory things, like the markets, stocks are grabbing the headlines after being down for six straight days here in the U.S. As it has been for a long time, and will continue to be for a long time, Europe’s problems are moving worldwide markets. “Euro meltdown take #63” is what one trader noted as there wasn’t much to talk about here in the States. Early on Wednesday our 10-yr T-note hit 1.79%, but then faded and closed around 1.83% after the $32 billion 10-yr auction.

Despite heavy originator selling of just over $3 billion, way above average, buyers were waiting, and mortgage prices did just fine. Agency MBS prices ended the day mixed with 30-year 3.5’s (containing 3.75-4.125% mortgages) setting a new price high of above 104 per Tradeweb – that is a four point premium for a 4% Fannie/Freddie loan – are borrowers seeing that on the rate sheet? (Of course not – companies have too much overhead now to pass all that along.)

Today we’re focused again on Europe’s woes – do we want them to fix them or not? – although we’ve had Import Prices for April (expected to decline, which they did by .5%), Export Prices (+.4%), Initial Jobless Claims (expected to increase slightly but actually dropped to 367k from a revised 368k), and International Trade  for March, projected to increase – which it did to a $51.83 billion deficit. Other events include the final leg of this quarter’s Treasury Refunding with $16 billion 30-year bonds auctioned at 1PM EST. In the early going the 10-yr is at 1.89% and MBS prices are worse about .125-.250.

A fourth-grade teacher asked the children what their fathers did for a living. All the typical answers came up – fireman, mechanic, businessman, salesman… and so forth. However, little Justin was being uncharacteristically quiet, so when the teacher prodded him about his father, he replied, “My father’s an exotic dancer in a gay cabaret and takes off his clothes to music in front of other men and they put money in his underwear.” The teacher, obviously shaken by this statement, hurriedly set the other children to work on some exercises.  She took little Justin aside to ask him, “Is that really true about your father?” “No,” the boy said, “He’s a mortgage banker, but it’s too embarrassing to say that in front of the other kids.”

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