Wednesday, December 22, 2010

The Best Gift Ever

As a child, I loved Christmas, as I think most children do.  To me, Christmas meant delicious food and toys.  Growing up in a large middle class family in the 1970's, we did not have extravagant gifts, but I remember many Christmases fondly.  There was the year that I received the baby doll in the pink blanket, and the year that I got the little record player that played Christmas songs on 45s.  One year, my brother received a set of plastic cowboys and Indians complete with plastic cows and horse corrals, and we could not wait to get up to start playing with them at the crack of dawn Christmas morning.

We always opened our presents on Christmas Eve, and then my mother would read the Christmas story to us from the Bible while we ate candy and treats.  It was the most wonderful day of the year.

I am reminded of that joy now as I purchase gifts for my nieces and nephews.  My five year old nephew informed me at Thanksgiving that he wanted "Epic Mickey" for Wii, and that he already had the Wii.  He is a lot more technologically savvy than I ever was--maybe than I still am--but the excitement over Christmas is the same.

It seems to me that as we get older, the Christmas spirit is a little harder to catch.  For those of us who work in real estate, the holidays are an especially stressful time of year as we try to work year end closings around holidays and vacations, to stay patient with other busy professionals who are not returning our phone calls, and to please demanding borrowers who expect their loans to close before they leave for the holidays.  This is my 13th Christmas in the mortgage industry, and it seems that every year we have the Christmas loan that has some sort of a problem attached to it.  The borrower and the problem change from year to year but invariably there is some sort of crisis which occurs right around Christmas.

Add to that packed malls, packed streets--I work relatively close to a major shopping mall so traffic can be a real headache--and the invariable stresses of work and finances, and it can all combine to make the most dedicated lover of Christmas throw up his or her hands and shout "Bah Humbug".

But it is at those moments that I force myself to take a deep breath and to remember that Christmas is still the most wonderful day ever.  Although my five year old nephew would take exception to this, the best gift ever is not a video game, or a doll, or a toy, or a car or a vacation.  The best gift ever is the gift of Christmas itself, which reminds us that we always have hope and that miracles happen no matter how bleak the world may seem.  For those of us who are Christians, Christmas is a powerful reminder that God is with us and we don't have to fear the future, even if at times it looks scary.  It is a reminder that we are loved. "For God sent not His Son into the world to condemn the world, but that the world through Him might be saved." (John 3:17).  And it is a chance to express love and kindness in real terms to people around us and to those we are blessed to have love us in return.  And all of those things are priceless and worth celebrating.

Merry Christmas.

Monday, December 20, 2010

Shop Til You Drop

During these few final days before Christmas, tis the season to go shopping.  Packed malls, crowded stores and slow websites, remind us that there are deals to be had in a world in which Christmas has become the biggest shopping season of the year.  And there is no shortage of eager shoppers ready to look around for the best available bargains.  Unless, of course, all you want for Christmas is a new house.

According to a new survey just released by Lending Tree, 96% of Americans make it a practice to comparison shop.  For instance, when shopping for a computer, shoppers will often research 3.1 models before selecting the model they purchase.  But almost 40% of those surveyed said that they obtain just one quote for a home loan.  The survey, conducted by Harris Interactive, compiled online results for 1317 respondents.

The survey results indicate that the lack of shopping is not because borrowers believe that they have gotten a good deal.  Rather, fewer than three in 10 consumers, "feel very confident that they received the best deal on their current mortgage."  While 85% of consumers comparison shop for interest rates on the web, only 21% look there first. 

The primary reasons that otherwise comparison shopping consumers gave for not shopping their mortgages is frustration with the process and the second reason that they provided is the time-consuming nature of the mortgage shopping.  Over 70% of those surveyed said that they spent less than one day shopping for their mortgage loan.

These survey results are supremely ironic in view of the fact that the entire justification for changing the good faith estimate in January was to facilitate shopping.  By changing the good faith estimate from an estimate to a binding contract and requiring that the lender guarantee the terms for 10 days, consumers had a firm guideline with which to shop their mortgage loans.  The entire process was designed to almost guarantee shopping.  So why, when 23% of consumers recognize that they can save a considerable amount of money with a lower interest rate, are consumers not taking advantage of the new tools and shopping their loans aggressively?

The president of Lending Tree, Doug Lebda, believes that it is because lenders need to provide still more disclosure and more borrower education.  I disagree.  The problem, in my opinion, is not lack of information--it is lack of options.  When there were many options available to consumers they did shop aggressively.  Their real estate agents shopped aggressively on their behalf.  It was unusual for qualified buyers to get right up to closing and inform the loan officer that they had been offered a better rate and that if the loan officer failed to match the new lower rate they were switching lenders.  Loan programs and loan officers were plentiful, so consumers perceived that if they were being treated unfairly, they could just walk away.

Today the atmosphere is quite different.  Loan approvals have become so difficult to obtain that if a consumer gets approved, they don't want to risk switching lenders and not getting their loan at all.  As guidelines continue to tighten and standards become more strict, consumers are less likely to shop.  Add to that the fact that competition is continuing to disappear, so there are fewer independent companies to rate shop to, and also the fact that many large lenders are still collecting up front fees from borrowers even though this is a clear violation of new truth in lending laws.  (I recently talked to a previous borrower of mine who had gotten a rate quote through his current mortgage servicer.  The current servicer informed him that they would not even talk to him unless he paid them a $300.00 application fee.  This fee was prior to issuing any disclosures.  Although I explained to my borrower that legally the lender is not allowed to do this, his $300.00 was still gone.)

If we want to encourage rate shopping, we have to create an environment in which borrowers perceive that they have options.  Consumers look at 3.1 computers before making a purchase because computers are widely available.  If mortgages ever become widely available again, consumers will shop more seriously for those as well.

ADDITIONAL NOTE:  On Friday I wrote about Payne County Bank in Oklahoma which was ordered to remove all of its religious and Christmas-oriented items from the lobby by the Federal Reserve.  It seems that after being contacted by a lot of people, the Federal Reserve has now reversed its position and will allow employees to wear their Merry Christmas pins and the bank to put its Bible verses back on the website.  As in the story, the Grinch appears to have learned the error of its ways.

Friday, December 17, 2010

The Grinch Who Stole Christmas

Remember the cartoon based on Dr. Seuss's children's story about the mean-hearted Grinch who stole all the presents, food, and trees from the tiny village of Whoville?  His motivation for the theft was his disgust at the unabashed joy the Whos exhibited every year as they celebrated Christmas together as a town.

