The U.S. Treasury Department has issued new guidance empowering state, local and tribal governments to direct more of the funding appropriated under the American Rescue Plan Act of 2021 toward affordable-housing investments.
The $350 billion American Rescue Plan (ARP) includes a range of aid focused on reducing hardships that individuals, businesses and communities face due to the COVID-19 pandemic. The Treasury Department’s new guidance is focused on the ARP’s flexible funding — called the State and Local Fiscal Recovery Funds (SLFRF) program.
The new rule guidance is designed to expand the supply of affordable housing by making it easier to develop, repair or operate affordable housing.
Some 600 state and local governments have already appropriated nearly $13 billion in SLFRF funds through the first quarter of this year for housing expansion and lowering housing costs, including $4.2 billion for affordable-housing development and preservation. The new guidance from Treasury builds on the existing SLFRF-backed efforts by expanding the scope of eligible affordable-housing projects and enhancing the flexibility of directing funding toward those projects.
“Increasing the nation’s housing supply is essential to lowering shelter costs over the long-term,” said Deputy Secretary of the Treasury Wally Adeyemo. “Treasury continues to strongly encourage state and local governments to dedicate a portion of the historic funding available through President Biden’s American Rescue Plan toward building and rehabilitating affordable housing in their communities, and the actions being announced today will make it even easier for them to do so.”
The new Treasury guidance will increase the flexibility of using SLFRF program to fund long-term affordable-housing project loans, “including those that would be eligible for additional assistance under Treasury’s Low Income Housing Tax Credit,” Treasury’s announcement of the rule changes states.
The new guidance also expands the range of presumptive uses for SLFRF-supported projects — offering state, local and tribal governments greater flexibility to leverage other sources of federal funding for affordable-housing efforts. Previously, the funding rules limited presumptive use of SLFRF funds to two programs sponsored by the Department of Housing and Urban Development.
“In addition, Treasury is updating guidance to clarify that SLFRF funds may be used to finance the development, repair, or operation of any affordable rental housing unit that provides long-term affordability of 20 years or more to households at or below 65% of the local area median income,” the announcement of the new guidance by Treasury states.
Marvin Owens, chief engagement officer atImpact Shares and former NAACP senior director, said the lack of affordable housing affects people across the board — particularly when interest rates are rising as they are now. “But it hits and impacts people of color — Black, Latino and low-income families — even harder because of the broader economic conditions that they have to deal with,” Owens said.
“I think the Treasury Department’s decision to leverage an existing program to be able to begin to address this is something that that I celebrate, because it’s been something that housing advocates have been asking for some time,” he added. “It’s a good example of the federal government listening and understanding and hearing from folks who are on the ground, who are seeing what’s happening and bringing new insight to the conversation.”
Impact Shares is a nonprofit investment firm that manages socially responsible exchange-traded funds (ETFs), including the Impact Shares Affordable Housing MBS ETF (NYSE: OWNS) launched in in 2021. It is an ETF focused on purchasing agency mortgage-backed securities that are secured by “pools of mortgage loans made to minority families, low- and moderate-income families, and/or families that live in persistent poverty areas,” according to Impact Shares’ website.
“When you are able to create more avenues for affordability, you then open the door to access, and access is really the big key,” Owens said. “We can’t close the racial-wealth gap and [expand] homeownership without access. And I think that’s why this program really makes a lot of sense because it will help to close that gap.”
Owens said expanding affordable housing opens the door for more mom-and-pop minority ownership of rental properties, which helps to build intergenerational wealth. It also allows more people of color to build solid credit credentials as renters to bolster their chances of qualifying for homeownership — and to save for down-payment necessary to purchase a home. Today, the gap in homeownership rates between Black and white families, for example, is greater than when it was still legal to not sell a home to someone because of skin color — a discriminatory act made illegal by the 1968 Fair Housing Act.
In 1960, a 27-point gap existed between black and white homeownership. As of the first quarter of this year, according to data from the Federal Reserve Bank of St. Louis, that gap is 29.3 points — with the white homeownership rate at 74%; the African American homeownership rate at 44.7% and the Latino homeownership rate at 49.1%.*
“With housing construction slowing amidst inflationary pressures, economic uncertainty and higher interest rates, both public- and private-sector financing will be necessary to create the supply of affordable rental housing that is needed to help ease costs for families, especially minorities and those with low and moderate incomes,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
Lenders continue to face tightening profit margins as interest rates stay substantially higher than they were last year. In light of this, HousingWire recently caught up with Teraverde Chief Technology & Innovation Officer Rob Peterson to learn more about the key to lender profitability in today’s lending environment.
HousingWire: As businesses of all types begin to rely more heavily on automation, is the mortgage industry doing enough to keep pace?
Rob Peterson: Most segments of the economy have effectively adopted technology to reduce their costs. For example, the Federal Reserve Bank of St. Louis computes a 34.7% increase in total labor productivity in the US from 2003 through 2022, largely through business process improvement and automation.
In the overall process of residential lending, our industry has not used automation. As a CTO, I have to smile when some lending executives mention that the costs of technology in the mortgage industry are high. Nothing could be further from the truth. In fact, our industry spends thirty times more on labor than it spends on technology. No wonder residential mortgage lending has wild swings in profitability!
Over the past ten years, our industry has increased the portion of costs spent on labor. The blue bar is compensation cost since 2012. Note that the compensation cost starts at a low of 64% of total origination cost in 2012 to 69% in 2021.
Interestingly, technology spend as a portion of total origination cost was about 2% in 2012, and its about 2% in 2021. And total origination costs have increased from about $5,100 in 2012 to over $10,500 in the first quarter of 2022. All the while, origination volume has increased steadily and instead of adding a modest increase to a spending budget on technology to effectively manage the volume, hiring personnel became the norm.
And these costs have a direct impact on lender profitability as you’d expect. If a lender were pitching their business on Shark Tank, I can imagine Kevin O’Leary blurting out, “You spend 30 times as much on labor than technology… Stop the madness!”
HW: What challenges are lenders facing when it comes to adopting new technology solutions?
RP: The first thing we need to differentiate is the difference between innovation with technology and adoption of technology. An industry that continues to increase its labor cost structure by failing to innovate is destined for a rough ride. We’ve surrendered lender profitability to waiting for the next refinance boom. We need to be actively innovating to manage costs to the point where the earn rate is always greater than the burn rate.
Jonathan Corr, former CEO of Ellie Mae had a favorite saying: “Our industry solves its issues with “human spackle.” Instead of innovating business processes and adopting technology to automate all things automatable, we hire people to do the same tasks today that they did in 2012.” In fact, the overall dependence on labor goes back to TIL machines, carbon paper in typewriters for VOEs and VODs, and manually typed conditions on commitment letters.
Jonathan stated that, “The typical lender used only a small fraction of the capability of Encompass to truly automate all that is automatable.” The reason is a lack of innovation from lenders in creating new improved business processes that are enhanced with technology. Lenders struggle with change and human spackle is easier than true innovation.
One can see human spackle in the charts above. We doubled volume from 2019 to 2021, but our labor cost actually increased in absolute dollars and as a percentage of total cost to produce a loan. Two-thirds of the cost to produce is labor, so when volume and margin fall, industry profits fall very fast. The result: Many lenders will give back the profits they earned in the boom times through losses over the next years.
Has there been innovation over the last 10 years? Absolutely. However, the majority of that innovation and technology spend as been focused on the front line – in origination. I’m not downplaying the great leaps that the industry has taken in the origination space, especially when coupled with increased regulation, compliance oversight, and the ever-changing landscape of the housing market. But I am more than certain of the significant deficit in the innovation and use of technology for lenders once the loan file comes in from their sales teams to the operational staff. The significance of not only innovating technologies for operations but actually adopting that technology will reap dividends many times over the amount spent on the investment of procurement, implementation and training needed to utilize it.
It doesn’t have to be that way.
The road to automation through innovation is one that starts with the senior executives. The C-suite has to recognize the importance of adoption by providing the catalyst. There is a principle created by U.S. Air Force Colonel John Boyd, that not only revolutionized the way the United States trains its combat pilots but has also been used in other branches of the military Special Forces, FBI, CIA and other foreign service agencies. This principle is “OODA loop:”
Observe, Orient, Decide, Act. In the simplest of terms:
Observe: collect the data;
Orient: analyze the data;
Decide: what should be done based on the analysis;
Act: due what you’ve decided to do.
During the Korean War, Boyd noted the U.S. Sabre pilots were more productive than their opponents piloting the Russian-made MiG. By comparison, the MiG was a better equipped, faster, and more versatile aircraft. What made the difference? Their agility. The Sabre was able to move in response to their adversaries much faster. In terms of the OODA loop, a pilot in the Sabre could observe their opponent, orient themselves in terms of their situational awareness in the fight theatre and then quickly move to decide their next course of action and act upon it. Clearly, those who act first win.
Similarly, lenders that can quickly cycle the process for their OODA loop will surpass their peers – and quickly. We’ve all made the observation: Technology spend and innovation is low. We now have to orient: What are the current technologies available to push innovation in my origination process? Once the technology is found, the decision and action must quickly follow. Those who choose indecisively or not at all have to reset their loop and get back to square one.
HW: Is the cost of investing in innovative tech and automation ultimately worth it in terms of profit and productivity?
RP: Refer the chart below. In 2003, the typical underwriter achieved 115 closed loans per month. In 2021, the typical underwriter achieved 28 closed loans per month. Said another way, underwriter productivity fell by a factor of five.
Teraverde Intelligence (TVI), Teraverde’s proprietary method for evaluating business process and productivity confirms these numbers. Interestingly, within a specific lender, TVI indicates that underwriter productivity varies by a factor of three among the most productive and least productive underwriters, after controlling for loan degree of difficulty.
So, the answer to the question, “Is innovation and automation worth it?” is unequivocally, “yes!” But herein lies the rub. It’s not about spending money to acquire more shiny objects within a lender’s tech stack. You don’t have to have your technology teams build new shiny objects. In a lot of cases, you don’t even need new shiny objects.
The key to productivity is innovating the business process to actually take advantage of the existing tech stack elements, and then driving adoption throughout the organization.
