January 30, 2008
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 6:30 am
Ruth Lee
Fiduciary and Agent Status:
Both of these standards of care have been roundly opposed by mortgage originators. Some of the arguments against specifically reference the inability of the originator to determine all factors considering that ECOA proscribes certain questions or their consideration in making the loan.
fiduciary
- 1) n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty.The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stockbrokers, title companies or anyone who undertakes to assist someone who places complete confidence and trust in that person or company.Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. He/she/it must avoid “self-dealing” or “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it.For example, a stockbroker must consider the best investment for the client and not buy or sell on the basis of what brings him/her the highest commission. While a fiduciary and the beneficiary may join together in a business venture or a purchase of property, the best interest of the beneficiary must be primary, and absolute candor is required of the fiduciary.
- 2) adj. defining a situation or relationship in which a person is acting as a fiduciary for another.
fiduciary relationship
- n. where one person places complete confidence in another in regard to a particular transaction or one’s general affairs or business. The relationship is not necessarily formally or legally established as in a declaration of trust, but can be one of moral or personal responsibility, due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling.
agent
- n. a person who is authorized to act for another (the agent’s principal) through employment, by contract or apparent authority. The importance is that the agent can bind the principal by contract or create liability if he/she causes injury while in the scope of the agency. Who is an agent and what is his/her authority are often difficult and crucial factual issues.
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 12:26 am
For many years now, there have been quakes and tremors in the mortgage industry over the words “duty of care,” “fiduciary” and “agent” as they relate to legislative and regulatory language. Why do the matter? Specifically, they matter because they define the context of the relationship between the originator and the borrower. This context establishes the legal recourse that the borrower has against the originator, as defined by the nature of their relationship.
There are three standards at issue, with the least restrictive being:
- HR 3915: Federal Duty of Care: The originator maintains a federal “duty of care.” This means that both the “duty of care” standard under legal precedent must be met, as well as the conditions laid out within HR 3915. Under the lesser standard of a federal duty of care, the originator is expected to take all reasonable precautions to not be negligent in their dealings with the consumer. Under HR 3915, the federal duty of care specifically excludes the terms “agent” and “fiduciary” from the definition of the relationship.
duty of care
- n. a requirement that a person act toward others and the public with the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would use. If a person’s actions do not meet this standard of care, then the acts are considered negligent, and any damages resulting may be claimed in a lawsuit for negligence.
Requirements to satisfy “Federal Duty of Care” under HR 3915
1. Licensing and registration for all originators, as applicable under State or Federal law, referencing new standards and definitions under Subtitle A.
Notable clauses:
- a. National Mortgage Licensing System: The Nationwide Mortgage Licensing System will streamline the licensing process for both regulatory agencies and the mortgage industry by providing a centralized and standardized system for mortgage licensing. The NMLS initiative was begun by state mortgage regulators in 2004 in response to the increased volume and variety of residential mortgage originators and the need to address these changes with modern tools and authorities. The NMLS was created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). It is owned and operated by the State Regulatory Registry LLC (SRR), a wholly owned subsidiary of CSBS. The system has been built and maintained by the Financial Industry Regulatory Authority (FINRA), who operates similar systems in the securities industry.
- b. Requirement that all originators and loan documentation are must demonstrate the originator’s original and unique identifier number.
- c. Clarification of Supervised and Independent processors and underwriters: whereby only Independent processors and underwriters are required to obtain licensing and registration
2. Suitability – a concept borrowed from the securities industry which demands the broker have a reasonable expectation that the recommendation of an investment is suitable to the client. In making the assessment for securities, the broker must consider risk tolerance, other holdings, objectives, financial needs etc… Under this legislation, the suitability is tailored to address three areas:
- a. Net tangible benefit
- b. Ability to repay
- c. No predatory characteristics outlined within
3. Compliance
- a. Full, timely and accurate compliance with all disclosure requirements
- b. Certifying lender’s compliance to mortgage origination requirements
Next installment: Fiduciary vs. Agent
January 24, 2008
Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 6:58 pm
Ruth Lee
As I mentioned in my previous post, there are two bills in Congress today that could have a major impact on the way that mortgage loans are originated and sold across our market.
The first bill, HR 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007 was passed through the House on Nov 15, 2007 by a roll call vote of 291 Ayes, 127 Nays, 14 Present/Not Voting. The bill is sponsored by Rep Bradley Miller and co-sponsored by 27 others, including Rep Barney Frank.
