Dec. 12: Notes for margins on swaps, CAIVRS, credit scoring, and dual employment for HUD mortgagees

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...

We’re into the holidays, and a lot of money is flying around. The Fed reports the lifespan of various bills is determined by denomination and by how much the public uses each one. The average lifespan of $100 bills (like the kind in my Dad’s safe deposit box) is 15 years; the $20 bill (like those under his mattress) is 7.7 years; the $5 bill is 4.9 years, and $1 bills (like in my Christmas present) are 6 years.

 

The conversation about whether or not residential loan originators can be real estate agents, financial planners, and so on goes on. I received a note saying, “Any Realtor who wants to add reverse lending to their business is not able to. HUD strictly prohibits this in HUD handbook, Chapter 2, Part A, Section G (which may now be in a different section). Some states do allow it, but HUD explicitly does not. Nor does it allow for people in the financial planners or insurance industry to partake in origination of loans. We vetted this through to Washington early last year. They consider these a “related field.” I have heard companies allowing for this, but they are putting their FHA license in line of fire. Here is the section from old guide; highlighted part seems pretty cut and dry: ‘G. Full Time, Part Time and Outside Employment. A mortgagee may employ staff full time or part time (less than the normal 40 hour work week). They may have other employment including self-employment. However, such outside employment may not be in mortgage lending, real estate, or a related field.”

 

Brandon Dwyer, however, counters this. “HUD just changed it in September with the new Handbook to allow for dual employment as long as the loan officer on a FHA transaction is not also the realtor on it. ‘(iv)The Mortgagee must require its employees to be its employees exclusively, unless the Mortgagee has determined that the employee’s other outside employment, including any self-employment, does not create a prohibited conflict of interest. (v) Conflicts of interest: Employees are prohibited from having multiple roles in a single FHA-insured transaction. Employees are prohibited from having multiple sources of compensation, either directly or indirectly, from a single FHA-insured transaction.’”

 

I asked Brad Hargrave with Medlin & Hargrave who responded, “Brandon is entirely correct. HUD Handbook 4000.1 took effect on September 14th.  Contained therein is a significant change to the long-standing prohibition on outside employment for employees of a HUD-approved mortgagee.  The new requirement is exactly as Brandon states (and can be found at section I.A.3.c.iv(B)(3)(b)(iv) and (v) of the Handbook).  HUD reiterated the new rule in its June 30th “FAQ’s,” and stated it yet again in an industry webinar that included a slide stating “Changes to Dual or Outside Employment requirements:  authorizes dual employment in real estate industry; prohibits having multiple roles in a single FHA-insured transaction; and prohibits multiple sources of compensation from a single FHA transaction.”   While it’s certainly reasonable for a mortgagee to take HUD/FHA at its word, it is also very important, in my view, to give serious consideration to other issues, and potential consequences, associated with permitting one’s employees to originate FHA-insured loans and engage in real estate sales activity (or any other outside employment that was formerly prohibited by the superseded Handbook). Considerations include issues related to state licensing restrictions and complications, supervisory obligations of the mortgagee over its employees and agents under Federal and state law, common law fiduciary duties owed to the borrower (particularly in California, where I practice) and of, course, the CFPB’s predisposition to utilize UDAAP when it wants to achieve a desired result. But in California at least, a BRE-licensed, HUD-approved mortgagee may, per the new rule, decide to permit its loan originators to engage in real estate sales activities subject to the conflict of interest language addressed by Brandon. My only suggestion is to carefully consider all of the ramifications associated with that decision before taking the leap.”

 

The subject of different credit scores comes up a lot as consumers now have better access to their credit. Sharin Peet writes, “Is your consumer claiming their credit score is different? Of course they are!  Many consumers think their credit score is higher, but they often have been given a different score than is reflected on the mortgage credit report. Many credit card companies now offer a FICO score on their credit card statement each month.  Following a data breach, consumers are offered credit monitoring, which includes a credit score.  In addition, popular consumer sites offer the credit score instantly, and often for free!  Credit scores have become easily accessible. But there are many different score models and numerous score versions. Some scores are industry-specific and used to qualify applicants for targeted purchases – automobile, retail, insurance.

 

“The two main companies providing scoring models are Fair Isaac (FICO) and Vantage. The FICO score is currently used for all mortgage lending decisions, nationwide.  The FICO version used by the lending industry is dictated by Fannie Mae and Freddie Mac (the GSEs).  Currently the only FICO model both GSE’s are accepting is at least two versions behind and is actually a “pre-recession” model.

 

“Score versions are frequently updated to reflect changes in applicant purchasing patterns.  These score version updates move faster than the GSE’s procedures & platforms are capable of adopting. There is much pressure on the GSE’s to adopt newer versions of FICO as the newer FICO versions have been proven to score more people with higher accuracy in reflecting risk, as current-day purchasing patterns are reflected. The scores that consumers are receiving directly are typically the latest versions available: FICO v8.0 or Vantage v3.0.

 

“The bottom line – if your applicant tells you their FICO score is higher, it may be, but you can assure them there are many different score models & versions.  The mortgage FICO score is used consistently across all mortgage entities and lending institution nationwide.” (Have more questions? Contact Sharin at CIS, a nationwide credit report provider.)

