Monday, July 26, 2010

HAMP Rides Again

With the ink barely dry on the Dodd-Frank bill which was signed into law last week by the President, one of the first changes provided for in the new bill will go into effect August 1--the revisions to the Making Home Affordable Program (more commonly called HAMP).

HAMP, which was supposed to allow troubled homeowners to refinance into loans they could more easily afford, has come under a lot of fire from both the mortgage industry and consumer advocacy groups for not being able to do the job. One major reason is that the lenders started requiring income documentation on these borrowers and soon discovered that the borrowers did not meet current underwriting standards. Bottom line--without enough income and sufficiently good credit to qualify, you can't get your rate and payment reduced.

Not until now, that is. According to HUD's website, starting August 1, mortgage servicers participating in the Making Home Affordable Program will begin offering the Unemployment Program which will offer a forbearance to suspend or reduce monthly mortgage payments while these homeowners look for work.

The forbearance will reduce the homeowner's payment to no more than 31% of his or her gross monthly income; at the servicer's discretion the total amount of the payment can be suspended. Each servicer will decide how much forbearance the homeowner will receive.

HUD's website is a little vague on the specifics, but the amendment to the Dodd Frank bill that makes this possible actually allows for the government to provide up to $50,000 of help to unemployed homeowners for up to 24 months. During the forbearance period, the servicer may not initiate foreclosure or collect late fees from the borrower.

To qualify, homeowners need to meet the following guidelines:

1. The mortgage is a first lien mortgage originated on or before January 1, 2009, with a remaining principal balance of no more than $729,750 for a single family residence (which is the super conforming loan limit for most mortgage loans.)

2. The property must the homeowner's principal residence.

3. The mortgage has not previously been modified through HAMP, or a modification was attempted but the homeowner was ineligible.

4. The homeowner is behind on the payments or there is a reasonable certainty that the homeowner will fall behind in the near future. (However, the borrower cannot be more than 3 months behind.)

5. The current total monthly payment is more than 31% of the homeowner's gross monthly income. (The servicer can use their own discretion about whether the homeowner can modify if their current payment is less than 31% of their income.)

6. The homeowner will be unemployed when the forbearance starts as documented by recipt of unemployment benefits (even if the benefits expire before the forbearance ends). At their own discretion the servicer may require that the homeowner has received three months of unemployment benefits prior to qualifying for the program.

If the homeowner gets a job during the forbearance period, the forbearance will end and the servicer will determine whether the homeowner qualifies for a loan modification.

One other set of qualifiers which you will not see on HUD's website are spelled out in the Dodd-Frank bill, Subtitle G Section 1481:

"In General--No person shall be eligible to begin receiving assistance from the Making Home Affordable Program authorized under the Emergency Economic Stabilization Act of 2008...or any other mortgage assistance program authorized or funded by that Act, on or after 60 days after the date of the enactment of this Act, if such person, in connection with a mortgage or real estate transaction, has been convicted within the last 10 years, of any one of the following:

(A) Felony larceny, theft, fraud or forgery.
(B) Money laundering.
(C) Tax evasion."

Interesting! If you have been caught not paying your taxes, you are unworthy of help, even if such conviction took place a long time ago. Obviously a lot of people currently in Washington are not counting on losing their jobs and needing mortgage modifications.

It will be very interesting to see how many homeowners are actually able to be modified under the new program, and government will be watching too. Under the new guidelines, servicers who participate in HAMP must report monthly on their progress, and no later than 14 days after the due date for submission of this data, it must be posted to a public site. The data will include the number of requests for loan modifications received by lenders and mortgage servicers, the number of modifications processed, the number approved and the number denied. This will at least provide a benchmark for whether the new program is working.

But the real test will come after these homeowners go back to work and we see how many of these homes were ultimately saved through HAMP, and how many others went into foreclosure while government assistance merely delayed the inevitable.

Friday, July 23, 2010

Why You (or Your Buyer) May Be Having Trouble Closing

As the interest rates have remained historically low for nearly a month, we have seen an increase in loan applications nationwide. Sales of new homes and existing homes are lower than they were before the home buyer tax credit ended, but according to NAR overall sales are higher than they were a year ago. And certainly with rates at historic lows, many borrowers who were on the fence about refinancing have decided to make a commitment to get the lower mortgage rate now. So why are those borrowers having so many problems?

I heard someone on television commenting that although rates are amazingly low, the banks are being very "stingy" about loaning money and for that reason it is hard to get financing. So, on this Friday afternoon, I thought that this issue of stinginess among lenders is a good one to finish the week with.

First, just a note. Banks make money by loaning money. Lenders do not get paid if they don't lend. We have adopted a mindset that the banker is an Ebenezer Scrooge type hoarding gold in a freezing cold counting house while his poor, shivering clerk tries to stay warm in the corner while dreaming of Christmas. In reality, banks like to loan money. Mortgage companies like to loan money. But they don't like to loan money if they incur financial consequences and/or penalties for doing so, and a common penalty, certainly among smaller lenders, is the very real possibility of having to buy back an improperly processed loan. Having to repurchase a closed mortgage loan that has been sold because the loan was deemed irregular is expensive and can be very detrimental to a company's bottom line, so lenders are going to try to avoid being put in that position as much as possible. One underwriter I spoke with today told me, "With Fannie and Freddie auditors being so strict, they look at a loan and say, 'We don't like this property, so we are rejecting this loan or we don't agree with the income, so we are rejecting the loan.'" So, of course, the underwriter is more careful to avoid being put in that position.

I thought today I would take time to address all of the underwriting problems that have come up this past few weeks in an effort to shed some light on how files are underwritten today.

1. Problem: Rental income from a family member cannot be used to qualify for the new mortgage. I have a borrower who was buying a home to rent to their daughter. The borrower has excellent credit--the mid scores for the primary borrower were over 800, and he has two years experience as a landlord. However, he is self-employed and does not file a lot of income on his tax returns. On an investment property this has not traditionally been a problem, because the projected rent as demonstrated by a form 1007, which is part of the appraisal, allows us to use the rental income to offset the payment. The fact that he had a tenant picked out who is his daughter should be good, because then he did not have to look for a tenant. Right? Actually that's wrong. It turns out that lenders do not allow rental income to offset the payment if the house is being rented to a family member. The lender considers it the same as a kiddie condo, and they require that the parent qualify with the full payment. I could not find this spelled out anywhere as a published lending guideline, and I was told by one underwriter that it is not a Fannie or Freddie guideline, but it is a rule that everyone follows nevertheless.


Rent the house to somebody else, and change lenders if necessary. Some lenders will not allow a new letter of intent even with a rent check and purchase agreement, so you may have to find a new lender.

