Mortgage Industry News

This article was contributed by TLC Partner Peak Performance Resources, Inc., a leading provider of mortgage industry consulting services. Learn more at www.PPRInc.biz.

Fannie’s LQI is underway: Will you be ready?

Remember when it was simple to deliver that generic, conforming loan and only the non-conforming product required meeting all the nuances of the investor?  Fannie Mae’s announcement of its Lender Quality Initiative (LQI) project has changed that for the immediate future, and the changes impact all brokers and lenders, as the requirements will be pushed down to the originator of the credit file.  Enhancements are significant and require changes in several areas, including technology, internal origination processes, quality control policy, and controls in place during delivery to Fannie Mae. Fannie Mae will provide reporting to assist lenders as the LQI plan progresses to different stages, and lenders should take advantage of these to locate the problem areas and address them before the warnings convert to fatal errors that result in undeliverable loans.

The focus areas during origination include several aspects of the borrower profile, expansion of the General Services Administration (GSA) Excluded Party List and HUD’s Limited Denial of Participation List (LDP) to include individuals in control or influencing origination or servicing, quality control policies and specificity of requirements, and delivery of the appraisal prior to loan delivery.  The Loan Delivery and Desktop Underwriter system is being revamped and will include enhancements for required delivery of additional data and changes from warnings to fatal edits for many fields. Fannie Mae will change to MISMO’s 3.0 XML delivery format. The LQI initiative also includes changes to the way Fannie Mae will deal with MI insurers and additional validations that the MI coverage is in place.

My company does not deliver loans to Fannie Mae, so are we really impacted? The Fannie Mae requirements are comprehensive and will require changes for all companies originating loans as wholesale lenders push these requirements down to their approved brokers and correspondents for all loans that will eventually be sold to Fannie Mae. Brokers and correspondents will see changes in the Sellers Guides as wholesale lenders implement their internal changes for deliveries to Fannie Mae. Not all wholesale lenders will implement changes the same way or on the same timetable, so brokers and correspondents delivering to investors will need to stay abreast of the notifications from those investors.

You have my attention!  Where do I begin?  Start at the beginning — with a plan.  Depending on the size of your organization, assign at least one person to review the requirements and determine how those areas will impact your organization’s processes.  For example, the LOS you use may require additional data fields and changes to interfaces.  The Quality Control plan will require revisions, so begin that review process. If your company delivers directly to Fannie Mae, give someone the responsibility for monitoring the new reports showing the deficiencies during the delivery process so they can be corrected before the warnings become fatal edits. The larger the organization, the more widespread the changes will be. It would be wise to inform all the staff members of the upcoming changes, the timetable for the phases, and how those changes will affect them.  Springing fatal edits on your origination sources without warning is not a way to increase loan production!

Consider all the checklists departments use, either online or printed forms for reviewing data.  Revise them accordingly to reflect the new data requirements.  Review procedures regarding processes to identify borrowers and their credit profiles.  Document existing pre-closing quality control and anti-fraud processes and work with the quality control plan to increase the steps to meet the new Fannie Mae specific requirements.  For areas where Fannie Mae will leave policies to the lender discretion, document the policy carefully to assure all employees follow the policy. Brokers or correspondents will need to decide whether to use each investor’s policies as loans are designated for sale or review all of them and develop a stringent generic policy that allows for variances only when loans are designated and locked with an investor.  Don’t forget the training for the new DU findings regarding specific requirements for documentation in new areas.

But there’s plenty of time? Fannie Mae has given lenders advance notice, and the enhancements are phased in with helpful reports to analyze your organization’s progress toward meeting the requirements. The overall complexity of these enhancements means organizations cannot take a wait- and- see attitude but should begin planning and reviewing what needs to be done within the organization.  Even those with very clean, efficient processes will see some requirements for change, and for those organizations that have been intending to do internal reviews, there’s no better time than the present!  As always, PPR is available to assist you to meet the goals you’ve set to comply with the LQI.

IMPORTANT UPDATE INFORMATION

All lenders that sell directly to FNMA or to an investor that sells directly to FNMA will be required to implement new due diligence policies and procedures starting within the next 90 days.

