Mortgage Industry News

by: Ruth Lee, EVP Sales, Titan Lenders Corp

There has never been greater demand or a clearer path for community banks to become a dominant force in the mortgage lending industry.  Non-depository mortgage bankers and their third-party originators sustained a devastating blow to their reputation and are being held accountable in ways that their business models were not meant to support. Community banks not only have the presence, footprint and liquidity to absorb mortgage lending demand, but also they are the preferred source of mortgage loans for most consumers.

This evolving dynamic promises to create an unprecedented community bank/mortgage banker relationship that will transform the mortgage lending transaction and stabilize the risks that have been accepted as “part of doing business.”

Read the full article in TLC’s Progress in Lending column: A Bit of TLC

by Mary Kladde

There is good news and not-so-good news in our industry.  The good news is that common sense appears to be gaining ground as the business model of choice for U.S. residential lending.  That’s right, after almost totaling its viability as an economic engine, and compromising itself embarrassingly for a chance at Wall Street grade greed, the U.S. mortgage industry – public, private and non-profit players – is grappling with its own discipline issues.

From my perspective the most promising sign of this is found in Fannie Mae’s Loan Quality Initiative (LQI), which begins to address the legacy weaknesses and opportunities for mischief that persist in mortgage lending processes.  The net result of LQI implies that pre-closing and pre-funding loan review are to become de rigueur, as will pre-purchase loan review. Another step in the right direction is the collaborative effort between the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to develop the Nationwide Cooperative Agreement for Mortgage Supervision (NCA). 

Compliance Ease co-founder Jason Roth has written an informed article about this collaboration in the September issue of Secondary Marketing Executive, but in summary, its standardized, data-intensive, multi-state approach to monitoring and auditing lenders will make it more difficult to conceal and easier to regulate mortgage lending compliance violations.

The not-so-good news is that our industry, its regulators, and policy makers continue to mistake the symptoms of our disarray for its causes.  The problem, from my personal perspective as a mortgage lending back office service provider to lenders of every size and stripe, is that this industry flies with its eyes wide shut.

And it is not for lack of data. We’ve got more data than we can deal with, literally.

As a result, we are part of a supply chain trying to assemble investable financial instruments whose underlying terms and conditions are not accurately reflected in their recordkeeping. This means that investors cannot rely on the loan files they receive from lenders unless they conduct a comprehensive loan level review, including documents.  If investors are going as a matter of policy to conduct loan level review, lenders must prepare for the scrutiny via their own loan review processes.

There is a fundamental disconnect in the mortgage lending lifecycle that will thwart even the most well intentioned common sense initiatives.  What good is data validation, even if conducted repeatedly by both the loan originator and the purchaser, if the data in the LOS does not process straight through to DU to correctly populate the appropriate document sets?

A stubborn dilemma remains.  Lenders are adding data to DU from their platforms but oftentimes loan closing documents are not synced with that data.  Clearly, if DU is taking into consideration data that is not recognizable and manageable by lenders’ doc prep systems, the document sets on these loans will be unreliable reflections of their underlying conditions.

This, in my view, reduces DU to little more than a placebo by which many in our industry will be placated into believing once again that the emperor’s new clothes are glorious and impervious to error. We need standardization of loan processing data for underwriting and accurate documentation, and every lender should be girding themselves for 100% loan level review throughout the loan and securitization lifecycle.

NexBank of Dallas’ launch of a $100 million mortgage warehouse lending division, offering lines of credit of up to $10 million to non-depositories, illustrates the evolving relationship between community banks and mortgage bankers (www.progressinlending.com/a-bit-of-tlc). Characteristic of a regulated institution, NexBank of Dallas warehouse lending guidelines are conservative, with lines of credit limited to mortgage bankers with a net worth of at least $1 million. Targeting NexBank mortgage brokers who are trying to become bankers, NexBank says it will consider lower net worth requirements on a firm by firm basis. TLC’s William Null (william.null@titanlenderscorp.com) is an expert on how community banks and mortgage bankers are collaborating in new ways.

by Mary Kladde

Part II – in follow up to commentary by Ruth Lee

Eliminating the GSEs is like throwing the baby out with the bathwater.  It is counterintuitive and ill advised. If the GSEs are eliminated the impact on the industry as whole will be severe.  The days of 80% LTV were not – even if you can remember them – the “good old days” and is not a time to which we should aspire to return.

The problem that I refer to as dirty bathwater is, more literally, the legacy infrastructure and context of mortgage lending. Up to this point, our industry has been a bit, shall we say, unstructured, in many of its business practices.  After all, in a non-regulated environment, there are fewer and looser “standards.”