Problem: The loan is not closing because the income tax transcript is not back from the IRS yet for one or both years. Lenders have been actually using the 4506T forms prior to closing on self-employed borrowers for several years, and last year they started requesting the transcripts on W2d borrowers. In January we had a borrower who had just established residency here in the United States and had filed his 2008 tax returns the previous year. Since we needed two years of returns to qualify, he filed his 2009 tax returns and took the returns directly to our local IRS field office and had them stamped "Received" into the office. In the past, having the returns stamped "Received" by the IRS office worked in lieu of having the transcript. But not any more. The lender had to have the processed transcript back, so the purchase transaction could not close until the end of April, after the IRS processed the return and sent us the transcript.

The solution: Wait for the transcript. The new financial reform bill mandates that lenders receive a processed transcript from the IRS. During tax season, which usually is January through April 15, the IRS is receiving millions of tax returns. This year, the wait to get a transcript on a 2009 filing was up to six weeks after the end of tax season. For those who have not filed an extension but have presented their 2009 tax return to qualify, the lender must have processed transcript back verifying the income on the return. So be patient and wait. A lot of originators use a verification service to verify the returns that we are presenting, and in the past, lenders have been able to use our processed transcript, but the new trend is for the lender to pull their own copy of a transcript. Ours is just really for internal quality control purposes. Remember, too, that the IRS is already short-staffed and now that they have a legal obligation to provide a transcript for every borrower on every file, the time frame for transcript delivery is probably going to increase. So be patient.

But you may say, the borrower has been salaried on their job for 10 years and the originator just asked for a W2 and a paystub. Why do you need the tax transcript at all? Because, new guidelines demand that lenders look at the overall financial picture as reported on a tax return. For instance, if you are salaried but your spouse is self-employed with losses on the tax return, the lender will subtract those losses from your income and require that you qualify on the remaining income even if your husband or wife is not on the loan.

Problem: I (or my friend or borrower) have a credit score below 660, so I am being asked to put 25% down. Anything over a 620 used to be considered A paper. Now 620-659 is B paper, and anything under 620 is C paper. Right now FHA is in a comment period for changing its own guidelines to require that loans below 580 put 10% down. In reality, most lenders won't do loans under a 620 credit score right now because it is too hard to get them approved. But FHA is really the last bastion for the lower credit score borrower. For a conventional borrower, even on a rate and term refinance, the difference between a 660 and a 654 can mean the difference between getting your mortgage refinanced at 80% of the value or not being able to refinance at all because the loan amount is cut down below what you actually owe on the mortgage.

The solution: Credit scores matter more than ever before. And while in these difficult times it can be very hard to keep your credit good, it is really important to try. Even 1 point can make a huge difference in interest rate and terms if you are just below a major threshold score. So, if possible, pay those bills on time!

Problem: My borrower is self-employed. He made substantially more money this year from the sale of goods (capital gains) than last year. I added together his capital gains from 2009 and from 2008 and divided them by 24 months. The underwriter declined the loan. (This happened to me this morning!)

The above scenario did not used to be a problem at all. The rule on capital gains, or dividends, or any of these types of incomes was that it had to be reported for two years and averaged if the income were greater in the most recent tax year. If the capital gains income were lower in the most recent tax year, the underwriter might not allow it, or might just allow the 12 month average of the lower income. But in a situation of increasing income, the underwriter was usually happy. Not any more. Even though the capital gains income was on the return for two years, was part of an ongoing business that we know is continuing in 2010, and the amount was larger in 2009 than in 2010, this underwriter did not use it.

The solution: A different set of eyes will often look at situations like this differently. Fortunately for me, I had anticipated that something like this might happen and I sent the file to another lender who approved it. While some rules, like the 4506T transcript processing, are etched in stone, others are subjective, and a different underwriter with different experiences will view the income favorably if the overall file is strong.

The most important rule to remember as we go through the challenges of tough credit standards and tough underwriting is that the lender is not your enemy. The guy or gal who can't close your deal today may be your best friend tomorrow as they help you do a different deal. Good solid loans for good solid borrowers will always find homes. So if the news you are getting going into this weekend is not what you were hoping to hear, don't despair; one man's junk really is another man's treasure.

Tuesday, July 20, 2010

Leading the Way--but to What?

Tomorrow, July 21, is the date that the White House has set for the signing of the historic Dodd Frank Financial reform bill. We can expect a lot of hoopla as the White House celebrates the passage and signing of this bill as a hallmark achievement of the current administration. But the Obama administration is not content just to let the new rules govern the United States; President Obama is hoping that the new financial rules will become a blueprint for implementation by other countries.

The Dodd Frank bill is a highly ambitious piece of legislation which appears to me to be coming under increasing criticism in the days leading up to the President's signature. Take for example, a Wall Street Journal piece, published July 1, 2010, authored by John Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, who highlights various flaws in the new regulations including the fact that the new bill leaves Fannie Mae and Freddie Mac intact, and allows for a system of bailouts for financial institutions who are "participant in any program or facility with broad based eligibility." He concludes, "The continuing debate over the Dodd Frank bill in the days since it emerged from conference is good news. People may be waking up to the fact that the bill does not do what its supporters claim. It does not prevent future financial crises. Rather, it makes them more likely and in the meantime impedes economic growth."

One huge problem with the Dodd Frank bill is that it calls for a lot of new studies--I counted around 30, but another article I read stated that there are 68. Hundreds of new regulations will be written in response to the new bill, so we won't know the full impact for many years to come. While we know that the new Consumer Financial Protection Bureau will have regulatory authority and the right to investigate complaints and that any statement made to them is actually sworn testimony given under oath, we won't begin to see the effects of that for probably 9 months to a year when the agency is in place, and the full effects will not be seen for several years as the bureau writes new rules and begins to regulate businesses. We know that one of the first mandates of the Bureau is to create a new good faith estimate and truth in lending which will be one combined form, but we have no idea what that form will be. We know that the bill will limit compensation--such as the Merkley amendment capping loan officer compensation--but we don't know what that will mean in real terms.

With so many unknowns, it seems a little premature to be calling for other nations to adopt similar laws. And, obviously, the other nations think so too. An article posted today in Bloomberg Businessweek quotes Federal Reserve Governor Daniel Tarullo as saying that "some countries will decline to follow the US in adopting limits on proprietary trading at banks and other regulatory restrictions." According to the article, the undersecretary of the Treasury for international affairs, Lael Brainard, has stated, "The challenge before us now is to ensure that the world's standards are every bit as strong as America's....Our reform efforts are focused on the largest and most consequential economies in order to reinforce our domestic reform efforts...International consistency is at a premium." This, according to Ms. Brainard, is important to stabilization of the world economy since the collapse of hedge funds can impact on the global banking system.

But a concentrated effort to force our laws on the world's "largest and most consequential economies," may end with dialogue straight from school recess, as other countries remind us, that "You're not the boss of me!"

And with so many unknowns wrapped into a 2300 page bill, maybe other nations want to see what direction we are leading them into before they decide to get on board.

