THE BASIS POINT

Broker Compensation, Wealth Perception, Single Global Currency

If your stock portfolio is going up in value, do you save less? Probably. People generally feel wealthier when their stocks are rising, or their house is appreciating: they will spend more and save less. When the reverse happens, they spend less and save more, which is exactly what is happening now, or at least has been until recently. And it happens to companies: when the stock market drops in value, companies decrease their spending on plants and equipment. When the value of homes declines, builders slow down or stop building new homes. In general, people become less confident, and the economy slows. We’re all so…predictable.

3yr Treasury Auctions Went Well
While we’re talking about the economy, yesterday’s $38 billion 3-yr note auction by the Treasury went very well. For giving them your money for 3 years, the government will pay you a yield of about 1.49%. The “bid-to-cover” ratio, a measure of (in very basic terms) how many people wanted to buy the notes versus how many actually did, was 3.02 – the highest level in almost a year.

Single Global Currency
Maybe the world will be a happier place if we all share the same currency. We have the UN calling for a global currency to replace the dollar, which is obviously easier said than done. But watch for more news on that as time passes. Today, in addition to another auction of $20 billion 10-yr notes, at 2PM EST the Fed will release its reports on the economy from the various Federal Reserve districts. The “Beige Book” usually doesn’t surprise anyone, but in a slow news day, it might. We start the day with the 10-yr a little worse at 3.50% and mortgage prices about unchanged.

Loan Apps Up 17%
Lock desks were busy last week, and the MBAA reported a 17% increase in applications! And compared to the same week in 2008, apps were up over 60%! Refi’s (which account for about 60% of all apps) were up over 22%, and purchases were up almost 10% versus the week before.

Mortgage Insurance
PMI, and other mortgage insurance companies, may see some benefits from some legislation that passed in Arizona. Starting in November, Arizona’s Department of Insurance will have discretionary authority over mortgage insurance companies in the event that they do not meet the state’s required minimum policyholder position to write new business. Arizona’s DOI will continue to consider the required minimum policyholder position, but can also include other criteria in determining if an MI company can still write policies in that state. And it will come in handy if an MI company is restructuring their portfolios and/or rebuilding capital levels. For us MI novices, it turns out that 16 states have mortgage insurance statutes or regulations that prescribe either a maximum risk-to-capital ratio or MPP, and the other 34 do not have explicit minimum capital requirements.

Homeless Taylor Bean Home Loans
CitiMortgage joined other lenders in their stance on Taylor Bean loans. “In the wake of recent announcements from Fannie Mae and Freddie Mac, any conventional or government loan where Taylor, Bean & Whitaker Mortgage Corp. (TBW) was directly or indirectly involved in any part of the origination or closing process – including borrower application, appraisal, processing, obtaining documentation, and/or underwriting (a “TBW Loan”) – is ineligible for delivery
to Fannie Mae or Freddie Mac and therefore ineligible for purchase by CitiMortgage.”

Re-Lock Policy With Wells
If you want to renegotiate a lock with Wells Fargo wholesale, be warned that they increased their renegotiation fee to .500. In addition, they “require that a change in rate must benefit the borrower only; an increase in broker compensation (yield spread premium, YSP) from the original loan when renegotiating a loan will not be allowed”, and “require loans to close within their original expiration period or be subject to standard extension costs.” For a re-lock, Wells’ wholesale channel will determine ‘worst of pricing’ by comparing original all-in price to current all-in price (rate to rate) and carry forward any incurred existing extension costs, including unlocked days, for a new lock.

Broker Compensation Chatter
There is a fair amount of confusion on the new Federal Reserve TILA (Reg Z) changes being proposed, not the least of which is “Is this only for brokers, or does it include bankers?” At this time the proposal would prevent any lender from basing compensation paid to a broker or a loan agent on the amount of the loan, the interest rate of the loan or the features of the loan (i.e. prepayment penalties). Lenders, regardless of broker or banker, would have very little flexibility in determining how to compensate brokers or loan agents. An alternate proposal would prevent the lender from basing compensation on the interest rate or loan features but would allow compensation based on loan amount, helpful in jumbo markets. Supposedly the paperwork will require disclosure of a single “Our Origination Charge” which must include all charges that all loan originators (broker, lender, banker, whoever) involved in the loan will receive, exclusive of true discount points, and a disclosure showing how any yield spread premium (YSP) will affect the settlement charges. This disclosure would not prevent the use of YSP or prevent a broker receiving YSP from sharing with the loan agent. The comment period lasts until Christmas Eve.

View the document for yourself.

Insider Opinion on Mortgage Compensation
John K. Hurley, with Secondary Solutions in Virginia, wrote to me about the TILA changes with several good points – none of which I am going to repeat. Just kidding – here are some of John’s comments with regard to the proposal.

“Inevitably, mortgage lenders will find ways to compensate their originators fairly, but not without certain inefficiencies vis-a-vis the current methods. As a result, the cost and availability of credit will be further restricted notwithstanding supposed government efforts to the contrary. I will say, however, that I see no explicit prohibition against paying loan originators on the basis of the loan amount in the proposed legislation. But because the loan amount determines the LTV and the LTV is specifically listed as a to-be-prohibited variable in the compensation calculation, this is confusing. Regulators underestimate the frequency with which many LOs lower the rate with some sacrifice of commission in an effort to get the loan that might otherwise go to another lender. They only see the other side of the transaction. What we will essentially have is a government-imposed form of price control. Price controls always have unintended consequences. In this case, it will involve a shortage of credit offerings by taking away lender incentives to lower rates in the face of competition and removing the incentive of LOs to offer higher rate loans when it would be market-efficient to do so. While it does not appear at this time that the government will set the actual commission rate (i.e., 50 basis points per loan), they will prohibit the lender from paying their originator a different amount based on the rate or fees that they collect. Like it or not, the whole concept of determining commissions based on terms of the loan is based on the fact that it allows a company to be more point-of-sale price-flexible in the interest of transaction efficiency and increasing loan production. There will be fewer loans offered because it is not in a lender’s interest to offer below-market terms to a borrower when they will incur “at-market” costs while doing so. Under the current prevailing system, with sliding-scale commission costs tied to the rate, any lender costs that result from making below-market rate loans are shared or absorbed by the LO. This will no longer be the case and additional market inefficiencies will be the result.”

Well said!

Daily Humor
A very gentle older Texas lady was driving across the Pecos High Bridge in Texas one day.
As she neared the middle of the bridge, she noticed a young man fixin’ to (means “getting ready to” in Texas-talk) jump.
She stopped her car, rolled down the window and said, “Please don’t jump, think of your dear mother and father.”
He replied, “Mom and Dad are both dead; I’m going to jump.”
She said, “Well, think of your wife and children.”
He replied, “I’m not married and I don’t have any kids.”
She said, “Well, Remember the Alamo.”
He replied, ”What’s the Alamo?”
She replied, ”Well, bless your heart, just go ahead and jump, you dumb Yankee.”