Lover’s spat or Thrilla in Manila?
BRAWL (Brokers rallying against Whole-tail lending) is grabbing attention, but is the viewpoint intelligence or ignorance, or somewhere in the middle?
Kimber White, President of the Florida Association of Mortgage Professionals, writes, “The relationship between wholesale and retail origination, particularly regarding companies doing business in both channels, has once again become a popular topic of conversation in industry circles. Specifically, the recent conversation has focused on a new spotlight that is being shined on the age-old issue of retail refinancing of mortgage broker-originated loans.
“For a variety of reasons, FAMP has refrained from becoming involved in these conversations. However, as President of FAMP, I believe it is in the interest of all our members and our industry partners for FAMP to clearly establish what we stand for as an association and what we will never support directly or indirectly by remaining silent.
“FAMP is the Florida Association of Mortgage Professionals. We are the largest individual membership organization for mortgage professionals in the State of Florida and we embrace our position as a leading voice within the mortgage industry in our state. FAMP does not favor any one channel of origination over another. To the contrary, we support healthy and fair competition among and between all channels of origination because we believe that strong competition leads to better customer service and better pricing for consumers.
“We also know, as mortgage professionals, that regardless of the channel we operate in, we do not ‘own’ our clients. Rather, we work hard every day to first build and then maintain strong relationships with our clients, prospects and referral sources, and we strive to offer the very best service and client experience to each of our borrowers.
“Nevertheless, we recognize there is a difference between healthy, robust competition and unfair or unethical business practices rooted in a quest for greater profit, and we acknowledge that there are, unfortunately, still individuals and companies in our industry engaging in unethical and consumer-harming business practices for their own benefit.
“FAMP condemns, in the strongest possible sense, all unethical business practices, particularly those that harm, or have the potential to harm, consumers and stifle fair competition. FAMP also rejects, however, efforts to combat unethical or allegedly unethical business practices through equally anti-competitive means, measures and rhetoric.
“To live-up to the title ‘mortgage professionals,’ we should all strive to treat each other with respect, and when we disagree, we should seek to do so in a way that helps us come together to work through whatever issues may separate us rather than engaging in rhetoric that further polarizes our different interests or positions.” Thank you, Kimber!
I received this note from an industry vet who has experience in capital markets, operations and production, employment by a national bank owned mortgage company, privately owned mortgage companies, national and regional lenders, retail and wholesale channels, and with servicers and non-servicers.
“Prior to 1994, most loans were originated and priced against the loans true sale price, whether that be directly to the one of the GSE’s through their cash window, in an MBS or PC (security), or for FHA/VA through a GNMA trade. The pricing was based on that specific execution, minus the cost to produce, and minus the net margin requirements – simple.
“When the markets crashed in January of 1994, after a LONG period of steadily dropping interest rates, the market quickly found its supply and demand way out of balance. The industry had enjoyed a very robust 10+ years of steadily dropping rates and built big machines to handle the volume of business. (This was before the days of imaging, LOS systems, and cell phones, meaning there were lots of people in large leasehold sites around the US physically moving lots of pieces of paper.) Now facing a major shortage of new loans, competition became fierce.
“Nobody wanted to dismantle their manufacturing businesses. In the years prior to this crash many originators of all sizes serviced their own loans because it was economically profitable to do so. Servicing at the time was ‘off balance sheet’ so it was not accounted for as an asset. While Servicers did show net revenue (the servicing fee collected minus the cost to service) on their income statements, there was not a requirement to capitalize servicing as an asset. This meant any mortgage originator able to service loans had a free asset to not only throw off additional income to offset expenses, but if it needed cash for business opportunities, or when things got tough, they could always grab a block of that servicing and sell it. Servicing sales during this era almost always had a positive cash gain because they had no capitalized expense to originate it.
In January 1994, like now, the market slowed so lenders dropped their prices. And in 1994, for the first time in the history of our business, lenders servicing loans started using some of the servicing income to put back into price, to hopefully give them a pricing advantage over their competition. Of course, this type of strategy never works out, but everyone else must follow along. This new pricing method made it very difficult for those smaller servicers to continue to own servicing, and the industry started seeing a consolidation of servicing out of smaller originator/servicers into the big aggregators. The large servicers (Wells, Countrywide, Chase, Citi, etc.) bought this servicing from the smaller servicers whose cost to service was too high, and they didn’t have enough margin left over to meet the subsidies necessary to put into price to enable them to compete. The practice of pricing part of the value of the servicing into the loans pricing has continued ever since.
“In 1995 the FASB Rules changed requiring all MSRs (Mortgage Servicing Rights) be capitalized as an Asset on the Servicer’s balance sheet. That capitalization rate was based off an assumed life of the loan, and it created a significant risk to the business for when these servicing assets pay off before the servicer can recapture the book value of the servicing asset. Loans that pay off earlier than expected creates a charge to income for the capitalized servicing value that has yet to be recovered through time, or what is sometimes called an ‘impairment charge,’ a charge that since 1995 has contributed towards several name brand originator/servicers being forced to sell, consolidate or go out of business.
“For example, a wholesale broker’s price for a Fannie Mae 4% loan, being placed in a 3.50% security, is 102.25. If the cost to produce that loan is .80, the current mid-range cost for a wholesale lender, the net price to the lender is 101.45. Yet when I looked at that day’s pricing from ICON the average top 5 lenders were priced at 102.30.
“If the lender is pricing 102.30 on the rate sheet, but they can only sell it for a net price of 101.45, the difference is 85 basis points. The .85% is coming out of the servicing value, and is paid for by the ultimate servicer. But the servicing value is only monetized by either owning the servicing long enough to recover the cost or selling the servicing to someone else who is willing to buy the future servicing revenue stream with an upfront cash payment.