The 2010 version of the Grinch is the Federal Reserve. According to a news report by  television station KOCO last week the Federal Reserve completed its regular audit of Payne County bank in Oklahoma City and as part of that audit ordered that the small local bank remove it's Thomas Kinkaid paintings hanging in the bank's lobby.  Apparently some tellers had crosses and Bible verses posted at their stations; employees were also seen wearing "Merry Christmas" pins.  Auditors said that this is inappropriate, and all religious items should be removed.  Finally, the bank posted a Bible verse of the day on its Internet banking site, and the auditors ordered them to remove this also.

Payne County Bank has reportedly complied with all of these demands, but they are asking for clarification of the rules that the Federal Reserve cited in ordering the removal of the religious items, and they have also asked for help from the Oklahoma City Mortgage Banker's Association. They are asking those sympathetic to them to write to the head of the Kansas City Federal Reserve to ask them to reverse the decision.

Frankly, this is such an outrageous overstepping of government authority that it should be alarming to everyone, regardless of their personal religious beliefs.  Payne County Bank is a private bank--it is not a government entity.  While as a society we cite "separation of church and state" as grounds to keep endorsement of religious practices out of the public arena, our country has long-valued freedom of expression and individual religious practice as a key cornerstone of our society.  Therefore, if the bank's management and owners want to have crosses and Bible verses in the lobby and on the company's website, that is their decision as a private business.  Likewise, tellers who wish to post Bible verses and crosses at their stations and to wear "Merry Christmas" pins are exercising their own freedom of religion. Since there are doubtless other banks in Oklahoma City where consumers who are offended by Payne County's pro-Christian decor can bank if they choose to, and obviously the bank has decided that it does not care if the lack of political correctness costs them a few depositors, their choice in decorations is none of the government's business.

We all know that every company has a culture.  All companies promote the values that the ownership and executives hold dear.   Sometimes the values that the company is promoting are so offensive to a large block of consumers that the consumers will launch a boycott in order to change the company culture.  But that is a decision between the consumers and the business.  It is not the place of regulators to interfere with or try to change that culture.

This new attitude that regulators can tell private banks what jewelry their employees can wear, what decor they can display, and what message they can promote is going to have far reaching consequences.  I wonder if the Consumer Financial Protection Bureau will order the decorative crosses given to me over the years by many different friends and family members removed from my building.  And it may not stop there.  Hobby Lobby--the home decor store--closes on Sundays and plays Christian music in the store as a reflection of the owner's desire to promote Christianity.  Will some supervisory authority order them to change the radio station and to staff the place on Sundays?  Chick-Fil-A recently did a promotion with contemporary Christian artist Michael W. Smith for his new CD "Wonder".  Smith autographed CDs at the Dallas Chick-Fil-A for any customers who wanted them.  (My nine year old niece stood in line to get her picture taken with him and get an autographed CD.  I think it was one of the high points of her life!)  Will we see a day when the FDA rules that such promotions are "inappropriate" even though they have nothing whatsoever to do with food safety?

The Grinch would be proud--he was able to steal Christmas from just one tiny town.  What the Federal Reserve has done could ultimately steal Christmas from all of us.

Monday, December 13, 2010

Follow the Money

Any fan of police or courtroom dramas or true crime television knows that when a prosecutor needs to establish a link between a particular set of activities and perpetrators, the first rule of detective work is to "follow the money."  But if the Treasury Department has its way with a new proposed rule, that could soon be our job as loan originators.

On December 9, 2010, the Financial Crimes Enforcement Network (FinCEN) which is a bureau of the U.S. Treasury, issued a notice of proposed rule making which would make non bank residential mortgage lenders and originators subject to anti money laundering and suspicious activities reporting (SAR ) requirements of the federal Bank Secrecy Act.

Here on the U.S. Mexican border, where people culturally prefer to deal in cash as much as possible rather than bank accounts and credit cards, sourcing money can be an on-going struggle.  Having spent many years attempting to educate new homebuyers that lenders do not accept "mattress money" and that they need to deposit their funds in the bank and leave them there several months prior to closing, I can appreciate the issues created by unsophisticated borrowers who think banks are the enemy.  And part of the Dodd Frank bill is designed to help borrowers who currently operate outside of the financial system establish bank accounts and a credit history.  But counseling borrowers about the need to source and season money (deposit it into a bank account and leave it there for at least two months) is a far cry from becoming part of the financial police and filing suspicious activity reports on borrowers who may be dodging their tax responsibilities or trying to hide funds. 

It is a well known fact that depository banks are required to report transactions over a certain dollar amount in one day.  About a year ago, a car dealer was arrested in downtown El Paso and charged with money laundering and financial crimes.  The car dealer had been depositing $9900 every day into his bank accounts, in an attempt to stay under the legal reporting limit (which he believed to be $10,000.)  What he apparently did not understand was that banks are required to report any large deposits consistently made into an account. Further, it turns out that it is against the law to attempt to dodge the reporting requirements by deliberately making cash deposits under the legal benchmark.  These activities are "suspicious" and as such, they must be reported by the financial institution in a suspicious activities report.

According to the FinCEN proposed rule, "The Bank Secrecy Act ("BSA") authorizes the Secretary of the Treasury (the Secretary) to issue regulations requiring financial institutions to keep records and file reports that the Secretary determines "have a high degree of usefulness in criminal, tax or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism."  Additionally, financial institutions must develop anti-money laundering protocols which include, "1. The Development of internal policies, procedures, and controls, 2. the designation of a compliance officer, 3. an ongoing employee training program; and 4. an independent audit program to test standards."    The Bank Secrecy Act includes as financial institutions loan or finance companies (including mortgage brokers) but in April and again in November of 2002 FinCEN exempted loan and finance companies from the reporting requirements.  Now, however with the SAFE Act requiring national training and testing for mortgage originators, FinCEN sees an opportunity to include training on money laundering activities. "Residential mortgage lenders and originators (e.g. independent mortgage loan companies and mortgage brokers) are primary providers of mortgage finance--in most cases dealing directly with the consumer--and are in a unique position to assess and identify money laundering risks and fraud while directly assisting consumers with their financial needs and protecting them from the abuses of financial crisis."  

The new rule, if implemented, would apply to all loan originators.  It provides an exemption for sellers financing their own homes, but it does not provide any exemption based on a low volume of loans (for example, companies originating fewer than 5 transactions per year are not exempt.)  The rule does not extend to real estate agents or title officers, although the wording of the rule leaves that possibility open to further rule-making at a later date.

