Aug. 13: Primer on funding for DAPs; more H.R. 2121 back & forth; marketplace lending – one size doesn’t fit all
There is a lot of political yammering out there. And it seems that during every election cycle someone revisits revising the horrific tax code, and with it the deduction for interest paid on home loans. In spite of the odds of changes to either one being miniscule, it doesn’t stop the debate about home loan interest. The latest is a piece titled, “The Case Against Everyone’s Favorite Tax Break: The Mortgage Interest Deduction.”
While we’re on factors that promote home ownership…If you’re a teacher in Lexington or a fireman in Denver, you may be able to afford the monthly payments on a small home in the suburbs. But how long does it take you to save up a down payment? In some cases, decades – if at all. And so in many appreciating markets there is a renewed interest in down payment assistance programs – and some of them are very generous. But where does the money come from?
I received a note from Dottie Sheppick on the topic “Understanding the Funding Sources for Down Payment Assistance.” The note, written by Dottie Sheppick and Theresa Hagman as Founding Partners of Specialty Mortgage Product Solutions, LLC, provides an interesting read for anyone who comes in contact with a DPA.
“The funding for Down Payment Assistance (DPA) can come from numerous sources and if you are going to take a position on if DPA is a good thing or a bad thing, you should know the differences. DPA programs have been in existence for decades, far before the credit crisis and before and after the seller funded programs that were shut down by the IRS and HUD. Thousands of DPA programs have been funded by federal funding sources, such as H.O.M.E. and CDBG and the programs have no impact on the interest rate or credit underwriting for the first mortgage, which can be a government or conventional loan. These program are funded and underwritten independently of the first mortgage and are offered by government or nonprofit agencies.
“The agency that offers the program decide the payback terms of the second mortgage based on their specific constituent needs. In a very low income area that may be in need of revitalization, the offering agency may provide a deep second mortgage with no payments due, no interest and due only on sale. In a higher income area, where the workforce cannot afford to live close to work, the offering agency may provide a second mortgage with a share of the expected appreciation. None are reliant on first mortgage interest rates.
“The only time a DPA program is dependent on the interest rate of the first mortgage is when a housing agency is using premium pricing to generate the funding for their program. The way it works is this – the borrower pays a higher interest rate for their mortgage. Because of the higher interest rate and higher revenue expected over time, that mortgage loan is worth more in the secondary market. If the loans are pooled into a mortgage backed security, it is worth more to an investor than a market rate mortgage backed security. This structure is called premium pricing and it is ONLY this structure that should be considered in the conversation about the future of down payment assistance.
“Admittedly, there are problems with premium pricing. The borrower may not be aware they are actually funding their own down payment assistance because they agreed to pay a higher rate on the first mortgage. This may be resolved by providing the borrower with a disclosure in plain writing that tells them, ‘you are agreeing to pay an interest rate that is ½ point (or whatever applicable) higher than what may be available to you. You are agreeing to pay this higher interest rate because by doing so, your lender will be able to sell your loan for a price that is higher than your original loan balance and some or all of the funds will be used to provide your down payment assistance.’ The borrower can then make an informed decision.
“Another issue is when a housing agency is using premium pricing to fund their DPA and they further secure it as a second mortgage with interest. It is reasonable that a borrower may think it is worth the opportunity to gain homeownership now, before rates go higher, by agreeing to premium pricing, but I doubt they would consider fair or worth the additional rate if they are getting another interest rate on their second mortgage. The borrower and the first mortgage lender may want to avoid these structures.
“In summary, we believe these points should be considered when thinking about the future of down payment assistance programs: programs funded independent of the first mortgage should not be at risk by lumping them in with premium pricing. If a borrower is getting a premium priced rate, they should receive a disclosure. Lenders should avoid any premium priced program where the second carries additional interest or share of appreciation. Those in a position to make decisions about down payment assistance for their company, their borrower or their agency client should be very clear on the differences for funding source. We need to avoid a rush to wipe out very good down payment assistance programs with those that may be more complex and not sustainable.” (Thank you Dottie and Theresa. If you have any questions write to them above or call 805.630.5081.)
H.R. 2121 – focused on transitional licensing for mortgage loan originators – continues to garner attention in the industry. As a reminder, the bill was passed by the House earlier this year and is now moving through the Senate, “is being hailed as a triumph for small business. The legislation, if approved, would make it easier for loan officers leaving a big bank to take a job with a small independent lender or start a brokerage.” The MBA, for example, as one of its priorities, is focused on getting H.R. 2121, the SAFE Transitional Licensing Act, through the Senate.