Now, with the push for greater standardization picking up heft and the FNMA Loan Quality Initiative (LQI) providing guidance and motivation, perhaps we can get those chubby, troublesome GSEs cleaned up and on their way to health once again.  And another thing – I’ve said it before and will say it again soon, I promise – Loan level review both on pre-closing side of the lender and on the pre-purchase side at investor is destined to become an industry standard, and lenders should push for it.

by Ruth Lee

Lawmakers, consumer advocates, politicos and agenda driven bystanders are all weighing in on the efficacy and relative value of the two investor giants in the market.  Lawmakers cringe at the shared liability and risk exposure of the taxpayer.  Consumer advocates want the GSEs to focus more on rental housing.  Politicos want to assess the two GSEs with blame for every conservative, liberal or otherwise economic misstep since the collapse of the market.  First, I would argue that most of these guys have a murky (at best) understanding of what they both do…and second, I think that this base misunderstanding could serve to completely destroy the housing industry if acted upon.

The GSEs don’t make mortgages.  The GSE fund mortgages.  Back in the “old days,” if you wanted $5K to buy a house, you would go to your local bank, thrift or savings and loan.  They would lend you $5K for thirty years.  They usually wanted a maximum LTV of 80%.  You would participate in the risk with your local banker.  When housing prices started hitting the stratosphere, a lot of local banks found that they just didn’t have that kind of money to tie up for 30 years potentially.  So… the GSEs were created to fund those loans through securitization and investment.  As part and parcel of that discussion, it also required some standardization, like AUS.

Perhaps there is a burgeoning private market for securitizing mortgages.  Perhaps they all have a fundamental working knowledge of how to underwrite the risk, leverage the volume and inveigh investor confidence…but I sincerely doubt it.  We struggle to push perfectly standard, qualified jumbo securitizations out in this market at any LTV or FICO.

Save us from the best intentions of ideologues and polemicists… they know not what they do.

by Ruth Lee

Like an infant growing into adolescence, the mortgage industry in the last five years reached a gawky, unattractive and undeniably destructive period in its development. It certainly looked like an adult, but there was a need for maturity and discipline behind the changing voice. If you’ve ever raised a child to that rebellious stage–from a sweet-faced, kiss and hug bundle of joy to a car-wrecking, school skipping, “truth bending”, beer sneaking teenager–you can see the similarities.

Now, of course, we are going through the discipline (e.g. regulatory compliance, public flogging in the media, and writing “We’ll always conduct thorough loan level due diligence whether we are servicing, selling or buying mortgages” 500 times). Maturity typically follows discipline and it is not surprising that not-for-profits are leading the growth curve. You might even say they are leading by example. Here’s how: Read the full article on our Progress in Lending blog… 

by: Ruth Lee 

MBA NewsLink “Survey: Industry Still 3-7 Years Away from Widespread eMortgage Use” 

I think the article is interesting…but puts the onus on the tail to wag the dog.  It doesn’t really matter what the originating lender wants or prefers…and being “paperless” is apples to oranges with advancing eMortgages – i.e. having a digital archive doesn’t have a thing to do with eMortgages per se.  It is true… the industry is slowly becoming more comfortable with digital… and we see the slow cultural shift from the tactile security of paper.   But more importantly the article misses the real impediment behind the advancement of eMortgages… that it is driven from the top down… not the bottom up.  While Flagstar is miles ahead of the mainstream industry… until all the investors and/or the interim funder/warehouse lenders embrace eMortgages… they will still be primarily the exception rather than the norm.

When the new Frank-Dodd law goes into effect,  many of the companies structured around subverting licensing requirements will be revisiting their business model.  And for the national banks – there is more to consider.   The bill eliminates the OTS and merges it with the OCC – and severely restricts the OCC’s ability to establish preemption.

[for more Titan Lenders Corp insight on Frank-Dodd and other mortgage lending regulations and compliance hurdles, read the detail at: http://www.progressinlending.com]

Ruth Lee

CNN Money: “Pending home sales ‘fell off a cliff’”

The tax credit expired yesterday.  Thousands of new homeowners were able to meet much stricter lending guidelines due to the government’s subsidization of their required “skin in the game.”  Whether this has expanded the moral hazard evident in 100% LTV financing is not yet clear.  What is clear is that the American economy is resilient enough to respond to a deal, a bargain or a “giveaway,” but not resilient enough to spend without it.  In much the same way that car sales plummeted after the “cash for clunkers” giveaway expired, I don’t think it is shocking to see home sales follow the same path.   Americans have exhibited much higher savings rates over the last year – realizing that a world of unlimited, cheap credit is gone…eternal equity and housing appreciation has disappeared… and that the consequences of abusing or luxuriating in a life above your means can set you and your family up for a hard and painful fall.

