Mortgage Industry News

Mary Kladde 

Approximately 2 weeks have passed since Ruth and I attended the MBA Policy Conference.  This was my first experience with this particular conference, and overall I was pleased with the experience.  The MBA setup approximately 170 appointments with different members of the federal legislature and their staff.  After an overview of industry topics and MBA positions on those topics, we were split into state delegation groups and set out to personally lobby for our industry. It was fascinating to participate and gain insight into exactly how the game is played.  As far as any results, that remains to be seen.

Things I learned while in DC:

1. Most members of the legislature and their staff do not understand the intricacies of our industry;
2. The ones that do understand are actively trying to make changes without necessarily thinking through all the ramifications of their actions; and 
3. It is incumbent upon us (the experts in the mortgage industry) to speak up, reach out, and attempt to educate when and where we can.

It is a little known fact that as a constituent you have direct and open access to your State’s federally elected officials. Knowing this, YOU/ALL OF US should be actively seeking to educate our elected officials in our home States.  Many of the decisions currently being made are being made in a box and do not reflect the “needs” of the many of lenders still persevering in today’s market.

Washington doesn’t seem to understand that those of us left behind are the “GOOD GUYS.”  We’ve survived because we were doing it right in the first place. It astonishes me to no end that our state and federal legislators continue to look to the leadership of larger banking institutions, who actively participated in the creation and expansion of the subprime markets and who in turn had to accept Federal Bailouts in order to survive, to provide the solutions to fix the current mortgage market issues.  AMAZING!  And I might add, counterintuitive.

With this statement, a call to action follows.  Let us not be complacent allowing others to determine our destinies.  It’s time for the voices of ALL lenders to be heard (big and small)…”DO NOT GO QUIETLY INTO THE NIGHT.”

While I applaud and support the MBA’s efforts to setup appointments with as many legislators as possible to create a concerted lobbying focus on topics of concern to the mortgage industry, this event only lasted one day.  Imagine what a “grassroots movement” by mortgage lenders within their own communities and States could accomplish.  If every independent mortgage banker in a given State made the effort to see just one of their federal and State elected officials, the movement would span months and would become preeminent in the minds of those elected to office. Make yourselves and the issues we face known so that we as a whole are being properly represented. 

Remember you don’t have to go to Washington. They all come home eventually, if for nothing else to campaign for the next election. Seek out your State representatives. Educate them on the state of the market and your pain points as a lender. Help them make informed decisions on your behalf. Let your voices be heard.  

Wow, I am starting to have de ja vu.

All of the things we have been saying about the current warehouse lending crisis and actionable solutions to the problem keep popping up in the industry press. But I am glad that our message about the liquidity crisis and the need for a national warehouse line solution are getting out there, and in a big way.

We had several meetings in Washington last week and were pleased at how receptive and enthusiastic legislators were to hear what we had to say, learn more about the problems and work to develop real, applicable solutions. Updates on those meetings and our plans coming soon. In the mean time, here is a snippet from the MBA’s commentary on the current warehouse lending situation, cited from this week’s MortgageOrb/Secondary Marketing Executive:

“Just when one might think the current crisis facing mortgage banking cannot get any worse, along come the problems facing the warehouse lending sector. At the recent Mortgage Bankers Association (MBA) National Secondary Market Conference, the perilous state of warehouse lending and the possible solutions were discussed.     

“Michael Carrier, associate vice president for secondary markets at the MBA, argued that the warehouse lending dilemma will create additional problems for independent mortgage banks struggling to stay afloat.

“There is a perfect storm for non-depositories that rely on warehouse lenders for their funding,” he said. “We have consolidation in the industry, so there are fewer and fewer players out there. We have existing warehouse lenders terminating their business because they are about to reduce risk and reduce costs, and the ones keeping the lines open are putting more restrictions on it and making it more and more difficult to obtain lines of credit.” 

“Carrier blamed the overall state of mortgage banking as having a damaging effect on the warehouse sector. “The reason many people say they are getting out of the business is because anything associated with a mortgage is a four-letter word,” he continued. “The risk-based capital charge associated with a warehouse line is so much higher than mortgages, so it is easier to clean up your balance sheet by getting rid of warehouse lines. But that’s not much comfort for the thousand or so non-depository independent mortgage bankers that rely on warehouse.” 