On February 26, 2010, Fannie Mae issued Lender Letter LL-2010-03, An Introduction to Fannie Mae’s Loan Quality Initiative, which identified policy, process, and technology enhancements aimed at improving the lender’s ability to deliver mortgage loans that meet Fannie Mae’s underwriting and eligibility guidelines and thus mitigate repurchase risk. This Announcement describes some of the changes impacting the Selling Guide as a result of the Loan Quality Initiative (LQI). Specifically:

·         Confirmation of each borrower’s identity prior to the extension of credit  (applications dated on or after 06/01/10)

·         Verification that all borrowers have a valid and accurate Social Security number or Individual Taxpayer Identification Number

·         Desktop Underwriter® (DU®) “Potential Red Flag” messages

·         Confirmation that all parties to the mortgage transaction meet certain qualifications

·         Determination that all borrower’s debts are included in the qualification for the mortgage loan

·         Identification of the property unit number

·         Calculating LTV ratios

·         Manual underwriting of DU Refer with Caution/IV loan casefiles

All customers should be prepared for some of the new due diligence required on FNMA products.   If you are not a direct seller/servicer executing these new functions, you should be prepared for delays or process enhancements by your investors who will be implementing these new functions.

https://www.efanniemae.com/sf/lqi/pdf/lqisummary.pdf   THIS SUMMARY PROVIDES RESOURCES, LINKS and DATES.

LEGISLATIVE UPDATE:

Rob Chrisman offers some of the best reporting and analysis around on mortgage news and legislative developments:

Well, let’s not beat around the bush. According to the popular press, the Federal Reserve scored a victory and mortgage bankers suffered a defeat yesterday when the Senate approved an amendment by a 90-9 vote to preserve Fed supervision of hundreds of smaller banks, instead of transferring them to other regulators. Also, the Senate voted 63 to 36 to approve the Merkley amendment and end mortgage kickbacks and “liar loans.” Sometimes one wonders if politicians know basic economic principals - bond math economic dictate that an investor will pay more for a higher yielding instrument, other things being equal. Regardless of my opinion, yield spread premiums are believed to have encouraged brokers to steer consumers into risky, high-interest loans even if they qualified for cheaper loans. And liar loans let consumers qualify for loans they could not possibly repay if they opted to simply state their income or other assets, rather than waiting for verification. The Merkley amendment can be found at Merkley

 

As a result of the Merkley amendment, mortgage lenders and loan originators would be banned from accepting payments based on the interest rate and other terms of the loan, which effectively wipes out loan steering, and as I mentioned kills off the yield spread premium - often a key part of broker’s compensation. Proponents say that the amendment will protect homeowners by prohibiting mortgage lenders and loan originators from receiving hidden payments when they steer homeowners into high-cost loans and will create strong underwriting standards to ensure borrowers have the ability to repay their loans. Opponents say that if this passes, it will spell the end of mortgage banking as we know it, and that borrowers should be allowed to cover their closing costs by accepting a higher interest rate loan.

 

The Senate also voted to keep a measure in the bill, opposed by the mortgage industry, which would require lenders who securitize to retain at least a 5 percent stake in their products. Not even the large lenders can do that if the law applies to conforming product. Democrats on Tuesday defeated a Republican amendment that would have ended government control of the Fannie & Freddie, arguing that the issue should be dealt with separately next year.

 

Final approval of the Senate bill could come next week. These amendments and the law are not final, and remember that the House bill does not have this language so even if they pass the Senate, there will still need to be reconciliation with the House. There are more than 200 amendments filed on the Senate bill. Any legislation that clears the Senate must be reconciled with a reform bill that passed the House of Representatives in December before Obama can sign it into law. (The Senate unanimously adopted a measure that clarifies that small businesses like jewelers and orthodontists that extend credit to customers would be exempt.) Trade organizations are recommending that members pick up the phone and call their elected officials. (http://namb.www.capwiz.com/namb/dbq/officials/)

Ruth Lee

The Charlotte Business Journal reports that a group of BofA bankers is launching an independent private-equity firm. According to the article, which we read via HousingWire’s newsfeed this afternoon, says “the group is splitting from BAML Capital Partners, BofA’s and Merrill Lynch’s combined private-equity unit, this summer.”  In addition to raising cash from outside investors, the new investment entity “also will manage about $1.4 billion of BofA’s private-equity portfolio.” We can’t help wondering whether, like Sterling Bancorp, this group sees opportunity in warehouse lending to worthy independent mortgage bankers. If they do, and we think they should, we know a domestic outsource provider that could help them make the most of such a venture.

If you know Travis Hain ask him to give me a call.

We enthusiastically applaud and support (and urge our peers in the industry to do likewise) the common sense amendment to Senate Bill 3217 proposed yesterday by Senators Landrieu, Hagan and Isakson. The amendment acknowledges a “zero-risk” category for loans that meet standard underwriting criteria and favors “back to basics underwriting.”  Of the 100 amendments proposed to the current Dodd bill, this is one we should all be able to get behind.

