Jan. 17: W-2 & 4506-T controversy; Collateral Underwriter – good or bad? Who does the rate survey for the CFPB’s Rate Checker?

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...

Here’s a note that echoes what lenders are seeing across the nation. “It looks like we are having perfect market timing for a refi market in the winter months – nothing wrong with that until purchases kick back in. The new challenge for us smaller lenders with a servicing portfolio it how to manage the runoff.  We are trying to be proactive, without increasing speeds and constantly looking at when the best time to start hedging it will be.  We are at only $500 million in servicing, so I am not sure it make sense to try to hedge it yet as our lift in origination volume during refi spikes is still outpacing the runoff, but it is something we are thinking about.  Are you hearing this from other small lenders?” Yes, I am certainly hearing that. And given rates, and locks, lenders can expect good closing months in February and March. Let’s hope margins, being as important as they are, hold, and let’s see how well small servicers can control refi runoff in their own portfolios.

 

“Rob, recently we have been hearing about lenders only providing paystubs and W2s and verifying documentation with a 4506-T (W-2 verification only) per the GSE’s guidelines. This illustrates that the GSE’s are willing to continue to put good lenders in jeopardy. One of the reasons originators/borrowers use this minimum documentation route is to ‘not  disclose’ 2106 expenses, schedule C, other  properties… or other possible negative aspects of a full tax return,  which may prohibit the borrower from qualifying. We asked FNMA’s QC team why they would require less than the full 4506-T. The response we received from FNMA was, ‘If the DU only requires this lesser 4506-T documentation then that is all you are required to provide.’ Yes, this is all the DU asked for because of the data a knowledgeable LO/Broker put on the application to get the desired response from the DU engine. It seems that they continue to put our industry harm’s way.  Some lenders use this lack of proper documentation as a competitive recruiting advantage while a more thoughtful lender would look at the long range implications. By not fully documenting files we run the risk of violating the ability to repay rule (MLOs have knowledge of info not shared) and creating a repurchase risk later. Historically FNMA/Freddie or an aggregators seek any info (including full tax returns) from the borrower during loan mods, workouts etc.  My big question is: Why do lenders and the GSEs continue to allow this?  Did we not learn anything from our past?” Just the thoughts of a concerned Mortgage Professional.

 

And this note from a person who is familiar with many mortgage operations:  “This is amazing. FNMA now has DU feedback messages that allow for confirming only a W-2, and not the whole Tax Return, as income. This allows the ‘industry’ to turn a blind eye to any separate independently owned business losses that the borrowers may be carrying outside of their employment, as well as hefty unreimbursed employee business expenses that the W-2 employee might be carrying on form 2106. So…let’s verify income ONLY, and leave the expenses in the dust. Here’s my favorite quote about this genius credit decision: ‘Turning a blind eye and opening windows for misrepresentation worked in the past, so let’s do it again…’ This person goes on to say: “ A more honest way to do this is for the Agency to just say you do not have to hit a borrower for 2106 expenses or business losses in qualifying. I can’t believe FNMA is so naïve to not realize all this does is create that scenario to be exploited otherwise.”

 

While we’re on agency thoughts, lenders are taking note of Fannie Mae’s Collateral Underwriter. Streetlinks had a seminar on the product last week asking, “Does Your AMC Have You Covered?” I have heard chatter out there wondering about the potential impact of this program, especially from Realtors. Some believe that this maybe the first step to risk based pricing and the first step towards backing away from the GSEs. Commercial banks are utilize this type of underwriting for financing real estate and it does impact the ability for the first time buyer to qualify, not to mention it the hinders of thousands of potential buyers reentering the market after the recent real estate debacle – certainly lower LTVs help insulate against loss.

 

Dave Biggars, Chairman of a la mode, inc. weighed in on what lenders should do about Collateral Underwriter. “Unless you’ve been hiding under a rock, you’ve heard lots of stories about how the world will soon be turned upside down by Fannie Mae’s Collateral Underwriter appraisal review tool. You’ve been told that weeks of chaos and endless stipulations will be added to every appraisal report. You’ve heard that you’re already behind in this ‘arms race’ of brains versus statistics and computers.  And you’ve of course been told that you need to spend money, yet again, to buy more software (even though it won’t generate any additional income). Our recommendation, however, is simple and contrarian: Don’t fall for the fear mongering.  Save your money. Why?  Any changes you might need to make in your appraisal habits will probably be minor; many of you won’t need to change a thing. You’ve been getting your reports reviewed for years by tools and checklists that are a lot more intrusive, and usually based on horrible public records and MLS data. Collateral Underwriter uses better data, generates fewer items to check, and isn’t even a new development at all — Fannie has been running it for years to evaluate your reports. The big difference is that now they’re allowing lenders to use it too.”

 

But Brian Coester with CoesterVMS spread the word. “Fannie Mae’s new Collateral Underwriter, commonly referred to as ‘CU,’ will undoubtedly (and irreversibly) alter the appraisal review process at all levels. This could be the single biggest change to valuation in the history of appraisal industry.” (CoesterVMS CEO Brian Coester will discuss Fannie Mae’s implementation of Collateral Underwriter and provides his perspective on how lenders can effectively manage the new requirements.)

 

And Bill Miklos from Bentley Mortgage, who sat in on the seminar last week writes, “Streetlinks made a strong case for an AMC to do the QC upfront to insure a better chance to get a 1-3 risk rating as 4-5 is considered the higher and highest risk. They did make note that the data used by Fannie is census track based which can lead to some issues. There was very little discussion on how to the underwriter/lender/AMC would deal with property conditions that change within a given neighborhood. High LTV loans were not even on the agenda or were they considered in their presentation. There will be at least 15 hard stops from the QC side of the program and who decides on it those stops can be overridden was the center of their discussion.”