 

This week I discussed “Caivers” which was incorrect, or at least needed some clarification. Lee sent, “CAIVRS (no e) is the Credit Alert Interactive Voice Response System.  Back in the day you had to call an 800 number and check them on each borrower.  You had to input the borrowers SS# and the computer voice would spit out a response.  If it started with A you were fine.  If it had a D (defaulted CAIVRs) or C (Claim) you were not eligible until you had proof it was cleared. Now it is automated through FHA connection.”

 

And from Texas Helene wrote, “I just wanted to provide a little more insight in CAIVRS: Note that although this specifically references FHA loans, it does apply to VA and USDA loans as well. CAIVRS stands for Credit Alert Verification Reporting System and it is a system maintained by the federal government that lists persons who have defaulted or had a loan foreclosed within the last three years on a debt owed to the Federal government or are currently delinquent on a debt owed to the Federal government. Examples of Federal debts include previous FHA or Veterans Administration home loans, Federal student loans, Small Business Administration loans and similar types of debts. A borrower is not eligible for an FHA mortgage if he is presently delinquent on any type of Federal debt, unless the delinquent debt is paid in full or otherwise brought current under a repayment plan approved by the Federal agency that is the holder of the debt.  “If the borrower is under an approved repayment plan with the debt holder, the borrower will have to obtain a written copy of it from the debt holder. (Federal IRS tax liens may remain unpaid provided the IRS subordinates the tax lien to the mortgage.) For a borrower that had an FHA mortgage foreclosed, that borrower is not eligible to apply for another FHA mortgage until three years after the date that HUD paid the insurance claim to the lender. Removal from CAIVRS, however, does not guarantee eligibility for an FHA mortgage. A borrower is not eligible for an FHA mortgage if he or she has an outstanding debt with any Federal agency that is in delinquent status.  “If the information in CAIVRS about a borrower with an FHA loan is incorrect, FHA will correct the information upon submission to the appropriate FHA Homeownership Center (HOC) of documentation showing the correct information. The HOC cannot correct information reported by another government agency. To locate the FHA Homeownership Center go to its website and click on the applicable state.

 

Switching gears to the capital markets, many in the industry attribute the credit crisis to the problems with credit default swaps. Bill Harrington, a Senior ABS Analyst with Debtwire ABS, sent a reminder of his well-written piece from last month headed up with, “US margin rule for swaps obliges securitization issuers to overhaul structures, add resources, and rethink capital structures.” “By 1 March 2017, many issuers of rated securitizations and structured vehicles will need a lot more resources to enter into a swap contract with a regulated US swap provider. From this date on, a swap provider will be subject to a new requirement to collect and post margin with respect to new swaps with many types of financial counterparties, including securitization issuers.

 

Five US regulators – the FDIC, Federal Reserve Board, FCA, FHFA, and OCC – have adopted a joint rule for margin requirements for swap contracts that are not centrally cleared. Under this rule, a US swap provider must ‘collect and post’ margin on a daily basis under a ‘new’ non-cleared swap contract with another swap dealer, a major swap participant, or a ‘financial end user’ — the broad category that includes many securitization issuers.

 

“The swap margin rule works in conjunction with SEC and CFTC rules. As such, it may be augmented by future SEC and CFTC rulemaking. Under the swap margin rule, a ‘covered swap entity’ is a swap dealer or major swap participant that is: 1) registered with, or exempted from registration by, the SEC or CFTC; and 2) also ‘prudentially regulated’ by the FDIC, Federal Reserve Board, FCA, or OCC. At the time of the rule’s adoption, there were 100+ ‘covered swap entities.’

 

“The big impact for issuers of securitizations and structured finance products is that ‘hedging’ (i.e., offsetting the potential depreciation of assets such as fixed-rate residential mortgages vis-a-vis floating-rate debt) with swap contracts will be much less attractive. A give-up is in store, one in which issuer will have to weigh hedging versus ratings. Swap hedging per industry practice will be much more expensive. Partial or no hedging will cost less, but likely result in lower ratings as debt will be more exposed to asset depreciation. Mitigating factors such as additional overcollateralization or substituting swaps for options could also come into play. Securitization issuers may discover exclusions as they examine the swap margin rule and review future SEC and CFTC rulemaking. However, the securitization industry is taking no chances. SFIG has been lobbying Congress for an exemption from the swap margin requirements for all securitization issuers.”

 

Bill’s in-depth analysis finishes up with, “If swap providers continue to use the current industry-standard template for swap contracts that hedge the commercial risks of captive finance companies, the securitization sector will see a bifurcation of swap contracts. Captive finance companies will continue to hedge commercial risks with swap contracts that adhere to current rating methodologies, whereas other securitization issuers will enter into swap contracts that are compliant with the swap margin rule. Rating agency methodologies will have to assess the impacts from the two types of swap contracts. And other providers of securitization analytics will also have to boost their assessments of the potential depreciation of securitized assets relative to rated liabilities.”

 

 

(Warning: don’t read if you don’t like the word “sex” in a joke.)

An 8-year-old girl went to her dad, who was working in the yard. She asked him, “Daddy, what is sex?”

The father was surprised that she would ask such a question, but decides that if she is old enough to ask the question, then she is old enough to get a straight answer. He proceeded to tell her all about the “birds and the bees.”

When he finished explaining, the little girl was looking at him with her mouth hanging open. The father asked her, “Why did you ask this question?”

The little girl replied, “Mom told me to tell you that dinner would be ready in just a couple of secs.”

 

 

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.)