Again, driving adoption starts with C-level executives. It means that the CEO has to push their senior executives to follow the directive. It’s now time to leverage the technology and innovations that are available today. And here’s why it’s important. If an organization innovated to increase underwriter productivity to 100 closed loans a month, it would reduce underwriting cost by 75%. Overall, if operational labor efficiency were increased by 25%, the lender would reduce its cost per loan by over $1,500. That’s $1,500 that drops right to the bottom line. $1,500. Per. Loan. That is more than significant – that’s monumental – that’s $1.8 million per year!
Want to see innovation in action? Spend two hours watching the movie, “The Founder.” It’s the story of Ray Kroc and innovation in the fast-food industry. Watch the movie with an eye on how Kroc and McDonald’s created business process innovation, controlled labor cost, reduced cycle time, drove adoption within each store and improved product quality all while earning outsized profits. Do you see any parallels to the residential lending business?
HW: How is Teraverde helping lenders improve productivity with automation and how can businesses measure tech efficiency?
RP: My business partners have developed a TopTiering by Teraverde. In short, about 30% of a lender’s employees produce 80% of the profit. Identifying the specific 30% is hard. TopTiering is identifying the 30% and then finding opportunities to boost the productivity of the remaining team to the point the lender is profitable in all market scenarios.
Teraverde calls this a resilient business model that is profit (not volume) driven. It’s a different mental model, and it’s not for everyone. It requires a commitment to examine the basic assumptions of the residential lending business and changing the productivity of employees. Productivity is increased by innovating in the business process, focusing on low-hanging fruit, continuous improvement, and a commitment to being profitable in all business conditions. We’re not talking about just your origination team – we’re looking at each individual in the loan life cycle.
It’s amazing to me that the same employee who has completely adopted a smart mobile device, changing their buying, travel and free time behaviors fiercely fights mortgage technology. Why is that? The reason is the employee doesn’t see the advantage of adopting mortgage technology because the technology is not deployed with a simultaneous upgrade of the basic business processes. Technology is deployed as an add-on, not an improvement of their role and responsibility to make their job less manual and more enriching. In the words of one employee, “It’s just another shiny object that doesn’t really help me or my customers.”
To combat the two elements of human nature when implementing technology, wanting the easiest way and having an aversion to change, there has to be an immediate and beneficial lift of the technology.
As an example, an underwriter that is proficient in self-employed borrower income computations may have a backlog of files to review if they are the ”go to” underwriter. Why create the backlog in the first place? Utilize technology that is available to be able to capture the necessary data and perform the calculations. Not just for that underwriter but for all of your underwriters. The significance of the technology utilize is three-fold: increased speed for the calculations (faster individual underwriting times), expanding the workload across the department (not all self-employed have to go to a select few) and increased data integrity and resiliency.
The TopTiering approach requires adopting a business process that uses employees to spend their time on the work that requires true analysis, problem-solving and customer-centric activities. It designs out the variations in process, checkers checking checkers, duplication of work, bad data quality and hindrances that block the automation that could be achieved in a lender’s existing tech stack. Once an employee has a business process and tech stack that makes their lives truly easier, adoption will follow and those employees that don’t adopt – you can release them to your competitors.
It requires an open mind, the adaptability to change and a willingness to say, “Stop the madness!” Also, leveraging industry experts that are solely focused on specialized products and services that quickly enhance their tech stack. The reward is more productive employees, profitability and increased customer satisfaction. It’s hard work, but it provides a significant business advantage in the difficult times that are imminent.
To learn more about how Teraverde is helping lenders improve productivity with automation, visit teraverde.com.
Nonbank mortgage lender Pennymac Financial Services laid off 32 additional employees in July, ahead of its scheduled Aug. 2 second-quarter earnings report.
It marks the California-based company’s third round of layoffs this year, as Pennymac had a workforce reduction of 236 employees in March and cut another 207 staff members in May.
According to a Worker Adjustment and Retraining Notification (WARN) alert submitted to the Employment Development Department (EDD), on July 18 the company cut 30 employees at its Thousand Oaks office, and two more who worked from Westlake Village.
HousingWire sent an email to the company seeking additional information but did not immediately receive a response.
The workforce reduction includes seven data science management employees, four senior analysts and three data scientists. The cuts mainly focus on vice president positions, including areas such as financial risk, secondary market and portfolio investment.
Bumping rights do not exist for these positions and employees are not represented by a union, wrote Stacy Diaz, executive vice president of human resources at Pennymac, in a letter to the EDD filed May 19 and reviewed by HousingWire.
Pennymac is scheduled to report its second-quarter earnings Aug. 2. However, an estimate from Inside Mortgage Finance puts Pennymac as the fourth-largest U.S. mortgage lender by volume in the period, behind Rocket Mortgage, Wells Fargo and United Wholesale Mortgage.
According to the most recent available data, Pennymac reached $59 billion in originations from April to June, down 21.8% year-over-year.
In the previous three months, the company reported to the Securities and Exchange Commission (SEC) total loan acquisitions and originations of $33.3 billion in unpaid balance, down 29% from the previous quarter and 50% from the first quarter of 2021.
In the first quarter, its net income dropped more than 50% from the same period in 2021. However, the company still reported a pretax net income of $234.5 million from January to March, essentially unchanged from the prior quarter.
“The unprecedented increase in mortgage rates resulted in lower overall industry origination volumes and left originators and aggregators who still hold excess operational capacity competing for a much smaller population of loans,” David Spector, chairman and chief executive officer of Pennymac, said in an earnings call.
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Freddie Mac’s net income for the second quarter slipped to $2.5 billion, a 33% year-over-year decline, as it grapples with the mortgage sector’s vulnerability to fluctuations in interest rates.
Freddie Mac’s net income for the year so far has decreased to $6.3 billion compared to $6.4 billion in 2021. But while Freddie Mac’s net income was down from the $3.8 billion it made in the first quarter, the company has still brought in more revenue year-to-date compared to last year. Freddie Mac saw $11.3 billion in the first six months of 2022, compared with last year’s $11.1 billion by this time.
The smaller of the two government-sponsored enterprises now has a net worth of $34.1 billion, up from $31.7 billion the prior quarter and $22.4 billion at the end of June 2021. The U.S. Treasury, which holds a majority stake in Freddie Mac, and the Federal Housing Finance Agency, its conservator, allowed the GSEs to retain earnings starting in 2019.
The Federal Reserve’s efforts to curb inflation have been devastating for mortgage firms who banked on relatively lower or stable mortgage rates. The rate for a thirty-year mortgage was 3.01% at the end of September 2021, and this week reached 5.3% per Freddie Mac’s latest survey.
For GSEs, rapidly declining rates can pose a challenge during the period between aggregating loans from lenders and selling them to investors. Multifamily loans take longer than single-family loans to aggregate and then sell to investors, making that business more vulnerable to spread-widening.
But the GSE’s single-family hedging strategy mitigated, in part, the fallout from rapidly declining rates.
Higher gains on single-family partially offset the $410 million, 82% year-over-year decrease in multifamily investment gains. In the second quarter of 2022, Freddie Mac reported $321 million in investment gains, compared to $636 million in 2021’s second quarter, a 49% decrease.
Freddie Mac bought $138 billion in single-family refinance and purchase mortgages during the quarter, compared to $207 billion the prior quarter. Almost two thirds — 62% — of loans Freddie Mac acquired in the second quarter were purchase mortgages, up from 45% in the first quarter. Total refinances Freddie Mac purchase declined sharply, to $52 billion from $114 billion the prior quarter.
The average loan size for single-family mortgages the GSE acquired in the second quarter of 2022 was $294,000, down from $300,000 in the first quarter.
The guarantee fees Freddie Mac charged rose to 52 basis points from 49 the prior quarter, primarily due to higher credit fees on some high balance and second home loans it started charging in April.
On the earnings call announcing the results, CEO Michael DeVito touted the company’s initiative to encourage landlords to report on-time rental payments. According to DeVito, 77,000 rental households over 800 multifamily properties have participated.
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The U.S. real gross domestic product (GDP) decreased 0.9% annually in the second quarter of 2022, after falling 1.6% in the previous three months, according to the U.S. Bureau of Economic Analysis (BEA). And the slowdown in the U.S. housing market was a major driver of the economic decline.
Two consecutive quarters of negative growth mark a “technical recession.” However, the Biden administration has argued that the American economy is not in a recession, based on a still strong labor market.
According to the BEA, the U.S economy shrunk, driven by decreases in private inventory investment, mainly general merchandise stores and motor vehicle dealers, and declines in residential fixed investment, especially broker’s commissions.
Government also decreased its spending during the second quarter. The federal government sold crude oil from the Strategic Petroleum Reserve, which resulted in declines in consumption expenditures. State and local governments reduced their investments in structures.
The BEA also reported that increased imports reflected growth in services, led by travel. Meanwhile, the U.S. increased its exports of goods (led by industrial supplies and materials) and services (led by travels).
The current dollar GDP reached $24.85 trillion in the second quarter. But the data released Thursday is subject to further revision and a second estimate will be released on August 25.
Despite the decrease in activity, personal income increased 1% in the second quarter, a slowdown from 1.8% in the previous three months, but still strong due to increases in wages and salaries, proprietors’ income, personal income receipts on assets and rental income.
“Consumer spending on goods is growing more slowly, and consumer spending on services is picking up. This is an ongoing normalization as the effects of the pandemic wane,” Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association (MBA), said in a statement.
The housing market, in contraction largely due to the Fed‘s tightening monetary policy, contributed to the decline in the GDP. Residential investment dropped at a 14% rate last quarter, contributing -0.7% to the decrease in GDP.
“Housing tends to lead the rest of the economy, and we expect that pattern will hold this cycle as well,” said Fratantoni.
On Wednesday, the Federal Reserve Open Markets Committee raised the federal funds rate by 75 basis points, to 2.25%-2.50%, noting that spending and production have softened, but job gains have been robust in recent months.
During a news conference following the Fed’s committee meeting, Chairman Jerome Powell said, “I do not think the U.S. is currently in a recession, and the reason is too many areas of the economy are performing”. – He cited the labor market is an example.
“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the U.S. economy, but the ongoing strength in the job market and other signs of growth makes it unlikely that this will be categorized as a recession at this point,” said Fratantoni.