Monday, July 19, 2010

Good News and Bad News About Flood Insurance

On this Monday morning, there is both good news and bad news about flood insurance. The good news is that flood insurance is once again available. At the end of June, Congress extended the flood insurance program through September, so buyers should be able to complete the homebuying season without other interruptions. The bad news is that a lot more people are going to need flood insurance, starting next year.

In El Paso, our new maps were released yesterday and made public today. They cover much of the Upper Valley, identifying the area as a flood zone and requiring flood insurance. The new maps go into effect next year (mid 2011) but the window of time for appealing new flood zone status begins today and lasts through October 18. If your house is in a flood zone, you need to hire an engineer or a surveyor and they will show their findings to FEMA to appeal their decision to designate your property as being in a flood zone. From October 18 to December 18 FEMA will process all of the appeals, and then the final maps will become effective, probably in June of 2011.

Understanding the new flood zones is critical for homeowners and homebuyers alike. Just because a home currently is not in a flood zone does not mean that it is not going to be with the new maps, so it is important to take the time to find out as soon as possible, or else buyers may find themselves surprised by a notice that they are required to buy flood insurance next year about this time.

The irony of remapping our city just at this time is that the International Water and Boundary commission is currently spending $220 million to build levees in the Upper Valley to prevent future flooding such as what we saw in 2006. Federal stimulus money is covering the cost of the project, but it will not be finished until sometime next year.

After the levee is finished, then homeowners have the right to appeal again but that can take up to two years to process and in the meantime you will have to pay for the flood insurance.

Of course, El Paso is not the only community being affected by this. The new flood maps are affecting the entire nation. An article in the Houston Chronicle on May 23, 2010 states that 17 counties along the Texas coast will be designated as flood zones. Even though Galveston County and Brazoria and Jefferson Counties have built levees to prevent flooding, the levees were started in 1962 and completed in the 1980s so they probably will not meet current FEMA standards. All levees must be certified within two years after the new data is ready, but at an estimated cost of $250 million to $350 million to meet the new standards, Galveston County says it does not have the money and does not think it can get it. In nearby Jefferson County, the estimated cost of bringing the levee protecting Port Arthur up to code is about $500 million.

According to the Houston Chronicle article, this problem is happening nationwide and not just here in Texas. State leaders from all over the country are asking FEMA to extend the deadline and pressuring Congress to write new legislation that would prohibit FEMA from updating the flood maps if a plan exists to upgrade the existing levee system and if residents have been warned about the risk of flooding. But remember that flood insurance is required for properties that have more than a 1% chance of flooding, so you can be in an area where your real risk is quite small, but you will still be required to buy flood insurance.

Last week, the House of Representatives passed HR 5114, the Flood Insurance Reform Priorities Act, sponsored by Maxine Waters (D-CA) and Barney Frank (D-MA), which we have discussed in some depth. (See The River is Rising and the River is still Rising from May and June). That bill would extend the flood insurance program for five years, but it would also raise the cap on premium increases from 10-20%. While this bill is not expected to pass the Senate, it is a reminder that shoring up the ailing National Flood Insurance Program is a priority for Congress. But shoring it up at what cost? According to the Houston Chronicle, Galveston County Judge Jim Yarbrough sent a letter to Senator Kay Bailey Hutchinson stating that if the levee protecting Texas City failed cerfication, the cost of insurance to homeowners could rise from $500 per year to $5000 per year. That is a big enough increase to force people out of their homes, particularly in the gulf region which has been hard hit by the oil spill, the loss of tourism and the moratorium on drilling.

So what should homeowners do? A good stop-gap plan is to be proactive. The local flood maps are available at If you live in an area designated as a flood zone, it might be prudent to buy flood insurance now at the 2010 rate before the new maps become active. At least that way, you are buying in at the current rates. And for home buyers out looking to purchase a new home this summer, find out whether your dream home is in one of the newly mapped flood zones. A little research today can save a lot of headaches a few months from now.

Friday, July 16, 2010

New 1099 Rules Could Spell Big Problems for Small Business

As we wait now for the President to sign the financial reform bill into law, I wanted to take today to talk about another huge looming problem for small business--the new 1099 rule. Last week the IRS announced that the new 1099 rule is going to be burdensome and difficult for small businesses to comply with. They are not exactly champions of the little guy, so when the IRS is sounding a warning we tend to sit up and listen.

We are talking specifically about the provisions of the health care bill which increase 1099 reporting requirements for all businesses purchasing goods or utilizing services over $600 in the course of a year. The new requirement, which goes into effect in January of 2012, promises to have disastrous consequences for small businesses owners and sole proprietorships.

Traditionally businesses have issued 1099s for contract labor. For instance, traditionally many loan officers received a 1099 at the end of the year from their employer. In our office, our employees were always W2d, but that was the exception, not the rule. In terms of services that we utilized, our two primary services that we ordered were appraisals and surveys. But we did not issue 1099s to corporations--only to individuals.

Currently, according to a number of sources, the average business owners issues about 10 1099s for the year. But imagine a world--which will soon be a reality--where every vendor from whom we purchase over $600 cumulatively over the course of the year must be 1099d. We will be issuing 1099s to Sams and Walmart as well as to any local businesses we use.

What about those of us who work in businesses where we routinely entertain as part of our business. As this was explained to me, we must 1099 the restaurants if we have spent over $600 in the course of a year. And, if we travel frequently for business, we must 1099 the airlines.

Of course, the tax payer identification number for each business we 1099 must be on the form, so we will have to obtain at taxpayer ID number for each business we frequent. I do believe that all companies will add their taxpayer ID number to their receipts to make compliance possible; otherwise we will be sitting on the phone for weeks trying to get the taxpayer ID numbers out of each company we have done business with over the course of a year.

The purpose of this new law is to ferret out transactions that might slip under the radar for tax reporting purposes and to make certain that all businesses are reporting all of their income. But the reality is that laws like this actually ultimately decrease the tax revenue that the government could collect. How? A burdensome bill such as this one makes it very hard for small businesses to comply, but it does more than that. Think about it--if you have to give a 1099 to everybody you buy office supplies from all year, don't you want to limit your supplier to one large company that is going to have its Taxpayer ID printed visibly on its receipt rather than frequenting local businesses part of the time and buying occasional items at the super store. In addition to compliance issues, this bill is going to put small businesses at a huge competitive disadvantage as buyers consolidate their sources. And since small businesses and entrepreneurship create most of the jobs in the United States, as small businesses fail, unemployment goes up and the tax base of working Americans who are contributing to the economy goes down. So in an attempt to squeeze every drop of taxable income out of American businesses, the bill actually does the opposite and creates less revenue.

Maybe all of us who are being unemployed by all of these excessive regulations should go back to school and get accounting degrees. With so many new rules in place, the days of Turbo Tax are probably going to be ending (has somebody told Tim Geithner?)so we can all try to get jobs helping the business that do survive file their income taxes.

Thursday, July 15, 2010

Taking a Closer Look at Appraisals now that Dodd Frank is on its Way to the President's Desk

The Senate passed the Dodd Frank bill at about 3:00 P.M.Eastern Standard time this afternoon. The bill is expected to be signed by the President next week, and then the long process of implementing each of the various changes to the financial system which are codified into law will begin.