“On a conventional FNMA fixed-rate loan, let’s assume the average cost to the servicer is around 7bps per year for a performing loan. The total servicing spread is 25bps, so that means the net is 18bps (.25 -.07). If the subsidy expense is .85% and the recovery is .18 per year, the break even for the servicer is (.85 /.18), or 4.7 years.
“When a servicer buys MSRs, it is buying that right to service the loan. Most servicers will tell you they are not ‘buying the customer,’ and the customer will belong to whoever earns the right to service that customers future needs. The consumer, of course, has a free will, and will generally chose the company they use with some blend of likeability, cost, trust and convenience.
“Selling the MSR, and then expecting the buyer of that MSR to cooperate and assist the seller in refinancing it out of the servicing portfolio, is a questionable business model that could ultimately put its business in jeopardy. In a free market system, the broker has the right to earn that client’s future business, and often does. But everyone knows that every loan that closes ends up on lead lists that are sold to many companies across the country who will also be soliciting these same borrowers for future transactions.
“At the end of every mortgage loan originated there is a servicer who is often not the originator, and in the case of a broker’s loan, is never the originator. The servicer is often not the wholesale lender either, and the loan frequently is sold to a servicing aggregator unrelated to the origination of the loan. Whoever ends up as the ‘ultimate servicer’ paid a price to obtain the loan, and that price rolls all the way up through the loans travels and finds its way into the wholesaler rate sheet and into the broker’s pocket.
“The BRAWL initiative is attacking some wholesale lenders. And some of the ‘good guys’ are marketing their support for the brokers by referring trigger leads back to them for brokers benefit. But they should be asked, does your company service loans, and if so, what percent of originations? If you use a sub servicer, does that sub servicer have a portfolio retention dept? Does your company sell servicing? If so, how much of your originated servicing in the last year have you sold? (You may find this answer very surprising.)
“If you’re a seller, once your company sells the servicing, can you continue to ‘refer’ trigger leads back to the originating client? And if so, for how long? (If they simply answer ‘yes,’ you have reason to suspect they may not be telling the whole story. If they did have a sales agreement that allowed for some sort of re-solicitation it would likely have restrictions and price adjustments associated with it, and it’s likely you’re not getting the benefit you think you will get, or they are paying you a lower price for the transactions.)
“Here is what your readers should pay attention to, and think about. BRAWL has caught the attention of some major servicing brokers around the country, and their genuine concern for the potential overall impact on the willingness for the buyers of servicing to continue to value the servicing in the same manner is making its way into future valuation discussions. Servicing values incorporate several key attributes, and duration (length of time on the books) is the single most important factor. One of the unintended future consequences of this continued attack on servicer’s ability to protect their asset could likely be the servicing aggregator’s unwillingness to pay for the longer duration assumptions on broker/wholesale originated loans, significantly impacting the total value of broker originated servicing, and therefore reducing or eliminating the amount available for price.
Since these price subsidies benefit the borrower and the broker, perhaps BRAWL should be careful what they are promoting against. If the result of this initiative causes servicing sales of broker originated loans to price at a LOWER price than Retail loans, the Brokers could find themselves in a disadvantageous price position against the larger retail lenders and delegated correspondent lenders. Large volumes of new originations are sold each month from delegated correspondents to many of these same ‘bad guys.’ Why are these correspondents are not jumping on the ‘Brawl bandwagon?’ What do these correspondent lenders know that the brokers don’t or that the Brawl group don’t want the Brokers to know?
“Here is an excerpt directly from BRAWL. ‘Let’s get to the truth about lending. Whole-tailers are stealing our customers, but we’re the ones handing them the keys to the front door. Let’s pledge to partner only with true wholesale lenders until the whole-tailers put an end to their selfish and greedy ways. Let’s work together in the best interest of our borrowers and ourselves. Let’s keep wholesale true.’ I find “let’s get to the truth” interesting. It reminds me of the discussion and question; if being truthful can be claimed when someone omits important information?
“In a recent video from an industry veteran, it was claimed that the value of the client relationship being ‘stolen’ from the broker is $25,000. If the average loan balance in wholesale is $220,000, and even if the broker’s Reg. Z compensation is 2.75%, then each loan would have a gross revenue of $6,050. If net profits after expenses are 1.50% (which is high) then the net value on this $220,000 loan would be $3,300 split between the LO and the Office. If the above stolen value of $25,000 were true, the originator would have to make and/or refinance this borrower 8 times. This is ridiculous.
“When BRAWL’s largest and loudest supporter of this initiative is another wholesale lender who has a direct and personal benefit from any pull back in business from the ‘bad guys,’ sleeping with one eye open wouldn’t be a bad idea for those brokers doing business with them.
“I sat through the BRAWL call on Nov 21st. There was a common message from most presenters, which was that ‘the brokers should be less concerned with the best price and more concerned with their partnership, and that that partnership should be worth .50-.75 in price difference from the “bad guys.”’ Really? Wouldn’t that be nice if they could take business away from the other wholesalers and pay less for it?! You could assume that ‘lower price paid’ would offset their hit to servicing value, and may be an important part of their fiscal planning for surviving 2018 … could it be that some of these wholesalers may not be able to continue paying what they are paying today for these loans and this is a way to compete with a lower price point?
“Here’s an interesting and neutral perspective worth watching, or watching again for those of you that follow The National Real Estate Post. Brokers should take the time to learn about the true economics of the business and form their own opinions. Be cautious of self-serving promotors, no different than you would with any other financial transaction into which you would enter. It is going to be very interesting to see how this plays out and who ends up winning in the end.” Perhaps we can add Tortious Interference, Fair Lending and RESPA section 8 concerns in a future piece.”
(Thank you to Sue W. for this one.)
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Lover’s spat or Thrilla in Manila?