The MBA forecasts 0.6% in the GDP for 2022, with downside risk as the full impact of the Fed’s rapid rate hikes is realized over the next 12 months.
As the Federal Reserve announced yet another 75 basis point interest rate hike Wednesday, loan officers and lending executives — already well aware of the news — were looking ahead, questioning whether mortgage rates will spike or dip in the aftermath.
Even economists are divided on what’s to come: Some believe rates have already peaked; others say they’ll climb until or unless the nation’s economy officially enters a recession.
But they do agree on one thing: Higher interest rates will quell housing demand, which will allow inventory to rebound and, eventually, spur the return of reluctant buyers.
“For consumers, this (rise in interest rates) means that unless the economy shows additional signs of tipping into a recession, mortgage rates are likely to trend higher, which will be a drag on housing demand,” said Danielle Hale, chief economist at Realtor.com
Mortgage rates leading up to June’s Fed rate hike surpassed the 6% level as higher-than-expected inflation data triggered volatility in the market, which led to turbulence in mortgage rates. Since the Fed’s June interest rate increase of 75 bps, mortgage rates in recent weeks crept closer to 5.5%.
Laurence Yun, chief economist for the National Association of Realtors, doesn’t believe raising interest rates by 75 bps will have an effect on mortgage rates. The long-term bond market, off which mortgage rates typically are based, “has mostly priced-in all future actions by the Fed, and may have already peaked with the 10-year Treasury shooting up to 3.5% in mid-June,” Yun added.
“It is possible that the 30-year fixed mortgage rate may settle down at 5.5% to 6% for the remainder of the year,” Yun said. “Still, mortgage rates are significantly higher now compared to one year ago, which is why home sales have been falling.”
An executive with the Mortgage Bankers Association (MBA) also believes mortgage rates have possibly peaked and could hold steady between 5% and 5.5% through the rest of 2022. An improvement from the 6% mark, yet it’s still significantly higher than early 2021’s 3% level.
“There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession,” said Mike Fratantoni, senior vice president and chief economist for the MBA.
If mortgage rates peak, Fratantoni said, “potential buyers who had been scared off by the rate spike, might find their way back to the housing market.”
There were clear consequences from the last spike. Sales of newly built homes fell more than 8% in June from the prior month and were 17% lower than June 2021, according to the U.S. Census and the Department of Housing and Urban Development. Signed contracts to purchase existing homes declined a wider-than-expected 8.6% in June from May and dropped 20% from June 2021, the National Association of Realtors said.
Home prices also grew, although at a slower pace. The national home-price growth slowed down in May, posting a 19.7% annual gain compared with a 20.4% increase in April and a 20.6% jump in March, according to the S&P CoreLogic Case-Shiller national home price index.
Yun sees home sales coming back if mortgage rates stabilize near the current rates and believes home sales will be dependent on jobs and consumer confidence.
“Job creations have been ongoing to date. Therefore, home sales could soon stabilize within a few months and then steadily turn upwards from early next year,” Yun said.
Hale, from Realtor.com, said the declining demand and higher costs belie some bright spots for home shoppers.
“While the options are more expensive and more costly to finance, the growing number (of home sales from a year ago) will help the real estate market rebalance, giving potential buyers a much-needed refresh,” Hale said.
Any increase in availability in inventory deserts would be enough to again attract buyers to the market, according to Marty Green, principal at mortgage law firm Polunsky Beitel Green.
“The question is whether the slowdown is a result of most consumers simply pausing a purchase decision while they see where interest rates and home prices settle, or whether they are having to delay a purchase decision indefinitely because of affordability concerns,” Green said.
Some LOs think the increase in interest rates was already baked into mortgage rates, so they don’t expect extreme volatility like last month.
“There was no major panic (like June),” said Christian Dicker, senior loan officer at Motto Mortgage. “I think it’s already priced in the market.”
Dicker suggested a slowdown in the housing market is good, to some degree, because it means less competition for the buyer — a welcome change after months of increasingly intense bidding wars, during which anything less than an all-cash offer came with inherent uncertainty.
“I’ve had more offers accepted in the last two weeks than the last two months. They (homebuyers) are going out looking at four houses and all of them are available. They’re making one or two offers and they’re getting accepted,” Dicker said.
Affordability remains a challenge, but some buyers are “resigning themselves to higher rates, knowing that they’re going to have to pay more if they want the property,” said Coley Carden, vice president of residential lending at Winchester Co-Operative Bank.
“With interest rates increasing and home price appreciation slowing down, demand for homes will stabilize,” Carden said.
Although he doesn’t see 20 offers on every property as he did during the pandemic, Carden still gets inquiries for houses, and even second homes.
“I think what could curtail homebuyer demand is more of a recession — especially if people get reduced hours and start to get laid off,” he said.
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Recently, I wrote an article stating that the housing market has begun transitioning from an extreme seller’s market to a much more balanced one—at least on a national level. While I do […]
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Angel Oak Cos., through its Angel Oak Mortgage Trust conduit, recently unveiled its latest private-label securitization (PLS) offering — a deal slated to close in early August backed by 788 predominately non-QM loans valued at $362 million.
Counting this latest offering, Angel Oak Cos. — through its affiliated companies, including real estate investment trust, or REIT, Angel Oak Mortgage Inc. (AOMR)— has brought to market a total of five PLS deals backed by mortgage pools valued at $2.1 billion.
For all last year, during a much calmer economic environment, non-QM lender Angel Oak closed a total of eight PLS offerings valued at $3.8 billion.
So, it appears Angel Oak’s liquidity channels are open for business this year, despite what the lender’s asset management arm, Angel Oak Capital Advisors, described in a recently published “2022 Mid-Year Outlook” white paper as a very challenging market for nonagency residential mortgage-backed securities (RMBS).
The question remains, however: Is Angel Oak’s liquidity strategy sufficiently robust to get it through the current economic environment, which is marked by high market volatility and fast-rising interest rates?
“The technical picture for nonagency RMBS since late last year has been a headwind for valuations year to date,” the Angel Oak white paper states. “Not only have nonagency RMBS been under pressure for the same reasons impacting agency MBS, … (e.g., surging rates and surging volatility), but also a robust new issuance calendar, particularly in the non-qualified [non-QM] mortgage subsector, has further weighed on [MBS] valuations.
“… This robust [PLS] pipeline is finally beginning to clear, which should begin to slow issuance meaningfully in the second half of 2022. In the meantime, surging supply met with waning demand from money managers (who are facing record outflows this year) has pushed spreads and yields to the most attractive levels we have seen in the post-crisis period.”
If those spreads and yields are attractive to investors, however, it usually means the margins for RMBS issuers like Angel Oak are squeezed. That helps to explain part of the reason Angel Oak Cos.’ affiliated REIT, AOMR, which reports its financials publicly, recorded a $43.5 million net loss in the first quarter of the year. Contributing to that loss was the “$2 million of securitization costs” associated with AOMR’s February 2022 PLS offering alone, Brandon Filson, AOMR’s chief financial officer, said during the company’s first-quarter (Q1) earnings call on May 12.
AOMR is part of an Angel Oak Cos. family of affiliates that also includes non-QM lenders Angel Oak Home Loans and Angel Oak Mortgage Solutions as well as Angel Oak Capital Advisors.
Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.
Because non-QM, or non-prime, mortgages are deemed riskier than prime loans, in a normal market they generally command an interest rate about 150 basis points above prime agency rates.
In addition, in a rising rate environment, MBS investors expect a premium on securities backed by lower-rate mortgages, compared to offerings involving more recent higher-rate mortgages. That creates execution and liquidity issues for lenders seeking to clear their loan pipelines to pay creditors and originate new loans.
“We have got three securitizations across our Angel Oak family of funds this year [as of May 12],” Namit Sinha, co-chief investment officer at AOMR, said during the company’s Q1 earnings call with analysts. “… And all of these deals have had coupons in the mid- to high 4% [range], which you would consider to be in the current context of the market discount coupons.”
In fact, according to bond-rating documents, the bulk of the loans backing Angel Oak’s five PLS deals to date are seasoned, or aged, between 7.4 and 10.7 months, which means most of the mortgages were originated at the lower rates prevailing last year. Consequently, Angel Oak’s PLS deals so far this year do not involve significant current production, which would command rates closer to where the market is at now.
Keith Lind, CEO of non-QM lender Acra Lending, said Acra’s mortgage rates have been in the “high 7%” range for the past month, “and there’s good liquidity” at that level.
Sinha, during the first-quarter earnings call in mid-May, confirmed that a good share of the whole loans then on Angel Oak’s balance sheet being prepared for securitization “are seasoned between three and six months.”
“Our loan portfolio is beginning to reflect increased coupons [interest rates] in response to the higher-rate environment that accelerated in late Q1,” Filson added during the AOMR earnings call. “The latest rate locks [as of May 12] on loans at our affiliated mortgage companies are over 7% weighted average coupon, which is approximately 250 basis points higher than our March 2022 loan portfolio.
“The loans we purchased in April had a weighted average coupon of 4.9%, and May purchases have so far a weighted average coupon of 5.4%.”
As of early May, just after the first quarter ended, Freddie Mac reported that the 30-year fixed-rate mortgage average was at 5.27%, up from 5.1% a week earlier. As of July 21, Freddie Mac reports the interest rate for a 30-year fixed mortgage averaged 5.54%.
“The lower-coupon loans have become sort of orphans of the market,” Lind explained in a recent interview focused on the overall PLS market, not Angel Oak specifically. “Investors are not jumping to buy bonds backed by [mortgage loans with] coupons so low that the loans [in the collateral pools] can’t even cover the coupon on the bonds and securitization [costs].
“So, I think it’s going to be difficult if people want to securitize that because it doesn’t seem to be received very well by investors in the securitization market.”
Executives with Angel Oak Cos. declined to be interviewed by HousingWire for this story.
Despite having a large volume of lower-rate mortgages in its securitization pipeline and the red ink posted by AOMR in the first quarter, Sinha expressed confidence during the Q1 earnings call in the company’s ability to navigate the current liquidity challenges.