I read this afternoon that the new law requires that over 550 new regulations be written, so we will not really know what we have on our hands for quite some time.

On that note, I need to correct and amplify a post from last week regarding HVCC and the new law. First, an apology. I always want to be as accurate as possible, and I said in error that the bill does not get rid of HVCC. The section on appraisals starts on page 2205 of the bill, in Subtitle F, and goes on to about page 2251. I started reading further past that, so I missed the paragraph sunseting the bill. On page 2216, paragraph J, the bill reads, "Sunset--Effective on the date the interim final regulations are promulgated pursuant to subsection g, the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect." So, technically, HVCC is gone. But many of the provisions of the code are enacted into the new bill. I am quoting here, but I invite everyone to read this section and see if you interpret it as I do.

For instance, on page 2208, section (c) "Free Copy of Appraisal:--A creditor shall provide 1 copy of each appraisal conducted in accordance with this section in connection with a higher-risk mortgage to the applicant without charge, and at least 3 days prior to the transaction closing date." Page 2243 states, under copies furnished to applicants--"In general each creditor shall furnish an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant's applications for a loan that is secured or would have been secured by a first lien dwelling promptly upon completion, but in no case later than 3 days prior to the closing of the loan..." And then on page 2244 it clarifies, "The applicant may waive the 3 day requirement provided for in paragraph (1) except where otherwise required in law."

This language comes directly from the home valuation code of conduct. I certainly have no problem furnishing borrowers with their appraisals--we always did even before HVCC, but this three day requirement with a possibility for a waiver came straight out of Cuomo's rule. We even have a form that borrowers have to sign with this exact language in it. So the three day rule with possibility of waiver is here to stay.

The House bill was supposed to contain strong language to guarantee appraiser independence. Page 2210 Section 129E states, "In General--It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraiser independence as described in or pursuant to regulations prescribed by this section...For purposes of subsection a, acts or practices that violate appraisal independence shall include--any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm or other entity conducting or involved in an appraisal, or attempts to compensate, coerce, extort collude, instruct, induce, bribe or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser; mischaractering, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of a transaction; and withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between parties." This section goes on to say, that these requirements shall not be construed to prevent any mortgage lender, mortgage banker, mortgage broker, real estate broker, appraisal management company, employee of an appraisal management company, consumer or any other person with an interest in a real estate transaction from asking an appraiser to: "Consider additional appropriate property information, including the consideration of additional comparable properties to make or support an appraisal; provide further detail, substantiation or explanation for the appraiser's value conclusion,[or] correct errors in the appraisal report." This final sentence is also straight out of the Home Valuation Code of Conduct. These were the three areas in which a lender could request that changes be made to a report.

Nothing in the new law appears to prohibit loan originators from ordering appraisals or having contact with the appraiser. However, the penalties for anything which may be interpreted as collusion are so severe that I believe in practice lenders will have to continue using AMCs. Page 2212 Section E, "Mandatory Reporting--Any mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency."

On the creditor side, "In connection with a consumer credit transaction secured by a consumer's principal dwelling, a creditor who knows at or before loan consummation, of a violation of the appraisal independence standards established in subsections (b) or (d) shall not extend credit based on such appraisal unless the creditor documents that the creditor has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling."

The penalties for violating this statute are severe. Violates "shall forfeit and pay a civil penalty of not more than $10,000 for each day that any such violation continues" for the first violation and $20,000 per day for any subsequent violation (page 2216 and 2217 section K items 1 and 2). OUCH! Those types of penalties are stiff enough to get anyone's attention. Further, the exact activities that constitute violations are unclear because these will be written in regulations developed by the Consumer Financial Protection Bureau along with the Federal Reserve Board and other regulatory agencies. "[They] and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services." Page 2214 states, "The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services..." Those rules, whatever they are, will determine the extent of the contact, if any, that the loan originator is allowed to have with the appraiser. But if a lender and I are both facing a $10,000 fine if the government decides that we are influencing the appraiser, both of us are going to err on the side of extreme caution. And if a loan that violates appraiser independence is an illegal loan, which it now is, we are going to be doubly careful. So I believe that ultimately, the use of AMCs will spread to all loans, not just those sold to Fannie Mae and Freddie Mac. Right now, my portfolio savings and loan lender can accept an appraisal that is not HVCC compliant because they don't sell the loan, but when this bill becomes law next week, they will not want to face the fines and consequences of having an appraisal that I ordered in the file. And I believe that the authors of this bill know this too, because they have instructed that the new good faith estimates should contain a breakdown of the AMCs fee and the part that was actually paid to the appraiser.

The bill does correct one big problem with HVCC and that is the low pay of appraisers by AMCs. On page 2215, the bill states that lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. "Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignments ordered by known appraisal managemnt companies." And the bill makes provision for a fee appraiser to charge more for a complex report: "In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non complex assignments."

Finally, one of the most frustrating and expensive aspects of HVCC for the loan officer and the borrower is that appraisals are basically not portable among lenders. Today, for instance, I have a loan that was declined, but the borrower had already paid for and received a perfectly good appraisal and a rent comp schedule. These two products are expensive, but she has no choice but to order new ones. When I was explaining to the agent that we have to move the loan, she said, "Under the new rules they have to transfer the appraisal." I explained that the financial reform bill will not be law until next week, but I looked up this provision especially because of this conversation. Page 2214 states under letter (h) Appraisal Report Portability, "Consistent with the requirements of this section, the Board, [and other federal agencies] may jointly issue regulations that address the issue of appraisal portability, including regulations that ensure the portability of the appraisal report between lenders for a consumer credit transaction secured by a 1-4 single family residence that is a principal dwelling of the consumer." So what does that mean exactly? We have to wait until they write the new rules to find out.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at

Tuesday, July 13, 2010

Government of the People for the People

Abraham Lincoln once famously stated that "Government of the people, for the people, by the people shall not perish from this earth." But what happens when the people lose faith that their government is actually representing them.

The Dodd Frank bill goes up for a vote on Thursday. With Scott Brown, Olympia Snowe and Susan Collins (all Republicans) promising to vote for it, the Democrats now have the votes pretty much assured. That is not a surprise--the passage of this bill has been a foregone conclusion since the healthcare bill passed in March amid lots of screaming from voters and contention. Financial reform was obviously much less contentious although I have been surprised at the passion of those on both sides of the political aisle who disagree with this bill.

But today, as we wait for the inevitable final vote which make this massive, intrusive legislation the law of the land, what I see is that even those who are most opposed to the bill seem convinced that their representatives do not represent them.