Following introduction of the bill to the Senate on Dec 3 2007, Senator Chris Dodd introduced his own brand of mortgage reform legislation, The Homeownership Preservation and Protection act of 2007. On Dec 12, 2007, this bill was referred to the Committee on Banking, Housing, and Urban Affairs.
Both bills address many facets of the industry, to include compensation, licensing, regulatory governance, predatory lending and HOEPA triggers, appraisals and general due diligence. In reviewing each of the bills, I will explore some of the high points and comparisons between the two. Stay tuned - more to follow…
Filed under: HR 3915, Mortgage Industry Legislation, Quality in Lending, S.2452 — admin @ 2:54 pm
Ruth Lee
I spend a lot of time attempting to maintain a solid, working knowledge of the events, milestones and issues facing the mortgage world. However, yesterday, I was humbled when a client asked me about the new legislation being proposed. His specific question was about the difference between the House Resolution 3915 and the new Senate version S. 2452. At that moment, I realized that although I have read about and spoken about both of these bills, other than big-hand, little map analysis, a la’ primetime news… I really just had rumor, innuendo and “sound bytes” to offer.
The real question is: how will the most substantive legislative reform EVER proposed impact our industry? Which one offers what, and how does that impact our ability to execute our work as mortgage originators?
Unfortunately, upon going back to do a little research, I came away with many more questions than answers… As such, I would like to explore some of these topics… lay out a little bit of fact, dig into the meaning behind cleverly worded language.
Some of the most interesting topics of our day are addressed in the legislation, and I would like to address them here: is YSP finished? Are mortgage brokers going to survive? What regulatory agencies will be affected, empowered or denuded? What cottage industries will arise to support the new legislation? What industries will be shut down in the wake of the legislation?
More to come over the next several weeks!
January 18, 2008
Filed under: Customer Service, Quality in Lending — admin @ 12:29 am
Ruth Lee
Customer service means many things to many people. However, in the mortgage industry, the definition of customer service is changing. For several years now, customer service has only been defined by speed and turn-time. The “customer” was defined by who was driving the volume: the originator.
Today, The “customer” in customer service are a wide range of institutions that rely on quality production to ensure their viability in a changing market. These include the investor, the hedge fund, the world banks and, finally, the originator. The originator was mentioned last because they are now last on the list of parties to the transaction that can demand speed.
Volume no longer rules the industry; quality production – loans that can actually sell- rules the day.
January 15, 2008
Filed under: Closing, Post Closing, Quality Control, Quality in Lending — admin @ 9:53 pm
Mary Kladde
One of the biggest objections I find to using fulfillment services such as those offered by Titan’s is control over document production. At Titan, we require control over the document production process as this is one of the defining moments in a loan’s life. As many lenders know, the production of loan closing documents and the overall facilitation of the closing process often times has the single most significant impact on post closing performance to include warehouse line management and timely investor purchase turn times. Not controlling this process would make it impossible to provide meaningful service reps and warrants.
Most of our potential clients have gotten used to producing docs, even as a broker, and cannot fathom why we would want or need to take that level of control away from them. Let’s face it, as a service company you’d be insane to rep and warrant what you can’t control. Looking at the market today, there are very few outsource fulfillment companies left that will “only” do post-closing. It is specifically due to the fact that without controlling the closing process, you are endlessly cleaning up small, yet significant mistakes. Mistakes, that if caught in the document and closing process, would have taken only moments to resolve at the time; now consume time and money for days in post closing. Not controlling the closing process means that you are cleaning up other people’s mistakes. And right, wrong, or indifferent, these mistakes roll down hill and fall onto the shoulders of the last person to touch the file. It’s no longer an issue of who or how the mistake was made, but how long it has taken to clean up and clean up always seems to take longer than expected.
Today, there are innumerable doc engines that will produce a doc set for a closing in a matter of minutes. However, many clients are not aware that there are relatively no reps and warrants for the accuracy of those document packages specific to investor programs and requirements. With few exceptions, the client is totally reliant upon the infallibility of the doc engine and in-house expertise and experience to not expose them to purchase issues or warehouse line loss. In addition, the lender is also reliant upon the accuracy of in-house data entry. “In-house” there are no reps and warrants against losses from poor employee performance or lack of experience.