“Generally speaking, the loans we have bought in the first quarter are still loans that were locked in at market rate at that time, which were in the mid- to high 4%. [range],” Sinha said. “… We have had a lot of success getting these deals out, and one of the deals just closed today [May 12] had a very good success in terms of the bond placements, et cetera.
“… The current coupon, that always is the target,” she added. “Now, as rates become volatile and they move around, when those loans eventually are securitized, the terms can vary. And we do hope to capture most of that variation through interest-rate hedges.”
In addition to hedges, Angel Oak also employing a strategy of mixing lower-rate and higher-rate mortgages in its securitization pools.
“We are continuing to buy current coupon loans from Angel Oak or even from outside sellers, mixing them with [lower-rate loans] to create somewhat of a higher coupon pool, and execute securitizations over the next six to 12 months to make the securitization process easier,” Sinha said during the Q1 earnings call in response to an analyst question about the practice.
Angel Oak also has another arrow in its quiver when it comes to surviving the current rate crisis. Filson pointed out in AOMR’s Q1 earnings call that the lender as of March 31 had $90.4 million in cash and cash equivalents on its balance sheet, plus financing facilities lined up with six banks.
“We increased our total committed loan financing capacity by $50 million in Q1,” he said. “Our total undrawn financing capacity was $344 million as of March 31.
“Subsequent to [after Q1] quarter end, we added a new $340 million credit facility, bringing our total current capacity to $1.64 billion. This, combined with our increased cash balance as of the end of the quarter, demonstrates our commitment to a sound liquidity management strategy during this period of rising rates.”
AOMR CEO Robert Williams says despite the challenges of the current rate environment, Angel Oak has a strong balance sheet with “ample liquidity.”
“Our first-quarter results were impacted by unrealized mark-to-market losses on our balance sheet,” Williams added. “And a big part of that was due to significant widening of credit spreads. … [but] our portfolio remains strong. We are confident we can operate in this complex environment, focusing on strong underwriting and sound liquidity.”
Lind stressed that loan quality in the non-QM space is not the issue today. “These aren’t bad loans, just bad prices,” he said.
The Department of Justice and the Consumer Financial Protection Bureau are taking the fight to non-bank mortgage lenders for redlining.
The two agencies revealed their new strategy to rein in mortgage discrimination on Wednesday, with a $24.4 million consent order, stemming from a referral the CFPB made in November 2020. It’s the DOJ’s second-largest mortgage redlining settlement ever, and its first against a non-bank mortgage lender.
The complaint alleged Trident Mortgage Co., a subsidiary of Warren Buffet’s Berkshire Hathaway, discriminated in its marketing outreach, failed to hire minority loan officers, avoided making loans or locating offices in minority areas and sent racist internal emails.
To resolve the DOJ and CFPB’s claims of redlining, Trident will pay $18.4 million toward increasing credit access in Philadelphia communities of color. Trident will also pay a civil penalty of $4 million to the CFPB.
Trident, which ceased doing business in 2021, will have to contract with a lender to open offices in minority areas and conduct outreach. It must also contract with a lender to administer $18.4 million to make “loans on a more affordable basis than otherwise available.” The loans may not exceed the conforming loan limit. The funds can also be used for down payment assistance or grants, but the amount of assistance per borrower can’t exceed $10,000.
Liz Liton, a spokesperson for HomeServices of America, Trident’s parent company and a subsidiary of Berkshire Hathaway, said the company “strongly disagreed” with the agencies’ interpretation of Trident’s practices, and said that the company has “never denied or discouraged access to mortgage loans or other services based on race.”
HomeServices of America was not named a defendant, but it did sign the consent order along with Trident.
In a press conference with federal and state DOJ officials announcing the consent order, CFPB Director Rohit Chopra said that the Bureau will be “increasing resources to state partners to regulate nonbank mortgage lenders.”
“One area where states are starting to make a difference is by passing their own Community Reinvestment Act laws to make sure all mortgage companies, bank or nonbank, serve everyone fairly,” said Chopra.
The federal anti-redlining statute, the Community Reinvestment Act, does not apply to non-bank mortgage lenders. In recent years, states including Illinois, Massachusetts and New York have passed laws that expand CRA-like frameworks to nonbanks and credit unions.
The federal CRA statute is also getting a major overhaul from federal regulators that enforce it. Bank regulators’ first draft, however, would not change the rule to include language specific to race — a critical fault in the eyes of many fair housing advocates.
Referring to non-bank mortgage lenders, Chopra said the CFPB would “look for new ways to penalize them and hold them accountable when they break the law with impunity.”
Chopra also reiterated his concerns about digital redlining, and algorithms that “might disguise bias in the formula.”
The consent order with Trident follows reporting from Reveal, an investigative journalism outlet, that the mortgage company catered to white borrowers. In 2018, Allison Bethel, director of the fair housing clinic at the John Marshall Law School in Chicago, told Reveal that it seemed Trident was “intentionally avoiding doing business with people of color.”
The complaint against Trident alleges that nearly all of its offices were in majority-white areas. The complaint alleged that 64 of Trident’s 68 loan officers in Philadelphia from 2015 to 2019 were white. In its marketing materials, the company allegedly used “white-appearing models and images of all white mortgage loan officers,” which the DOJ and CFPB allege discouraged minority residents from applying for loans.
The mortgage applications Trident ultimately generated in majority-minority areas also lagged its peers, according to the complaint. Out of the 30,701 mortgage applications Trident made from 2015 to 2019 in Philadelphia, 12% came from residents of majority-minority areas, the complaint alleged. According to the complaint, Trident’s peers generated 21.5% of their applications from the same majority-minority neighborhoods.
Marketing and lending disparities, lack of minority loan officers and few offices in majority-minority neighborhoods are standard fare for redlining complaints. But the DOJ and CFPB also found that loan officers sent emails containing racial slurs, including references to properties in minority-majority neighborhoods as being in the “ghetto.”
The company’s senior vice president, responsible for hiring and overseeing loan officers, posed with others in front of a Confederate flag in 2019, the complaint alleged.
The DOJ announced last year with large bank regulator Office of the Comptroller of the Currency, and with the CFPB, a new joint effort to curb redlining.
When it comes to continuing suspensions of policies that roiled the mortgage market in 2021, the ball is now in the U.S. Treasury‘s court.
The Federal Housing Finance Agency and Treasury agreed in September 2021 to end limits imposed by the Trump administration on overall volume and the kind of mortgages lenders’ could sell to Fannie Mae and Freddie Mac. The limits, set in January 2021 by then-FHFA Director Mark Calabria and Treasury Director Steven Mnuchin, had infuriated the mortgage industry, and was one of the first items Sandra Thompson tackled after she became acting director of the agency.
But instead of wiping out those provisions for good, the FHFA and Treasury elected to hit pause. Whether that suspension will continue is something of a mystery for industry stakeholders.
Those suspensions are set to lapse Sept. 14 and six months from whenever the Treasury gives the FHFA notice, whichever is later. A Treasury spokesperson said both conditions have to be satisfied for the suspensions to lift.
A Treasury spokesperson said the Treasury would not need FHFA’s permission to give notice to terminate the suspensions. FHFA said it has not received notice from the Treasury.
A spokesperson for FHFA said that terminating the suspensions would be a “coordinated process,” and conversations about changes to the Preferred Stock Purchase Agreements (PSPAs) are regularly conducted at the “highest levels.”
Formal changes to the document that contains the provisions — the PSPAs — are haggled over by the Treasury and the FHFA.
Negotiating on behalf of the government sponsored enterprises, as their conservator, is FHFA Director Thompson. On the other side of the table is Treasury Sec. Janet Yellen, since her agency holds a majority stake in the GSEs. Both FHFA and Treasury declined to provide information about the specific staff responsible for the agreement which governs most of the mortgage market.
At the very least, statute requires Thompson and Yellen meet four times a year, in quarterly meetings of the Federal Housing Finance Oversight Board, on which Yellen serves and Thompson chairs.
The PSPAs have been formally amended just four times since 2008, the year the Treasury took control of warrants representing a 79.9% stake in each GSE. Those changes each centered around GSE finances. Notably, the 2019 amendment allowed Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively.
But the 2021 amendments to the PSPA took a dramatic turn into policy territory. The agreement between Mnuchin and Calabria mandated that mortgage lenders selling to the GSEs could not exceed a volume cap of 7% of mortgages secured by investment properties. The agreement also limited the amount of unpaid principal balance mortgage lenders could sell to the GSEs for cash to $1.5 billion per calendar year.
The mortgage industry protested the changes, largely through major trade groups such as the Mortgage Bankers Association.
Now, for market participants, the thought that those suspensions may be lifted is troubling. Some mortgage finance lobbyists are also concerned that the Treasury could unilaterally terminate those suspensions.
In a letter to Thompson and Yellen sent last week, the Community Mortgage Lenders of America, which represents community banks, and the Community Home Lenders Association, which represents small and mid-sized mortgage lenders, asked the two agencies to continue the suspensions.
The volume and product limits, the letter stated, “then seemed akin to edicts literally handed down from on high, appearing as if from the clouds.”
After suspending the limits, the FHFA announced new upfront fees on high-balance and second home loans sold to the GSEs. The mortgage industry overall preferred the fees to the hard limits, but CHLA and CMLA argued in their letter that the fees were “excessive compared to their risk.”
“Therefore, we ask the Enterprises to reduce the LLPA fee hikes for low- and moderate-income borrowers and for lower-balance loans,” the letter reads.
And while the negotiations between FHFA and Treasury do not take place in a public forum, CHLA and CMLA said that after a face-to-face meeting with Thompson earlier this year, they had the impression she does not believe the PSPA is the correct forum for program and product changes. Whether Treasury shares that vision is not clear.
“We do understand that the current FHFA leadership has a different view of the scope of future
PSPA changes, and that FHFA is less inclined to use the PSPAs for sudden product and delivery policy changes,” the trade groups wrote.
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Treasury Department expands funding options for affordable housing
The U.S. Treasury Department has issued new guidance empowering state, local and tribal governments to direct more of the funding appropriated under the American Rescue Plan Act of 2021 toward affordable-housing investments.
The $350 billion American Rescue Plan (ARP) includes a range of aid focused on reducing hardships that individuals, businesses and communities face due to the COVID-19 pandemic. The Treasury Department’s new guidance is focused on the ARP’s flexible funding — called the State and Local Fiscal Recovery Funds (SLFRF) program.