 

But the event that generated the most controversy and used up the most e-mail bandwidth came from the CFPB. In a report released on January 13, 2015, the CFPB announced that nearly half of consumers do not shop among multiple lenders before applying for a mortgage loan, especially those unfamiliar with the process, and that 70% go to lenders or brokers.  Even fewer—about one of every four—submit multiple applications to gauge the best deal, the Bureau says. The report is the first to harness data gathered by the National Survey of Mortgage Borrowers, an ongoing research effort funded jointly by the Bureau and the Federal Housing Finance Agency (FHFA).  Its findings rely on responses gathered from roughly 1,900 consumers (out of how many million?) who took out home-purchase mortgages in 2013. Oh, and the report suggests that the 8/1 TILA/RESPA integrated disclosures may not, by themselves, sufficiently address consumers’ failure to shop the mortgage market.

 

But most focused on the CFPB’s page called the “Owning a Home Toolkit” with its “Rate Checker” tool, which the Bureau disclaims is still in beta testing. The Rate Checker allows a consumer to enter information about his or her location, credit profile, desired loan amount, and collateral value. Pairing this information with daily-updated data from financial institutions (via private research firm Informa), the Rate Checker displays the prevailing interest rates for which the consumer may qualify, as well as the number of financial institutions offering those rates to consumers with the consumer’s profile. Can consumers rely on information produced by the tool, which does not account for the full scope of consumers’ risk profiles? At the end of the report, the CFPB notes that the current analysis did not evaluate the extent to which more shopping by consumers improves mortgage outcomes, such as better loan terms and fewer delinquencies and foreclosures. A work in progress…

 

The letters and notes continued throughout the week. Dave Stevens from the MBA sent out, “This tool was developed without industry or other stakeholder involvement.  Needless to say, MBA has serious concerns with the scope, methodology and future plans for this new CFPB initiative.  As such, we sent a letter today to the CFPB voicing our displeasure and asking the Bureau to remove the tool from its website. I encourage all of you to also voice your concerns by sending an email to info@consumerfinance.gov. Also, please make sure to put “Rate Checker” in the subject line. Specifically, I would mention in the email that the tool: Provides incomplete data by not informing borrowers of a host of costs that lenders are required to disclose under TILA-RESPA, such as closing costs, APR, and other charges and fees. It fails to provide the most accurate rates possible because the lenders’ rates included are only a mix of large banks, regional banks, and credit unions. Independent mortgage bankers, which make up approximately 36 percent of the market, are excluded from these calculations. Additionally MBA will be sending out a “call to action” to members of our Mortgage Action Alliance (MAA), urging them to contact their senator or congressman about this issue. If you are not already a member of MAA, please go here to sign up.

 

And Bill Kidwell with IMMAAG, Inc. wrote, “Maybe it’s because regulators see it as “do as I say, not as I do” because they are not covered entities under the Truth in Lending Act, but to have the primary oversight body introduce an ‘interactive tool’ that disregards one of what the Bureau and the FRB before it, publicly considers the most important things for consumers to be aware of – front end costs and to disregard the presentation of the resulting APR when publishing “stated rates” is not only completely opposite what Barney Frank, Christopher Dodd, Elizabeth Warren, the FRB and the CFPB have been pursuing for the past five + years; it is a slap in the face of small mortgage originator shops who have been disparately treated by the regulator as a result of an apparent misunderstanding of the relevant impact of the front end costs – costs that are ignored in the CFPB’s new ‘interactive tool’.

 

“For a government agency to imply to consumers 1) that the most important consideration in a decision about financing real property is the stated interest rate is to ignore myriad other components of the ‘deal’ that might make one better than another; 2) that comparing simple/stated rates of 4.5% versus 4% and telling people what they’ll save without considering other costs is at best misleading; it also violates one of the basic disclosure requirements of TILA; 3) that using a mortgage broker, who searches dozens of lenders for the characteristics and balance of rates, maturity and other costs to attempt to help the consumer make an informed decision is not ‘shopping’ is yet another misrepresentation advanced by those who have never been in the trenches.

 

“What is the payback period of the total package offered in your example? Based on the tool, the consumer cannot determine that.” Bill goes on to discuss a simple form that allows comparative shopping which apparently has been disregarded by the government. “In the face of the clamor about ‘hidden costs, etc.’ how can the CFPB have the audacity to suggest to consumers that the stated interest rate determines the best deal and that is how the consumer should make decisions?”

 

Steven H. writes, “The collection of comments in your about the new CFPB loan shopping website was great!  I especially liked the comment, “And why doesn’t the CFPB suggest a person shop for a Realtor the same way?” I have two answers to that question.  First, the CFPB knows that unlike our weak lobbyists, the NAR could make their life miserable.  Second, like everyone else the CFPB knows that there is no need for a complicated cost-shopping tool for the “highly competitive” residential real estate brokerage industry.  Here is the formula – Sales price X 0.06 = $Commission. Done.”

 

 

The United States is an interesting study in linguistics. Why don’t most people in Florida, where I am today, have Southern accents? Why do people pronounce words differently in Oregon, Louisiana, Georgia, Virginia, Minnesota, or Maine? This short explanation is entertaining and educational – a good combination. Be sure to have your speakers on.

 

 

Rob

 

(Copyright 2015 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.)