The new proposed requirements are spelled out in section 103 of the proposed rule. Transactions involving an aggregate of more than $5000.00 of funds or assets would be subject to filing requirements.  The rule is designed "to encourage the reporting of transactions that appear relevant to violations of law or regulation even in cases in which the rule does not explicitly so require for example in the case of a transaction falling below the $5000.00 threshold in the rule."  Under the new rules, a mortgage originator must report a transaction, "if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (i) Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity, (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the loan or finance company knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the loan or finance company to facilitate criminal activity."

FinCEN admits that they are painting with a pretty broad brush here.  (After nearly thirteen years as a mortgage originator I have seen a few transactions for which "there was no reasonable explanation after examining the available evidence," but that does not mean that the parties to the transaction were breaking the law. If making stupid decisions ever becomes criminal we will all be in prison.)  Because the "means of commerce and the techniques of money laundering are continually evolving, and there is no way to provide an exhaustive list of suspicious transactions," each mortgage company is required to develop and implement a monitoring program for suspicious transactions that "is appropriate for the particular loan or finance company in light of such risks."  Within 30 days of observing the suspicious activity, the loan originator must file a report with FinCEN along with any supporting documentation.  (In the case of an emergency, the originator can file the initial report by telephone.)  The originator must then keep copies of the supporting documentation for up to five years.

The second part of the rule is the anti-money laundering provision.  Residential mortgage loan originators must put into place internal procedures and controls to guard against money laundering including keeping track of methods of payment by customers.  Each mortgage company must designate a compliance officer  who is "competent and knowledgeable" regarding the Bank Secrecy Act requirements and money laundering issues and risks.  The compliance officer's job is to make sure that "1. The program is implemented effectively; 2. The program is updated as necessary; 3. The appropriate persons are trained and educated."

On-going training of employees is a requirement of the anti-money laundering provisions of the proposed rule.  This training may be conducted on site, or through outside seminars, or through computer based on-line training, but it must be regular and comprehensive.  Finally the compliance program must be periodically tested for effectiveness to make sure that it complies with the guidelines of the proposed rule.  While this testing does not have to be performed by an outside consultant or accountant, it cannot be performed by the compliance officer or any employee who reports to the compliance officer.

For independent mortgage brokers who are not currently regulated by a federal agencies who would enforce the Bank Secrecy Act, the IRS will act as the enforcement entity to make sure that the program is in place and that it meets guidelines.

I have to say that I have a number of objections to this entire proposal.  First and foremost--the cost of complying with and implementing this new proposal would be huge.  All of those of us who are independent mortgage brokers have seen our cost of doing business go steadily upward for the past three years, but to have to pay for additional training and set up a new program for reporting suspicious transactions to the federal government would be very expensive.  Even by the standards of the proposed rule, this is going to affect small business primarily, "95% of the affected industry is considered a small business, and...the proposed regulation would affect all of them."  Although FinCEN estimates that the burden of additional paperwork will be small because the software systems that mortgage brokers currently use will undoubtedly be upgraded to include a suspicious activities report form, they do not take into consideration the cost of program implementation and on-going training, which on top of the other training that we are required to have and pay for is a lot of extra money for an industry that is barely surviving right now.

Second, I have an issue with making the IRS the regulatory authority for compliance with pretty much everything.  It is the IRS who is responsible for enforcing health care, the IRS who is responsible for enforcing new FinCEN proposed regulations, and the IRS who will be summoned  if the Consumer Financial Protection Bureau suspects any mortgage lender of wrong doing.  The Internal Revenue Service already needs 16,000 new agents in order to enforce the health care laws; they are going to need a lot more agents than that to enforce compliance with this statute as well.

Third, while we all support anti-money laundering and anti-terrorist provisions, do we really want to become a nation with a legal mandate to turn every person we meet over to the government?  The proposed rule admits that mortgage fraud is already a crime, and money laundering is already a crime.  "Many loan and finance companies already voluntarily report suspicious transactions and fraud through entities such as the Loan Modification Scam Prevention Network."  There are a lot of provisions in place right now for reporting fraud.  But do we really want to have to fill out a Suspicious Activities Report on the 70 year old grandmother who kept her life savings in her pillow case and cannot prove where she got her cash?  That's a little too much oversight from Big Brother for me.

The proposed rule is open for public comment until February 7, 2011.  If you would like to read the entire, you may do so by logging on to    To comment, log on to  Follow the instructions and reference 1506-AB02.  Be sure to refer to docket number FINCEN-2010-0001.


Friday, December 10, 2010

Get the Facts on Your FHA Case Numbers

On October 4, 2010, FHA changed the upfront and the annual mortgage insurance premium.  The upfront premium decreased and the annual premium increased.  While all originators who work with FHA mortgages know this, what many do not know is that FHA case numbers follow the property--not the borrower.  This means that if a specific house had an FHA contract that fell through, the FHA case number that was assigned to the property is still valid for six months. 

This has the potential to pose a huge problem for an unsuspecting loan originator who is arranging an FHA mortgage for a resale.   Let's say that John and Mary Smith put in a contract to purchase 12345 Maple Street, and they go to A+ mortgage for loan approval.  The originator qualifies John and Mary for an FHA loan but does not check with FHA to see if the property already has an FHA case number assigned to it from a previous contract that fell through.  Within three business days, the originator issues a good faith estimate and a truth in lending to John and Mary Smith.  The originator uses the current FHA upfront and annual MIP to compute the estimate.   If there were a prior FHA case number on the property and the case number has not been cancelled, the originator has now issued a binding good faith estimate with the annual premium underdisclosed.  That means that the originator will have to pay the difference between the premium he disclosed and the premium he should have disclosed.  Since not getting proper information about the existence of a case number is not considered a legitimate reason to issue a new good faith estimate, the originator is stuck.  And since a lot of lenders are now rejecting loans with good faith estimates that contain even minor errors, this mistake could cost the originator more than money--it could cost him the entire loan.

To prevent this situation, originators need to check to make sure that the property does not have a case number assigned to it before issuing the estimate.  HUD does make provisions for cancelling case numbers so that a new case number can be issued to allow use of the new mortgage insurance. The lender holding the case number must fax a signed and dated written request on company letterhead to the Homeownership Center with jurisdiction. The request must state,"Case Number Cancellation requested to allow the borrower the benefit of using the new mortgage insurance premium structure."  Requests take up to three business days to process.

Here is where it gets dicey.  Since a lender cannot cancel a case number it does not own, if the new loan originator did not issue the previous case number, he cannot cancel it.  He would have to contact the company that issued the previous case number and ask them to cancel it which might take a while.  I have had some experience with trying to get VA appraisals released between lenders and it has always been a nightmare, so I can imagine that this process will probably be difficult also.