The new rule guidance is designed to expand the supply of affordable housing by making it easier to develop, repair or operate affordable housing.
Some 600 state and local governments have already appropriated nearly $13 billion in SLFRF funds through the first quarter of this year for housing expansion and lowering housing costs, including $4.2 billion for affordable-housing development and preservation. The new guidance from Treasury builds on the existing SLFRF-backed efforts by expanding the scope of eligible affordable-housing projects and enhancing the flexibility of directing funding toward those projects.
“Increasing the nation’s housing supply is essential to lowering shelter costs over the long-term,” said Deputy Secretary of the Treasury Wally Adeyemo. “Treasury continues to strongly encourage state and local governments to dedicate a portion of the historic funding available through President Biden’s American Rescue Plan toward building and rehabilitating affordable housing in their communities, and the actions being announced today will make it even easier for them to do so.”
The new Treasury guidance will increase the flexibility of using SLFRF program to fund long-term affordable-housing project loans, “including those that would be eligible for additional assistance under Treasury’s Low Income Housing Tax Credit,” Treasury’s announcement of the rule changes states.
The new guidance also expands the range of presumptive uses for SLFRF-supported projects — offering state, local and tribal governments greater flexibility to leverage other sources of federal funding for affordable-housing efforts. Previously, the funding rules limited presumptive use of SLFRF funds to two programs sponsored by the Department of Housing and Urban Development.
“In addition, Treasury is updating guidance to clarify that SLFRF funds may be used to finance the development, repair, or operation of any affordable rental housing unit that provides long-term affordability of 20 years or more to households at or below 65% of the local area median income,” the announcement of the new guidance by Treasury states.
Marvin Owens, chief engagement officer at Impact Shares and former NAACP senior director, said the lack of affordable housing affects people across the board — particularly when interest rates are rising as they are now. “But it hits and impacts people of color — Black, Latino and low-income families — even harder because of the broader economic conditions that they have to deal with,” Owens said.
“I think the Treasury Department’s decision to leverage an existing program to be able to begin to address this is something that that I celebrate, because it’s been something that housing advocates have been asking for some time,” he added. “It’s a good example of the federal government listening and understanding and hearing from folks who are on the ground, who are seeing what’s happening and bringing new insight to the conversation.”
Impact Shares is a nonprofit investment firm that manages socially responsible exchange-traded funds (ETFs), including the Impact Shares Affordable Housing MBS ETF (NYSE: OWNS) launched in in 2021. It is an ETF focused on purchasing agency mortgage-backed securities that are secured by “pools of mortgage loans made to minority families, low- and moderate-income families, and/or families that live in persistent poverty areas,” according to Impact Shares’ website.
“When you are able to create more avenues for affordability, you then open the door to access, and access is really the big key,” Owens said. “We can’t close the racial-wealth gap and [expand] homeownership without access. And I think that’s why this program really makes a lot of sense because it will help to close that gap.”
Owens said expanding affordable housing opens the door for more mom-and-pop minority ownership of rental properties, which helps to build intergenerational wealth. It also allows more people of color to build solid credit credentials as renters to bolster their chances of qualifying for homeownership — and to save for down-payment necessary to purchase a home. Today, the gap in homeownership rates between Black and white families, for example, is greater than when it was still legal to not sell a home to someone because of skin color — a discriminatory act made illegal by the 1968 Fair Housing Act.
In 1960, a 27-point gap existed between black and white homeownership. As of the first quarter of this year, according to data from the Federal Reserve Bank of St. Louis, that gap is 29.3 points — with the white homeownership rate at 74%; the African American homeownership rate at 44.7% and the Latino homeownership rate at 49.1%.*
“With housing construction slowing amidst inflationary pressures, economic uncertainty and higher interest rates, both public- and private-sector financing will be necessary to create the supply of affordable rental housing that is needed to help ease costs for families, especially minorities and those with low and moderate incomes,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
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More than ever, lender profitability requires maintaining pace with innovation
Lenders continue to face tightening profit margins as interest rates stay substantially higher than they were last year. In light of this, HousingWire recently caught up with Teraverde Chief Technology & Innovation Officer Rob Peterson to learn more about the key to lender profitability in today’s lending environment.
HousingWire: As businesses of all types begin to rely more heavily on automation, is the mortgage industry doing enough to keep pace?
Rob Peterson: Most segments of the economy have effectively adopted technology to reduce their costs. For example, the Federal Reserve Bank of St. Louis computes a 34.7% increase in total labor productivity in the US from 2003 through 2022, largely through business process improvement and automation.
In the overall process of residential lending, our industry has not used automation. As a CTO, I have to smile when some lending executives mention that the costs of technology in the mortgage industry are high. Nothing could be further from the truth. In fact, our industry spends thirty times more on labor than it spends on technology. No wonder residential mortgage lending has wild swings in profitability!
Over the past ten years, our industry has increased the portion of costs spent on labor. The blue bar is compensation cost since 2012. Note that the compensation cost starts at a low of 64% of total origination cost in 2012 to 69% in 2021.
Interestingly, technology spend as a portion of total origination cost was about 2% in 2012, and its about 2% in 2021. And total origination costs have increased from about $5,100 in 2012 to over $10,500 in the first quarter of 2022. All the while, origination volume has increased steadily and instead of adding a modest increase to a spending budget on technology to effectively manage the volume, hiring personnel became the norm.
And these costs have a direct impact on lender profitability as you’d expect. If a lender were pitching their business on Shark Tank, I can imagine Kevin O’Leary blurting out, “You spend 30 times as much on labor than technology… Stop the madness!”
HW: What challenges are lenders facing when it comes to adopting new technology solutions?
RP: The first thing we need to differentiate is the difference between innovation with technology and adoption of technology. An industry that continues to increase its labor cost structure by failing to innovate is destined for a rough ride. We’ve surrendered lender profitability to waiting for the next refinance boom. We need to be actively innovating to manage costs to the point where the earn rate is always greater than the burn rate.
Jonathan Corr, former CEO of Ellie Mae had a favorite saying: “Our industry solves its issues with “human spackle.” Instead of innovating business processes and adopting technology to automate all things automatable, we hire people to do the same tasks today that they did in 2012.” In fact, the overall dependence on labor goes back to TIL machines, carbon paper in typewriters for VOEs and VODs, and manually typed conditions on commitment letters.
Jonathan stated that, “The typical lender used only a small fraction of the capability of Encompass to truly automate all that is automatable.” The reason is a lack of innovation from lenders in creating new improved business processes that are enhanced with technology. Lenders struggle with change and human spackle is easier than true innovation.
One can see human spackle in the charts above. We doubled volume from 2019 to 2021, but our labor cost actually increased in absolute dollars and as a percentage of total cost to produce a loan. Two-thirds of the cost to produce is labor, so when volume and margin fall, industry profits fall very fast. The result: Many lenders will give back the profits they earned in the boom times through losses over the next years.
Has there been innovation over the last 10 years? Absolutely. However, the majority of that innovation and technology spend as been focused on the front line – in origination. I’m not downplaying the great leaps that the industry has taken in the origination space, especially when coupled with increased regulation, compliance oversight, and the ever-changing landscape of the housing market. But I am more than certain of the significant deficit in the innovation and use of technology for lenders once the loan file comes in from their sales teams to the operational staff. The significance of not only innovating technologies for operations but actually adopting that technology will reap dividends many times over the amount spent on the investment of procurement, implementation and training needed to utilize it.
It doesn’t have to be that way.
The road to automation through innovation is one that starts with the senior executives. The C-suite has to recognize the importance of adoption by providing the catalyst. There is a principle created by U.S. Air Force Colonel John Boyd, that not only revolutionized the way the United States trains its combat pilots but has also been used in other branches of the military Special Forces, FBI, CIA and other foreign service agencies. This principle is “OODA loop:”
Observe, Orient, Decide, Act. In the simplest of terms:
Observe: collect the data;
Orient: analyze the data;
Decide: what should be done based on the analysis;
Act: due what you’ve decided to do.
During the Korean War, Boyd noted the U.S. Sabre pilots were more productive than their opponents piloting the Russian-made MiG. By comparison, the MiG was a better equipped, faster, and more versatile aircraft. What made the difference? Their agility. The Sabre was able to move in response to their adversaries much faster. In terms of the OODA loop, a pilot in the Sabre could observe their opponent, orient themselves in terms of their situational awareness in the fight theatre and then quickly move to decide their next course of action and act upon it. Clearly, those who act first win.
Similarly, lenders that can quickly cycle the process for their OODA loop will surpass their peers – and quickly. We’ve all made the observation: Technology spend and innovation is low. We now have to orient: What are the current technologies available to push innovation in my origination process? Once the technology is found, the decision and action must quickly follow. Those who choose indecisively or not at all have to reset their loop and get back to square one.
HW: Is the cost of investing in innovative tech and automation ultimately worth it in terms of profit and productivity?
RP: Refer the chart below. In 2003, the typical underwriter achieved 115 closed loans per month. In 2021, the typical underwriter achieved 28 closed loans per month. Said another way, underwriter productivity fell by a factor of five.
Teraverde Intelligence (TVI), Teraverde’s proprietary method for evaluating business process and productivity confirms these numbers. Interestingly, within a specific lender, TVI indicates that underwriter productivity varies by a factor of three among the most productive and least productive underwriters, after controlling for loan degree of difficulty.
So, the answer to the question, “Is innovation and automation worth it?” is unequivocally, “yes!” But herein lies the rub. It’s not about spending money to acquire more shiny objects within a lender’s tech stack. You don’t have to have your technology teams build new shiny objects. In a lot of cases, you don’t even need new shiny objects.
The key to productivity is innovating the business process to actually take advantage of the existing tech stack elements, and then driving adoption throughout the organization.
Again, driving adoption starts with C-level executives. It means that the CEO has to push their senior executives to follow the directive. It’s now time to leverage the technology and innovations that are available today. And here’s why it’s important. If an organization innovated to increase underwriter productivity to 100 closed loans a month, it would reduce underwriting cost by 75%. Overall, if operational labor efficiency were increased by 25%, the lender would reduce its cost per loan by over $1,500. That’s $1,500 that drops right to the bottom line. $1,500. Per. Loan. That is more than significant – that’s monumental – that’s $1.8 million per year!