The National Association of Mortgage Brokers is sending out a final call to action asking all of their members to contact their Senators and ask them to vote against the Dodd Frank bill. The letter that NAMB has prepared contains talking points regarding the damage the bill will do. Note the first paragraph: "I write to you today, as your constituent, urging you to carefully weigh your vote for the Dodd-Frank Wall Street Reform and Consumer Protection Act. I have outlined in numerous letters and calls to your office the harm this bill will have on consumers, my customers and your constituents. A vote for this bill will do more to harm consumers and will be remembered by voters for many years to come."

The NAMB letter concludes with, "As a small business mortgage professional, I will undoubtedly be adversely affected should this bill pass, at a time when I have already suffered greatly throughout the economic downturn. But in the end, my consumers will be the biggest loser because of reduced competition in the marketplace and the lack of available credit."

While I do commend NAMB for a final effort, and I believe that it is our duty as U.S. citizens to remain engaged and involved with our government, I have to wonder about the wisdom of sending a letter that essentially says, "Even though you have ignored my repeated pleadings not to pass this bill, I am just letting you know that you are going to put me out of business when you do this." Acknowledging that they have ignored the grassroots efforts of the industry implies an understanding that they are not going to listen this time either.

This attitude was also reflected an email being sent out by Mortgage Trends with the subject line, "Act Now, before Congress Acts for you in July." The email starts with "Our industry is going down in flames RIGHT NOW unless we do somthing about it. One thing learned in the past is letter writing campaigns and phone calls have been completely ineffective." The author of the email is asking recipients to subscribe to a third party validation system which, he promises, will allow Congress to see that the industry is capable of acting as its own watch dog. The fact that registration for this system does not require a credit card or any fees to participate lends credance to his assertion that his system is about showing politicians that our industry is capable of policing itself. But if they don't care about our letters or our phone calls, and they don't care about the numerous mortgage credit restricting guidelines which have been implemented over the last two years, why would politicians suddenly respond to yet another campaign to "clean up the industry."

I emailed both of my Senators and my Congressman regarding the financial reform bill. I used strong language--words such as "evil" and "socialist"--because I wanted them to understand that I am completely opposed to this legislation. I knew before I wrote that my efforts would fall on deaf ears because I know their voting records, but I did it anyway because it is important to participate in the process. I got three generic emails back telling me that this bill is wonderful. On July 8, my Congressman, Harry Teague, sent out an email to his constituents who had emailed him on the subject of financial reform. It reads, in part, "Over the last few weeks, a bi-partisan House and Senate Conference committee has worked to create legislation to address dangerous Wall Street banking practices and help protect American consumers. Through this process it was important to me that their final product hold the big banks that caused our current economic mess accountable and protect the average New Mexican from predatory practices. I was pleased when the final bill, the Wall Street Reform and Consumer Protection Act, met my standards and I was proud to vote for it on the House floor...This bill ensures that taxpayers on Main Street won't be forced to pay for mistakes made on Wall Street, as those most responsible for these mistakes grow richer by the day."

In reality, we know that actually the opposite is going to happen. The biggest banks will be such an integral part of the financial system that they are indeed too big to fail. And since the Bureau of Consumer Financial Protection will have governance over both the smallest players in the industry--the self employed mortgage brokers--and the largest, and it will write regulations which will govern both, we can be pretty sure that Bureau will soon be adhering closely to the golden rule--he who has the gold makes the rules.

That is part of the problem we have right now. Huge corporations, including bank holding companies, can afford lobbyists to get their message across to law makers and regulators. But small business people, including mortgage brokers as represented by the National Association of Mortgage Brokers, and small mortgage banks as represented by the Mortgage Bankers Association, don't have the money to pay top notch lobbyists. All we have is our voice--our letters, our emails, our grassroots lobbies in Washington D.C. I participated in six lobby trips with the National Association of Mortgage Brokers, and I was always amazed by the open lack of interest that our legislators displayed toward us. We after all, paid our own expenses to go to Washington D.C. to meet with our elected officials to let them know about the issues that mattered to us, and yet, so often, the legislators let us know that they were not very interested in what we were there to say. We were just a grassroots lobbyist, rather than a top notch Washington lobbyist. The distinction between the two is the difference between having your income capped (us) and getting to keep all of the yield earned on interest rates when you sell a closed mortgage loan (them).

Lincoln said that government for the people shall not perish--not government for some people, or government for lobbyists, or government for corporations. Making trips to Washington D.C. as a grass roots lobbyist may not make any difference, but making a trip to the voting booth in November could. We still have a voice, and we need to use it. Laws can be changed, revoked, replaced and undone, but that will happen only if the people in Washington passing the laws actually understand that our government is representative, and they represent us.

Friday, July 9, 2010

I am From the Government and I am Here to Help

The title of today's post comes from a famous quote by Ronald Reagan. According to him, those are the scariest words ever uttered.

As we near the finish line on the Dodd Frank Bill, it is clear that the prevailing attitude which is apparent throughout the pages of this bill is, "I am from the government, and I am here to help."

As I look through the pages of the final bill, I see new entitlements in the form of additional funding to the Making Home Affordable Program which will subsidize mortgages for those who are unemployed and in the form of entitlement programs to create mainstream access to financial institutions for those relying on payday lenders and check cashing institutions. Those programs are going to get a lot of press because people love giveaways. On the Monday after financial reform passed through conference, I got a phone call from a young woman from a very affluent family in El Paso asking me about the changes to HAMP program which will allow her to get a principal reduction on her mortgage. That's all many people are going to hear--"What can I get out of this that is free?"

I also see a lot of new restrictions and limitations on freedom, and these apply mainly to consumers and small businesses. No longer are you as the consumer going to be able to decide what you can afford in the way of a mortgage, or how you should be able to invest in the stock market. The government is going to be "limiting" the types of mortgages that are available and apparently determining the financial literacy of investors.

Who gets hurt in this? The middle class, the small business owner, the man or woman who works hard for a living and is hoping to move ahead in life. Those of us who work hard each day and start our own businesses, pay our taxes, and do not rely on the government for help are ultimately going to have fewer options to borrow money, less access to credit, and less access to investment options for our money. The government will be studying us to determine whether we are smart enough to make positive choices about loans and investing. The price of security is often freedom, and in their promise to keep us safe from ourselves, they must tell us what we may and may not do.

Who benefits? The banking giants who got the bailout money in the first place. This is the real irony of the financial reform bill, and it is a fact agreed upon by both liberals and conservatives who are angry about this bill. I read an opinion piece this morning by a liberal blogger furious at the Democrats and the Obama Administration because the financial reform bill basically gives more power to the giant banking lobbies. A Newsweek article published June 25, echoes this same sentiment with the headline, "Financial Reform Makes the Biggest Banks Stronger." In the article, author Michael Hirsh quotes a former U.S. Treasury official who insisted on remaining anonymous but has followed the bill closely, "The bottom line: this doesn't fundamentally change the way the banking industry works. The ironic thing is that the biggest banks that took most of the money end up with the most beneficial position, and the regulators that failed to stop them in the first place get even more money and discretion." Hirsh continues, "Indeed the bill may make these banks even more critical to the economy and therefore even more likely to be rescued in some future imposing new capital charges that will create barriers to entry for new firms, especially in swaps and other derivatives, while at the same time permitting giant bank holding companies to continue controlling most of what they were before, 'we've consolidated the position of the five banks that were most central to the crisis.'" The five banks he is talking about are JP Morgan, Goldman Sachs, Bank of America and Morgan Stanley and Citigroup. He also throws Wells Fargo into the mix, for now. (If I were an executive at Wells Fargo I would be very nervous about being number six since Treasury officials keep insisting the final number is five.) Hirsh also quotes a former Federal Reserve official as stating, "It makes it tougher now to kiss somebody off when they get into trouble."

