North Carolina: FHA Broker no more…
Filed under: FHA — admin @ 12:20 pm
North Carolina has been on the cutting edge of progressive mortgage legislation for almost ten years. The results have been effective in reducing subprime legislation; however, the net benefit of these efforts is still up for debate. There are indications that North Carolina, while producing less subprime origination, has not been as successful in producing equal access to financing for poor and minority borrowers. Today, recent legislation is having the consequence, intended or otherwise, of putting the NC FHA broker out of business.
AS PRESENTED IN BILL SUMMARY:
S. 1149, given the short title “Prohibit Predatory Lending” (referred to as the “Act”) was, as its name implies, designed to prevent predatory lending practices — a practice in which mortgage lenders sell the borrower on a loan with the highest interest rates and fees possible. These mortgage lenders frequently solicit customers through telemarketing, direct mail and/or home visits, promising lower monthly payments. However, they typically do not effectively disclose that in the long run the borrower’s costs will be significantly higher. Predatory lending practices include excessive points and loan origination fees; additional and excessive “junk” fees for questionable services such as document preparation, underwriting and processing; balloon payments (payments in the near term only cover debt service with almost the entire original principal due at the end of the term); equity stripping; flipping i.e., frequently refinancing the loan transaction with more fees at each closing resulting in added debt to the consumer; and packing, i.e. adding and financing overpriced extras, particularly single premium credit life insurance.
In 1999, the industry quaked as North Carolina enacted HB 1149. The law addressed many aspects of mortgage and consumer finance, but of specific issue here is the 5% cap on fees. While originators are familiar with fee caps, like in Texas, the NC law went further than any other to link fees included under the cap to Reg-Z: all APR fees, to include UFMIP and the VA Funding Fee, are included in the 5% cap. If a loan exceeds the 5% cap, it is considered a “high cost” loan; as a “high-cost” loan, there are several prohibitions, however, from a business perspective the most important is a prohibition on financing ANY points or fees. Now as of January 1st, 2008, the definition of those fees in the 5% cap has been amended to include YSP.
This means that, prior to January, the fee cap on all FHA loans was effectively limited to 2.75% after the 2.25% UFMIP was assessed. When you consider the general cost of completing a loan, many of which are not tied to a percentage, FHA was a tough sell to brokers. The only real compensation they could expect for their work was YSP. Now that it is included in the 5% cap, there is no cost-effective way that they could offer FHA as a product.
Fortunately, for the FHA broker in NC, they are used to getting audited financials. The law also specifically exempted secondary market transactions from the fee restrictions, making the bias for mortgage banking very transparent.
For those seeking to make the change to mortgage banking, it is not the most conducive environment. Warehouse lenders have left the market almost on pace with wholesale lenders. The net worth requirements for FHA are only $63K + $25K per branch; while most warehouse lenders start at $250K. These new bankers will need to seek out small cap warehouse lending, such as our partner Texas Capital Bank. They offer smaller, more supervised lines for new entrants into the market. For the back-office functions, they will either need to hire and manage a fulfillment staff: closer, post-closer and funder or use an outsource fulfillment, such as Titan.
The mortgage brokers have long been convinced that the banking industry wants them out of business. In garnering 67% market share with little contingent regulation, they have been unstoppable. The NC legislation has effectively done just that, specifically for the FHA broker. When you look at the recent federal legislation HR 3915 and S 2552, you see a lot of reflections of the NC legislation. While both bills are stalled while Congress focuses on FHA and bail outs and the administration is in vocal opposition to most of the reform, the time is coming. The next Administration will definitely focus and define the debate…but we can anticipate change on the horizon. For now, the states are doing it themselves.
Stumble it!