Want to see innovation in action? Spend two hours watching the movie, “The Founder.” It’s the story of Ray Kroc and innovation in the fast-food industry. Watch the movie with an eye on how Kroc and McDonald’s created business process innovation, controlled labor cost, reduced cycle time, drove adoption within each store and improved product quality all while earning outsized profits. Do you see any parallels to the residential lending business?
HW: How is Teraverde helping lenders improve productivity with automation and how can businesses measure tech efficiency?
RP: My business partners have developed a TopTiering by Teraverde. In short, about 30% of a lender’s employees produce 80% of the profit. Identifying the specific 30% is hard. TopTiering is identifying the 30% and then finding opportunities to boost the productivity of the remaining team to the point the lender is profitable in all market scenarios.
Teraverde calls this a resilient business model that is profit (not volume) driven. It’s a different mental model, and it’s not for everyone. It requires a commitment to examine the basic assumptions of the residential lending business and changing the productivity of employees. Productivity is increased by innovating in the business process, focusing on low-hanging fruit, continuous improvement, and a commitment to being profitable in all business conditions. We’re not talking about just your origination team – we’re looking at each individual in the loan life cycle.
It’s amazing to me that the same employee who has completely adopted a smart mobile device, changing their buying, travel and free time behaviors fiercely fights mortgage technology. Why is that? The reason is the employee doesn’t see the advantage of adopting mortgage technology because the technology is not deployed with a simultaneous upgrade of the basic business processes. Technology is deployed as an add-on, not an improvement of their role and responsibility to make their job less manual and more enriching. In the words of one employee, “It’s just another shiny object that doesn’t really help me or my customers.”
To combat the two elements of human nature when implementing technology, wanting the easiest way and having an aversion to change, there has to be an immediate and beneficial lift of the technology.
As an example, an underwriter that is proficient in self-employed borrower income computations may have a backlog of files to review if they are the ”go to” underwriter. Why create the backlog in the first place? Utilize technology that is available to be able to capture the necessary data and perform the calculations. Not just for that underwriter but for all of your underwriters. The significance of the technology utilize is three-fold: increased speed for the calculations (faster individual underwriting times), expanding the workload across the department (not all self-employed have to go to a select few) and increased data integrity and resiliency.
The TopTiering approach requires adopting a business process that uses employees to spend their time on the work that requires true analysis, problem-solving and customer-centric activities. It designs out the variations in process, checkers checking checkers, duplication of work, bad data quality and hindrances that block the automation that could be achieved in a lender’s existing tech stack. Once an employee has a business process and tech stack that makes their lives truly easier, adoption will follow and those employees that don’t adopt – you can release them to your competitors.
It requires an open mind, the adaptability to change and a willingness to say, “Stop the madness!” Also, leveraging industry experts that are solely focused on specialized products and services that quickly enhance their tech stack. The reward is more productive employees, profitability and increased customer satisfaction. It’s hard work, but it provides a significant business advantage in the difficult times that are imminent.
To learn more about how Teraverde is helping lenders improve productivity with automation, visit teraverde.com.
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Pennymac Financial cuts another 32 jobs in California
Nonbank mortgage lender Pennymac Financial Services laid off 32 additional employees in July, ahead of its scheduled Aug. 2 second-quarter earnings report.
It marks the California-based company’s third round of layoffs this year, as Pennymac had a workforce reduction of 236 employees in March and cut another 207 staff members in May.
According to a Worker Adjustment and Retraining Notification (WARN) alert submitted to the Employment Development Department (EDD), on July 18 the company cut 30 employees at its Thousand Oaks office, and two more who worked from Westlake Village.
HousingWire sent an email to the company seeking additional information but did not immediately receive a response.
The workforce reduction includes seven data science management employees, four senior analysts and three data scientists. The cuts mainly focus on vice president positions, including areas such as financial risk, secondary market and portfolio investment.
Bumping rights do not exist for these positions and employees are not represented by a union, wrote Stacy Diaz, executive vice president of human resources at Pennymac, in a letter to the EDD filed May 19 and reviewed by HousingWire.
Pennymac is scheduled to report its second-quarter earnings Aug. 2. However, an estimate from Inside Mortgage Finance puts Pennymac as the fourth-largest U.S. mortgage lender by volume in the period, behind Rocket Mortgage, Wells Fargo and United Wholesale Mortgage.
According to the most recent available data, Pennymac reached $59 billion in originations from April to June, down 21.8% year-over-year.
In the previous three months, the company reported to the Securities and Exchange Commission (SEC) total loan acquisitions and originations of $33.3 billion in unpaid balance, down 29% from the previous quarter and 50% from the first quarter of 2021.
In the first quarter, its net income dropped more than 50% from the same period in 2021. However, the company still reported a pretax net income of $234.5 million from January to March, essentially unchanged from the prior quarter.
“The unprecedented increase in mortgage rates resulted in lower overall industry origination volumes and left originators and aggregators who still hold excess operational capacity competing for a much smaller population of loans,” David Spector, chairman and chief executive officer of Pennymac, said in an earnings call.
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Freddie Mac reports net income of $2.5B in Q2 2022
Freddie Mac’s net income for the second quarter slipped to $2.5 billion, a 33% year-over-year decline, as it grapples with the mortgage sector’s vulnerability to fluctuations in interest rates.
Freddie Mac’s net income for the year so far has decreased to $6.3 billion compared to $6.4 billion in 2021. But while Freddie Mac’s net income was down from the $3.8 billion it made in the first quarter, the company has still brought in more revenue year-to-date compared to last year. Freddie Mac saw $11.3 billion in the first six months of 2022, compared with last year’s $11.1 billion by this time.
The smaller of the two government-sponsored enterprises now has a net worth of $34.1 billion, up from $31.7 billion the prior quarter and $22.4 billion at the end of June 2021. The U.S. Treasury, which holds a majority stake in Freddie Mac, and the Federal Housing Finance Agency, its conservator, allowed the GSEs to retain earnings starting in 2019.
The Federal Reserve’s efforts to curb inflation have been devastating for mortgage firms who banked on relatively lower or stable mortgage rates. The rate for a thirty-year mortgage was 3.01% at the end of September 2021, and this week reached 5.3% per Freddie Mac’s latest survey.
For GSEs, rapidly declining rates can pose a challenge during the period between aggregating loans from lenders and selling them to investors. Multifamily loans take longer than single-family loans to aggregate and then sell to investors, making that business more vulnerable to spread-widening.
But the GSE’s single-family hedging strategy mitigated, in part, the fallout from rapidly declining rates.
Higher gains on single-family partially offset the $410 million, 82% year-over-year decrease in multifamily investment gains. In the second quarter of 2022, Freddie Mac reported $321 million in investment gains, compared to $636 million in 2021’s second quarter, a 49% decrease.
Freddie Mac bought $138 billion in single-family refinance and purchase mortgages during the quarter, compared to $207 billion the prior quarter. Almost two thirds — 62% — of loans Freddie Mac acquired in the second quarter were purchase mortgages, up from 45% in the first quarter. Total refinances Freddie Mac purchase declined sharply, to $52 billion from $114 billion the prior quarter.
The average loan size for single-family mortgages the GSE acquired in the second quarter of 2022 was $294,000, down from $300,000 in the first quarter.
The guarantee fees Freddie Mac charged rose to 52 basis points from 49 the prior quarter, primarily due to higher credit fees on some high balance and second home loans it started charging in April.
On the earnings call announcing the results, CEO Michael DeVito touted the company’s initiative to encourage landlords to report on-time rental payments. According to DeVito, 77,000 rental households over 800 multifamily properties have participated.
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US economy contracts in Q2, enters ‘technical recession’
The U.S. real gross domestic product (GDP) decreased 0.9% annually in the second quarter of 2022, after falling 1.6% in the previous three months, according to the U.S. Bureau of Economic Analysis (BEA). And the slowdown in the U.S. housing market was a major driver of the economic decline.
Two consecutive quarters of negative growth mark a “technical recession.” However, the Biden administration has argued that the American economy is not in a recession, based on a still strong labor market.
According to the BEA, the U.S economy shrunk, driven by decreases in private inventory investment, mainly general merchandise stores and motor vehicle dealers, and declines in residential fixed investment, especially broker’s commissions.
Government also decreased its spending during the second quarter. The federal government sold crude oil from the Strategic Petroleum Reserve, which resulted in declines in consumption expenditures. State and local governments reduced their investments in structures.
The BEA also reported that increased imports reflected growth in services, led by travel. Meanwhile, the U.S. increased its exports of goods (led by industrial supplies and materials) and services (led by travels).
The current dollar GDP reached $24.85 trillion in the second quarter. But the data released Thursday is subject to further revision and a second estimate will be released on August 25.
Despite the decrease in activity, personal income increased 1% in the second quarter, a slowdown from 1.8% in the previous three months, but still strong due to increases in wages and salaries, proprietors’ income, personal income receipts on assets and rental income.
“Consumer spending on goods is growing more slowly, and consumer spending on services is picking up. This is an ongoing normalization as the effects of the pandemic wane,” Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association (MBA), said in a statement.
The housing market, in contraction largely due to the Fed‘s tightening monetary policy, contributed to the decline in the GDP. Residential investment dropped at a 14% rate last quarter, contributing -0.7% to the decrease in GDP.
“Housing tends to lead the rest of the economy, and we expect that pattern will hold this cycle as well,” said Fratantoni.
On Wednesday, the Federal Reserve Open Markets Committee raised the federal funds rate by 75 basis points, to 2.25%-2.50%, noting that spending and production have softened, but job gains have been robust in recent months.
During a news conference following the Fed’s committee meeting, Chairman Jerome Powell said, “I do not think the U.S. is currently in a recession, and the reason is too many areas of the economy are performing”. – He cited the labor market is an example.
“The headline of a second straight decline in real GDP highlights the abrupt change in the path of the U.S. economy, but the ongoing strength in the job market and other signs of growth makes it unlikely that this will be categorized as a recession at this point,” said Fratantoni.