Be proactive in finding out whether properties have a case number before you issue any estimate.  My own personal advice would be that if you find out there is an existing case number and your company does not own it, issue an estimate with the old annual and monthly MIP.  Doing a little research on this as soon as you get the property address could save a lot of money and stress down the road.


Wednesday, December 8, 2010

Is that Check from the Home Warranty Company Legal?

How many of us have sat at an escrow office with an elated buyer just minutes after the closing?  As they sit waiting for the title officer to return to the room with copies of the hundreds of pages they just signed, their real estate agent reminds them that they have a home warranty and that the agent will be providing the buyer with all necessary literature in case they need to use the warranty.  But if the agent is compensated by the home warranty company, that compensation may be a violation of RESPA.

On June 25, 2010 HUD published an Interpretative Rule, with a public comment period, in the Federal Register addressing the legality of payments by home warranty companies to real estate agents.  In December, HUD provided additional guidance regarding compensation from home warranty companies to real estate professionals.   In it, HUD reaffirms Section 8 of the Real Estate Settlement Procedures Act which prohibits payments to anyone involved in a real estate transaction for anything except services which are actual, necessary, and distinct from the primary services of a real estate agent or broker, which are not nominal and which are not duplicative.  In determining whether the payment by a home warranty company is legal or not, HUD will look at whether the duties performed by the real estate agent  meet the above criteria.  For example, marketing a specific home warranty company, doing sales pitches for the company, distributing promotional material about a home warranty company at the broker's or agent's offices or at an open house is considered a "referral" under Section 8 of RESPA, and as such it would be illegal to receive payment from the home warranty company.  HUD states in its explanation, "Nothing precludes a real estate broker or agent from performing services to aid the seller or buyer, or to increase the possibility that the real estate transaction will occur and thereby benefit the broker or agent.  However, the broker or agent may not be compensated by the HWC [home warranty company] for marketing services directly to particular homebuyers or sellers."

However, there are some services that HUD considers bona fide services for compensation by home warranty companies.  These include inspection of items to be covered under the warranty, recording serial numbers of the items to be covered, documenting condition of the items by taking pictures and reporting to the home warranty company regarding the inspections.  The test here is that the service must be actually performed by the agent receiving the compensation.  In other words, the agent must perform the inspections as the legal agent of the home warranty company, so the company must assume responsibility for any representations that the agent makes to the borrower, and the real estate agent must disclose to the borrower that he or she is being paid by the home warranty company and that the borrower is not obligated to purchase the services of any particular home warranty company.

Finally, in examining whether compensation by home warranty companies is legal, HUD will look at the actual amount of the payment to the real estate agent or broker to determine whether the amount paid is reasonable and customary for the work being compensated.  Even if HUD determines that the agent did actually perform the services required to deserve payment, if the compensation is too great, HUD can rule that the amount of payment that is greater than what would be considered reasonable and customary compensation for the actual service performed is an illegal referral fee.

Remember that the penalty for violating Section 8 of the Real Estate Settlement and Procedures Act is a $10,000 fine and 1 year in prison per violation.  If you have any doubts about whether the check from the home warranty company is legal or not, return it uncashed.  It's better to be safe today than really sorry tomorrow.

Monday, December 6, 2010

Could Correspondent Lending Disappear?

Every rose has a thorn.  For mortgage brokers, the ability to originate FHA loans without having to meet net worth requirements was like receiving a gift of two dozen roses in a beautiful vase direct from David Stevens and HUD.  Unfortunately, at the same time, HUD handed a basket of thorns to those companies who had been previously originating FHA loans as correspondent lenders. 

HUD made a lot of changes to the FHA origination process this year including raising the net worth requirement for lenders from $250,000 to $2.5 million.  Lenders who cannot meet the new net worth requirements need a sponsoring lender in order to basically originate as mortgage brokers.  Since the net worth requirement was eliminated for mortgage brokers, that opened new opportunities for really small players, but at the same time it reduced some solid correspondent companies who had been originating these loans successfully to the same status as their poorer, tinier counterparts.

To appreciate what a real can of worms this opens, think about the changes to the mortgage broker community this year.  We now have the SAFE Act which requires individual national licensing for each loan officer with additional requirements added in each state where that loan officer works.  We have the new Federal Reserve compensation rule which goes into effect April 1 which says that employees of mortgage broker shops and the mortgage broker shops themselves cannot be paid yield spread premium.  And, as I wrote last week, HUD has now published a notice for comments regarding the workings of warehouse lines.

With all of this in mind, the Mortgage Banker Association wrote a letter to the leaders of the House and Senate asking them to pass legislation that would prevent the new FHA rules from disallowing table funding and correspondent lending for FHA.  MBA's letter states, "Lenders rely on the efficient process of allowing qualified correspondents to close loans in their own names in order to serve all markets effectively. If correspondents are unable to close loans in their own name, many of them will cease to offer and originate FHA products, thus reducing the availability of safe and affordable mortgage and refinancing options for  low to moderate income and first time homebuyers."  MBA is asking for immediate action from the House and Senate since the new rules go into effect on January 1, 2011.  But with Congress wrangling over taxes and and unemployment benefits and trapped in a lame duck session until January, the chances that anyone in Congress is going to look seriously at this issue before the end of the year seems pretty slim.

While MBA's prediction that HUD's new view that there are only lenders and brokers will affect access to FHA is undoubtedly true, there is so much more at stake here than just access to FHA mortgages.  If the Treasury rolls out a government-insured model similar to FHA for all mortgages, as I believe they will, in January, then we can look at what HUD has done with FHA as a model for all mortgage origination.  Like Cinderella, we can all go to the prince's ball, if we can meet all of the conditions for licensure, if we survive supervision by the Consumer Financial Protection Bureau and if we can figure out how to run our offices with greatly reduced compensation.  So what seemed at the outset to be a wonderful gift is really just the beginning of the end for a large segment of our industry.

Thursday, December 2, 2010

If You Think it's Hard to Get Loans Closed Now...

On October 4, 2010, the SEC published notice of a proposed rule for comment regarding requiring new reviews for asset backed securities.  According to the summary, the SEC is "proposing new requirements in order to implement Section 945 and a portion of Section 932 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010...First we are proposing a new rule under the Securities Act of 1933 to require any issuer registering the offer and sale of an asset-backed security (ABS) to perform a review of the underlying ABS...We are also proposing amendments to Item 1111 of Regulation AB that would require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer's review of the assets.  If the issuer has engaged a third party for the purposes of reviewing the assets, we propose to require that the issuer disclose the third-party's findings and conclusions."  The asset backed securities covered by the SEC's request specifically include credit cards, commercial real loans and residential real estate loans.  The comment period ended November 15, 2010.

