Game Change

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The Latest SERVICING Or ig i nat ion Fed Finalizes Bank Reforms, Adds Rules for Small Institutions Amid the furor for more clarity in the rules, the Fed has stepped in to lift the fog. Profits and Losses Loan volumes decrease and profits drop for independent mortgage bankers nationally. On the production side, average volume was $442 million per company in Q1, down $46 million from the prior quarter. The average volume count per company was also down, falling from 2,132 loans to 1,954. "The average firm's production volume dropped about 10 percent in the first quarter. On a per-loan basis, the combination of lower revenues and rising costs resulted in lower profits compared to the previous three quarters," said Marina Walsh, associate VP of industry analysis at MBA. "Nonetheless, the margins remain strong in comparison to other quarters since 2008." The refinancing share of total originations (by dollar volume) was 60 percent, down slightly from the fourth quarter. For the mortgage industry as a whole, MBA estimates the refinancing share at 74 percent in Q1. Production employees originated an average of 3.1 loans per month in the first quarter. Fulfillment productivity was 8.6 loans originated per fulfillment employee per month, down from 10.2 in Q 4. The M Report | 65 se c on da r y m a r k e t P rofits and loan volume declined for at independent mortgage bankers in the first quarter of the year, the Mortgage Bankers Association reported. Independent mortgage banks and mortgage subsidiaries of chartered banks took in an average profit of $1,772 on each loan they originated in Q1, down from $2,256 per loan in Q 4 2012. Meanwhile, total production expenses, including commissions, compensation, occupancy and equipment, and other expenses and corporate allocations, increased to $5,779 per loan, up from $5,603. Personnel expenses averaged $3,785 per loan, up from $3,570 in the fourth quarter of 2012. The net cost to originate also rose, climbing to $4,182 from $3,813 in the previous quarter. That cost includes all production operating expenses and commissions minus all fee income but excludes secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread. a na ly t ic s common equity tier 1 capital— "the most loss-absorbing form of capital"—and implements strict eligibility criteria for regulatory capital instruments. It also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The Fed also announced a number of changes in the rule designed to address concerns about the regulatory burden on smaller community banks. According to a release, data from March shows nine out of 10 financial institutions with less than $10 billion in assets would meet the common equity tier 1 minimum plus buffer of 7 percent, making the impact from the finalized rule minimal. In the area of residential loans, the rule will continue to apply existing risk-based capital standards, including a 50 percent risk weight for safely underwritten first-lien mortgages that are not past due. Community banks will also have a longer transition period to meet the new requirements. According to the Fed, the phasein for smaller banking organizations will not begin until January 2015, while the phase-in period for larger banks starts in January 2014. "I'm pleased that we were able to agree on a rulemaking that not only improves the quantity and quality of capital for banks of all sizes, but does so in a way that minimizes the burden on community banks," said Comptroller of the Currency Thomas Curry. "I think those are important accommodations, and it is entirely appropriate that they apply to the community banks and thrifts that had nothing to do with bringing on the crisis." s e r v ic i ng T he Federal Reserve Board announced its approval of a final rule to implement the Basel III regulatory capital reforms and other changes required by the Dodd-Frank Act. The Basel III reforms were created to address "shortcomings in capital requirements, particularly for larger, internationally active banking organizations, that became apparent during the recent financial crisis." "This framework requires banking organizations to hold more and higher-quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks," said Fed chairman Ben Bernanke. "With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy." Consistent with the international Basel III framework, the approved rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent as well as a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance-sheet exposures. In terms of quality of capital, the final rule emphasizes

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