Hello, LOs!
We talked quite a bit last week about early payoff penalties. LOs from across the country described their frustration with chargebacks. You can see some of those responses here.
Today, let's talk a little about the investor perspective.
"I get to see what happens to the loans we buy or get through our wholesale channel," said one mortgage pro who works on the secondary/capital markets side for a non-QM aggregator/securities issuer. "It is not uncommon for us to see brokers churning loans after the EPO period. We have restrictions on soliciting refinance for 12 months, but that is impossible to enforce in the wholesale channel. If the EPO penalty was eliminated our investors' response would likely be to increase our interest rates to compensate for the added prepayment risk they are taking."
He added: "Increased borrowing costs help nobody. As you know, there is no such thing as a loan that is made at a price of 100 – everything is at a premium to the borrowed amount. When an investor believes that loan will exist for a certain period of time and it prepays within 6 months all they do is pay less for the next loan."
Another mortgage pro who works on the capital markets side for a direct lender said EPOs have been a point of contention for every shop where he's worked, retail and wholesale.
"While you could say they hurt an investors return, the truth is EPOs are built into the prepay speeds and are expected. No agency investor is being hoodwinked by an EPO. Rather, EPO fees are designed to discourage churning and slow down the speeds. Flexible lenders will work with their originators to find ways to lower their EPO fee exposure, but even that can be difficult. Heard many a time, 'My borrower has received a ton of mailers and cold calls and we're trying to keep the borrower with us.' There's only so many times you can let that excuse fly, regardless of how truthful it might be. A discussion should always be had with the borrower to not refinance until at least 6 payments have been made."
There are times to worry, though.
"Where it is a point of concern is the increase of non-agency products, where a borrower might take a Non-QM loan since that can sometimes be processed quicker than a regular Jumbo loan," he said. "They close almost simultaneously and you can bet the first investor will want to be paid back any premium paid out on that loan. The lender is then on the hook for a huge EPO bill depending on the size of the loan."
As for solutions, he said there is logic in setting up rules that stipulate one refinance per year on a property to a borrower, whether that's through a combination of tax laws and securitization rules or compensation rules.
"It would be extremely unpopular in the industry as it further shrinks the eligible refinance pool, but would force originators to always offer the best possible terms to their clients," the capital markets VP said. "The end result would be an increase in servicing values that could be passed through to borrowers and lender revenue."
James Kleimann
Managing Editor, HousingWire
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