June 22: Reader comments from across the nation on the FHA, QM, mini-corr, QE, escrow accounts, and high priced loans

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

I am a firm believer that the mortgage & real estate industry is filled with some smart, entrepreneurial, observant business people, and that “all of us are smarter than one of us.” That being said, here is a collection of e-mails that I have received in the last few weeks on various topics that are relevant to lending.

 

“Rob, we received our first California DOC audit after waiting six months for the results.  The primary issue relates to the payment of 2% per annum on escrowed impound accounts. California will not allow these funds to be placed into an interest bearing account unless requested by the borrower.   This means that if we pay this rate of interest it’s coming directly out of our pocket.  Is anybody following this requirement?   If so, I think we found a new investment vehicle that pays more than a Bank of America 12 month CD: invest in an impound account.   Is the DOC correct?  There seems to be legal opinions that differ from their interpretation.” To the best of my knowledge, it is indeed correct. Everyone in California should keep their money in an escrow account. There’s your tip of the day.

 

(I head to Missouri tomorrow for a conference, and in several events that I have been fortunate enough to attend lately, in different parts of our nation, the subject of high-priced loans has come up especially pertaining to FHA loans. What’s the scuttlebutt? The Department of Housing and Urban Development (HUD) has provided new guidance for HPML transactions.  Without being too technical, a higher priced mortgage loan is defined as a consumer credit transaction secured by the consumer’s principal dwelling that has an APR that exceeds the “average prime offer rate” for a comparable transaction as of the date the interest rate is set by 1.5% or more for first lien loans OR 3.5% or more for subordinate lien loans. All FHA HPML transactions must be credit-qualifying (noncredit qualifying streamline HPML transactions are not eligible for financing). As I understand it, to go through the HPML determination, a person locates the average prime offer rate (APOR) table at http://www.ffiec.gov/ratespread/YieldTableFixed.CSV. They then locate the Lock Date (select the week the loan was locked), locate the Loan Term, locate the Average Prime Rate based on selected Lock Date and Loan Term, and apply the HPML calculation (APOR + 1.5%).  If the loan APR is greater than the total of APOR and 1.5%, the transaction is a Higher-Priced Mortgage Loan. All FHA HPML transactions must be credit-qualifying. Some investors will only allow HPML loans on bond transactions and FHA loans as detailed.)

 

This note about interest being received on FHA/VA loans, from Dick K.: “Is it true that the FHA could stop charging extra interest on mortgage payoffs? In this day and age where every agency is focused on profits, some would say it is unlikely, but nonetheless the idea is out there: Extra Interest? (http://articles.latimes.com/2013/jun/07/business/la-fi-harney-20130609) Who actually gets the ‘extra money’?  The FHA? Ginnie Mae? The bond holders? The servicer? VA and USDA-GRH loans go into Ginnie Mae’s.  But when either of those two loans pay off, isn’t interest calculated to the date the servicing lender receives the loan payoff?   If that is indeed the case, then what makes up the “EOM interest short-fall” on those loans? If an FHA is sold into a Fannie/Freddie MBS or for cash, is interest to the EOM still collected on its payoff? The article mentions $500 million, which is a lot of money.  Once we figure out where the money goes, then if the collection of EOM interest on FHA loans is stopped … what will the impact be? When I was in secondary, I recall hearing that VA servicing was touch less valuable because on a VA loan the servicing lender cannot collect EOM interest like they can on FHAs. So at the end of the day … if the policy is changed … we’re going to be shifting the costs from one pocket of the consumer to another.”

 

A while back the commentary mentioned a note from an experienced compliance person. “These FHA changes will be interesting to watch.  With the new FHA loans all pretty much hitting HPML status, FHA effectively shut down its ‘non-credit qualifying streamline’ program.  Lenders warned it ahead of time – and yes, every loan I’ve test run has hit HPML.  Do you think HUD intentionally did that to stop the non-credit qualifying transactions?  Or did it just miss the point totally?  It amazes me that this is a surprise to management.  A lot of us said back when it implemented this that the April changes would make everyone unhappy, but the June ones will put FHA back as the agency of last resort. Credit & performance for FHA for the last couple years has been stellar; but with these changes it looks like it is intentionally trying to get only the weakest of the weak.  Maybe I’m just missing what its goal is. I’m thinking HUD needs to actually listen to those comments that come in.”

 

The writer went on. “Something tells me that the FHA has run the numbers, and has come to the conclusion that the benefits outweigh the costs. But who knows for sure? I think it was actually intentional on the streamlines. As to whether it is intentionally trying to become the agency of last resort again, don’t know, but have a feeling that may be the result.  If the MI companies have their way, that will happen. They are pushing hugely on marketing their benefit over FHA, so what FHA will be left with are the low credit scores.  Oh well maybe they know what they are doing.”

 

Scott D. wrote, “In a HUD annual meeting of industry leaders a couple of months ago, HUD representatives stated in no uncertain terms that their goal was to serve the less advantaged and that if this means that the higher quality loans go to agency lending only to leave the FHA universe with generally weaker borrowers, that’s okay because that’s who FHA is designed to serve. In other words, it’s not unexpected that a) FHA will serve fewer borrowers, b) will have a weaker portfolio, and c) will suffer more delinquencies and defaults as a percentage of its portfolio from the last few years. Although this next part was left unsaid, the increases in MIP are designed to offset these higher risks and the program should remain solvent barring any new mortgage debacles. In other words, FHA is content being the lender of last resort for low to moderate income, mediocre credit and otherwise disadvantaged borrowers, and that’s not a bad thing.”