We read with interest the Systemic Risk Information Study issued this month by the Securities Industry and Financial Markets Association (SIFMA) and business consulting firm Deloitte & Touche.  In fact, we hear a familiar tune behind its findings for creating a systemic risk regulator: data standardization and greater transparency are needed, including  non-regulated entities.  Still, for the purposes of regulation, we agree that “relying on . . . massive quantities of granular information may provide a false comfort to a systemic risk regulator, who should consider a more holistic view, such as of overall trends, major concentrations and imbalances, and significant interconnections between firms. A data-centric approach poses the risk that the systemic risk regulator could ‘miss the forest for the trees.’”

http://www.sifma.org/regulatory/pdf/SIFMA_Systemic_Risk_Information_Study_June_2010.pdf 

Ruth Lee

Reference:

HUD is asking a lot of questions about ‘required use’

Kenneth R. Harney

Washington Post

Ten years ago, I worked on coordinating consumer testimony to the Texas state legislature on this exact topic.   While our consumers provided hours of testimony and tales of woe, steering and strong arm tactics to the committee… the attorneys for some of the largest builders in the country strolled in and greeted the legislators by name – flashing college rings and golf-tanned faces.  Needless to say, as one of the largest lobbying and GR power centers in the country, the consumers were marginalized and then ignored.

While I believe that there are good builders that aim to effect a smooth purchase transaction for their clients – the assertion that there wasn’t a profit motive for builder originations is just outrageously untrue.  That is like saying that McDonalds starting selling their lucrative coffee products because they just wanted more alert patrons.

Builders have gotten a bad name in mortgage banking for the same reason that everyone else has…because they pushed homes people couldn’t afford with bad mortgage products and strong-armed clients into loans that they could have shopped – if it meant that the builder wouldn’t rescind the offer to pay for concessions – or title insurance premiums – or upgrades.    When faced with the option of losing $30K or more… well, you suck up the slightly less favorable interest rate or higher origination charges.  I have even personally worked with builders that will refuse to sell the home – unless it is originated and closed per their specific directive with their “affiliates.”

From a call with Pulte in 2007 on earnings:

• The second quarter pre-tax income from Pulte’s Financial Services operations was approximately $7 million, or a decrease compared with the prior-year quarter of approximately $8 million. The decrease during the second quarter is mainly attributed to lower revenues from decreased volumes offsetting a favorable product mix shift to higher profit loans and an increase in the capture rate.
• The level of adjustable rate mortgage products originated during the second quarter of 2007 decreased from approximately 33% of origination dollars funded from a warehouse line in the second quarter of the previous year to approximately 9% this quarter. Pulte Mortgage’s capture rate for the current quarter was approximately 93%.

We applaud the FHFA’s new initiative for GSEs to advance data standardization and uniformity for appraisals and other loan data, as reported today by National Mortgage News, including the mandated application of MISMO Version 3.0 standards.  Looking forward to the delivery of the Uniform Loan Delivery Data Specification later in the year, we hope this signals an industry-wide epiphany that standardization both of data and processes is critical to the stability and effectiveness of the U.S. Residential lending economy.

[in National Mortgage News today] GSEs Advance Industry Standards

The Federal Housing Finance Agency has launched a major new initiative by Freddie Mac and Fannie Mae to improve the consistency and quality of data for appraisals and other loan information, said the government entity on its website, which has both GSEs mandating the use of MISMO Version 3.0 data standards.  ”FHFA directed the enterprises to undertake the development of the standards to provide greater uniformity in the data they collect,” said FHFA acting director Edward DeMarco. “This initiative is a major step toward meeting industry requests for uniformity in appraisal and loan data. Improvements in data quality will benefit all mortgage market participants and strengthen the housing finance system.” The GSEs have now gone forward to standardize mortgage lending using MISMO as the backbone of all loan delivery to both GSEs. Specifically, Freddie Mac and Fannie Mae have developed the Uniform Loan Delivery Data Specification, which defines the Uniform Loan Delivery Dataset and the common GSE approach to single-family loan delivery data requirements for all mortgages that will be delivered to either GSE on or after Sept. 1, 2011.

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/)