When using these doc engines, it is important that the lender employ an experienced closer. Not a processor that knows how to use a doc engine, but an experienced closer. The fact is most problems for both purchase and repurchase happen in closing. An experienced closer knows that document production is the easiest part of their job. The work they perform on the closing and funding audit to ensure accuracy, compliance, and adherence to the Final Approval Clear to Close are the real work in closing. And, it is a true fact that it is almost impossible for a processor to audit themselves.
Here at Titan, we are able to produce figures for the settlement agent prior to receiving the Final Clear to Close Approval. This enables our lenders to disclose fund requirements to the borrowers well in advance, securing their customer’s confidence in the transaction. While the lender continues toward their Final Clear to Close Approval, we simultaneously perform an impartial 3rd party audit of the file, complete verbal verifications of employment and the necessary compliance and fraud checks needed to produce a clean and timely disbursement. All work in unison to produce and deliver documents to the settlement agent when expected. At Titan, we have the option of being able to accomplish the meat of the closing work, even as we are waiting for the Final Approval to send live docs. Experienced closers allow Titan to perform with agility not only for the borrower, but for the lender, ensuring a purchasable loan package.
January 11, 2008
Filed under: Foreclosure, Mortgage Industry Trends, Quality in Lending — admin @ 5:25 pm
Ruth Lee
Over the last few months, it is hard not to notice all of the gleeful hand-rubbing and “I-told-you-so-ing,” as disgruntled ex-employees, ex-insiders and ex-originators Monday morning quarterback the potential demise of one of the country’s largest lenders. The Implode-o-meter forums froth with idle comments from bored survivors, with a few fantastic exceptions. The fact is that no one hit the meter because Countrywide’s mean old underwriters didn’t accept your trumped up appraisal… the industry hasn’t lost its potency over extended underwriting or closing turntimes… (In fact, many would argue that the push for volume over quality was instrumental in the collapse.) Even the more egregious slights, like the ones they are going to court over, well, they just weren’t the fulcrum either. The reason that we are in trouble is simple: there are many homeowners that cannot pay their mortgage and foreclosure is BAD for business.
There are a thousand reasons why homeowners can’t pay their mortgage: some chose poor loan products, others were coerced into them, many bought houses they couldn’t afford, real income is declining, productivity is increasing causing manufacturing jobs to evaporate, the value of the dollar is falling, Katrina, rising health care costs, Wall Street made some bad calls on the whole underwriting thing. One of the main reasons I would argue: we have not been compelled or incented to save; we are incented to spend. In our consumer climate, if you can’t become an millionaire in America; being a “Visa”nairre is almost as good.
Investors relied on the stability of the American mortgage; real property as collateral, a track record of strong repayment and a well-established rule of law. But, as that same collateral depreciates, the track record erodes into a Cliff’s Notes of bad assumptions and worse performance, and regulators scramble to respond with ham-fisted alacrity, those enticements are gone…leaving a sudden desire to invest in anything that doesn’t have the word mortgage in the title. Without investors, we have less liquidity. Without liquidity, loans must compete for those dollars…and guess which ones are winning…definitely not the wage-earner stated, pay option ARM on a non warrantable igloo in downtown Miami.
I am not an apologist for Countrywide; frankly, I am just a practical, steely-eyed capitalist. There is a true link between the demise of an institution the scope and size of Countrywide and investor confidence in the industry as a whole. Since investor confidence is a key factor in how we are going to rebound, and many of us still in the industry need the rebound sooner than later, I am hoping that they are able to recover and flourish. I finally understand the impulse for bailouts and intervention. Whatever the response, we need action. We need resolve to adapt and respond to our investors. Neither their family nor mine can eat “I told you so.”
January 8, 2008
Filed under: Correspondent Lending, Mortgage Industry Trends, Quality in Lending — admin @ 9:24 pm
Ruth Lee
I never fail to marvel at the sheer survivability of the entrepreneurs in the mortgage industry. For those that are sounding the death knell of the small mortgage entrepreneur, I wouldn’t ring it too loudly. Most of the mid-tier wholesale lenders are fleeing from wholesale production and anything to do with the word broker.
Any quick overview of the implode-o-meter will show a who’s who of the players in the wholesale arena that have all exited stage left by force or design. Plagued by the inability to fund many products through their line, draconian haircuts, exposure to risks from brokers, and a general lack of profitability in wholesale… they have made the only sound business decision available…stop the insanity.
