Mortgage lenders are hoping that expected clarifications to borrower disclosure rules will alleviate delays that affect their warehouse lines of credit.
Uncertainty about what constitutes a TRID compliance error, and how to cure them, has had a direct impact on independent mortgage bankers who sell loans to aggregators. But some warehouse lenders that provide those originators with interim funding have also been affected by the liquidity concern, taking on increased risk exposure.
The Consumer Financial Protection Bureau is expected to issue clarifications to the Truth in Lending Act and Real Estate Settlement Procedures Act integrated disclosures, also known as TRID, by the end of July.
Turn times — the time between when warehouse funds are advanced and then repaid after a loan is sold — increased significantly when TRID first went into effect in October because aggregators who typically buy the loans were taking more time to review files, said David Frase, president of mortgage warehouse lending at Southwest Bank in Dallas.
Originators face monetary penalties from warehouse lenders, known as curtailments, if they exceed certain timeframes that differ by warehouse lender, said David Lykken, president and founder of Transformational Mortgage Solutions, a consulting firm in Austin, Texas.
"Very few of those [curtailments] have happened, but there are some investors that have been buying loans at a very slow rate, and that has been cause for concern," he said.
There are some anecdotal accounts of warehouse lenders allowed turn times of 60 days or more without curtailment, according to James Reynolds III, managing partner of The Reynolds Group in Summit, N.J.
But many may not have allowed long turn times to occur without curtailment, and TRID did slow turn times, at least temporarily.
The turn times on loans in some cases doubled or tripled in the first six months after implementation, according to Stanley Street, owner of warehouse lending software firm Street Resource Group. The median turned turn time during that period extended from 18 days to about 45 days. Some outliers even had turn times that even went beyond 100 days just after TRID's implementation, but turn times have improved markedly since then.
"I would also say that the issues have started to diminish and that turn times are moving back toward historical industry equilibrium," Street said.
Turn times averaged 20 to 33 days during the six months that followed TRID's implementation, according to Reynolds, whose company provides due diligence services for mid- and large-cap warehouse lenders.
"In April, May, June it started to clear up," he said. "Now it's nowhere near where it was when it punched through 30 days."
Like warehouse lenders, independent mortgage bankers also reported a slight uptick in turn times between October 2015 and March 2016, with numbers for the second quarter of 2016 suggesting an improvement in turn times, according to advisory firm Richey May in Englewood, Colo.
But the number of loans which end-investors are rejecting from entry-level originator clients in particular remains high, said Frase.
"We probably could count on two hands the number of problem loans we've had in the previous four years and that number rose significantly once TRID went into effect," said Frase. "It's still going on at a reduced level. We're still having new ones show up for nominal errors."
Such stresses on mortgage bankers have a knock-on effect on the business of the warehouse lenders they work with, said Street. "The mortgage banker may fail to meet profitability covenants, which in turn might trigger warehouse termination," he said.
When a warehouse line of credit is terminated, a mortgage banker loses a source of interim funding it can use to close the loans it sells to investors. In a worst-case scenario, if a mortgage banker depends too heavily on a line and can't replace it in a timely fashion, it could prove to be a fatal blow for the originator's business.
The most notable example of this was lender
For the most part warehouse line-related TRID concerns have not been that severe. More often they have matched
Some secondary market platforms don't even find TRID affecting sales to investors in the private markets they deal in at this point.
TRID, which also is referred to as the "Know Before You Owe" disclosure rule, hasn't been affecting any recent trades on loan platform Resitrader, according to the platform's CEO John Ardy. "TRID doesn't appear to be an issue at this time," he said.
And even those who find that aggregators continue to reject a higher-than-normal amount of loans due to TRID say these mortgages aren't totally illiquid. If mainstream investors won't buy the loans, "scratch and dent" investors who buy at a discount usually will.
But more typically, the new broker-to-banker originators that Southwest works with respond to a TRID loan rejection by refinancing the mortgage in such a way that the borrower gets a tangible benefit, said Frase.
This has been doable in a falling rate environment, but could be more of a challenge if rates ever rise, he said.
"[Lenders] have to lower the interest rate and hope that the borrower is cooperative. We haven't had any that we've been completely stuck with, but we've had a number that were stuck on our lines for quite a while," said Frase. "I haven't had anybody go the scratch-and-dent route."
For an entry-level originator, refinancing a loan rejected for TRID compliance reasons may be better than selling the loan at a discount, which can exceed 10%; but other larger originators have found scratch-and-dent pricing has been "decent as of late," said Reynolds.
Clarifications expected from the CFPB about resolving TRID errors could help address the kind of
The Structured Finance Industry Group, which represents securitized mortgage investors and issuers among others, has been working on TRID error resolution best-practices and has presented related information to the bureau in hopes the bureau will address some of it
"For items as to which there is uncertainty as to whether such items can be cured, or how to cure them, participants want certainty," said Eric Kaplan, managing partner, structured finance at Ranieri Strategies, a New York asset management firm.
Even if the bureau doesn't release a proposed clarification that addresses these items, the voluntary industry standards SFIG's effort provides could help reduce differences in buyers' TRID compliance interpretations and the time loans spend on warehouse lines.
"Regardless, the industry will have an agreed-upon set of guidelines for TRID compliance reviews," said Kim Thompson, an executive vice president at Overture Technologies, a company that helps automate loan sales, servicing and originations.
The bureau has been considering input from stakeholders ahead of the proposed clarification and will consider additional feedback after that proposal is released in late July, according to CFPB spokesman Samuel Gilford.