The MBA forecasts 0.6% in the GDP for 2022, with downside risk as the full impact of the Fed’s rapid rate hikes is realized over the next 12 months.
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Fed’s interest rate hike to create less competition in the housing market 
As the Federal Reserve announced yet another 75 basis point interest rate hike Wednesday, loan officers and lending executives — already well aware of the news — were looking ahead, questioning whether mortgage rates will spike or dip in the aftermath.
Even economists are divided on what’s to come: Some believe rates have already peaked; others say they’ll climb until or unless the nation’s economy officially enters a recession.
But they do agree on one thing: Higher interest rates will quell housing demand, which will allow inventory to rebound and, eventually, spur the return of reluctant buyers.
“For consumers, this (rise in interest rates) means that unless the economy shows additional signs of tipping into a recession, mortgage rates are likely to trend higher, which will be a drag on housing demand,” said Danielle Hale, chief economist at Realtor.com
Mortgage rates leading up to June’s Fed rate hike surpassed the 6% level as higher-than-expected inflation data triggered volatility in the market, which led to turbulence in mortgage rates. Since the Fed’s June interest rate increase of 75 bps, mortgage rates in recent weeks crept closer to 5.5%.
Laurence Yun, chief economist for the National Association of Realtors, doesn’t believe raising interest rates by 75 bps will have an effect on mortgage rates. The long-term bond market, off which mortgage rates typically are based, “has mostly priced-in all future actions by the Fed, and may have already peaked with the 10-year Treasury shooting up to 3.5% in mid-June,” Yun added.
“It is possible that the 30-year fixed mortgage rate may settle down at 5.5% to 6% for the remainder of the year,” Yun said. “Still, mortgage rates are significantly higher now compared to one year ago, which is why home sales have been falling.”
An executive with the Mortgage Bankers Association (MBA) also believes mortgage rates have possibly peaked and could hold steady between 5% and 5.5% through the rest of 2022. An improvement from the 6% mark, yet it’s still significantly higher than early 2021’s 3% level.
“There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession,” said Mike Fratantoni, senior vice president and chief economist for the MBA.
If mortgage rates peak, Fratantoni said, “potential buyers who had been scared off by the rate spike, might find their way back to the housing market.”
There were clear consequences from the last spike. Sales of newly built homes fell more than 8% in June from the prior month and were 17% lower than June 2021, according to the U.S. Census and the Department of Housing and Urban Development. Signed contracts to purchase existing homes declined a wider-than-expected 8.6% in June from May and dropped 20% from June 2021, the National Association of Realtors said.
Home prices also grew, although at a slower pace. The national home-price growth slowed down in May, posting a 19.7% annual gain compared with a 20.4% increase in April and a 20.6% jump in March, according to the S&P CoreLogic Case-Shiller national home price index.
Yun sees home sales coming back if mortgage rates stabilize near the current rates and believes home sales will be dependent on jobs and consumer confidence.
“Job creations have been ongoing to date. Therefore, home sales could soon stabilize within a few months and then steadily turn upwards from early next year,” Yun said.
Hale, from Realtor.com, said the declining demand and higher costs belie some bright spots for home shoppers.
“While the options are more expensive and more costly to finance, the growing number (of home sales from a year ago) will help the real estate market rebalance, giving potential buyers a much-needed refresh,” Hale said.
Any increase in availability in inventory deserts would be enough to again attract buyers to the market, according to Marty Green, principal at mortgage law firm Polunsky Beitel Green.
“The question is whether the slowdown is a result of most consumers simply pausing a purchase decision while they see where interest rates and home prices settle, or whether they are having to delay a purchase decision indefinitely because of affordability concerns,” Green said.
Some LOs think the increase in interest rates was already baked into mortgage rates, so they don’t expect extreme volatility like last month.
“There was no major panic (like June),” said Christian Dicker, senior loan officer at Motto Mortgage. “I think it’s already priced in the market.”
Dicker suggested a slowdown in the housing market is good, to some degree, because it means less competition for the buyer — a welcome change after months of increasingly intense bidding wars, during which anything less than an all-cash offer came with inherent uncertainty.
“I’ve had more offers accepted in the last two weeks than the last two months. They (homebuyers) are going out looking at four houses and all of them are available. They’re making one or two offers and they’re getting accepted,” Dicker said.
Affordability remains a challenge, but some buyers are “resigning themselves to higher rates, knowing that they’re going to have to pay more if they want the property,” said Coley Carden, vice president of residential lending at Winchester Co-Operative Bank.
“With interest rates increasing and home price appreciation slowing down, demand for homes will stabilize,” Carden said.
Although he doesn’t see 20 offers on every property as he did during the pandemic, Carden still gets inquiries for houses, and even second homes.
“I think what could curtail homebuyer demand is more of a recession — especially if people get reduced hours and start to get laid off,” he said.
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June 2022 Housing Market Statistics: Interactive Map of Every ZIP Code in the U.S.
Recently, I wrote an article stating that the housing market has begun transitioning from an extreme seller’s market to a much more balanced one—at least on a national level. While I do […]
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Angel Oak confronts the challenges of market volatility, fast-rising rates
Angel Oak Cos., through its Angel Oak Mortgage Trust conduit, recently unveiled its latest private-label securitization (PLS) offering — a deal slated to close in early August backed by 788 predominately non-QM loans valued at $362 million.
Counting this latest offering, Angel Oak Cos. — through its affiliated companies, including real estate investment trust, or REIT, Angel Oak Mortgage Inc. (AOMR)— has brought to market a total of five PLS deals backed by mortgage pools valued at $2.1 billion.
For all last year, during a much calmer economic environment, non-QM lender Angel Oak closed a total of eight PLS offerings valued at $3.8 billion.
So, it appears Angel Oak’s liquidity channels are open for business this year, despite what the lender’s asset management arm, Angel Oak Capital Advisors, described in a recently published “2022 Mid-Year Outlook” white paper as a very challenging market for nonagency residential mortgage-backed securities (RMBS).
The question remains, however: Is Angel Oak’s liquidity strategy sufficiently robust to get it through the current economic environment, which is marked by high market volatility and fast-rising interest rates?
“The technical picture for nonagency RMBS since late last year has been a headwind for valuations year to date,” the Angel Oak white paper states. “Not only have nonagency RMBS been under pressure for the same reasons impacting agency MBS, … (e.g., surging rates and surging volatility), but also a robust new issuance calendar, particularly in the non-qualified [non-QM] mortgage subsector, has further weighed on [MBS] valuations.
“… This robust [PLS] pipeline is finally beginning to clear, which should begin to slow issuance meaningfully in the second half of 2022. In the meantime, surging supply met with waning demand from money managers (who are facing record outflows this year) has pushed spreads and yields to the most attractive levels we have seen in the post-crisis period.”
If those spreads and yields are attractive to investors, however, it usually means the margins for RMBS issuers like Angel Oak are squeezed. That helps to explain part of the reason Angel Oak Cos.’ affiliated REIT, AOMR, which reports its financials publicly, recorded a $43.5 million net loss in the first quarter of the year. Contributing to that loss was the “$2 million of securitization costs” associated with AOMR’s February 2022 PLS offering alone, Brandon Filson, AOMR’s chief financial officer, said during the company’s first-quarter (Q1) earnings call on May 12.
AOMR is part of an Angel Oak Cos. family of affiliates that also includes non-QM lenders Angel Oak Home Loans and Angel Oak Mortgage Solutions as well as Angel Oak Capital Advisors.
Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self-employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.
Because non-QM, or non-prime, mortgages are deemed riskier than prime loans, in a normal market they generally command an interest rate about 150 basis points above prime agency rates.
In addition, in a rising rate environment, MBS investors expect a premium on securities backed by lower-rate mortgages, compared to offerings involving more recent higher-rate mortgages. That creates execution and liquidity issues for lenders seeking to clear their loan pipelines to pay creditors and originate new loans.
“We have got three securitizations across our Angel Oak family of funds this year [as of May 12],” Namit Sinha, co-chief investment officer at AOMR, said during the company’s Q1 earnings call with analysts. “… And all of these deals have had coupons in the mid- to high 4% [range], which you would consider to be in the current context of the market discount coupons.”
In fact, according to bond-rating documents, the bulk of the loans backing Angel Oak’s five PLS deals to date are seasoned, or aged, between 7.4 and 10.7 months, which means most of the mortgages were originated at the lower rates prevailing last year. Consequently, Angel Oak’s PLS deals so far this year do not involve significant current production, which would command rates closer to where the market is at now.
Keith Lind, CEO of non-QM lender Acra Lending, said Acra’s mortgage rates have been in the “high 7%” range for the past month, “and there’s good liquidity” at that level.
Sinha, during the first-quarter earnings call in mid-May, confirmed that a good share of the whole loans then on Angel Oak’s balance sheet being prepared for securitization “are seasoned between three and six months.”
“Our loan portfolio is beginning to reflect increased coupons [interest rates] in response to the higher-rate environment that accelerated in late Q1,” Filson added during the AOMR earnings call. “The latest rate locks [as of May 12] on loans at our affiliated mortgage companies are over 7% weighted average coupon, which is approximately 250 basis points higher than our March 2022 loan portfolio.
“The loans we purchased in April had a weighted average coupon of 4.9%, and May purchases have so far a weighted average coupon of 5.4%.”
As of early May, just after the first quarter ended, Freddie Mac reported that the 30-year fixed-rate mortgage average was at 5.27%, up from 5.1% a week earlier. As of July 21, Freddie Mac reports the interest rate for a 30-year fixed mortgage averaged 5.54%.
“The lower-coupon loans have become sort of orphans of the market,” Lind explained in a recent interview focused on the overall PLS market, not Angel Oak specifically. “Investors are not jumping to buy bonds backed by [mortgage loans with] coupons so low that the loans [in the collateral pools] can’t even cover the coupon on the bonds and securitization [costs].
“So, I think it’s going to be difficult if people want to securitize that because it doesn’t seem to be received very well by investors in the securitization market.”
Executives with Angel Oak Cos. declined to be interviewed by HousingWire for this story.
Despite having a large volume of lower-rate mortgages in its securitization pipeline and the red ink posted by AOMR in the first quarter, Sinha expressed confidence during the Q1 earnings call in the company’s ability to navigate the current liquidity challenges.