However, from the ashes does rise the phoenix of the small correspondent lender. Without massive overhead and unruly production, they are still offering boutique wholesale. They don’t have massive rate sheets or innovative technology. They don’t offer hundreds of products. They have a small line, a small select group of brokers and a willingness to produce quality loans.
Perhaps it is the genesis of a new class of wholesalers… ones that offer conservative yet substantive support to their brokers. Wholesalers that, at least right now, are not interested in risks…. Or getting it done for the sake of getting it done. They have proven that they have a business model that supports their survival.
January 3, 2008
Filed under: Mortgage Industry Trends, Mortgage Investors, Secondary Market, Subprime Crash, Warehouse Line Lending — admin @ 11:54 pm
Ruth Lee
Over the holidays, you get to see all of the people that are not “professionally” related to you. As many of them know that I have worked in the mortgage industry, I expected flowers and wreaths rather than gaily wrapped presents of monogrammed sweaters. For most of the planet, MBS and GSE have almost no meaning. They just hear meltdown… and that is bad. When my father asked me for a simple explanation of the mortgage meltdown over turkey, I was required to really think about it in terms that he could understand and use in his daily life. Here is my quick attempt to say it in layman’s terms.
The American mortgage market has long been considered one of the safest investments on the planet. As an investor, when you review lending your money, you look at the traditional 3 Cs: credit, collateral and capacity to pay. For many years, mortgage investors were small community banks or savings and loans. There were many established guidelines that maintained the integrity of the investment portfolio. Unfortunately, there just wasn’t enough money there. The American mortgage market plays in the trillions… not the millions that small community banks offer. So the problem became how to court investors of that magnitude to fund billions and trillions rather than millions. When Americans need investment capital, they go to Wall Street.
For over a decade, the American mortgage market has been invested in and paid for by the investments of Wall Street with their thousands of investors, from 401Ks and pension funds on the individual level to world banks on the macro. The base assumption was that these investments were relatively safe, as they are backed by real property, they are vetted through underwriting for credit and capacity to pay, and they have historical data to show the track record for repayment, allowing investors to assess risk vs. return. Based on that historical data, investors signed up in droves… and the engine of the mortgage market was turbo charged to offer both money (liquidity) and expanded products.
The perfect storm was created when the Fed continued to drop interest rates, inflation remained low and the value of real property continued to offer more than double digit appreciation year over year. For investors, there were no real tangible reasons to stop investing – the numbers were great. For Wall Street, they were able continue marketing their gains and started a whole revolution in products. With their wide pool to leverage, they started to back investments that were ever more risky, like 100% loans and Stated Income/Stated Asset. For lenders, they were able to offer new products that allowed an ever deepening pool of potential borrowers… some that we now know were probably not investment worthy. For borrowers, they were able to purchase more house with less emphasis on their 3Cs than ever before for both investment and for primary residences.
So what happened? The market changed. (Read more here) When the reality of the economy was that houses stopped posting double digit appreciation and real income started to decline, many of the persons that were marginal became true bad investments. In addition, a number of the loans were offered as ARMS to people were presented as a “stop gap” loan (one that you can refinance out of later… but would get you in the house now), but when they started to adjust, the borrower was incapable of making the payment or refinancing out of their home. Foreclosures started to rise.
Now lets go back to the secondary market and investors… when they see the foreclosures start to rise at unprecedented rates, they start pulling their investments. They looked, as any investor will, to more stable investments that don’t post losses. That big fat pool of money started to dwindle. That is the liquidity crunch you hear about. In the panic, investors pulled their funds and lenders started to cut programs and loan products that weren’t performing. In addition, they started to exercise the dusty clauses of their contracts that require those that originated the loans to “buy back” the defaulted or “incomplete” loans and service it themselves. The megalenders struggle, get discussions of bailouts and infusions from other megabanks…the small business owner closes.
For the borrower, especially ones in loans that were marginal, they are unable to refinance their loans. They are either unable to meet the enhanced underwriting criteria, the loan product is no longer available or they are upside-down on their house. This continues to exacerbate the crisis. For those borrowers that watched those “get rich quick” in real estate, they were invested in homes that couldn’t cover their investments and just walked away. Every foreclosure adds to the depreciation in the real values in local markets…and the problem quickly compounds.
Until such time as the American mortgage market can prove its investment worth to the world community, we are stuck. The moves that have been taken by the market are a step…but every person in the entire chain will be responsible for ensuring that we don’t face this crisis again. It is all about quality production and creating a track record that allows our investment partners to believe in a stable rate of return on investment.
