3-14-15: National Pi Day; underwriters advice to LOs, kickbacks, and working together as an industry

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...

Steve Bowmer writes, “Today – National Pi Day – is going to be one of the nerdiest days in a long time. It is a little known ‘holiday’ that is celebrated by math nerds because the date is 3/14 and Pi equals 3.14.  Where this becomes the nerdy part is that Pi actually is 3.14159265359.  It does continue on, never repeating itself. The first 5 digits of Pi are 3.1415 which as far as our date goes is 3/14/15. So this year we have the most accurate Pi Day for the next 100 years.  If you want to get a little nerdier, at 9:26 and 53 seconds we will be at 3.141592653.” Thanks Steve!

 

On to some recent notes from readers, from which I continue to receive positive feedback about including – we’re all in this together, right? Well, most of the time…

 

A few weeks ago Mike Court wrote, “I am an underwriter and I read your commentary which had a note from an LO blasting us for not caring about his deadlines. Seems like the age old argument of, ‘He said, she said.’ The mention of the expiring bank statement is REALLY frustrating – doesn’t he, as a conscientious LO, watch the expiration dates of his documents? My closing conditions always show those dates. Or is he just too concerned with his CTC to worry if we have a salable loan? He makes considerable generalizations about ‘unreasonable’ times to review conditions. Does he consider we have turn times we adhere to (ours being 24-48 hours) and his is NOT the only loan we have to review and try and clear. Does he consider the fact that he doesn’t send us the documentation that we request – he has known about it from day one – because HE doesn’t feel it is necessary? And as for ordering an appraisal – in our system, he can get that done – he pulls that trigger, not me the underwriter. Now we have both had our rants. Let’s get some loans done.”

 

And Mark B. wrote, “I know that underwriting has become very difficult in many aspects but I think it’s a valuable exercise to take the time to understand the intent of a guideline. Take this comment from you letter dated 1/10/2015 for example. “My favorite was when a lender wanted copies of a Federal Employees Employee 401k handbook to prove they had access to the funds in their 10+ year old 401K.” Lenders ask for proof of ability to withdraw funds when retirement funds are being used for reserves. Not all 401K programs are created equal as I have seen withdrawal requirements limited to the event of death and borrowing was not permitted. If a borrower does not have access to the funds, other than dying, then the funds in this 401K cannot be used as reserves. It makes sense. The more one can understand guidelines, the more the loan officer will be prepared when asking for and reviewing documentation from the borrower. This can go a long way to prevent surprises during the underwriting process.”

 

A mortgage banker from San Antonio wrote, in response to a note about LOs and deadlines, “Brokers have always been at the mercy of the lenders and wholesalers with whom they do business. It has always been a pendulum swinging both directions as far as promises, turn-times, service-levels, etc. The only way to maintain control in an over-regulated world is to work for a mortgage banker with at least FNMA/GNMA approvals. There are still some of us out here who understand the importance of contract deadlines and work hard incorporating the ever-increasing compliance demands into our manufacturing process…while trying to maintain some semblance of customer service. The key is, and always has been, ‘He who holds the gold can make all the rules.’  Unfortunately, we are all at the mercy of investors’ ‘interpretations’ (I say that sarcastically because I believe most need some training in basic regulations and their application thereof).”

 

Josh Lewis weighed in on the LO situation. “I read the column faithfully but finally felt compelled to write in after reading the Saturday edition due to a confluence of issues covered, primarily stated income loans and the aging LO workforce. You began by pointing out that stated income loans are currently illegal and followed that up with an absurd letter lecturing everyone under age 60 about how ignorant and unethical they are.

 

“Let’s start at the beginning. The government now mandates that lenders verify a borrower’s ability to repay. Not much disagreement there from anyone. Then, they go on to dictate the limited ways that this ability to repay can be documented. The primary problem here is that the number one predictor of repayment on a loan is past payment history. I’ve lost track of the number of loans I have had to turn down to a borrower who has made payments on time for the last 10 years on their 6.5% mortgage because we were unable to verify their ‘ability to repay’ a new loan of the same amount with a monthly payment several hundred dollars lower. ATR must be expanded to offer safe harbor for rate and term refinances, utilizing similar guidelines as FHA/VA use for Streamlines and IRRRL. Contrary to your reader’s statement that, ‘“Any…borrower, and MLO…involved in…NINA deal should immediately be referred for law enforcement for loan fraud,’ this is a perfect example of where a NO income, NO asset verification loan has a valid and justifiable business purpose for all parties involved. He, and most others, also misses the difference between Stated Income and No Income for wage earners. To be clear, one means the application lies about income, the other means the income question isn’t even asked. One was fraud, the other was not. Now that both are outlawed, the point is moot.

 

“By now, anyone reading is likely saying, ‘That’s one very narrow use case,’ and the fact remains that SISA and NINA loans are still a horrible idea. And you would be mainly correct. Going back to your reader’s claim that LOs should know the ‘history’ of the industry and the products that were used, I would suggest he do the same as he incorrectly stated that banks and S&L’s ‘made enormous numbers of SISA loans’ in the 50’s, 60’s and 70’s. I’m sure a few happened but I’ve never seen one. Certainly many stated income loans were made but never without strong asset based verification to support the income stated.”

