“Nothing is more frustrating than the EPO. The EPO’s penalty not only hits the company, but it also transfers this right to the LO and takes back their commission,” said Michael Clark, Vice President of the European Patent Office . major residential mortgage companies
While Clark Branch promoters don’t cover those fees when borrowers refinance within the EPO window, he expects there will be a wave of penalties as refinance shops start offering customers lower rates. .
“I’ve seen it. I’ve seen it in pricing,” Clark said. “There are a ton of different coupons available on FHA, Veterans Administration (VA) loans, and high-balance conventional mortgages, and refinance shops are taking a bit of a hit right now to include them in their portfolios in order to They can turn a profit and refinance. They’re running on time.
EPO fees can fluctuate based on the loan size and the fees the aggregator pays for the loan, but generally range from 1% to 5% of the loan amount.
For companies that retain servicing, the lender will write off the unamortized value of the loan if the loan is paid off early.
“If you sell loans at a high premium, there are potential challenges,” said Ben Hunsaker, head of structured credit. Beach Point Capital Management. “I would say you (the lender) are selling for 104% of face value, $105 face value, and you offer prepayment protection to the loan buyer, which means you will pay them face value plus the premium they paid. The difference in cash is where the lender’s cash limits begin.
EPO fees can wipe out any profit the original lender made on the loan and can even result in thousands of dollars in additional fees, which is an especially costly loss for smaller lenders.
While many lenders have access to software that aggregates information on potential refinancing candidates, lenders without a service portfolio may not have the systems in place to contact these customers more quickly.
“Lenders who retain an MSR (Mortgage Servicing Rights) have more visibility into their ability to collect. When a borrower has their credit taken off as a result of a mortgage refinance application, the servicer will see this and have the opportunity to obtain credit from that customer. Earn financial benefits there.
Lender strategies for dealing with penalties
When a lender sells a loan to an investor or mortgage aggregator, it is key to pay close attention to the EPO clauses in the loan sales agreement so that penalties do not come as a surprise. Lenders should negotiate what EPO penalties will be and how they will be enforced.
Some investors will waive European Patent Office penalties against lenders in exchange for lenders sending them the majority of trading volume. Typically, investors don’t pay market rates on these loans, so the lender may actually end up paying the penalty through lower revenue.
“Some very smart people are offering premium loans and selling a lot of products to aggregators, either negotiating shorter EPO terms or reducing the penalties that can be charged on each loan,” Hale said.
Removing language that investors have the sole say in purchasing loans would protect lenders, especially when interest rates rise, because investors would have the option to purchase smaller loans. Another strategy is to price any purchases by investors with EPOs with longer maturities than institutions.
“For example, if our EPO is higher than other investors, investors can tell us to price at 5 basis points (bps). In a normal market that might be fine,” one lender said. “But in a volatile market like today, where the EPO window is 60 days away and all the premium has to be repaid, it’s more like paying 150 to 200 basis points.”
Companies often do not allow secondary teams to pay attention to differences in EPO terms among investors, especially in volatile markets. Lenders explain that under normal circumstances, these differences may be much smaller.
The rule of thumb when it comes to the European Patent Office is to close the deal and take the money. The risk, originators and industry experts say, is that if lenders are able to recapture borrowers, EPO fees could offset revenue from new loans.
“Obviously, if a client has a need and you can fill it, sometimes you have to do it because otherwise they’re going to find someone else to do it and you’re still going to get the EPO,” said Jeff Black, senior loan consultant guild mortgage. “So your option is to do that and get reimbursed on the new loan, and at the same time you can repossess the old loan. So, you end up with a tie. It’s all a retention move.
