Catsup or Ketchup? Language is fascinating. The mortgage biz is filled with acronyms, and the last time I counted there were over 850 commonly used abbreviations that are Greek to anyone outside of the biz. Okay, I just made that number up, but it is an overwhelming number. (What’s a “HENRY?” High Earner Not Ready Yet to buy a house.) Even something as simple as “LO” is something we use every day but has to explained to a borrower. Speaking of LOs, their role is changing, as is their compensation, and here is STRATMOR’s latest blog on the topic.

Lender Products and Services

Northpointe Bank Correspondent Lending is pleased to announce the addition of the Assignment of Trade (AOT) and Bulk Assignment of Trade (Bulk AOT) delivery methods. The AOT delivery execution provides clients with competitive loan sale pricing by assigning TBA mortgage-backed securities directly to Northpointe Bank. Client benefits include eliminating the bid/ask spread, and avoiding the need to exit pipeline coverage trades, as well as reducing the margin call exposure. For more information reach out to Seth Elbaum (617-543-1071).

“In the time it took a borrower to hook up the home theatre, you’ve probably already sold their loan despite all that time you spent wining and dining them to get their business. That two-second decision you made based on best price is going to cost you. Big time. When it’s time to refi or buy a new loan, that borrower is going to go somewhere new and hopefully to a place that treats them with great customer service throughout the entire process, including the 30 years they pay back their mortgage. Don’t miss out on the 93% of customers who said they’d refer their mortgage provider IF they delivered good customer service. Learn how to deliver that 5-star customer service in this TMS White Paper”

“With the mortgage industry battling rising costs and margin compression, profits are a growing concern. Teraverde has seen and worked through major challenges in the mortgage lending and banking industries. Our experience of working with Mortgage Bankers, in-depth understanding of Encompass users’ needs, and innovative expertise allows us to accurately identify the appropriate Profit Intelligence Solutions, maximizing their Encompass investment. Our in-depth knowledge of working with Encompass allowed us to develop solutions that benefit Encompass Users. A user can fully automate data extraction between Encompass and their Data Warehouse by selecting the fields they want from the Encompass System. Our solutions run on API, with near real time data Ellie Mae users can generate reports for key metrics or find out how lenders are taking this data, visualizing it and making decisions that drive profitability. When Profitability Matters…Teraverde Delivers. Visit us at Ellie Mae Experience 2019, San Francisco Booth #514.”

Unlock opportunity in a growing market with Loan Product Advisor® asset and income modeler (AIM) for self-employed borrowers. AIM for self-employed is Freddie Mac’s solution to automate the manual lender process of assessing borrower income using tax return data. It’s also the industry’s only AUS-integrated self-employed borrower income calculation solution. AIM for self-employed makes it easier to do more business, close loans faster and get immediate income rep and warranty relief related to certain borrower employment income. Freddie Mac has teamed up with third-party service provider, LoanBeam®, in leveraging their expertise and powerful optical character recognition (OCR) technology to supply qualifying income for any applicant. Freddie Mac’s broad release of AIM for self-employed on March 6 is the next step in their journey to provide  AIM for self-employed borrowers … and get YOUR edge.

BCG on the mortgage industry's digital transformation: Lenders across the country are reading Boston Consulting Group's first white paper of 2019 on the next wave of digital transformation in mortgage. Join the conversation today. Get the White Paper.  

Sierra Pacific Mortgage is hosting a free webinar on Bank Statement loans for its wholesale partners. Because this product is unique, and can help you achieve your sales goals, they are offering it twice this month. Register now for Tuesday, March 12 at 10:00 am PST or for Thursday, March 28 at 1:00 pm PST.

Capital Markets

Although I am hearing about signs of improvement, everyone is talking about margin compression and the reduction in profits seen by lenders across the nation. Every lender is trying to eke every basis point out of its loan sales, and it is good for LOs, or any originator, to know about “specified pools,” what the current pay ups, or price bumps are, and why investors will pay more for these pools as it ultimately affects pricing on the rate sheet.

First off, how do we define a “specified” pool? Specified Mortgage Backed Securities are pools created with loans that have similar characteristics that are traded at a pay-up to TBA prices, such as pools limiting the size of the largest loan in the pool, pools with high LTVs, pools of loans made to investors, pools of loans from specific geographic locations, and pools with specified LTV bands.Trading these specified pools attempts to take advantage of refinancing inefficiencies by identifying pools or categories of loans that are expected to experience either lower refinancing rates or faster turnover speeds, rewarding lenders with a premium or “pay-up” for segregating and pooling loans with attractive prepayment characteristics separately.

Let’s look at a few examples, one for loan size and one for interest rate. Since one of the most common forms of prepayment in an MBS pool is a borrower’s right to refinance, investors are willing to pay a spread above the TBA price in the hopes that the borrower will not prepay his/her mortgage as interest rates fall. Obviously, when rates move lower, many borrowers will have some degree of refinance incentive. LOs know that there are no perfect predictive measures, as borrowers often make decisions that seem inefficient at face value. For example, a borrower with a low mortgage rate may decide to refinance into a larger loan through cash-out refinancing with a higher rate if they either need the proceeds for personal reasons or fund expenditures. Conversely, borrowers with relatively high rates may not take advantage of refinancing opportunities due to lack of knowledge, limited equity, or poor credit. Or simply, they may decide that the monthly savings on their loans do not offset the upfront costs and aggravation of taking out a new loan. Nevertheless, on to our examples.

