Oct. 26:Trends for builders; letters on QM points & fees & mini-corr, high cost mortgages, ECOA snafu, and MSAs

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 have never been accused of being “well heeled.” But when I reach that level, I’d want a house that reflected my taste for Mickey’s Big Mouth and pizza-flavored Goldfish crackers. The Wall Street Journal reports that builders are indeed targeting this wealthy segment of our population. (LOs everywhere are wondering how long they can stay in it.) “Newly built homes in the U.S. are getting pricier as better-heeled buyers have rebounded more quickly from the recession than entry-level buyers, spurring home builders to go upscale to match the shift…The new-home market has split into the haves and have-nots since the recession, and some economists predict it may favor more-affluent buyers for at least another year, if not longer. That has builders that typically cater to entry-level buyers now skewing their offerings toward the more active market. Some of the reasons for the market shift are a reaction to the excesses of the housing boom. Lower-end buyers, including first-timers, are hampered by strict qualification standards for mortgages and requirements by many lenders for hefty down payments. For some, buying an existing home, sometimes out of foreclosure, is cheaper than buying a new one. Meanwhile, more-affluent buyers have reaped better earnings growth since the recession, as well as stock-market gains and improving home equity.” I’m still hoping to cash in on my baseball card collection that my mother DID NOT throw out.

 

QM will consumer countless industry hours for months to come, with the cost being passed on to borrowers of course. Bill Kidwell, president of IMMAAG, writes, “The CFPB final QM/ATR rule includes language that will result in unavoidable consumer confusion when the rule is implemented in January. Further, the same language will drive misinformation and will cause consumers to ‘see’ different pricing on identical loans depending on whether they obtain the loan form a non-self funding originator, a self funding originator, or a bank or other depository.”

 

His note continued, “I wish I could lay it out simply, but I can’t. However, in the simplest form I can muster, the new rule excludes the dollar amount of lender paid compensation from becoming part of the points and fees calculation when the loan is funded by a creditor under the definition of creditor as added to TILA by the LO Comp Rule in 2010. This means that any entity that uses its own funds, including a bona fide warehouse line of credit to make the loan is a creditor and the lender paid compensation is not part of the ‘magic’ 3% points and fees cap that defines a qualified mortgage.

 

“Implications include consumers who shop a traditional broker for a lender paid deal will be exposed to disclosures which will include higher fees than form self-funded sources. The fees are not real, so the consumer will be shopping ‘apples to oranges’ for no justifiable reason. Consumer access will be negatively affected because traditional self-funding originators will hit the HOEPA (HPML) triggers on loans that do not trigger the same issue for self-funding sources. It is unfair to consumers, unfair to traditional brokers, confusing and misleading for all.

 

“I asked the Bureau in writing on 9/11/2013 to clarify whether or not the lender-paid compensation points and fees number affects APR. To date after three follow up requests the answer is still not forthcoming. In fact not even a response. The disparate treatment of the points and fees calculation also causes a disparate impact on industry. Mini-correspondent business plans are springing up everywhere. To the extent the distributions system becomes more consolidated as a result of the unjustified definition and calculation consumers lose choice. Further, small business owners appear attracted to an inappropriate solution to avoid the problem. Based on verbal comments (nothing in writing form the FRB or the CFPB, go figure) from Paul Mondor during the LO comp rule implementation slave warehouse lines are not ‘bona fide’. Therefore, most mini-correspondent models will not prevent compliance with the new requirement. Small originator companies who decide to become mini-correspondents simply to avoid the cap/disclosure issue will only cause themselves deferred pain and agony because upon examination it is doubtful the slave warehouse lines will pass muster as “bona fide”. But the Bureau has also refused my request for clarification of the definition of bona fide warehouse line.”

 

He finishes up, “What does all this have to do with HR3211? In March 2013, Bill Huizenga introduced HR1077. That bill would have amended the Dodd Frank changes to TILA in such a way that the Bureau would have to reconsider its definition of lender paid compensation with respect to the points and Fees calculation. The bill also includes some language that would prevent the Bureau‘s decision to count loan level price adjustments. That bill remains in the House Financial Services Committee and has 66 bi-partisan co-sponsors. There is also a bi-partisan companion bill in the Senate (S949) which languishes in committee as well.

 

“On 9/28 Mr. Huizenga offered HR3211 to the House Financial Services Committee. It has 9 co-sponsors and it is identical to HR1077, except it guts the lender paid compensation language and the exclusion of loan level price adjustments from the bill. The result, it does nothing to protect consumers. So, given the Bureau’s unwillingness to even listen, we (industry) were depending on HR1077 to save the consumer day. Now it is clear we need to raise broader awareness of the impending confusion and harm so maybe someone other than IMMAAG or NAIHP will pick up the baton and help us run with it.”

 

Switching gears, Lori Randich from Redwood Mortgage contributes, “The industry should know about the unintended consequence of the CFPB’s revision of Section 32 under TILA. Per Dodd Frank, Section 32, the High Cost Mortgage Rule, will change come January 2014, with a lower threshold for ‘covered’ loans and the elimination of the exemption for purchase loans. I think the change in the purchase exemption will have a big effect on real estate sales. Unlike Sec. 32, when the Higher Priced Mortgage regulations (HPML – Sec. 35) were adopted ‘bona fide’ bridge loans were made exempt. Bridge loans are not well-defined in the regs., but TILA offers an example (“…such as a short term loan to purchase a new home before selling the existing home…”). Sec. 32 never had a bridge loan exemption, but it didn’t need to because it exempted purchase transactions entirely. So a lender who wanted to fund a bridge loan could do so, using the bridge loan exemption under Sec. 35, and the purchase exemption under Sec. 32.