 

As we know, FHA & VA make up the lion’s share of Ginnie Mae pools, and Juan R. observed, “GNMA will have a lot to think about and the approval process will be lengthy. This conversation of combining the G1 and G2 has been going on a while; I heard some of the buzz at the National in Chicago last year along with talks of combining Fannie and Freddie securities. As you know there is a lot more liquidity in the Fannies over Golds, and G1s over G2s, so the spreads would need to tighten up drastically before they could combine these or it could hurt the markets.  Guys like me are taking advantage of the spec pool pay-ups in G1 max loan amount pools (85k, 110K, 125K, 150k) and also just G1 pool pay-ups in general every chance I get so combining the G1 and G2 could hurt.  But, by getting rid of the G1, as long as liquidity in the G2s increased, GNMA could make the G2 custom pools eligible for ‘good delivery’ then this would be a huge plus for most originators like me with the added flexibility of various interest rates that can go into the G2 custom spec pools. That, along with being able to create CRA spec pools in the G2 customs, would be great for originators (added pay-ups!) and hopefully increase the streets appetite for these types of securities. Most dealers do not want to touch the G2 customs currently, but I see a bigger need for them if the G1 goes away.  Plus I see a spike in G2 custom production if it becomes eligible for ‘good delivery’ that would supersede current G1 production.”

 

Juan continued, “While they are making all these changes, they should consider opening the trading space for the Ginnie ARMs.  With all the rules they have regarding when the Ginnie ARMs can be securitized, if they entertain the G2 custom thoughts mentioned above maybe they can make the G2 custom ARM pools more liquid and allow for flexibility on securitizing seasoned ARMs.”

 

Yes, rates have unnaturally shot up. David Oldenburg opines, “The way I see it, the Fed is going to be trapped for a period of time with QE. We have had 3 QE’s since 2009 and they each give that false sense of security that props up the stock market, gives consumers confidence and we quickly forget that QE is happening behind the scenes. It reminds me of growing up on military bases overseas, you stop noticing the guys with M-16’s around you. The Fed themselves realize the dire need for QE to keep the markets (for now) in check, which is why this time they did an open-ended QE to infinity announcement. They have tried several times to take the market off of life support and things did not go well. In fact, the only thing that rallied the market in 2012 was the ‘hope and belief’ that more QE was coming. Like the addict that can’t make it without their fix, the stock market, the mortgage market and the consumer, have become dependent on being ‘fed’ by the FED!  If and when they do pull this rug out from under us, initially we will see days like yesterday. The bond market and stock market will both sell off. However, it is this cycle that causes the buying opportunities that eventually level things off, similar to what happened in the real estate market when things finally got so cheap buyers came in. For mortgage originators and Realtors, we are seeing over the last month what happens when interest rates rise.”

 

Mini-correspondent programs seem to be the new fad, or the old business model newly discovered due to QM requirements. Recently the commentary noted, “Mini correspondent – the new paradigm?” and received this from Hank A.: “Who offers a ‘guaranteed purchase’ with their Mini C? Interesting that you should address this question as many brokers are going this route with Freedom, who offers a ‘guaranteed purchase’ when using our Warehouse line provider. Yes, it’s not true correspondent, we underwrite and prepare closing docs, but that’s how we can offer the guaranteed purchase, we control everything, so the risk to us isn’t any different than a brokered loan. Most do it in response to the dumb ‘Lender paid/borrower paid’ requirements, Mini-C makes it easy for them to take care of the borrower, which you can’t do if you’re doing Lender Paid and want to reduce your fees….it’s a mixed bag, and our Government agencies aren’t really doing anything to help the borrower – increasing costs and paperwork sure don’t.”

 

Finally, Doug J. writes, “Regarding the discounted appraisals for the military buyers, I was told by my state regulator (Maryland) a couple of years ago that this could be considered an ‘inducement to buy’ if I (the loan officer) paid for the appraisal out of my commission.  It would effectively be reducing my commission for one borrower over another which is not allowed as a lender paid LO.  However there are no restrictions on advertising or promotion that my employer does, so if the employer paid for it, it wouldn’t be a violation of LO Comp. Whether it is a Fair Lending issue – who knows?  Is it fair for my grocery store to give me a discount because I am a club member?”

 

 

How about some lexicon for seniors?

ATD – At The Doctor’s BFF – Best Friend Fell BTW – Bring The Wheelchair BYOT – Bring Your Own Teeth CBM – Covered By Medicare CUATSC – See You At The Senior Center DWI – Driving While Incontinent FWB – Friend With Beta Blockers FWIW – Forgot Where I Was FYI – Found Your Insulin GGPBL – Gotta Go, Pacemaker Battery Low GHA – Got Heartburn Again HGBM – Had Good Bowel Movement IMHO – Is My Hearing-Aid On LMDO – Laughing My Dentures Out LOL – Living On Lipitor LWO – Lawrence Welk’s On OMMR – On My Massage Recliner OMSG – Oh My! Sorry, Gas. ROFL…CGU – Rolling On The Floor Laughing …and Can’t Get Up SGGP – Sorry, Gotta Go Poop TTYL – Talk To You Louder WAITT – Who Am I Talking To WTFA – Wet The Furniture Again WTP – Where’s The Prunes? WWNO – Walker Wheels Need Oil LMGA – Lost My Glasses Again GLKI – Gotta Go, Laxative Kicking In

 

 

Rob Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)