Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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HousingWire AnnualIPO / M&AMortgageOriginationSecondary

Feeding the capital markets beast and figuring out pricing in a time of extraordinary uncertainty

Panelists at HousingWire Annual talk rise of the nonbank, regulatory challenges, IPOs, technology, the upcoming adverse-market fee and more

Changes to capital markets have been fast and furious over the last year in housing. By some accounts, the growth timeline has been compressed five years. It makes for exciting – and uneasy – times for lenders, investors and policy makers, panelists said at HousingWire Annual on Thursday.

During the half-hour discussion, the panelists offered their takes on capital market appetite by channel, touching on the rise of the nonbank, regulatory challenges, IPOs, adaptation and technology, the upcoming adverse-market fee, MSR value and even the forbearance timelines.

“Changes in culture, society, how we all work and live – it all ends up in capital markets,” said Richard Koss, chief of research at Recursion Companies. “This is where the rubber hits the road between the lender, the investor and the policy maker.”

Koss told the moderator Brent Chandler, the CEO of FormFree, that the nonbanks have dramatically increased market share. Delivery to the GSEs for banks during September 2020 was just 26%, the lowest level on record, Koss said. As recently as 2017, it was over 50%.

“The forbearance policies are having a huge impact on the way investors and lenders are operating,” he said. The change in market share coincides with nonbanks tapping the capital markets through IPOs, according to Koss, who noted that retail has “squeezed against” the correspondent channel and brokers have gobbled up more market share since March. “As an investor, you’re looking at all this trying to figure it out,” he said. “One good thing is tech has advanced to the point where you can start to get a really sharp picture of what’s going on.”

Said Koss: “One of my clients said, ‘We’re looking for what not to buy as much as what to buy.'”

For Gary Malis, chief financial officer of Paramount Residential Mortgage Group, the complexities in modeling right now are dizzying, especially when accounting for servicing and PIWs (property inspection waivers).

“You talk about what you want to buy – it’s about how you price it up front,” said Malis. “And how you deal with pricing that is sophisticated enough to address it either by loan officer or broker shop. Do you throw out the baby with the bathwater? Do you penalize an entire company? Do you break it down by individual person? So you get into all kinds of difficult modeling questions when you get into prepay speed and you also get into fair lending questions and technological questions.”

Malis said using good data is the key to “not overpaying or underpaying.”

The banking tech laggard

The panel also touched on the growing gap in technological innovation between the nonbanks and the banks.

“What I’ve noticed is that with regulation comes a lot of red tape just to get things approved,” said Leora Ruzin, senior vice president of Wholesale Operations at Equity Prime Mortgage, who’s worked in banks and credit unions in the past. “And then you’re getting things approved from entities or business units within an organization that has nothing to do with mortgage operations origination, so they’re making decisions based on just not really knowing that the flow of mortgage loan and so it takes, nine, 10 times longer for technologies to get instituted. And then when they do, they fall apart almost right away.”

Another reason banks have lost market share, according to Malis, is cultural and based on compensation. Banks don’t pay a lot of money and they won’t let loan originators be entrepreneurs and become brands onto themselves, the opposite of what’s happening with nonbanks. “It’s not celebrated at a bank,” he said.

Adverse-market fee is just the beginning

The panel was in agreement that the upcoming 50 BPS adverse-market fee put forth by the GSEs on refinancings wasn’t well-received by the industry. Ruzin said that political headwinds – notably the presidential election – could result in the fee being spiked, even though many lenders have already implemented it into their pricing.

Koss, a former head of capital markets research at Fannie Mae, said there would be more fees in the future. “The LLPA is sort of a warning signal of what’s yet to come,” he said, with Malis adding, “They do have additional cost, it’s not debatable. The bigger question is what comes next.”

Malis said the “bigger capital markets story” is if pipelines are hit unexpectedly and companies take losses. “As if servicing wasn’t hard enough in terms of how to model, now if you’re adding another piece to it, another dimension, you get this idea that I’m going to take 50 basis points hit unexpectedly on a pipeline. How do I price in some margin later for what could come next?”

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