The request for comments is a 58 page document which asks for input on a number of issues, including whether the issuer of the securities should be able to rely on the underwriter's decisioning as part of the review.  If they do rely on the underwriter's decisioning, should the underwriter be subject to "expert liability'? (Would you want to be underwriting residential loans these days and suddenly find yourself subject to "expert liability" if your decision to approve John and Mary Smith's loan turns out to be a mistake after John has a massive heart attack, Mary gets laid off, and the house goes into foreclosure?  I don't think so.)  If the underwriter's decision cannot be relied upon, what sort of review process should be in place?  Can it be outsourced to third parties?

A specific area of comment was in section 4 regarding real estate appraisals.  The SEC requested comments on whether specific types of appraisal reviews should be conducted for real estate transactions and whether the SEC should establish standards for those reviews to determine whether the property values stated by loan originators are indeed accurate.  The SEC also asked for comments about whether these reviews should be required for both commercial and residential loans and what types of reviews would be appropriate.

In response to the SECs call for information, the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers responded with a letter to the SEC containing its recommendations with regard to reviews.  This letter is dated November 15, 2010.    "In an ideal world, every appraisal would receive an appraisal review in accordance with Standard 3 of USPAP and completed by a certified or licensed appraiser.  However, the industry standard has traditionally been a 10 percent random review of a portfolio.  We believe that this would be an appropriate minimum measure for the SEC to adopt.  We do not believe that automated valuation models and broker price opinions should be the primary or exclusive source for residential appraisal reviews.  Despite this, we acknowledge that the use of AVMs and BPOs in the review process has gained some acceptance.  We strongly believe that any properties that are found to fall below recognized statistical confidence levels using these abbreviated tools should be field reviewed by a qualified appraiser or trigger a second appraisal altogether.  For instance, if an appraisal reported a value of a residential property of $300,000 and an AVM reported a value of $200,000, this should trigger some additional action.  However, if the AVM resulted in a value of $290,000 under the scenario above, the margin of variance is likely acceptable, so long as appropriate due diligence is conducted on the entire pool."

A few years ago, appraisal reviews were fairly common because when the originator ordered the appraisals, it was assumed that the originator had exercised influence over the appraiser to bring in a higher value than the property deserved.  But when the Home Valuation Code of Conduct was implemented last year, the appraisal process became totally independent of the originator.  Originators could no longer have any contact with the appraiser, and in most cases that meant that an appraisal was ordered through a third-party appraisal management company which had its own quality control procedures. Although HVCC is technically gone, as part of the Dodd Frank bill the appraiser independence regulations are now permanently in place.

Over the last year, however, Fannie Mae has expanded its internal valuation model to include a greater number of properties.  This means that an increasing number of properties being secured by loans sold to Fannie Mae don't need appraisals at all, or they need very minimal appraisals.  So while the average appraisal costs more than it did two years ago, more properties do not require appraisals at all.  But the SEC's new rule could mean that all properties require at least one appraisal to independently verify the automated valuation model and a larger majority of homes will require a second appraisal or a review. And since this review will be a field review, the borrower will essentially be paying for 2 appraisals at a cost of $400 a piece or more.

Of course, when an underwriter calls for a field review or a second appraisal, if there is a difference in value between the original appraisal and the second appraisal, the underwriter uses the lower of the two to establish value.  The net result of this will be that once again we are going to see more appraisals for less than the sales price of the house.

What all of this means to the average home buyer is that costs to get a home loan are about to go up and underwriting times are about to increase.  The bottom line for companies originating loans is that those loans have to be sold on the secondary market.  And no loan is good if it cannot be sold.  So the underwriter is not going to sign off on a deal if she can be subject to "expert liability" when the loan is sold. That may mean second level underwriting reviews for all files and appraisal reviews on most files.  We can look for lenders to increase their underwriting fees since they can expect to have to pay for additional underwriting reviews,  and we can expect to see the appraisal costs on a transaction effectively double. These additional costs and delays--which also result in more costs--make the homebuying process more difficult and more expensive.  Continuing tightening of credit standards is going to keep the real estate market stagnant.  So these new rules, which are supposed to inspire greater investor confidence in asset backed securities, in the end could help to keep the housing market flat.  And that is bad news for all of us.


Tuesday, November 30, 2010

HUD Turns its Attention To Warehouse Lending

Last Wednesday, while most of us were closing our offices to go home and prepare our turkey and dressing, HUD was busy publishing a notice in the Federal Register which could have a huge impact on wholesale mortgage lending.  On November 24, HUD published a Notice that is it considering issuing new guidelines regarding RESPA compliance with regard to warehouse lending and other financing mechanisms.  You can read the Notice at:

HUD is asking for comments to 10 questions, some of which contain multiple subquestions.  All deal with the structure of current warehouse lending arrangements including buy back provisions, ownership of loans, whether the warehouse lender is involved in the credit or underwriting decisions, and whether the warehouse lender scrutinizes individual files.   HUD wants to know whether the size or credit worthiness of the lender determines the extent to which their files are scrutinized.  HUD also asks, "what characteristics indicate a bona fide transfer of the loan obligation, such that the transaction would be a secondary market transaction that is not covered by HUD's RESPA regulations?"

The fact that HUD has posted this Notice is extremely significant, and the timing is not a coincidence. When the new good faith estimate went into effect last January, the mortgage broker industry cried foul because the new rule discriminates against the smaller broker in the way that interest rate spreads are disclosed. Stronger, more credit worthy brokers with cash got warehouse lines so that they could continue to do business as they had done before.  Since only those brokers with more cash and experience were able to qualify to receive warehouse lines, these stronger players were able to escape to higher ground.

Now, however, HUD is demanding an explanation of the inner workings of warehouse lending and that does not bode well for the future of these mortgage brokers turned correspondents.  Remember that in January of 2011, the Treasury is supposed to present to Congress a new blueprint for housing finance in the United States, which according to indications we see in statements made by Barney Frank last year, will probably include a complete disbanding of Fannie Mae and Freddie Mac.  Presumably these two mortgage giants who have bled hundreds of millions of dollars in taxpayer money since they went into conservatorship in 2008, are going to be replaced by a completely government-owned, government backed system.  HUD's demand for information regarding warehouse lending right now is in anticipation of these larger changes that we expect to see early next year.