What the Dodd Frank Act is ultimately about is the consolidation of wealth and power into a few hands. The mortgage industry, for instance, was an over $3.2 trillion dollar industry a few years ago, but those dollars were spread among many small businesses--small mortgage brokers, small mortgage banks, and small independent mortgage lenders who packaged their loans and sold them. There were a lot of players and a lot of competition, which kept costs down.

The Dodd Frank bill makes the cost of business higher for smaller players. The entire focus of the bill is on making business more difficult and more expensive so that the smaller, less well capitalized entities will wash out, which then leaves the largest entities more empowered.

Consumers are going to see a difference as the smaller players now disappear completely and only the larger companies are left. Taxpayers are going to see a difference the next time that these companies need help. As Hirsh points out, the Federal Reserve cannot bail out any one firm, but it can supply liquidity to shore up the entire system, and since the five surviving major banks have become the five pillars of the US financial system, if one of them wobbles, the entire system is endangered, thus justifying a bailout to save the system as a whole.

What is most disturbing about this whole thing is that while financial reform is just becoming a reality next week, the processes that allowed it to happen have been going on for years. The former president of the former Ohio Savings Bank reportedly told his staff in 2003 just at the beginning of the real estate boom, "When this is over, there will only be five major banks left." That was well in advance of the height of the boom or the subsequent bust. An AE for Ohio Savings Bank at the time repeated his statement to me in 2007. I have never forgotten it. Was it prophecy, or did he know that what we are seeing today is not a reaction to the stock market freezing in 2008 but a well thought out and orchestrated strategy which was developed years ago to fundamentally change the American system? I don't really subscribe to conspiracy theories, but this situation really makes me wonder who is pulling the strings of our government and our financial system.

John Boehner has taken a lot of criticism lately for equating the Dodd Frank bill to using a nuclear weapon to kill an ant. I like the analogy, but I think it needs tweaking. I would say that this is more like using a nuclear weapon to kill an ant, missing the ant, and annihilating all life within a thirty mile radius. This bill will fundamentally change the way we live, work, save money, invest money, and manage our money in this country. And when it is all over, only the chosen elites win.

Thursday, July 8, 2010

A Study on Studies

In yesterday's post, I discussed a study that the Dodd Frank Wall Street Reform Act calls for regarding appraisal methods and processes to determine whether the appraisal methods being used led to speculation during the housing boom. As I thought about this study, it occurred to me that as I have read through the Act, there appear to be an inordinate number of studies built into the new law. So tonight I looked through the table of contents and I counted them. I came up with over 27.

Title I on the subject of Financial Stability calls for a study of the effects of the size and complexity of financial institutions on capital market efficiency and economic growth. It also calls for studies and reports on holding company capital requirements. Title II, which addresses the Orderly Liquidation Authority, calls for a study on bankruptcy process for financial and nonbank financial institutions. It also calls for a study on "secured creditor haircuts," and a study on international coordination relating to bankruptcy process for nonbank financial institutions.

Title IV--Regulation of Advisers to Hedge Funds and Others--calls for a study and report on accredited advisors and a study on self-regulatory organization for private funds.

Title V--Insurance--calls for a study of the nonadmitted insurance market.

Title VI--Improvements to Regulation of Bank and Savings Association Holding Companies and Depistory institions--calls for a study of bank investment activities.

Title VII--Wall Street Transparency and Accountability--Part I calls for "Studies." The table of contents does not specify the purpose of the studies.

Title IX--The Investor Protections and Improvements to the Regulations of Securities--calls for 13 separate studies. Among these is a government accounting office study of "person to person lending", a study and rulemaking on assigned credit ratings, and a study regarding financial literacy among investors. Subtitle G calls for a study and report on credit scores.

Title XIV--Mortgage Reform and Anti-Predatory Lending Act, calls for multiple studies including a study of defaults and foreclosures, a study of the effect of drywall on foreclosures, and a study of the effectiveness and impact of various appraisal methods, valuation models and distribution channels and on the Home Valuation Code of conduct and Appraisal Subcommittee. (This one was discussed in yesterday's post.)

When I was growing up, my father equated anything particularly wasteful to a government study on the mating habits of the tsetse fly. Whether there ever was such a study I do not know, but this was the standard by which he judged bureaucratic nonsense. The numerous studies mandated by the Dodd Frank act will probably be about as helpful as a study on the mating habits of the tsetse fly, partially because rather than fixing problems that the legislators knew, or had good reason to suspect, were major issues for Americans, the Congress and the Senate merely called for a study. Rather than setting up a time frame to dismantle Fannie Mae or Freddie Mac, which the bill itself acknowledges may cost tax payers over $5 trillion dollars, the Dodd Frank bill calls for a study of the problem. In spite of industry concerns regarding HVCC and circulated petitions with over 100,000 signatures requesting that it be over turned, and in spite of the obvious legal problems with an attorney general from one state being allowed to strong arm Fannie Mae and Freddie Mac into setting a policy that affects the entire country, the bill calls for study of its effects. Why do we need so many studies?

The new bill calls for so many studies partially because the authors want to know about the personal financial habits of Americans. Where do we spend money, how do we invest, how financially savvy are we? That gives them a benchmark for how we need to be further regulated.

For example, Title IX--Investor Protections and Improvements to the Regulations of Securities--which may be referred to as "Investor Protection and Securities Reform Act of 2010," calls for a study regarding financial literacy among investors. The Act states that The Commission shall conduct a study to identify "the existing level of financial literacy among retail investors, including subgroups of investors identified by the commission, methods to improve the timing, content and format of disclosures to investors with respect to financial intermediaries, investment products and investment services, the most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies...methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products...the most effective existing private and public efforts to educate investors, and in consultation with the Financial Literacy and Education Commission a strategy (including, to the extent practicable, measurable goals and objectives) to increase the financial literacy of investors in order to bring about a positive change in investor behavior."

Retail investors--that's you and me. The government is authorizing a study of how much we know so as to affect a "positive change" in our behavior. This study is important because the newly established investor advisory committee, which the act creates within the SEC, shall advise and consult with the SEC on matters relating to investors. The Committee shall be people who are knowledgeable about investment matters, and they shall include a representative on behalf of senior citizens. They and the SEC will work together to "gather information from and communicate with investors or other members of the public, engage in such temporary investor testing programs as the Commission determines are in the public interest or would protect investors, and consult with academics and consultants as necessary to carry out this subsection."

