The more things change, the more they stay the same. It feels like ages ago I began writing on this topic of wholesale and correspondent lending in late 2009 and early into 2010. This was the first period in which non-depository mortgage providers really began revising operations and preparing for the new federal regulatory changes. I continued to update my opinions on what the future would look like and my view point as an involved mortgage broker, motivated by all the inaccurate information and assumptions flooding the industry regarding the wholesale lending channel. Part four of this series will mirror the same message as before, with the addition of final ruling interpretation of the Qualified Mortgage (QM), primarily as it pertains to the three percent cap on points and fees (set to take effect Jan. 14, 2014).
On May 29, 2013 the Consumer Financial Protection Bureau (CFPB) finalized a rule amending the Ability-to-Repay/Qualified Mortgage proposal issued this past January. There was a lot of new attention placed on the change in how loan originator (LO) compensation would be calculated under the points and fees calculation. Some had misinterpreted the proposed rule before, assuming that there would be a “double counting” wherein the bureau would count the mortgage brokerage “company” origination fee, in addition to the compensation paid to their originator. While written a little poorly on the proposal, this was never the intention of the bureau just as it was not with the “flat fee” misinterpretation on prior proposed amendments to compensation rules. The broker “company” compensation was the only to be included in the cap.
Many of us were surprised with the recent change from earlier proposal when it comes to creditor-employed originators. To begin, let’s all remember that the three percent cap on points and fees as created under the Dodd-Frank Act was to protect consumers from excessive upfront fees or predatory high-cost loans. These rules were not created to include origination or other fees in which consumers do not pay. Common sense would then tell us that if a creditor is paying an originator (regardless of the channel), than this would not be included in a QM calculation unrelated. Unfortunately, they made the amendment for originators “employed” by the creditor to be exempt from the calculation, but not for originators “not employed” by the creditor (unchanged). It appears that special interests and lobbying had finally made its influence on the CFPB.
I noticed some comments about the difficulty creditors claimed when calculating income for the originators they employ. I do not believe that non-consumer paid originator compensation should be included in the three percent cap on any channel, but we all know that this statement regarding difficulty in calculating is completely false. Compensation reform makes it very easy to determine exactly what each originator will be paid per file, regardless if they are employed by the creditor or not. These compensation agreements do not only pertain to a mortgage broker and wholesale lender, it applies to every originator on every channel. To provide this exemption for creditor-employed originators rather than non-creditor-employed is unjustifiable as this should have applied to all origination channels equally.
We hear a lot about “disparate impact” and “fair lending.” What we are witnessing is regulators contradicting their own alleged agenda and presenting the opposite of their intended responsibilities for consumer protection under this final ruling. They are discriminating against small business and a minority class originator (the wholesale lending channel), resulting in unfair lending which affects consumer choice in the primary mortgage market. If a regulator is to discriminate a class of originator without merit, this will reduce competition and influence higher costs and fewer choices to consumers. Remember, these rules should be 100 percent focused on protecting consumers. Clear confusion by regulators and special interests should have no place in influencing these rules when dealing with such an important financing transaction. Both consumer groups and regulators cannot allow ignorance to create this “disparate impact” or unintended consequences. The analytics and facts must be understood rather than blanket assumptions, fully created by the “old” mortgage industry and how things were in the past.
There are many analytical internal key elements also that are still up in the air on interpretation when calculating the three percent cap. How will future disclosures look as it pertains to removal of yield spread premiums (YSPs) to equally match service release premiums (SRPs)? What does this mean to “bona fide” discount points under different channels for exemption? Will risk-based pricing be exempt as built in the rate sheet, or will up-front bona fide discount costs be viewed as a fee to off-set this embedded adjustment? Will underwriting fees be moved into the rate sheet in wholesale to allow for more room? How will the lower loan amounts and exemptions fit in and will lower income borrowers be negatively impacted? Will lender rebates be applied toward reducing costs calculated in this cap? Many more questions, but we need to get busy communicating with the Consumer Financial Protection Bureau (CFPB).
Things have changed and everyone must acknowledge that, including our regulators and consumer groups. I encourage you to read parts one through three of my series in National Mortgage Professional Magazine also if you want some of my opinions and things in which I feel have already transpired in the wholesale and correspondent markets. I have also created the site www.TheFutureofMortgageLending.com to share a message and spread the need for fair and equal accountability and consumer choice in lending. Real-life examples and facts must be discussed and debated. Future rules and disclosures must be transparent and equal, for the sake of consumer costs and to avoid confusion. While congressional action for change is unlikely, awareness to consumers and regulators for change is possible if we all come together to support a message of right versus wrong. Wholesale lending is important to the consumer and should be treated fairly, period.
Here are just a few bullet points I would like to again share about our industry and the wholesale lending channel:
►Step back for a moment: I’ve noticed that everything in our industry seems to be surrounded with special interests, recruiting, and people putting their own agenda in place of what might be best for the consumers we serve. It’s vital that we put our sales and competitive mentality aside for a moment to really think about what we need to support together without expecting financial gain. If you broker a little or a lot, competition and the wholesale lending channel is important for consumer’s choice and comparison.