 

Josh’s note went on. “This is where every politician and bar stool expert gets it wrong. Stated income loans were safely and profitably done for decades. Banks understood there are valid reasons why someone’s monthly cash flow to repay a loan was not accurately reflected in their tax returns. They also understood that by analyzing the entire financial picture of the borrower, a sound underwriting decision could still be reached. Stated income loans did not destroy the real estate market. What destroyed the real estate and mortgage markets was the layering of risk factors and improper pricing of that risk by parties who originated and sold the loans with no intention of actually being the owner of the loan in the long term. The first 90% stated income loan I ever saw marketed was in the late 90’s. While it represented an expansion of the guidelines for the product it was still a safe and profitable product. It required a 720 credit score. It required 12 months of stated income in reserves. It required a 10% down payment. It had about a .500% hit to rate relative to full doc loans.

 

“Anyone who understands underwriting can see the safeguards built into this program and why it would not represent undue risk to the investor or the banking system. Now, let’s flash forward 5 years and see what that program had become by 2003. Credit scores of 620 and below, NO down payment, NO verification of assets to support the stated income, NO reserves post closing and at the higher FICO ranges almost no premium to interest rate. To anyone outside of Wall Street, this looked like exactly what it was, a foreclosure waiting to happen.

 

“Let’s remember that underwriting is a multi-legged stool. The more legs you take out, the more likely the stool is to fall. Weakness or absence of any one leg can be compensated for with strength in the other legs AND an acknowledgement by the guy sitting on the stool that it may not be quite as robust as the stool next to it. It’s just common sense, which was sadly uncommon in the years from 2000 through the meltdown. Aside from true asset based lending at lower LTV’s where the lender is accepting the high probability of taking back and liquidating collateral, stated asset loans are probably never a good idea. Alternative documentation (bank statements/1099’s), stated income(for self-employed) and no income loans have a place in our industry as a small but valuable tool to serve borrowers who need and deserve financing and are otherwise being locked out of the market. To qualify, these borrowers must have strength in their file to offset the additional risk and accept risk based pricing to accurately offset the higher default rate.

 

“To close this out, let’s go back to the age thing. Before I ever got to the part in your reader’s letter about his 35 years in the business, I knew he was over age 60. Speaking in absolutes and disparaging everyone under age 40 for their ignorance and greed is a great recipe for keeping talented young people out of the mortgage industry. I am fortunate, at age 41, to be young enough to relate to and learn from younger LO’s and borrowers. I’m also just as close in age to 60 year olds who remember when a set of loan docs was no more than 20 pages and you prepared your 1003’s and VOE’s on a typewriter. There is wisdom and excellence in the best of both generations. There is greed, stupidity and selfishness in the worst of both generations. The difference is, by age 60 most of the bad actors have washed out of our industry. The young ones are just getting started. With all of the ‘safeguards’ currently in place, they don’t get very far and move on to softer targets.

 

The industry must stop painting everyone with such a broad brush. As many have pointed out, there are probably better places to build a career currently than in the mortgage business. But for those who (bravely or foolishly) accept the challenge, we should accept and welcome them. Try to teach them and try to learn from them. The pace of change is rapidly accelerating everywhere in the world and the Millennials entering the workforce are the first generation who simply accept rapid and constant change as a fact of life, look to the horizon and try to find opportunity. We should all do the same. We don’t have a choice.” Thank you Josh!

 

On the subject of kickbacks and referral fees, from West Virginia Thomas Burke contributed, “The sad thing is that we have a great relationship with a realtor friend who loves our service and client support. His hands are tied when it comes to referrals from one company because, if he suggests to his home buying client that they get a second opinion on their mortgage quote, he knows he’s biting the hand that feeds him. UST training webinars stress that one of the most significant violations of RESPA which is stressed time and time again is the subject of kickbacks and ‘things of value.’ ‘If you performed no actual work, you cannot be compensated’ – period! Well it seems not all referring organizations/individuals subscribe to this concept. One large player in our industry/market is a Texas-based Fortune 500 diversified financial services group of companies, and it will refer a homebuyer to a realtor who pays an annual or monthly fee in advance for this privilege. Then, the realtor must return 35% of their real estate commission to the big company for every referral said company introduces to the realtor. The company contributes ‘some’ of this 35% kickback to the borrower and keeps the remainder as a ‘processing fee’ and then requires the Realtor to steer the homebuyer/borrower to an approved lender. The Realtor/partner of the large company does not want to upset this lucrative relationship so essentially does whatever is instructed.”

 

 

(Rated PG even after cleaning this up.)

Two Irish nuns, old and young, were sitting at a traffic light in their car when a bunch of rowdy drunks pulled up alongside of them.

“Hey, lift up yer blouses and show us what’s underneath, ye bloody penguins!” shouts one of the drunks.

The Mother Superior thought this would be a good test for the novice, and turns to Sister Immaculata, “I don’t think they know who we are – show them your cross.”

So, Sister Immaculata rolls down her window and shouts, “Screw off ye little jerks, before I come over there and rip yah in half!”

Sister Immaculata looks back at the Mother Superior and asks, “Was that cross enough, Sister?”

 

 

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.)