Read more about the SB 3217 Amendment:

“Amendment Would Limit Extent of Risk Retention Requirements; MBA Urges Support“

DocuTech Compliance Specialist Alex Parker just published a very informative article entitled “Using Worksheets In Initial Disclosure Packages,” which I definitely recommend reading:

“A worksheet is a document used by loan originators that provides information about fees and interest rates associated with a mortgage loan. The document may also be used to give the borrower information that is not contained in the new GFE such as the overall cost of the transaction or the estimated amount the borrower will need to bring to the closing.  Many lenders and borrowers have been frustrated by the lack of information included on the new GFE and have decided that worksheets are the best way to provide additional information about the transaction. “

Read the full article on initial disclosure worksheets here.

It still amazes me the number of lenders trying to skirt quality control requirements considering the debacle of the last 3 years.  FNMA is absolutely doing the right thing and I would argue should check a few more data points.

The LQI being put in place by FNMA applies to direct sellers/servicers.  The additional checks should not tax the resources of purchasing investors that will then sell the loans directly to FNMA because they should be making these very checks prior to purchase anyway.

Read more:  American Banker: “Lenders Call Fannie’s Push on Loan Quality Redundant”

Ruth Lee

Everyone always wants an easy explanation of what all these terms mean:  MBS, CDO, synthetic CDOs.  And with the lack of any “mea culpa” from Goldman, the terms are hitting the news again.  This is a high level explanation of what that means.

A Mortgage is a loan on one house.  If that mortgage defaults, the owner of that mortgage loses.  SO… what if you bundle up a 1000 mortgages? - then if one mortgage fails, the entire investment isn’t a loss.  You still have an investment that has a large portion of mortgages that are performing.  When you bundle those mortgages and securitize them - that is called a Mortgage Backed Security.

Well, if you are concerned that your risk is still too high with an MBS, you can bundle up a bunch of MBSs into a CDO (collateralized debt obligation).  This new CDO has 100s or 1000s of MBSs.  You are now leveraging your risk of default against thousands or tens of thousands of mortgages.  As an investor, you are betting long - that they will perform - or short - that they will fail.  As an investor, you assess the value of your investment, perhaps saying that the value is 90 cents on the dollar or 85 cents on the dollar.

Synthetic CDOs are side “bets” on whether an investor will profit or lose from an investment in a regular CDO.  They aren’t an investment really - they are just a means of hedging risk, says Blankfein of Goldman Sachs.  In his spin, he feels that it is just a responsible means of leveraging risk.  Not by ensuring there is quality in the MBS or the CDO… but by betting both on the Pass and Don’t Pass line - hoping to capitalize when one plays out.  I can hedge my “investment” by gambling both sides of the line- but if it looks like a duck, swims like a duck, quacks like a duck - there is no spin that makes it an eagle for me. 

An article in Mortgage Servicing News entitled Housing Finance System Future is Wide Open written by Brian Collins quotes Treasury Secretary Timothy Geithner “as blaming the GSEs’ large investment portfolios for the substantial losses on the inherited commitments of two, saying FNMA and FHLMC failed to charge appropriate guarantee fees on low quality loans.”  I would argue that once again the real issue has been missed.

Encouraging the collection of more fees to shore up “guarantees” is not going to fix the problem or prevent what has happened over the last couple of years from happening again.  The real issue is not that appropriate guarantee fees were not charged.  While this may have stemmed some of the bloodletting, it does not fix the real problem.  Quality loan production tiering from loan origination through purchase is the real issue.  Charging more fees just drives up the cost to produce mortgages, which ultimately has taxpayers eating it coming and going.  Haven’t we already eaten our portion of this dog’s breakfast?

The REAL Solutionis to not buy the loans in the first place if quality production cannot be demonstrated prior to purchase.  No more exceptions or backroom deals based on volume submission allowed.  The days are numbered for direct seller/servicers who deliver Notes for purchase knowing the mortgage produced wasn’t done in accordance with good lending practices.  The winds of change are a blowing… slowly, but surely.  The new FNMA Loan Quality Initiative set to go into effect June 1st is the first step in the right direction, but there is so much more that can be done.

Have I mentioned standardization?   

Mary Kladde 

Consider this a call to action. I am on a mission to standardize the mortgage industry.  Standardization is the key both to sensible regulation and to producing a valuation that is measurable on a per file basis.  Reviving investor confidence and stabilizing the mortgage market means that we need to be able accurately value a mortgage.    We need to make the quality review of a file as simple as knowing what a dollar is made up of…4 quarters, 10 dimes, 20 nickels, or 100 pennies.  Once this is accomplished, there is no more guessing associated with what’s a “good” loan.”  Do I have your interest piqued? Do you agree that standardization is a linchpin of the mortgage industry’s sustained recovery?  Spread the word and more to follow….