My own belief is that when the review process is finished, HUD will develop its own guidelines for what the agency will accept as a "bona fide, legitimate" warehousing relationship.  To qualify, a lender will have to have a fairly substantial amount of his money in the loan, a high net worth, and a good amount of experience with operating a warehouse line.  Lenders who do not meet the HUD standards will have to be treated as brokers rather than as correspondent lenders.  This will mean that when the new Federal Reserve rule takes effect in April, the lenders whose warehouse lines do not qualify under whatever standards HUD sets will not be able to receive yield spread premium or service release premium when they sell the loans.  (Under the new rule, neither a loan officer nor a mortgage broker company can receive yield spread premium or service release premium if they are compensated in any way by the consumer.  However, a correspondent lender closing loans through a warehouse line can receive the service release premium even though it cannot be paid to the loan originator.)  If I am correct about this, we will see many lenders who have invested in warehouse lines who are now going to be told that they do not qualify in HUD's eyes.  Once again, the federal government is picking the winners and the losers in the housing finance market.

The comment period for this notice ends December 27, 2010.  Instructions for making comments are included in the link I have included in this post.

Tuesday, November 23, 2010

Give Thanks

Every Thanksgiving for as many years as I can remember, my mother had a tradition at Thanksgiving dinner.  After my father prayed over the food, my mother asked each of us to name one thing that had happened in the last year that we were thankful for.  As I got older, knowing that I would have to state what I was grateful for, I started thinking about the year a couple of weeks in advance of the holiday, and I found that even in difficult years, I had a lot to be thankful for.  My mother's tradition, which she continues to this day, has helped me to really think about the meaning of Thanksgiving each year.

This year has seen so many negative changes and so much bad news that those of us who work in real estate and mortgage lending might feel stumped at my mother's dinner table the day after tomorrow.  So in the spirit of Thanksgiving week, I have compiled a list of 5 things that all of us in our industry can give thanks for on November 25.

1.  We still have low interest rates.  For all of the problems we have had with rule changes, underwriting changes and guideline changes, 2010 has seen record low interest rates.  When I started in this industry in 1998, I would have never believed it possible that I would be financing people at fixed interest rates in the 3's.  Those low interest rates have allowed those of us in lending to weather tough times and perform a real service for borrowers who now have fixed rates lower than we ever imagined.

2.  We are seeing lower housing prices.  Yes, I know that this is a mixed blessing at best, but think about it.  With underwriting standards so tight, many borrowers could not qualify at all if housing prices had not dropped.  Lower prices mean that many home buyers who had been priced out of an accelerating market can actually afford a home.

3. We have access to great programs.  We have seen a huge number of products go away, but there are still some great loan programs that allow borrowers to qualify for financing.  Programs like Fannie Mae's Home Path give borrowers an opportunity to buy a home with conventional financing, a reduced down payment and no mortgage insurance.  I just finished quoting a borrower for Home Path investment loan with 10% down and no mortgage insurance and a 5.25% fixed rate for 30 years.  Although we mourn the loss of some of our past programs, great financing still exists for qualified buyers.

4. We have greater FHA availability.  This is huge.  Back in the early part of the decade, the broker industry lobbied repeatedly for HUD to open up FHA to brokers, totally without success.  Now that the market is FHA dependent, HUD has opened up access to brokers.  This means more competition and better pricing options for consumers.

5. We are still alive, and we are not alone! "Don't worry about things--food, drink and clothes. For you already have life and a body--and they are more important than what to eat and what to wear. Look at the birds!  They don't worry about what to eat--they don't need to sow or reap or store up food--for your heavenly Father feeds them...And why worry about your clothes? Look at the field lilies! They don't worry  about theirs. Yet King Solomon in all his glory was not clothed as beautifully as they.  And if God cares so wonderfully for flowers that are here today and gone tomorrow, won't he more surely care for you....So don't be anxious about tomorrow. God will take care of your tomorrow too.  Live one day at a time."  (Matthew 6: 25-34 TLB)

Now that's something we can be thankful for every day!  Happy Thanksgiving.

Thursday, November 18, 2010

Good Credit Is No Longer Enough

A couple of months ago, I took a refinance application for a doctor and his wife.  They were refinancing their home valued at about a half a million dollars, which was well in line with his annual income of over one million dollars a year.   After I had the basic information, I went into my office to pull their credit reports.  The wife looked a little worried when she asked me about their scores.  I assured her that their scores, which were over 750, were excellent and they would have no trouble securing the interest rate they wanted.  Worry then turned to confusion, as the wife explained to me that she had just had her credit line decreased by Wells Fargo to just slightly more than she owed on the card.  When she called Wells Fargo to ask why they had taken this action, they had told her that her credit was not very good and that she was a poor risk.  Although she protested their decision, they were adamant that this couple, who have more than 20 years of good credit, no late payments on any accounts, and a seven figure income, with very little debt in proportion to that income, were not a good enough risk for Wells.

I was not able to explain to the couple what Wells Fargo's motivation might be for cutting their credit limit at the time, but an article in the today sheds some light on why banks are deciding, for no apparent reason, that some clients are more creditworthy than others.  For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives.  But today banks are using new tools in addition to credit scores to determine whether borrowers are creditworthy. 

For example, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--has a new system marketed to banks to track depositor behavior.  They assign each bank client a score based on deposit and withdrawal activity.  Presumably, checks for non-sufficient funds and returned checks will count against the borrower's score.  The scoring system can alert the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job.  Using up the savings may also signal financial difficulties.  And that can be the bank's cue to cut off credit.

In addition to tracking bank information, credit bureaus are also using income estimates to determine  potential debt to income ratio.  Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines.  Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is.  His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.

The banks are also tracking the consumer's home's value.  The WSJ article tells of Ken Lin, who had a very good credit score but was denied for a credit card.  He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage.  As property values continue to decline nationwide, more borrowers may find that they cannot receive credit because they have lost the equity in their homes even if they have paid all of their bills on time. 

The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income.  Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.

All of this just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, job loss, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history.  It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.

Wednesday, November 17, 2010

More Foreclosure Problems on the Horizon

The Congressional Oversight Panel released new findings yesterday that the mess we are facing with foreclosures may have more far reaching implications for the economy than we had initially believed.  While the Treasury Department asserts that the issues with foreclosure filings do not pose a systemic threat to the overall financial system, the COP believes that such a finding is premature.  Their report states, "Clear and uncontested property rights are the foundation of the housing market.  If these rights fall into question, that foundation could collapse."

The COP's main concerns appear to be:  1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot.  For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own.  The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid.  Additionally, foreclosures they have initiated may be nullified.

To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."