 

“Most bridge loans are written for less than a year, and they all have a balloon payment due at the end of their term. I’m sure you understand, if you’re funding a short term loan, even at the best of rates, the APR is going to be high. With the rule change and the lower threshold, most bridge loans will be covered under Sec. 32. However, if a loan is a covered loan under Sec. 32 balloon payments are prohibited. So lenders and borrowers are caught in a Catch 22. Even if a lender wanted to follow all the restrictions and take on all the liabilities under Sec. 32, the lender can’t make the loan. And the lender can’t make a longer term loan because they would lose the exemption under Sec. 35. This was probably an oversight on the CFPB’s part, but it does affect a number of homeowners throughout the country.

 

“You might be surprised by how many bridge loans are being done right now. In Northern California we have a large number of homeowners who are in or are nearing retirement and who own their homes free & clear. They want to move down, but don’t want the nuisance of listing and showing their home before buying a new one. Using their existing home and the acquisition home as collateral, they often have ample equity to cover 100% of the purchase price if they want to. And once they sell their exit home, they’re back to a free & clear position in the new home. A bridge loan is the perfect solution for them, but the door will be shut on these types of loans come January.”

 

Lori finishes up, “The solution would be to exempt bridge loans under Sec. 32, just as they are exempt under Section 35. It’s simple common sense. Frankly, I’m certain this is something the CFPB didn’t consider when issuing these changes. But this minor correction to the regulation would make a big difference in peoples’ lives.”

 

Marketing Service Agreements are always “fun” to talk about. Marx Sterbcow, Managing Attorney with The Sterbow Law Group in Louisiana, writes, “Regarding the MSA information in your commentary, I will reiterate that companies must provide individualized accounting for each service provided—this isn’t just an issue in Oregon this is something the CFPB wants.  If you have an MSA you had better make darn sure each service performed is individually valued and verified by a third party valuation company.  Do not do the valuations yourself or allow the MSA partner to come up with those valuations. Office space should not be calculated into a MSA either—it should be in a separate lease agreement not part of an MSA.  And lastly, any language in an MSA that compensates based on access (i.e. real estate sales meetings, right to speak at a meeting, one-on-one meetings with agents, etc) should be immediately stricken and payments involving such should be refunded. The CFBP is all over MSA’s right now and there are multiple investigations involving them across the US. So if you have one in place my recommendation would be to have your legal counsel review it immediately because the CFPB has targeted their use. Can they be done at all? Yes but if you are going to enter into the MSA space make sure they are carefully and conservatively tailored.” Thank you Marx.

 

Here is a topic that only compliance and underwriters will like: the disclosure process and ECOA rules. “Rob, we’re really struggling with the new ECOA rules around disclosing all collateral valuations to the borrower ‘promptly’ but in all cases 3 days prior to closing. The main pain point right now is around Freddie Mac. They deliver their HVE (AVM) values on their LP Feedback Certificates and on their UCDP appraisal reports (SSRs). The rule says we have to provide the borrower a copy of all valuations developed in connection with an application for credit. It doesn’t say you don’t have to provide it if you don’t use it. The majority opinion of the compliance experts we’ve consulted along with apparently Fannie and Freddie is that these types of GSE produced valuations have to be provided to the borrower even if the lender ‘doesn’t use them’ in make a final valuation determination (the lawyers out there will wonder how you can argue you didn’t use something that’s in your file). Fannie has never put property valuations on their SSRs and they are now going to stop putting them on the DU findings.  Although they will still give you a warning on DU if they think your value is not reasonable.  We’re lobbying Freddie to follow Fannie’s lead and not put the property valuations on their LPs and SSR but to just give us valuation warnings.  I wonder if anyone else is having this problem and if anyone else is lobbying Freddie about this.”

 

There is a rumor that this was discussed at the last Freddie Advisory Board meeting. Perhaps Freddie will provide some sort of disclosure that lenders can provide the borrower without having to provide the entire LP feedback. This might be of help:

http://www.freddiemac.com/singlefamily/news/2013/1008_valuation_data_announced.html.

 

My guess is that Freddie is aware of this section of the CFPB’s small lender compliance guide and have brought this issue to the FHFA & CFPB’s attention because it doesn’t accurately reflect Freddie’s ECOA readiness plan. We will see if Freddie does anything besides the guidance issued in the October 8th Bulletin and the valuation style sheet for LP HVE values that it plans to provide in the coming weeks to vendors and lenders.

 

But that leaves the question of any third-party provider who says the valuation contains proprietary information that I cannot disclose to others. How can the lender provide a copy to the applicant? Some providers of valuations, such as government-sponsored enterprises (GSEs), have developed special forms you can use to provide valuations to customers. Providing a copy on a GSE-approved form is an acceptable way to comply with the rule. Creditors should consult applicable GSE program guides to determine the procedures for providing consumers with copies of valuation estimates provided by GSEs. So lenders are left wondering about providing borrowers copies of the LP Feedback Certificates and the UCDP SSRs. And if so, providing them a copy of the actual form or use the Freddie provided extraction tools to put it in their own form.

 

 

Not only does the MBA conference start tomorrow, but Halloween is coming up! Here you go – worth a minute or two. It is very well done: http://www.youtube.com/embed/VlOxlSOr3_M?feature=player_embedded

 

 

Rob

 

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