►Wholesale is discretional: It’s interesting to think back on a few files in which I had a bad experience. It could have been with an overlay, possibly performance, turn times or an underwriter. Things that generally would have impacted my client in a negative manner. When I think more about these instances although somewhat rare, the thought crosses my mind … what if I was actually employed by this lender? I couldn’t imagine having that kind of restriction. The ability to have lenders competing for our business and comparing them on products, warehouse lines or direct seller/servicers, overlays, pricing, and performance is priceless to the clients we serve as brokers.
►A line of credit is not a fountain of youth: It sounds like 2008 or 2009 all over again. The sky is falling. Hurry up and get those correspondent lines, net branches, or mini-correspondents set up. Broker to banker … step right up, step right up. Get your broker to banker here. We’ve got all kinds … you can choose from more overlays, to higher rates and margins, but don’t forget we also have some warehouse line steering requirements with questionable capital retention for long-term sustainability. Don’t worry, the buy-backs are not as bad as they seem and you shouldn’t worry about the fair lending suit because you can call yourself a banker now to the real estate agents you’re calling on. This can all be yours and all you have to do is give up your entire business you spent years building … for free. Yes, I am being sarcastic, but come on guys … we’re smarter than this. I’m surprised we have not seen banker to broker talk to counter the chaos.
►Performance is not determined by the channel, but only by the originator: The originator is the main point of contact as the licensed professional dealing with the consumer directly. They decide where they fund their loans and there is no doubt they make the most important decisions with their clients. There are good “brokers” and there are bad “brokers.” There are good “bankers” and there are bad “bankers.” The titles, however, mean nothing. The client experience is fully reliant on humans establishing the systems needed for effective execution and communication.
►Perspective: It is very difficult for a creditor-employed originator to understand what being a mortgage broker “exclusively” is like in today’s market. Employer influence (influence from a party financially interested in you believing one thing over another), warehouse line restrictions or steering, varying margins, etc. can make it hard to properly judge wholesale when others try to discredit. Many correspondent originators find themselves brokering only the programs they cannot do, resulting in a “niche program” performance that does not best represent wholesale operations and execution. This builds on the false sales mentality when using terms such as “banker,” “in-house underwriting,” or “direct lending” all of which mean nothing to consumers and business partners (and in many cases are misrepresentative).
►Control your balance sheet or you balance sheet will control you: Individuals or businesses that cannot control their liabilities will make short-term impulsive decisions, many of which are not the best choice for their careers or clients they serve. You must have a long-term vision and documented goals, created without the stress of an unfavorable balance sheet over your head. Many have expanded too fast and taken on too much overhead and will be unable to continue without recourse. Stay as liquid as possible and be prepared for volume fluctuations and new regulations.
►Interest rates are up: We have seen a significant increase in interest rates. Simply put, we’re in a purchase market. The good news is that rates are still historically favorable and market share opportunities are great for those with a good book of business. The bad news is that we will see many companies merge, downsize, or close their doors as they have to deal with much less revenue compared to the 2012 party, in addition to much tighter regulatory demands and higher capital requirements. Between June 2013 and June 2014 (just an estimated range in my opinion), originator (revenue makers) recruiting efforts will be the most aggressive in history.
►We are in a transactional-based industry: There is no passive or residual income or revenue. The employer is the consumer. The employee is the originator. Originators, through a combined effort, then cover the payroll and all other expenses of the mortgage company in which they place their NMLS number. The company is completely reliant on the activity of the originator(s) to cover overhead and profits. This is important to remember when fear-based recruiting hits the streets.
So the big question is what does the future of wholesale and correspondent lending look like? That will be fully determined by the behavior of non-depository mortgage loan originators, as they provide the gas that fuels the engines. I have personally found that about 80 to 90 percent of originators are not informed of the new rules and regulations or how this affects the analytics of the process under the wholesale and correspondent origination channels. I do hope that awareness grows and I have faith in originators to self-educate rather than procrastinate when career planning. I also have faith in our regulators. I truly hope that the CFPB continues to capture data to make wise and accurate amendments for consumer choice and protection. I’ve agreed and applauded all changes, with the exception of the recent unjust discriminatory ruling against wholesale.
With all of this said, the mortgage broker will still be here in the future just as we have always been. We are one of the most resilient groups of small business professionals in the Unites States. We evolve and we adapt. We have deep-rooted commitments to our clients and the local communities we serve. We have much more “skin in the game” than our non-owner competitors originating for banks, net branches, and correspondents. The good will stand out from the bad and we will always put our client’s interests before our own. We choose this path because we support where it leads our clients and welcome more followers that can see the trail. Although titles mean nothing to the consumer in this agency-backed primary mortgage market, I am certainly proud to be a mortgage broker!
Andy W. Harris, CRMS is president and owner of Lake Oswego, Ore.-based Vantage Mortgage Group Inc. and 2010-2011 president of the Oregon Association of Mortgage Professionals. He may be reached by phone at (877) 496-0431 or e-mail [email protected]
or visit VantageMortgageGroup.com.