In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom.  Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.

It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points.  1.  The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice.  To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place.  2.  We have Americans living in homes they have not paid a penny on for over 400 days.  To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford. 

The other issue here is the proposal of another stress test.  When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship.  By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks.  But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants?  Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.

Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold.  By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.

Monday, November 15, 2010

Two Sets of Rules

In ancient times, kings and government officials cast die or used sorcery or astrology to try to determine the dates for an important action to take place.  Using this method, they decided when wars should be declared and when new laws should go into effect.

In the twenty-first century we are supposed to be more sophisticated, so I wonder what method the government is using to determine the implementation date for its new policies. For instance, who decided that April should be the month to cut pay for everyone working in the various aspects of financial services? Not only will residential loan officers see their compensation change in April of 2011, but the Securities and Exchange Commission is expected to release new compensation rules for investment advisers that same month.

Just as the Federal Reserve wants to change/slash loan officer compensation to make sure that loan officer pay is not tied to interest rates or credit scores, so the SEC wants to change investment adviser compensation to limit incentive-based pay that "rewards risk taking."  The SEC wants to determine whether officers and employees of investment firms are receiving "excessive compensation or benefits" which may endanger the financial institution.  Mary Schapiro, chairman of the SEC,  has stated that the SEC is going to focus on compensation plans that reward risk taking.  She wants to implement TARP-like rules which will limit executive compensation and bonuses.  According to Schapiro, sign-on bonuses and compensation tied to risky behaviors such as "higher levels of compensation for higher levels of turnover in the portfolio...are things that absolutely have to change."  The SEC under Schapiro's watch is committed to writing new rules that will create "compensation programs that incentivize the right kinds of behavior."

The supreme irony of Schapiro's SEC writing rules limiting how executives can be paid is that she herself has been the subject of heavy criticism for receiving $9 million in payouts and bonuses from the Financial Industry Regulatory Authority Inc (FINRA) when she left her post as the chief executive last year to become the chairman of the SEC. (Included in that $8.98 million figure was $7.6 million in vested retirement benefits).  According to an October 10 article in Investment News Daily, FINRA paid Schapiro and other managers $35 million in salaries and bonuses in 2008 even though the non profit suffered $567 million in investment losses. The payout to Ms. Schapiro became public when Amerivet Securities Inc. asked that FINRA be investigated for excessive pay to its board members, legal advisers and consultants.  According to the article, Amerivet brought action against FINRA because FINRA paid lavish salaries and bonuses to board members who had failed to provide adequate supervision to uncover Bernie Madoff's Ponzi scheme, or to prevent the failures of Bear Stearns or Lehman Brothers.

Fortunately for Ms. Schapiro, the investigation concluded that she and her fellow officials did not do anything wrong in taking the bonuses since the pay levels of FINRA needed to be comparable with those of brokerage firms, investment banks and insurance companies.  This compensation was necessary since, according to the report, FINRA "competed primarily with the financial services industry for talent."

In Schapiro's new capacity as the chairman of the SEC she earns about $165,300 per year, which is a major pay cut from her 2008 FINRA compensation which included $937,961 in salary, bonuses and incentives worth $1.75 million, and "additional compensation" totaling $565,995.00.  Having taken a major cut in pay herself, she is now prepared to make sure that she gives the rest of the financial services world a pay cut as well.

The bonuses paid by FINRA are symptomatic of what is wrong with the entire financial regulatory system.   There are two sets of rules--one for the chosen and the other for everybody else.  If the bonuses and severance packages are being paid to officers and executives of non-profit regulatory agencies who failed to guard the financial system, no wrongdoing has taken place because these agencies have to compete with Wall Street Firms for talent.  But it is perfectly okay for Schapiro in her new role as SEC chair to impose limits on pay for executives of private firms who have not taken bail out money from the taxpayers to insure that they are not being compensated for risky behaviors.  Schapiro conveniently forgets that one of the ideals of capitalism is that risk determines reward--without risk takers we have no growth and no innovation.

It will be interesting to see what Schapiro defines as the "right types of behavior," since she is dedicated to creating compensation rules that incentivize "good behavior" and punish risk taking.  We won't have that long to find out--if the SEC has its way, April of 2011 will see a whole new set of rules.

Friday, November 12, 2010

The President's New Score Card

No, this is not a score card for the economy or taxes or job growth.  This is the new Home Energy Score Program announced by Vice President Joe Biden on Tuesday at a Middle Class Task Force event.  The new program will be test piloted in 10 communities nationwide. 

The Score Program will allow homeowners to voluntarily register their homes for energy audits.  The audits will be performed by trained, certified contractors using new energy software tools to assign each property a home energy score, to estimate of how much money the homeowner could save through "energy retrofits" and to create a personalized set of recommended improvements complete with the annual savings and estimated payback period. The limited review audits under the Home Energy Score pilot program are expected to cost participating homeowners $400 to $500, which is roughly a $200.00 savings over the cost of a full audit. 

Allegheny County, Pennsylvania is one of the 10 test pilot communities selected by the federal government.  At least 12 local homes from each community are expected to be selected for participation.  Homeowners in the Allegheny area can register their homes by signing up at EfficiencyPa. com.  Selected homes will be rated from 1 to 10, with 10 being awarded to a home with excellent energy efficiency and 1 being awarded to a home needing major upgrades.

Contractors who perform the audits must be certified and registered through the Department of Energy.  The Department of Energy and the Department of Labor are working with the Departments of Education, Health and Human Services and the Environmental Protection Agency to identify the skills and qualifications required for a contractor to become certified in the "home energy retrofit" industry.  The Small Business Administration is also on board with a new on-line course, Green Business Opportunities: a Small Business Guide, to help small business owners who want to enter the home energy retrofit market.

To finance the cost of the improvement's, HUD is offering the new FHA PowerSaver loans.  The PowerSaver program provides federally insured loans of up $25,000 to homeowners who make the recommended improvements after their energy audit.  With loan terms of up to 20 years, the PowerSaver program makes improvements including new windows and doors, new heating and cooling, water heaters, insulation, solar panels, duct sealing and geothermal systems attainable for homeowners who qualify for the financing.

