BOB ROCKLEIN
DOB asked about ‘pipeline’
The state’s bank examiners may not be doctors, but they play the role on the telephone.
In the wake of bankruptcy filings and closures of many national subprime lenders, Massachusetts regulators last week conducted financial health checkups on local mortgage lenders with subprime business arms.
The Division of Banks – whose examiners conducted the five-day phone check sweep of 81 lenders out of 647 total in the state – declined to discuss specific findings of the phone examinations by Banker & Tradesman’s press deadline on Friday.
DOB Chief Operating Officer David Cotney said results will be used mainly to determine which of the companies called may need to be checked on a more regular basis. He said the companies were chosen for the initial round of calls because they do a “significant” amount of subprime lending, and not necessarily because any complaints had been lodged against them.
He compared the calls to the division’s pre-Y2K checkups of financial institutions in 1999 and early 2000, and its rate-lock investigations on mortgage companies in 2004, the year in which interest-rate volatility caused some lenders to promise certain loan rates to consumers, then renege after realizing their own investors wouldn’t fund the loans at that rate.
DOB officials also said they believe the data gathered last week will give them a sense of whether problems at national lending companies that buy loans from local brokers and lenders, but whose own funders have pulled away, is having a spillover effect on the local loan market. If so, the agency wants to ensure it has or puts in place appropriate monitoring to properly protect consumers, some of whom already have been affected by events such as the bankruptcy of Connecticut-based subprime mega-lender Mortgage Lenders Network.
The DOB concurrently is conducting more formal checks of national mortgage lenders it licenses, which include bank subsidiaries such as Washington Mutual but not bank affiliates, such as Countrywide, Cotney said. He declined to say which specific local or national companies are being checked on.
In the more formal checks, examiners are asking for paperwork such as pipeline reports (on mortgages paid to the consumer but not yet purchased by a parent company or third party on the secondary market), reports on mortgages already funded and general balance sheet information.
In the local checks, lenders were asked to provide more detail over the phone about loans they sell to outside funders.
“They [Division of Banks regulators] wanted a dollar amount of how many loans we have in the pipeline,” said Bob Rocklein, president of Family Trust Mortgage, which has closed $30 million in loans since it opened last August in Burlington. DOB examiners called Family Trust on Monday.
The examiners also wanted to know the percentage of prime, Alt-A (typically loans for borrowers who meet Fannie Mae and Freddie Mac credit score standards but do not meet the guidelines for documentation, property type, debt ratio or loan-to-value ratio and subsequently are charged a higher interest rate) and subprime loans issued by Family Trust, Rocklein said. Examiners also inquired whether his company had had any problems with wholesalers purchasing loans.
“We haven’t had any trouble at all with our [wholesalers],” which include “the big A-paper [prime loan] companies” such as Taylor Bean & Whitaker, Ohio Savings Bank and Countrywide Funding, said Rocklein, who added that his company has not originated a single subprime loan.
A number of wholesale lenders who deal mostly or exclusively with subprime loans, such as Mortgage Lenders Network, have gone out of business in 2007 after seeing their lines of credit with Wall Street subprime loan investors cut off.
Rocklein, whose operations manager fielded the 10-minute DOB call, said he got the impression that the state is interested in the activities of local loan originators but is even more interested in verifying the health of national companies that fund their lending activities.
“They’re interested in the health of the [larger] companies we’re dealing with. They asked, ‘are the companies you do business with pulling out?'” he said. “They are looking for where the next shoe is going to drop.”
‘Very Straightforward’
Bill Mullin, president of NE Moves Mortgage Corp., the lending arm of Coldwell Banker Residential Brokerage, said he spoke with a DOB examiner for about 20 minutes on Tuesday.
“It was very straightforward Â… they wanted to be sure that lenders had the ability to finance the loans they were making to customers,” said Mullin, who’s run the Waltham-based company – formerly named Hunneman Mortgage Corp. – since 1994.
Some lenders were no longer able to finance loans after they ran out of in-house funding or had their lines of credit pulled by investors, Mullin said. “The ability to continue funding loans was obviously an important question to [DOB examiners].”
NE Moves and its sister companies all draw on the same $350 million line of credit from parent corporation PHH Mortgage (formerly Cendant) of New Jersey, he said. As of last Monday, NE Moves was using $47.3 million of the line.
DOB examiners also wanted to know how long loans funded to customers remain “in the warehouse,” meaning the loans have closed but have not yet been purchased from the warehouse banks by secondary market investors, Mullin said.
If loans are in the warehouse longer than 30 days, he said, regulators likely start to wonder whether it is a sign of funding woes.
“What happened with [New Century and others] is that their loans were sitting in the warehouse” Mullin said.
On March 13, the Massachusetts Division of Banks ordered Irvine, California-based New Century Mortgage, one of the nation’s largest subprime lenders, to stop accepting new loan applications in its two Massachusetts offices after learning it had closed some loans here but failed to fund them.
According to published reports, New Century also is the subject of a federal criminal investigation and is likely on the brink of bankruptcy after its March 12 announcement that its warehouse lenders had canceled their lines of credit to the company. It is one of at least 20 subprime lenders who have quit the industry in the past year.
Mullin said just 3.5 percent of NE Moves’ loans are subprime. That is likely a “comforting” number to state examiners and well within the risk tolerances they currently are probing. Fifteen percent of the $1.48 billion in loans NE Moves closed last year were refinances, and the rest were home purchase loans. Mullin said most local lenders’ business these days involves a much greater percentage of refinance mortgages.
“Many of the loans getting into trouble today are the people that kept refinancing, drawing down their equity and taking on increasingly volatile mortgage products,” he said.
Jim Picciotto, president of 14-year-old Patriot Funding in Framingham, which was started by the parent company of real estate brokerage firm RE/MAX of New England but is now independent, said the examiners asked him on Tuesday about to whom his company sells its loans.
“They were happy that the entities we [sold] subprime loans to in June 2006 are still around,” he said.
The DOB also was interested in Patriot Funding’s overall “philosophy” about subprime loans, said Picciotto, who said such loans make up about 15 percent of his company’s business.
The way his company has handled subprime loans hasn’t changed much, he said. “We felt that we were pretty well ahead of the curve in anticipating future events.”
Patriot Funding was aware of problems that could arise from issuing loans to people who couldn’t pay them back and took steps to avoid that outcome, he said.
While Rocklein said he’d heard from lenders large and small across the state that DOB examiners had called, some firms that issue subprime loans were not called. Some brokers who have lender’s licenses but aren’t currently using them also didn’t get called.
Jim Hastie, co-president of lender-broker United Funding, which has offices in Milford and Boston, said companies with both types of licenses tend to use their lender’s license for prime mortgage loans transactions and the broker’s license on the riskier ones.
His company currently is not using its lender’s license, he said, but hadn’t received any calls from the DOB by midweek.
Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff predicted the division will get important information through the calls it is making.
They’re an important, proactive step DOB is using to get an on-the-ground picture of a marketplace that is changing dramatically, he said.