What!!! I, the retail investor, will now be studied to find out how financially literate I am and possibly subjected to a test before I can invest my money? Seriously? This is my own money, which I earned myself, but some government bureaucrat who can't work together with a bunch of other bureaucrats to get the budget balanced and the deficit under control is going to study me like a lab rat in an effort to affect a "positive change" in my behavior. And I am supposed to be glad because it is for my own protection.

Come to think of it, I think they should stick studying the tsetse fly and leave the rest of us alone.

Wednesday, July 7, 2010

How Will Financial Reform Affect the Future of HVCC? Part II

When I wrote Part I of this article, I had hopes that the financial reform bill would sunset HVCC--the Home Valuation Code of Conduct--which was the agreement made between Andrew Cuomo and Fannie Mae and Freddie Mac in order to get Cuomo to drop a criminal investigation against both entities. HVCC was the code adopted which legislated that mortgage loan originators would no longer have contact with appraisers and that appraisals would be ordered through appraisal management companies.

The reason that I had hopes that the code would be sunseted was that the house version of the bill did sunset the provisions of the code. However, the Senate bill did not, and the final bill does not. While the bill does call for a study of the provisions of the Home Valuation Code of Conduct and its impact on the housing market, the bill does not eliminate it and it does require that originators not have contact with appraisers. If anything, the final version of the bill actually strengthens the provisions of the HVCC, because HVCC only pertained to loans sold to Fannie Mae and Freddie Mac, while the new Dodd-Frank Wall Street Reform and Consumer Protection Act, as it has been been renamed, applies to all residential mortgage lending.

As those of us who work in real estate are well aware, the Home Valuation Code of Conduct prohibits a loan originator from hiring an appraiser or having any contact with the appraiser. It also prohibits ordering a second appraisal if the buyer and seller disagree with the valuation of the house. The only way to correct a low valuation is to start over with a new lender and a new loan and order a new appraisal. And in real terms, the Home Valuation Code of Conduct means that is a loan is denied for any reason, the appraisal is not really transferable, even if the reason for the denial had nothing to do with the property. This can get very expensive, especially on appraisals for investment properties where additional schedules are required, since the AMCs set the price. A borrower can end up spending close to $1000.00 to get a second appraisal with an operating income statement for an investment property if his loan is denied.

This is one reason that many of us in the lending and real estate communities were hoping that HVCC would be ended in the financial reform bill and replaced with language guaranteeing appraiser independence. But instead, HVCC goes on. The Dodd-Frank Act deals with the problem of HVCC much the way that it deals with the problem of Fannie Mae and Freddie Mac and many other problems--it calls for a study. "12 months after the date of enactment of this Act, the Government Accountability Office shall submit a study to the Committee on Banking Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives, and 90 days after the date of the enactment of this Act, the Governmment Accountability Office shall provide a report on the status of the study and any preliminary findings to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives."

And what will this study cover? "The study required by this section shall include an examination of the following...The prevalence, alone or in combination, of certain appraisal approaches, models and channels in purchase money and refinance mortgage transactions; The accuracy of these approaches, models and channels in assessing property as collateral; Whether and how these approaches, models and channels contributed to price speculation during the previous cycle; the costs to consumers of these approaches, models and channels, the disclosure of fees to consumers in the appraisal process; to what extent the usage of these approaches, models and channels may be influenced by a conflict of interest between the mortgage lender and the appraiser and the mechanism by which the lender selects and compensates the appraiser...How the HVCC affects mortgage lenders' selection of appraisers; How the HVCC affects state regulation of appraisers and appraisal distibution channels; how the HVCC affects the quality and cost of appraisals and the length of time to obtain an appraisal; and how the HVCC affects mortgage brokers, small businesses and consumers."

Actually the government does not need to spend taxpayer dollars to do a study on this. The mortgage broker community and the appraisal community have all weighed in on HVCC, and the regulation has received more than its fair share of bad PR since it went into effect in May of 2009. Opponents of HVCC organized a petition which received over 100,000 signatures asking that HVCC be repealed last year.

In addition, the Dodd Frank Bill authorizes a second study, which shall include an examination of, "the Appraisal Subcommittee's ability to monitor and enforce State and Federal certification requirements and standards including by providing a summary with a statistical breakdown of enforcement actions taken during the last ten years, and whether existing Federal financial institutions exemptions on appraisals for federally related transactions needs to be revised; and whether new means of data collection, such as the establishment of a national repository would benefit the Appraisal Subcommittee's ability to perform its functions." Last but not least the Dodd Frank Bill will amend RESPA by adding that a new combination good faith estimate and truth in lending form, which is mandated to be developed by the new Bureau of Consumer Financial Protection, may provide a clear disclosure of "the fee paid directly to the appraiser by such company (an AMC) and the administration fee charged by such company (the AMC)."

In other words, watch out. After the Feds complete their study of the models, processes and procedures for appraising properties and whether those models and processes led to the last real estate boom, they can rewrite all of the rules of appraising to make sure that we never have another boom again. And it is apparently okay to make small business owners work for Appraisal Management Companies as long as the consumer is fully aware that much of the money he is paying for his home valuation is going to the AMC taking the order and not to the individual doing the work.

Tuesday, July 6, 2010

What's In (and Out) of the Financial Reform Bill Part II

As we anticipate the financial reform bill being signed into law next week, we will be looking at the final draft of this bill this week. A number of amendments and changes were added at the last minute, so the final bill contains quite a few changes.

The section we are examining is Title XIV--The Mortgage Reform and Anti-Predatory Lending Act. These regulations shall take effect no later than 12 months after the regulations are issued in final form. The findings on page 8 of this section of the final bill are particularly interesting: "The Congress finds that economic stabilization would be enhanced by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit, while ensuring that responsible, affordable mortgage credit remains available to consumers." Personally, I don't think that the federal government should be setting lending standards to limit the availability of mortgage credit, but that is exactly what this bill does.

The final draft of the amendments did resolve some glaring problems from the initial legislation. For instance, the final mortgage reform act does leave room for seller financing for up to 3 properties in 12 months to the purchasers of those properties. That would allow investors who want to get rid of their properties to provide seller financing. There are, however, some restrictions--the seller cannot be the builder of the home; the loan must be fully amortizing, the seller must verify that the individual has a "reasonable ability to repay the loan"; and the new loan must have a rate that is fixed for at least 5 years. These restrictions on seller financing--especially the text legislating that the seller must verify the income and ability to repay of the purchaser--are new, but at least they preserve seller financing as an option, which in these days of tightened credit standards is going to be increasingly important.