Certainly, making a home more energy efficient and helping the homeowner save money on heating and cooling bills is a good goal.  Efficiency PA's program manager John Horchner, who is heading up the pilot program for Allegheny County, estimates that a home with a score card of 10 could save the homeowner $2000 to $3000 compared to a house with a 5 rating.  My primary concern is that while initial participation the program is voluntary, over time participation may become mandatory.  One of the goals of Chris Dodd's Livable Communities Act is to assess private homes for energy efficiency and to require that the homeowners bring their homes up to government-mandated energy efficient standards.  Homeowners who voluntarily want to take the initiative to retrofit their homes with energy efficient features should certainly be encouraged to do so, but no homeowner should be forced by an agency to make their private home energy efficient.  The danger of a potentially far reaching initiative such as the Score Program is that once the system is in place and the auditors are trained and certified in each community, homeowners may be told that they now are required to pay for the audits and to pay the costs of the upgrades whether they desire to do so or not.  That is too much government regulation for me.


Monday, November 8, 2010

Death by A Thousand Cuts

My brother, Stefan, who works here in my office, came in today telling me about the SAW VI movie that he rented this weekend.  He wanted to see it in advance of seeing the final SAW movie--as a young single man in his twenties he still has the stomach for the kind of blood and gore that have made the SAW franchise a hit.  He tells me that in each movie the psychotic--and yet oddly self-righteous--serial killer Jigsaw tortures and punishes a particularly evil segment of society who preys upon the weak.  Stefan tells me that SAW VI opens with a man and a woman trapped by the killer who is about to extract vengeance for their crimes against society.  This time, however, they are not violent criminals, or drug dealers; instead they are mortgage brokers who put people into houses they could not afford and then foreclosed on them when they did not make their payments.  It seems that Jigsaw turned all of his attentions to the business community in SAW VI--he also hunts down and tortures an insurance agent whose "crime" was that he denied a claim because the claimant had lied on his application for insurance. (I would be willing to bet that there will never be a SAW movie in which the killer traps and murders preachy movie producers and overpayed actors for making millions turning out low quality slasher movies, but that is another subject for another blog.)

In real life, Jigsaw would not need to waste his efforts murdering mortgage brokers--Barney Frank beat him to it.  Frank had famously promised death panels for non depository lenders, but instead he and all of his cohorts sentenced the whole industry to death by a thousand cuts, and even though the GOP won the House of Representatives last week, there is no reason to believe that the sentence will be commuted.

Cut # 1 came in the form of the Safe Act (Secure and Fair Enforcement) which required licensing and testing for mortgage brokers and loan officers working for institutions that did not take deposits. In my office we had finished all of the requirements except the credit report ordering process, which became available last week.  As I went on line to order and pay for the individual credit reports, I was once again confronted with the fundamental unfairness of the SAFE act.  Registrants (employees of banks, credit unions and other institutions which receive deposits) do not have to have a credit check, just as they did not have to take a state test and a federal test or complete 20 hours of CE.  The sad irony of the law is that many of the small business people who are left in the industry have had a lot of credit problems resulting from the steady drop in income we have all experienced the last three years.  So if a broker has filed bankruptcy, or had his credit cards charged off, he may not be able to get a license, but if an employee at a bank has had the same experience no one will ever know.

Cut # 2 was the new RESPA rule which is designed to favor banking institutions in the way that fees are disclosed.  A former client of mine came to see me last week to ask me about refinancing his house.  He had brought with him his estimate from his current servicer, along with the estimate that I had emailed him.  The bank's interest rate was .375% higher than I had quoted and the fees were almost exactly the same.  But he was confused about which was the best deal because the bank had told him that they were giving him a special "discount" for being an existing customer.  Not being in the industry, he did not understand that "discount" is just bank speak for "I am charging you a 1% fee to give you an interest rate which was too high to begin with."    The three page good faith estimate was designed to make it hard for brokers to win deals, but fortunately it is so confusing that very few borrowers can actually understand what it says, so we have a chance to defend our numbers in person.

The other 998 cuts are going to come in the form of the Federal Reserve's new rule which was published August 16 and which will become effective April 1, 2011 regarding broker compensation.  I believed from the beginning, and wrote in my post entitled "The Broker," that this rule was going to be the final death blow for what is left of our industry.  After attending a webinar last week, however, I find that this is not just one solid blow, but a series of cuts which will drain the last of the life out of the brokers who are left.

As explained to us by the law firm of Black, Mann and Graham last week, the new rule is going to effectively require that brokers have written compensation agreements with their wholesale lenders.  These agreements can be renegotiated with the consent of both parties, but they cannot vary from loan to loan.  Further, the rule absolutely prohibits the loan officers from collecting fees from both the consumer and the lender.  (The exception would be that a salaried employee of a bank could collect a commission from the consumer as well as his salary.)  In the world of the broker, the lender is ultimately responsible for whether the loan is compliant with federal laws and regulations, so if the broker sneaks out and collects a processing fee from the consumer without properly disclosing that information and then collects a fee from the lender also, the lender has funded an illegal loan.  For this reason, I believe that starting April 1, few or no wholesalers will pay the brokers any compensation for their loans.  By requiring brokers to receive all of their compensation directly from the consumers, the lenders will protect themselves, but they will also put the brokers at a significant competitive disadvantage against the large banks who can offer lower upfront closing costs since their loan officers are salaried.

The broker industry has only two real advantages over the retail banking industry--the ability to offer overall better pricing and the ability to transfer loans between lenders in the case that one lender does not accept a loan application package for a consumer.  But the new rule requires that the broker guarantee the lowest rate and lowest costs to the consumer by offering loan options containing  1. the lowest rate, 2. the lowest fees and costs.  If the broker has three lenders, he needs to present pricing options from lender A, lender B, and lender C.  If lender A has the lowest interest rate, and the lowest over all costs, and the borrower chooses that option, then presumably the broker would prepare a good faith estimate, which is now a binding contract, and send it to the borrower within three days of loan application.  But what if lender A denies the loan?  In the old days, if lender A denied the loan because the underwriter did not like it, the broker could send it to lender B, who would probably like the loan package.  If the interest rate were the same, the borrower was usually fine with the switch.  But what about under the new rules?  Under RESPA reform, changing wholesale lenders is not an acceptable reason to issue a revised good faith estimate, so if the broker cannot honor the lowest rates and or lowest fees he has guaranteed the borrower, he is going to have to deny the loan.  Now both competitive advantages--pricing and flexibility--have been wiped out.  Add to that the reputational damage that the industry has suffered, and death is soon to follow.

I researched "death by a thousand cuts" this afternoon.  Used in Imperial China from about 900 A.D. until 1905 A.D. this form of torture and execution appears to have been administered primarily to enemies of the state.  While the victim died long before the cuts reached thousands, the dismemberment of the prisoners meant that they could not be resurrected in the afterlife.  As a form of execution it symbolized permanent death and extinction--both in this world and in the next.   Even Jigsaw could not do better than that.