“Generally speaking, the loans we have bought in the first quarter are still loans that were locked in at market rate at that time, which were in the mid- to high 4%. [range],” Sinha said. “… We have had a lot of success getting these deals out, and one of the deals just closed today [May 12] had a very good success in terms of the bond placements, et cetera.
“… The current coupon, that always is the target,” she added. “Now, as rates become volatile and they move around, when those loans eventually are securitized, the terms can vary. And we do hope to capture most of that variation through interest-rate hedges.”
In addition to hedges, Angel Oak also employing a strategy of mixing lower-rate and higher-rate mortgages in its securitization pools.
“We are continuing to buy current coupon loans from Angel Oak or even from outside sellers, mixing them with [lower-rate loans] to create somewhat of a higher coupon pool, and execute securitizations over the next six to 12 months to make the securitization process easier,” Sinha said during the Q1 earnings call in response to an analyst question about the practice.
Angel Oak also has another arrow in its quiver when it comes to surviving the current rate crisis. Filson pointed out in AOMR’s Q1 earnings call that the lender as of March 31 had $90.4 million in cash and cash equivalents on its balance sheet, plus financing facilities lined up with six banks.
“We increased our total committed loan financing capacity by $50 million in Q1,” he said. “Our total undrawn financing capacity was $344 million as of March 31.
“Subsequent to [after Q1] quarter end, we added a new $340 million credit facility, bringing our total current capacity to $1.64 billion. This, combined with our increased cash balance as of the end of the quarter, demonstrates our commitment to a sound liquidity management strategy during this period of rising rates.”
AOMR CEO Robert Williams says despite the challenges of the current rate environment, Angel Oak has a strong balance sheet with “ample liquidity.”
“Our first-quarter results were impacted by unrealized mark-to-market losses on our balance sheet,” Williams added. “And a big part of that was due to significant widening of credit spreads. … [but] our portfolio remains strong. We are confident we can operate in this complex environment, focusing on strong underwriting and sound liquidity.”
Lind stressed that loan quality in the non-QM space is not the issue today. “These aren’t bad loans, just bad prices,” he said.
AOMR is scheduled to released second-quarter financial results on August 9.
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DOJ, CFPB announce $24M redlining settlement with Trident Mortgage
The Department of Justice and the Consumer Financial Protection Bureau are taking the fight to non-bank mortgage lenders for redlining.
The two agencies revealed their new strategy to rein in mortgage discrimination on Wednesday, with a $24.4 million consent order, stemming from a referral the CFPB made in November 2020. It’s the DOJ’s second-largest mortgage redlining settlement ever, and its first against a non-bank mortgage lender.
The complaint alleged Trident Mortgage Co., a subsidiary of Warren Buffet’s Berkshire Hathaway, discriminated in its marketing outreach, failed to hire minority loan officers, avoided making loans or locating offices in minority areas and sent racist internal emails.
To resolve the DOJ and CFPB’s claims of redlining, Trident will pay $18.4 million toward increasing credit access in Philadelphia communities of color. Trident will also pay a civil penalty of $4 million to the CFPB.
Trident, which ceased doing business in 2021, will have to contract with a lender to open offices in minority areas and conduct outreach. It must also contract with a lender to administer $18.4 million to make “loans on a more affordable basis than otherwise available.” The loans may not exceed the conforming loan limit. The funds can also be used for down payment assistance or grants, but the amount of assistance per borrower can’t exceed $10,000.
Liz Liton, a spokesperson for HomeServices of America, Trident’s parent company and a subsidiary of Berkshire Hathaway, said the company “strongly disagreed” with the agencies’ interpretation of Trident’s practices, and said that the company has “never denied or discouraged access to mortgage loans or other services based on race.”
HomeServices of America was not named a defendant, but it did sign the consent order along with Trident.
In a press conference with federal and state DOJ officials announcing the consent order, CFPB Director Rohit Chopra said that the Bureau will be “increasing resources to state partners to regulate nonbank mortgage lenders.”
“One area where states are starting to make a difference is by passing their own Community Reinvestment Act laws to make sure all mortgage companies, bank or nonbank, serve everyone fairly,” said Chopra.
The federal anti-redlining statute, the Community Reinvestment Act, does not apply to non-bank mortgage lenders. In recent years, states including Illinois, Massachusetts and New York have passed laws that expand CRA-like frameworks to nonbanks and credit unions.
The federal CRA statute is also getting a major overhaul from federal regulators that enforce it. Bank regulators’ first draft, however, would not change the rule to include language specific to race — a critical fault in the eyes of many fair housing advocates.
Referring to non-bank mortgage lenders, Chopra said the CFPB would “look for new ways to penalize them and hold them accountable when they break the law with impunity.”
Chopra also reiterated his concerns about digital redlining, and algorithms that “might disguise bias in the formula.”
The consent order with Trident follows reporting from Reveal, an investigative journalism outlet, that the mortgage company catered to white borrowers. In 2018, Allison Bethel, director of the fair housing clinic at the John Marshall Law School in Chicago, told Reveal that it seemed Trident was “intentionally avoiding doing business with people of color.”
The complaint against Trident alleges that nearly all of its offices were in majority-white areas. The complaint alleged that 64 of Trident’s 68 loan officers in Philadelphia from 2015 to 2019 were white. In its marketing materials, the company allegedly used “white-appearing models and images of all white mortgage loan officers,” which the DOJ and CFPB allege discouraged minority residents from applying for loans.
The mortgage applications Trident ultimately generated in majority-minority areas also lagged its peers, according to the complaint. Out of the 30,701 mortgage applications Trident made from 2015 to 2019 in Philadelphia, 12% came from residents of majority-minority areas, the complaint alleged. According to the complaint, Trident’s peers generated 21.5% of their applications from the same majority-minority neighborhoods.
Marketing and lending disparities, lack of minority loan officers and few offices in majority-minority neighborhoods are standard fare for redlining complaints. But the DOJ and CFPB also found that loan officers sent emails containing racial slurs, including references to properties in minority-majority neighborhoods as being in the “ghetto.”
The company’s senior vice president, responsible for hiring and overseeing loan officers, posed with others in front of a Confederate flag in 2019, the complaint alleged.
The DOJ announced last year with large bank regulator Office of the Comptroller of the Currency, and with the CFPB, a new joint effort to curb redlining.
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Treasury holds the cards on paused investor property and cash window caps
When it comes to continuing suspensions of policies that roiled the mortgage market in 2021, the ball is now in the U.S. Treasury‘s court.
The Federal Housing Finance Agency and Treasury agreed in September 2021 to end limits imposed by the Trump administration on overall volume and the kind of mortgages lenders’ could sell to Fannie Mae and Freddie Mac. The limits, set in January 2021 by then-FHFA Director Mark Calabria and Treasury Director Steven Mnuchin, had infuriated the mortgage industry, and was one of the first items Sandra Thompson tackled after she became acting director of the agency.
But instead of wiping out those provisions for good, the FHFA and Treasury elected to hit pause. Whether that suspension will continue is something of a mystery for industry stakeholders.
Those suspensions are set to lapse Sept. 14 and six months from whenever the Treasury gives the FHFA notice, whichever is later. A Treasury spokesperson said both conditions have to be satisfied for the suspensions to lift.
A Treasury spokesperson said the Treasury would not need FHFA’s permission to give notice to terminate the suspensions. FHFA said it has not received notice from the Treasury.
A spokesperson for FHFA said that terminating the suspensions would be a “coordinated process,” and conversations about changes to the Preferred Stock Purchase Agreements (PSPAs) are regularly conducted at the “highest levels.”
Formal changes to the document that contains the provisions — the PSPAs — are haggled over by the Treasury and the FHFA.
Negotiating on behalf of the government sponsored enterprises, as their conservator, is FHFA Director Thompson. On the other side of the table is Treasury Sec. Janet Yellen, since her agency holds a majority stake in the GSEs. Both FHFA and Treasury declined to provide information about the specific staff responsible for the agreement which governs most of the mortgage market.
At the very least, statute requires Thompson and Yellen meet four times a year, in quarterly meetings of the Federal Housing Finance Oversight Board, on which Yellen serves and Thompson chairs.
The PSPAs have been formally amended just four times since 2008, the year the Treasury took control of warrants representing a 79.9% stake in each GSE. Those changes each centered around GSE finances. Notably, the 2019 amendment allowed Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively.
But the 2021 amendments to the PSPA took a dramatic turn into policy territory. The agreement between Mnuchin and Calabria mandated that mortgage lenders selling to the GSEs could not exceed a volume cap of 7% of mortgages secured by investment properties. The agreement also limited the amount of unpaid principal balance mortgage lenders could sell to the GSEs for cash to $1.5 billion per calendar year.
The mortgage industry protested the changes, largely through major trade groups such as the Mortgage Bankers Association.
Now, for market participants, the thought that those suspensions may be lifted is troubling. Some mortgage finance lobbyists are also concerned that the Treasury could unilaterally terminate those suspensions.
In a letter to Thompson and Yellen sent last week, the Community Mortgage Lenders of America, which represents community banks, and the Community Home Lenders Association, which represents small and mid-sized mortgage lenders, asked the two agencies to continue the suspensions.
The volume and product limits, the letter stated, “then seemed akin to edicts literally handed down from on high, appearing as if from the clouds.”
After suspending the limits, the FHFA announced new upfront fees on high-balance and second home loans sold to the GSEs. The mortgage industry overall preferred the fees to the hard limits, but CHLA and CMLA argued in their letter that the fees were “excessive compared to their risk.”
“Therefore, we ask the Enterprises to reduce the LLPA fee hikes for low- and moderate-income borrowers and for lower-balance loans,” the letter reads.
And while the negotiations between FHFA and Treasury do not take place in a public forum, CHLA and CMLA said that after a face-to-face meeting with Thompson earlier this year, they had the impression she does not believe the PSPA is the correct forum for program and product changes. Whether Treasury shares that vision is not clear.
“We do understand that the current FHFA leadership has a different view of the scope of future
PSPA changes, and that FHFA is less inclined to use the PSPAs for sudden product and delivery policy changes,” the trade groups wrote.
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