Stated income loans are outlawed under the new rules. All borrowers must be able to prove their income with at least a W2 and their income must be verified through tax transcripts with the IRS. Currently this is standard practice, but many borrowers have been looking forward to the days when credit guidelines will relax and they will be able to get stated income loans again. Those days are not coming back. This has special implications for people living in border communities like El Paso where we deal with a lot of foreign income. Traditionally, the foreign national borrower could make a large downpayment and state their income. Now, they must be able to prove their income with tax returns, which can create challenges. The new act does provide an exemption for streamline refinances as long as the consumer is not 30 days or more past due on the current mortgage, and the refinance does not increase the principal balance on the current residential mortgage except to the extent of the fees and charges allowed by new rules as written by the new governing agencies.

Finally, the new Act revises the way that mortgage originators are paid. A mortgage originator may no longer receive payments from the lender unless none of the origination fees are paid by the consumer. Further, there is a three percent cap on points and fees for qualified loans. Qualified loans have a presumption of compliance with guidelines regarding income verification, so in practical terms these loans are quickly going to become the only loans that can be originated and sold on the secondary market. As industry professonals have complained that since this cap must include all lender fees it will lead to fewer smaller loans being originated and to less financing being made available for smaller properties, the new Act calls for a study to determine whether financing is actually affected by the new rules. Prohibited practices include: "steering any consumer from a residential mortgage loan for which the consumer is a residential mortgage loan that is not a qualified mortgage...abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age...mischaracterizing the credit history of a consumer or the residential mortgage loans available to a consumer; [and] mischaracterization of the appraised value of the property securing the extension of credit."

Penalties for violating this statute are stiff--the mortgage originator determined to be in violation of this statute can be fined up to 3 times the total amount of direct and indirect compensation plus court costs and the consumer's attorney's fee.

Industry experts predict that since banks are allowed to receive payments on the servicing release premium when the loans are sold, we will see lender administrative fees rolled into higher interest rates which will be sold to the consumers. And that is probably true, because in the end nothing is free. Banks are going to pass their costs on to consumers one way or another.

The new statute ends mandatory arbitration, so consumers with a complaint have the right to go to court. This is an important change because lenders have come to rely on mandatory arbitration clauses to keep costs down in disputes.

Tomorrow we will look at the provisions of the bill as they relate to appraisers and HVCC.

Friday, July 2, 2010

Rights vs. Expectations

Finland announced this week that it is the first nation to make broadband access the right of every citizen. As we are coming up on Independence Day and the chance to celebrate our own rights and liberties as a nation, Finland's announcement set me thinking. Is broadband access actually a right, or is it merely an expectation? Does an expectation deserve to be upgraded to a right? What difference does it make anyway?

One of the best sermons I ever heard was actually not a sermon in the traditional sense. The pastor of the church I was attending at the time went on vacation, and the assistant pastor spoke in his place. But the assistant pastor mainly did family counseling and so when he had to preach, he used his counseling sessions as the basis for his talk. And the sermon on this particular Sunday was on this issue of rights versus expectations based on his experiences counseling families. It seems that we all approach life with a given set of expectations--expectations for our careers, our social lives, our relationships, our financial success, etc. The problem is that we mentally turn those expectations into rights, and then when our expectations are not met, we get angry. We may say that we have the right to be loved, respected or appreciated by an individual, but when that person hurts us, they have violated our rights. The pastor's point was that most of the things that we claim as rights actually are not--they are just expectations. For example, most people believe that they have a right to be married, but marriage is not a right, it is an expectation. If you believe that it is your right to be married, and yet it never happens for you, you will become a very bitter individual. In truth, he told us, we have very few actual rights, and we need to learn the difference between rights and expectations in order to manage our personal emotional health and control our reactions to disappointment.

I have thought about this comparison of rights versus expectations for many years, and I think that it is very applicable in the current social and political environment. As we celebrate Independence Day, we remember the Declaration of Independence, which states that we have the right to life, liberty and the pursuit of happiness. Later, when the Constitution was signed, we were given a bill of rights which gave us, among other things, the right to freedom of religion, freedom of the press, freedom of expression, the right to keep and bear arms, and the right to peaceful assembly. Over the 234 years of our nation's existence, we have added other rights, such as the right for all Americans to obtain credit for housing without regard to race, religion, handicap or familial status, the right to live in whatever neighborhoods we choose, the right of all citizens of legal age to vote, and so on and so forth. We are arguably the freest society that has ever existed. But does having so many legitimate rights make us less sensitive to what genuine rights are?

For instance, in my office we comply with the Gramm Leach Bliley act which protects people's confidentiality in financial transactions. The disclosure states that the top that the borrower has the right to privacy. Of course, we all know that we do not have a right to privacy and certainly not to absolute privacy. We live in an era of surveillance where our movements are captured on video in stores, hotels, parking lots and on the freeway. TSA scanners use virtual strip search X-rays to make sure that we are not taking weapons on planes. So we know that we do not have an absolute right to privacy. What we mean is that we have a limited right to have certain financial transactions kept confidential from the general public and from telemarketers who might be planning to hound us if we remember to opt out of the telemarketing program.

So what about the right to broadband? Actually, we could really see a universal right to broadband access in this country in the not too distant future. If broadband access is a right, and every citizen is entitled to broadband access, then the airways must be freed up to allow all of that access. But then my exercise of my right to broadband may interfere with another person's rights. My brother and my sister-in-law both work for local news. There is not enough airspace available in the United States to give everyone access to broadband, so the FCC is looking at possibly shutting down broadcast television.

This would mean an end to the major networks that everyone has been used to for over 50 years. When my sister-in-law first told me about this, I asked her what would happen to those people who are used to getting their television free. She replied that the government would subsidize the cost of cable or satellite television for these people. But what about the jobs of the people employed by broadcast television stations. In pursuit of giving all citizens the right to broadband access, are we taking away the right of my brother and sister-in-law to jobs they have had for 20 years and 10 years respectively?

And that brings us to another question--is free television a right? Most of us would think so since television has always been free to the viewer except for the cost of the set and the cost of the electricity. (Of course, it is not genuinely free, because advertisers cover the cost of the programming.) After about 60 years of television, most of us cannot imagine not having television. (Maybe that is covered under the pursuit of happiness clause in the Declaration of Independence.) Should something that has always been free to the end user suddenly be replaced with something that costs (satellite or cable) and should that cost then be levied on taxpayers? Is television an entitlement?

If the local television stations are shut down and people like my brother and sister-in-law lose their jobs, the new financial reform bill dictates that they can receive up to 2 years of mortgage payment assistance. The Secretary of the Treasury will "establish underwriting guidelines or procedures to allocate amounts made available for loans and advances insured under this section and for emergency relief payments made under this section 106 based on the likelihood that a mortgagor will be able to resume mortgage payments," although the assistance shall not exceed $50,000 per homeowner. Since my brother has been extremely frugal, $50,000 of assistance would pay off his mortgage completely. That would give them time to decide what they wanted to do with the rest of their lives before they have to go back to work so that they can once again contribute to the tax base so that they can do their part to help subsidize television and broadband.

Happy Independence Day!