Post-Closing’s Impact on Hedging Costs; Bank Liquidity and Required Reserves; ADP’s Accuracy; NMLS Training


My girlfriend thinks I’m a stalker.
Well, she’s not exactly my girlfriend – yet.

Given yesterday’s economic numbers, suddenly
the market thinks the US is heading into another recession. Well, it’s
not exactly a recession – yet
. But many will argue that there should be no
“suddenly” in that sentence, and that, since housing and jobs are
languishing, the economy has never come out of its doldrums to begin with. In a
recent article, however, Caroline Baum pointed out that the yield curve
“says” that there will be no recession
. “With the Federal
Reserve’s benchmark rate at zero to 0.25 percent and the 10-year Treasury note
yielding 3.06 percent, the spread between the two interest rates is among the
widest in history. It’s the reverse configuration (an inverted yield curve with
short rates above long rates) that augurs recession… When the yield curve is
steep, as it is now, it’s an inducement for banks to expand their balance
sheets — borrow short, lend long — and increase the money supply. That bank
credit isn’t growing now owes more to the hangover from a period of excess
leverage and new-found religion on lending standards than any restrictive
policy on the part of the Fed…A $15 trillion economy doesn’t turn on a dime.
Listening to the media, you’d think that one day inflation is ready to take off
and the next the economy is struggling to stay afloat.”

Mortgage folks should take special note that
in yesterday’s weekly mortgage application number, the refi index was down 5.7%
last week. Although it will bounce back this week, year over year the refi
component of MBA index is down 26.8% – even with mortgage rates 25 basis points
Credit appraisals loan fees, credit appraisals
loan fees…READ MORE

The ADP Private Sector Employment number only
increased by 38,000 in May, far less than the 175k that was expected. But
remember that the ADP number, while it grabs headlines, is of dubious
predictive ability
for tomorrow’s government-produced employment number.
Over the last 6 months alone ADP’s initial figure has ranged from understating
the gain in jobs by 5k to overestimating it by 184k!

But the ADP only started the market moving
yesterday, making everyone who locked a loan earlier in the week wish that
they hadn’t. The ISM Purchasing Managers’ index fell in May, and was much lower
than expected. In fact, it was the lowest reading in a year. Construction
Spending increased 0.4% in April although during the first 4 months of 2011,
construction spending is 8.4% below the same period in 2010. These components,
pointing to a slow economy, moved stocks lower but pushed 10-year UST note
yields below 3% for the first time in 2011. Generally speaking, a slow
economy helps keep rates low – but is that what the mortgage industry really needs?
Low rates help, but be careful what you wish for.

Earlier in the week the commentary discussed
bank liquidity, and received this astute note: “Another reason why banks
are sitting on top of a large amount of cash is because of the uncertainty
of Basel III and the intense reserve requirements needed
.  All major
G-20 financial centers must adopt the rules by the end of this year. 
Mortgage servicing rights, deferred tax assets, and investments in financial
institutions cannot surpass 15% of common equity.  Therefore, a major
review of assets will be needed from bank to bank until the end of the
year.  If you think the QRM is onerous… Jack Nicholson said it best in
Batman when he said “wait until you get a load of me.”  The OECD
already pegged global GDP growth to be stymied by 5-15 bps.  With
economies across the world hurting and additional lending needed to foster
growth, my guess is that the projections will be severely underestimated. 
The effective date of implementation is staggered to allow banks to meet
certain periodic benchmarks, but maybe it will help if the initial date is
postponed by a year.  After all, which bank would help facilitate another
first-time homebuyer wave if the high LTV, high DTI, low fico loan traits are
contrary to Frank-Dodd and Basel III?”