Last Saturday the commentary contained a note from Pete Mills of the MBA. “Rob – regarding the opposition expressed recently to HR 2121 based on ‘consumer protection concerns’…I would urge folks to read and understand the steps MBA and the Conference of State Bank Supervisors took to address all of the “what if” scenarios to ensure that states retain both the authority and the ability to mitigate consumer concerns. As a result of these efforts between industry and the regulators, the bill passed the House Financial Services Committee and the full House on bipartisan, unanimous votes. HR 2121 makes the licensing system better and more efficient for all MLOs and nonbank originators, while ensuring consumer protection concerns are addressed.”
In response Bill Kidwell, President of IMMAAG, wrote, “I just wanted to share a counterpoint to the comments in your Saturday (8/6/16) post provided by Craig Jarrell, John Hudson and Pete Mills about Mr. Stivers’ HR2121, Temporary Licensing bill. As is often the case the commentary that finds its way to well-read public forums fail to consider the position or opinion of the segment of the mortgage distribution system that represents over 90% of the non-depository companies originating mortgages; those with 10 or fewer MLOs.
“The idea that small shop owners and originators support the aspect of the bill that allows federally registered MLOs to conduct business prior to proving they have met the same education and financial requirements of the SAFE Act that over 135,000 others have is simply not representative of the broader section of the segment.
“And, the argument, such as the one made by Craig Jarrell, that ‘We have to take 20 hours of classes every year from our bank’s online university’ may be true for Iberiabank MLOs; but depositories have registered over 400,000 LOs and while hard data is not available; it is clear that a majority of the federally registered LOs working in their 10,000 institutions are not involved in origination; in fact many are tellers and other branch personnel that are registered because becoming a registered MLO is a very low bar and by registering it protects the bank from the occasional mistake made by an employee crossing the origination line in discussion with a bank customer. I think Jarrell’s bank is a good example. Iberiabank reports 1,265 federally registered LOs on the NMLS website. Yet the Iberiabank Mortgage Company reflects a total of about 132 MLOs originating in 10 states. Wonder what the other 1,000 registered LOs do?
“On the other hand, the aspect of HR2121 that provides for crossing state lines is generally an accepted part of the legislation, especially since there are only 6 states (7 agencies) that don’t recognize the Uniform State test.
“But supporting a bill that allows individuals into the industry to do what all other have had to ‘prove’ the education to do is not protecting customers. It only serves those that want to recruit and have lower barriers. As for the bank employees they may feel disadvantaged, I suggest that a 60-90-day period to ‘qualify’ for the new career is not too much to ask. Any of them that wanted to become real estate agents would find a much more intensive training requirement to get the licenses and with the automated background checks and proliferation of education and testing; transitioning to the ‘greener grass’ should be easy without the need of this special interest legislation.”
And Jayne Bail, Senior Loan Originator, responded with, “The issue to allow a potentially uneducated, non-practicing person to enter into the state regulated side of the industry is diluting the reason for licensing and leaves room for potential harm to the consumer.
“Licensure is earned and is in place for prevention of harm and wrong doing. Allowing companies to take on the burden of the actions of a licensee is not sufficient to preventing harm or wrong doing, it is only a back board which is an afterthought of the harm or wrong doing. The individual must be held accountable, otherwise, they should remain an employee of the depository where TRULY the burden of the individual’s action is on the depository.
“I would suggest that the level of service and responsibility from a state regulated licensee is much higher than an employee of a bank, mostly due to the requirements of being a licensee. If we truly want to even the playing field, the MLOs in the bank should be fully licensed and regulated as are the state licensees.
“This bill is a shortcut for the large mortgage bankers that want to burn and churn through originations. This is not a benefit to the market place or to our consumers.” Thank you Jayne.
Last but certainly not least, G5’s Loren Picard sent along a piece that he wrote last month for American Banker on marketplace lending. “Online lenders believe they are all operating in the same universe, subject to the same fundamental laws. Among other things, the new crop of digital lenders believes: Faster is better for consumers and loan buyers; everything should be automated; millennials are one homogenous group who need to be coddled with an unbelievable customer experience; credit risk is to be avoided; they are technology companies first and lenders second; and that they are marketplaces, while their borrowers are members.
“I believe, however, the opposite is true. Each lending product and service is unique and in its own universe; thus, attempting to impose the fundamental laws of a particular lending universe on another will lead to an eventual collapse of a particular firm or industry segment.”
I went over to the local gun shop to get a small 9 mm for home protection.
When I was ready to pay for the gun and bullets, the cashier said, “Strip down, facing me.”
Making a mental note to complain to the NRA about the gun control wackos running amok, I did just as she had instructed.
When the hysterical shrieking and alarms finally subsided, I found out she was referring to how I should place my credit card in the card reader!
I’ve been asked to shop elsewhere in the future.
They need to make their instructions to seniors a little clearer.
I still don’t think I looked that bad.
(Copyright 2016 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.)