CFPB to Whack LO’s Upside the Head? QM Thoughts; How Much to be a Mortgage Banker?


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 loa
n. 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.
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.

next week I am in Ohio, speaking at the Ohio
Mortgage Banker’s conference
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

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

“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.



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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