In the case of a low loan balance pool, borrowers with the lowest loan sizes have the least refinance incentive. A 30-year fixed loan with a rate of 4.50% would have a principal and interest payment of $431 per month on an $85,000 loan, whereas a $400,000 loan with that same rate and term carries a payment of $2,026 per month. The refinance incentive for the borrower with the larger loan balance is much greater since he/she could save $230 per month if he/she refinanced into loan with a rate of 3.50%, while the borrower with the loan balance of $85,000 would only save $49 per month with a 3.50% rate. Therefore, the borrower with the lower loan balance is generally less likely to refinance given the same movement in rates. Due to that greater incentive to refinance on the larger loan, the pay up would not be as high on the pool of larger loans.

In addition to specified stories, pay ups also vary by coupon. Let’s say FN30 4.0s trade at ~$105-08, (5.25 points of premium). On a simple level absent of market technicals, investors are willing to pay up more for prepayment protection on higher coupons because they pay a greater price above par for the higher coupon. This is because if a loan within a pool refinances, investors who own the pool get their principal on that loan paid back to them at par. If an investor paid $105.125 for a $100,000 investment in a pool, he/she spent that $5,125 for the right to earn the coupon on that pool. So if the loans in the pool paid off, the investor would receive back only the initial principal balance of $100,000 and lose the premium paid. Therefore, on coupons priced above par, investors who purchase specified pools are willing to “pay up” for slower-paying pools in order to protect the premium they paid up front. The higher the coupon, the more premium risk that must be protected, and thus, the higher the pay up value assigned to the pool. Favorable prepayment performance does not necessarily translate into slow prepayment speeds, as slow prepayments serve as a major drag on performance when rates rise significantly and the MBS in question are trading at a discount to par.

A more useful way to consider prepayment performance is based on the overall prepayment profile of either a single security or a cohort by measuring and/or predicting the prepayment speeds of the assets in question in different interest rate environments, through a charting technique called an “S-curve,” which shows prepayments on the vertical axis and “rates” (or, more accurately, refinancing incentives) on the horizontal. Given the impact of prepayments on returns and the above risks discussed in previous reports, the flatter profile is clearly more desirable.  Therefore, investors in low rate environments typically seek loan attributes that mute prepayment speeds, managers seeking enhanced performance in a variety of rate scenarios will try to identify loans that have the flattest possible profile and exhibit relatively fast speeds in the absence of a refinancing incentive.

We saw a major rate rally yesterday, with U.S. Treasury yields dropping across the curve, including the 10-year closing down at 2.64% after the European Central Bank released a dovish statement acknowledging slow growth in the eurozone, lowering GDP growth forecasts for the region from 1.7% to 1.1%. The ECB said that it intends to keep rates at their current levels throughout 2019, three months longer than what was stated in its previous guidance. Additionally, the ECB announced that a new targeted longer-term refinancing operation (TLTRO) will be launched in September, surprising considering the market only expected to hear that the governing council has discussed this measure. Reports from November indicated that the ECB would only resort to launching a new TLTRO in the event of a serious economic shock. Separately in Europe, EU officials are reportedly skeptical of a breakthrough in Brexit negotiations while British Prime Minister Theresa May's cabinet expects that the prime minister's deal will be defeated by about 100 votes next week.

So far bonds have shrugged off the dramatic employment data this morning. The February payrolls report showed that nonfarm payrolls were only up 20k, much lower than expected. The unemployment rate came in at 3.8%, strong. Hourly earnings were +.4%, also stronger than expected. We also saw that housing starts rebounded, +18.6%. That is it for economic releases, though Fed Chair Powell will speak at Stanford University in the evening. After the employment data agency MBS prices have improved a tad and the 10-year is yielding 2.63%.

Employment

Opus Capital Markets Consultants, LLC, leading provider of mortgage due diligence, a wholly-owned subsidiary of Wipro Ltd. (NYSE: WIT), a leading global Information Technology, Consulting and Business Process Services company, is seeking a Director of Business Development. The candidate will be responsible for business development nationally and have the additional advantage of also selling technology and outsourcing tools and services. He/she will have deep diverse experience from more than 15 years in the industry, close relationships within Wall Street firms, originators, servicers, mortgage banks, regulators as well as knowledge and an understanding of the broader industry. “Our industry continues to evolve and digitize, so given current market conditions, assisting our clients with methods to gain efficiencies through new tools while maintaining customer centricity is critical to our collective success.” said Pete Butler, Executive Managing Director/Business Unit Head, Opus CMC. For more info, visit www.opuscmc.com/careers or contact Lea Pedros.

Northern California’s Redwood Mortgage, a privately-owned real estate mortgage company located on the SF Peninsula, seeks an Account Executive for the Orange County / San Diego area. “Redwood Mortgage has been one of California’s leading innovators in private mortgage lending (aka Hard Money lending) and mortgage pools. The company offers the right candidate the opportunity to build a territory and career in our loan sales department. The ideal candidate has solid experience in commercial, multi-family, and residential investment real estate lending, have an active Cal DRE real estate license, and NMLS. The person will learn and understand the commercial bridge loan product and private money loan product, and manage a territory and develop relationships with Bankers, Brokers and Retail borrowers. Benefits include 401K, dental, life insurance, medical, and vision. Interested parties should contact the Director of Sales and Marketing Steve Belleville.

Stearns Wholesale Lending is celebrating its 30th year supporting the mortgage broker. Using a collaborative approach, Stearns Wholesale leadership team is comprised of Nick Pabarcus, Jon McCash, Teresa Reber and Chad Schoep. Not to be outdone, the Sales Regional Vice Presidents are truly best in class. Dennis Waxman, Rich Hoover, Todd Pinkerton-Riegel, Brian Herbert and Delfino Aguilar provide outstanding support and management of the sales team. Stearns Wholesale Lending empowers their associates with client level decisions and creates accrued value with the firm.  To learn more about this inclusive culture watch the short video “More Than an Account Executive.”  Find out more by emailing wholesaleleadership@stearns.com. We Can Help You!