“Carrier pointed out that the situation will limit attempts to revitalize both the industry and the overall housing market. “About 25 percent to 40 percent of all originations come from independent mortgage bankers, and 55 percent of Federal Housing Administration originations from these sources,” he added. “With fewer originations now, there is higher volume for commercial banks, so they are raising their rates and fees in order to slow down volume. That is not helping consumers.”  

“MBA has gone on road shows to various financial regulators,” he explained. “We started with the [Federal Deposit Insurance Corp.] (FDIC) and met with Chairwoman Sheila Bair. We said that they issued a financial institution letter that said, ‘Don’t stop lending to creditworthy borrowers.’ We then said that warehouse lenders are creditworthy borrowers - so why doesn’t the FDIC issue an updated financial institution letter that emphasizes warehouse lending? She expressed absolutely no interest in this, pointed a finger and said, ‘Why don’t you talk to the other banking regulators?’  

We have several exciting prospects in the works, and are actively discussing new legislative initiatives with Washington lawmakers. We are working to show them both how current legislative initiatives are addressing problems that no longer exist, and to also turn their focus to the critical issues that need to be addressed now to move the mortgage and housing industries back to a place of strength, health and quality. We will keep publishing details as we move forward. Stay tuned!

Ruth Lee

Regulators and legislators are scrambling to prove their value in an election year.  Following the federal response with the Housing and Economic Recovery Act of 2008, state legislatures are clamoring to offer their own resolution to the local crisis.   With most information coming from consumer groups and the media, the initial proposal to “cure” subprime is often diluted in the reality of the mortgage market.

Can you legislate subprime away?

Continue reading »

Ruth Lee

In the eternal death march of progress on capital hill, the housing reform and rescue bill is once again set for a vote on Wednesday.  However, negotiations have again stalled as the White House threatens to veto the bill over an allocation of $4b to allow state and local governments purchase foreclosed properties for resale.  This is despite an inclusion of the changes to the legislation that Treasury Secretary Henry Paulson sought on the Hill last week, allowing increased authority for the Treasury to purchase unlimited amounts of debt and equity from the GSEs and offer the Fed a role in GSE regulatory authority.  Despite opposition from the Administration, most insiders expect President Bush to sign the bill.

The bill is still in negotiation to settle the differences between the House and Senate packages, but political pressure seems to be enhancing a “spirit of compromise.”

Ruth Lee

With the impending election, Congress left for its July 4th recess unable to face constituents with any real headway on foreclosure legislation. Having started and stopped the discussion of The Foreclosure Prevention Act of 2008 several times, it is disappointing to see that Congress is faithfully endeavoring to do as little as possible even when they have a consensus. Conventional wisdom projected that Congress would be able to finalize the bill prior to the recess, following a test vote of 83 in agreement. But procedural hurdles reared, the final passage undone by a dispute over an unrelated issue for tax breaks on renewable energy, an issue also supported by 88 Senators. (By way of explanation, HR 3221 was initially an energy bill that was gutted and renamed TFPA of 2008)

Essentially, what was once a “gentleman’s” game based on philosophical and political differences is now a cutthroat gauntlet of gaming the system. While one can debate the merits and expense of what many view as a bailout bill, on some level, one would expect some kind of response after months of debate, negotiation and compromise to produce a bipartisan bill. But the fact is, it is an election year. With both sides of the aisle maneuvering for political currency, they are using the procedural rules of the Senate to gain advantage, with the ancillary disadvantage of causing any progress to grind to a halt.

HR 3221 was introduced July 30th, 2007 to the House. It passed the House August 4th, 2007. It passed the Senate April 10, 2008. The Senate bill still has to be resolved with the House version. It is now July again… and still nothing. Other bills like HR 3915 and S 2452 which address predatory lending, have been mostly tabled for partisan concerns, most likely to be revisited post-election. The problem is… we have a consensus, the bill has been voted on and ready to go, so what is the holdup?
Continue reading »

Ruth Lee

As I said yesterday, the Bush Administration has indicated that they understand that HR 3221 will be amended on the Senate floor to include some text from S 2636 and it is the White House’s position to oppose and veto such legislation if passed.

