Sep. 27: Observations on foreclosing on HOAs vs. first liens, Millennials, vendor management, putbacks and reps & warrants

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...

Trulia reports the home ownership rate for Millennials is at an all-time low of 13.2%, and 31.1% of 18 to 34 year olds still live with their parents. Amy Tierce, new Regional VP at Wintrust Mortgage, contributes, “I find the whole Millennial conversation so interesting. Not only are Millennials delaying home buying but on the other end of the generational spectrum I find that Boomers do not seem to be quick to down size and move onto their next adventure. If ’60 is the new 50′ then ’30 is the new 20′ and we all have to be patient as these cultural changes work their way through the real estate economy. When the boomers start selling, the move up buyers have something to buy and the first time buyers will have more inventory and the market will regain a healthy balance.”

 

Do you have your drone yet? Realtors are chomping at their collective bits to allow their use, “arguing that the technology does not pose a threat to public safety.” Critics argue that everything is fine until one takes down a 737 airliner, or crashes into preschoolers in a PE class.

 

The report yesterday about HOA liens “bumping” 1st mortgage liens in Nevada caused quite a commotion. I received this note from someone at one of the Agencies. “It’s a very risky situation for lenders. I can’t imagine, however, a first trust lender that would not pay off an HOA penalty or lien if they were aware of it versus standing by and risk getting severely injured as a result of an actual foreclosure proceeding. Without having looked into the details, I’m assuming that such laws in these states are okay with the Agencies (and, thus, most lenders). Perhaps the statutes have a provision that protects 1st deeds of trust. Additionally, I recall from my days dealing with foreclosures that as long as there are enough proceeds from the sale of a foreclosure, any subordinate lien holders must be paid off as well. The foreclosing entity cannot keep excess proceeds as ‘profit’”. In the example you cited, the HOA could only keep the $6,000 (plus legal and foreclosure costs, presumably), but must pass on the rest to subordinate lien holders. It’s still a big risk because the property could be ‘underwater’ with respect to other lien holders and they may not want to monetize a loss if the borrower is making payments. So, my question is, how do subordinate lien holders really get ‘wiped out’ if the HOA forecloses? My experience was that subordinate lien holders only got wiped out if there were insufficient foreclosure sale proceeds to pay them off.  I’m curious as to why lenders are even willing to lend in these areas.”

 

And Ballard Spahr LLP’s Abran Vigil contributes, “This is a link to our alert on the recent Nevada Supreme Court case. Within that alert, you should find links to two other alerts, one regarding the same HOA issue from when it first arose and one regarding a similar issue involving Washington D.C.”

 

Lastly, Bart suggests, “Probably too simple to be a viable solution to the “super lien” issue on HOA dues but what about lenders making HOA dues a required part of the mortgage payment on homes involving an HOA, much along the same lines as impound accounts for taxes and insurance?”

 

And on tenant’s rights when the owner stops making their payments, a broker in Nevada suggests, “I have another thought for you regarding the CFPB. When the crisis hit, there were many NOO borrowers that stopped making payments, because the value had dropped, and the investment was no longer worth the expense. Or they were in financial difficulty and needed the money. The reason for not making the mortgage payment does not matter. Fact: there were tenants that had faithfully made their monthly rent payments, and through no fault of their own, were evicted when the property was foreclosed – very unfair.  Maybe the CFPB can set up some sort of clearing house so tenants make their payments to an entity (Paypal) and the payment is send to the lender. If the rent is higher than the payment, then the difference can be refunded to the borrower, or applied as principal payment.  What do you think?”

 

Earlier this month this commentary mentioned, “Like the medical profession, aspects of residential lending such as secondary marketing, underwriting, you name it, are becoming a series of specialties. This includes vendor management. George Manolis with FormFree writes, ‘I found this article in American Banker interesting. From the eyes of a vendor, it is incredible lately what even small non-depository lenders want us to go through. This paragraph rings true to today’s environment: ‘there is a dark side to vendor risk management hysteria: compliance fears are sucking innovation out of the banking industry. When banks shy away from partnering with smaller vendors and start-ups, they ironically leave themselves exposed to more risk. If smaller ventures are unable to pass vendor risk management hurdles, they will go out of business or else be acquired by major players, creating concentration risk among the few remaining vendors.’ To move the quality bar higher, innovation is necessary over the old ways of doing things, it is usually the small tech guys who are innovating and they are making it difficult for lenders who want to use us to clear their own internal vendor hurdles. There is a disconnect present for sure.’”

 

The note prompted John Levonick, Legal and Compliance Lead with Accenture Software, to contribute, “I must respond to the comment ‘compliance fears are sucking innovation out of the banking industry.’ Financial Institutions (FI) that leverage large service providers and/or ‘smaller vendors and start-ups’ have a number of different affirmative obligations to adhere to as part of the vendor due diligence assessment when outsourcing, what is referred to as ‘hurdles’. Among the many requirements, such as having the appropriate policies, procedures and controls; and, having the compliance acumen to understand and fulfill the FI’s regulatory compliance obligations (i.e. protecting NPI), both are obvious requirements and if a small vendor or start-up cannot grasp this, they need not bother participating in this space.”