Another wrote, on general mortgage
conditions, “Six years ago underwriting was ‘anything goes’ to ‘nothing
doing’ now, which reflects banks attitudes that they are not willing to take
the risks that they did prior to the housing crash and subsequent decline in
economic growth. The private market for funding mortgages is broken and will
take a long time to fix and the government is not helping by the talk that the
FHA should tighten up when they are almost the only game in town. The FHA is under
the microscope by Republicans as they want to raise the minimum down payment on
FHA loans to 5%
and drastically scale back the size of the federal mortgage
insurance program. Is this what housing needs?”

Need some NMLS
for Federal Institutions? Much of it has already taken place,
although later this month there will be a session in Maryland. NMLSTraining In
addition, for information on FBI Criminal History Record Information in the
context of mortgage-related licensing, go to FBINMLS.

In previous weeks this commentary has
discussed hedge costs, and things that companies can do to lower them.
But as a few readers have pointed out, one peripheral area that impacts a
mortgage company’s gain or loss is the post-closing process, more
specifically delivery and purchase reconciliation. Many companies are moving to
electronic delivery of files to expedite this and make it easier for investors
to review loan documentation. Meeting delivery dates and making sure that all
the required documentation is included in the file is critical in order to
avoid extensions and the fees associated with rolling trades – which usually
hit Secondary Marketing’s PL. (How many meetings have been held with
company president’s, secondary managers and Ops managers to complain about late
file shipments or missed delivery dates?) When purchase documents are received
from investors, they must be addressed and resolved in a timely fashion.
“Did we actually receive a price of 102.125 on the Nguyen loan, and if
not, why not?” When I visit companies, the more successful lenders have
these policies in place, and are using them.

Although one can argue that timely file delivery and auditing purchase monies
don’t directly impact hedging costs, they still impact the bottom line and fall
within reach of Secondary Marketing Managers in spite of being more in the
realm of Ops and Accounting. As one publication noted, “Successful
Secondary Marketing Managers wear many hats and oversee each loan lock from the
time of origination until it is purchased by an Investor.  They are
intimately familiar with each step along the way and have a hand in overseeing
multiple departments, from sales and marketing all the way through to the
post-closing team…managing the post-closing process helps avoid the costs
associated with pairing out of and rolling commitments, and ensures that the
loan is purchased at the anticipated price.  By constantly searching for
ways to improve processes, procedures and best practices, SMM’s can continue to
find ways to maximize profits and reduce costs.”

Turning the focus back onto the markets,
remember that not only do we have issues in this country, but also overseas.
Granted, the public’s memory seems to be short, but the sovereign debt issues
in Greece, Italy, Spain, etc. just won’t go away and definitely have an impact
on worldwide markets. Yesterday Greece once again stole the spotlight, as a
possible bailout package began to take form – a deal in the 30 billion euro
range was being discussed. Moody’s gives Greece a 50/50 chance of default.
And still, here in the US our government continues to be a role model for us
all and bicker over debt ceilings while our economy slows to a crawl. As expected,
law makers overwhelmingly voted against raising the debt Tuesday night. Why
would they do anything without trashing the other side of the aisle first?

So yesterday, at the 3PM EST marks, the 10-yr was .75
higher and down to a yield of 2.97% (eventually hitting 2.94%), and rate sheet
MBS prices closed higher/better by .625-.750. This morning’s numbers came out
pretty much in line: Initial jobless claims at 422,000, and Non-farm
productivity 1.8%. Later at 11AM EST the
Treasury announces details of next week’s auctions of 3s, 10s and 30s –
estimated at $66bln versus $72bln in the previous round. As one would
expect after yesterday’s big move, we’re seeing a slight bounce back this

I’ve sure gotten old!

I’ve had two bypass surgeries, a hip replacement, new knees, fought prostate
cancer and diabetes.

I’m half blind, can’t hear anything quieter than a jet engine, take 40
different medications that make me dizzy, winded, and subject to blackouts.

Have bouts with dementia.

Have poor circulation; hardly feel my hands and feet anymore.

Can’t remember if I’m 85 or 92.

Have lost all my friends.

But, thank God, I still have my Florida driver’s license.

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