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.