 

His note continued. “But I do suspect that the factor driving this misguided rant, is that poorly capitalized small vendors and start-ups do pose significant risk to FI’s and this is a firm Vendor Management obligation that cannot be overlooked. FI’s must assess for Business Continuity Risk to determine, assuming the Vendor is providing a material function for the FI, what happens if they discontinue offering the service or are face severe financial crisis that would impede their ability to perform the service.  I understand that even the strongest small vendors and start-ups, with the best infrastructures, controls, and compliance are subject to the dreaded “send me your financials” request as part of the vendor assessment, which may very well disqualify small vendors and start-ups from consideration. This is a clear reality of the world we live in today, if a vendor is providing material services to an FI, the FI needs to know that BK is not an option. And on a side note, the small tech guys have not cornered the market on innovation, but if you build something magnificent those well capitalized vendors with the strong infrastructures will be tripping over themselves to acquire it.”

 

From the Pacific Northwest I received, “Hey Rob, I landed on my feet a few weeks ago and wanted to see if you might know someone who can help us with something. We’re looking to add investors for our hard money lending on owner-occupied properties. Old school hard money. Show me your bank statements and I’ll give you a bunch of money tomorrow. Hard money as in 12% interest rates and 3 points, 6-9 month term. Do you know anyone that’s creative and might be worth contacting?” (Editor’s note: many programs in various states can be found at www.mortgageelements.com.)

 

I turned to Tim L. for an answer. “NO ONE is buying section 32 loans. It doesn’t matter who you are or how big your balance sheet is. There are of course ways around it….but what happens when you pay for things outside of escrow (see Athas Capital) is that a client will rarely close. (It has other products in its mix too). That being said, if Sec 35 loans are what you are after, there are a number of lenders in the market doing owner occupied alternative documentation loans.  Some will allow you to bank them however most simply aren’t priced any differently so why would you. And then there are the Silvergates and BOFI’s of the world who are effectively priced on alt doc products in the o/o space. As for the other alternative, (outside of Dodd Frank) a bridge loan (the 12 and 3 that you mentioned), there are no such ‘investors’ (those buying loans) because the loan can’t be capitalized, meaning no investor will buy a loan that matures in 6 to 9 months.  The companies that are doing these short term loans have to create returns to their own investors, so they typically will charge points up front and pass through the coupon to their investors. So you end up brokering to your local hard money guy. Even so, most are non-owner loans. Citadel has the approach that if the owner occupied home is owned by an LLC it is a business loan and will allow you to proceed outside of QM. Beyond that, you are going to be stuck going to private money groups that will have a defined appetite for what they want. Each source may feel comfortable on the owner side with some hoops to clear or not. Long story short, there is no easy answer these days, unless you build it yourself…. Reg 506(D).”

 

In mid-September American Banker’s Kate Berry reported about a government watchdog report criticizing the FHFA for implementing the new rep and warrant framework on repurchase exposure. The report, titled “Watchdog Releases Scathing Report on Fannie, Freddie Putback Plan” noted, “A watchdog agency lambasted the regulator of Fannie Mae and Freddie Mac for failing to assess the risks of a plan to reduce loan buybacks for banks and mortgage lenders. The Federal Housing Finance Agency adopted the plan last year even though Fannie and Freddie did not have the technology in place to make it work, the agency’s inspector general said. The FHFA’s so-called “representation and warranty” framework was supposed to reduce taxpayer losses and improve the quality of loans backed by the government-sponsored enterprises. The plan also was designed to give banks and mortgage lenders relief from costly repurchases, thus encouraging them to make more loans to borrowers with lower credit scores. The framework was a significant change from the past when Fannie and Freddie only reviewed a sampling of loans they acquired, or examined loans only after, not before, a borrower defaulted. But the inspector general’s report found that FHFA, Fannie and Freddie did not adequately consider the operational risks of not having the necessary computer systems, tools and processes in place. As a result, banks and mortgage lenders may have received too much relief from buybacks, the report said. Taxpayers now are at even greater risk for losses that cannot be recouped down the road, the inspector general warned.”

 

The investigative study prompted attorney Brian Levy to contribute, “This criticism of the FHFA makes me shake my head. The watchdog completely misunderstands the purpose of the repurchase remedy to begin with and is actually saying that the program will work as intended. In my work defending originators, I have seen countless examples of investors seeking to use an alleged underwriting defect (e.g., undisclosed debts, asset shortage DTI ratio) to pass back huge loan losses on loans that paid on time for years only to default due to unforeseeable job loss or life events. The whole point of the new GSE rep and warrant framework was to confirm that the repurchase remedy should not be used to pass back losses that are unrelated to underwriting defects.  FHFA recognized that after 3 years of good performance, the initial underwriting cannot realistically be blamed for any future failure in performance. The point was to reduce the fear of originators that an immaterial or technical underwriting defect could result in liability years later for what was actually a good loan.  This is something that I believe needs to be recognized in the reps and warrants of all loan sale agreements in the broader industry to bring back sensibility to the repurchase concept.”

 

 

Husband’s Message (by email):

Darling, I got hit by a car outside the office. Paula brought me to the hospital. They have been doing tests and taking X-rays, although I have been passing in and out of consciousness. The blow to my head, though very strong, should not have any serious or lasting effect. But I have three broken ribs, a broken arm, a compound fracture of the left leg and they may have to amputate my right foot. Fingers crossed!

Wife’s Response:

Who’s Paula?

 

 

Rob

 

(Copyright 2014 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.)