The White House has indicated they will veto legislation with the following provisions:

• From S 2636, provision funding $4b in assistance to state and local governments for the redevelopment of abandoned and foreclosed properties.

o    Seen as too exepensive, a bailout to investors and speculators, may cause the market to take longer to recover.

• From S 2636, provision tripling the funding of Neighborhood Reinvestment Coalition NRC

o    Seen as unnecessary and taxing the ability of the NRC to administer services.

• From S 2636, provision modifying bankruptcy code to allow judges to modify loan terms

o    Seen as undermining existing contracts
o    Seen as possibly leading to the contraction of mortgage credit availability and affordability.

In my opinion, the provision to really look at is the modification to the bankruptcy code.   Unfortunately, the previous modifications to the bankruptcy code sought to allow consumer credit to have par relevance and priority as mortgage debt. The exception was removed in 2005; but it had been in place since the last major bankruptcy overhaul in 1978.  That exception made home loan lenders a favored class of creditors and originally was intended to encourage mortgage lending.  Provisions allowing judges to modify terms will not only make them an unfavored class; but have a potentially chilling effect on mortgage investment.

Ruth Lee

The two most relevant pieces of mortgage reform legislation to date are:  FHA Housing Stabilization and Homeownership Retention Act of 2008 (H.R. 5830) and The Foreclosure Prevention Act of 2008 (H.R. 3221).   It is understood that HR 3221 will be amended on the Senate floor to include some controversial provisions from S 2636 put forth by Majority Leader Reid.

The Administration has indicated what they will and will not support.  Text of the White House response on mortgage reform legislation from 02/28/08 is here.

The Bush Administration has indicated that they understand that HR 3221 will be amended on the Senate floor to include some text from S 2636 and it is the White House’s position to oppose and veto such legislation if passed.

The White House is in favor of the following:

• Modernizing FHA:  FHA SECURE
• Hope Now Alliance whose Mission Statement is to “Maximize the preservation of homeownership while minimizing foreclosures. Assist borrowers who have the willingness and wherewithal to remain in their homes, but need some help to do it. Our goal is to keep people in their homes and when that is not possible, prevent foreclosure.”
• Reformation of regulatory oversight of GSE’s
• Increased funding for housing counseling
• RESPA reform – no details, just RESPA reform
• Authorizing the FRB to implement their Blueprint to improve mortgage disclosure requirements
• Developing of new standards for deceptive and unfair trade practices under HOEPA authority
• The FRB developing regulations to manage underwriting standards and criteria

To be continued…

Ruth Lee

Here is a brief synopsis of HR 514o - a bill designed to inject money into the economy through individual tax rebates, business tax incentives and increasing the number of loans the FHA and GSEs are allowed to buy up or insure - as it applies to the mortgage industry:

Title II - Housing GSE and FHA Loan Limits

Section 201 -

• Raises the statutory ceiling on the maximum original principal obligation of a mortgage originated between July 1, 2007, and December 31, 2008, that may be purchased by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Disregards mortgages purchased with the increased ceiling amount for purposes of meeting certain housing goals established under the Housing and Community Development Act of 1992.
• Expresses the sense of Congress that Fannie Mae and Freddie Mac should securitize mortgages acquired pursuant to the increased conforming loan limits of this Act if the manner of securitization does not: (1) impose additional costs for mortgages originated, purchased, or securitized under existing limits; or (2) interfere with the goal of adding liquidity to the market.

Section 202 -

• Establishes a temporary loan limit increase for FHA-insured mortgages in specified high-cost areas for which a borrower received credit approval by December 31, 2008.
• Grants the Secretary of Housing and Urban Development (HUD) discretionary authority to increase loan limits in 2008 based upon the size and location of residences in particular areas.
• Directs the Secretary to publish the median house prices and mortgage principal obligation limits as revised by this Act not later than 30 days after its enactment.

To read more about this bill, click here.

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.

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