Aug. 16: Great notes on ECOA & appraisals, DAPs, Realtor fees, private capital, prison time for lenders, etc.

Plenty of money is merely paper, which the public trusts to be backed by the government. And counterfeiting is a problem. For something non-mortgage related for a Saturday, here is a short essay of the story of the greatest convicted counterfeiter – it turns out spending the money can be a real problem. Some will argue that the bits of paper in my kid’s wallets (extracted from mine) are somewhat virtual, and on par with bitcoins. Speaking of which – the CFPB has gone on record by watching out for us and warning us about virtual currency.


A few weeks ago the commentary mentioned Uber’s possible influence on Realtor life – the internet has certainly done its part in increasing efficiency and bringing costs down. But the National Association of Realtors is a powerful lobby, and it controls the Multiple Listing Service. For now. But we have Zillow and Trulia, sittin’ in a tree, k-i-s…. never mind. Collingwood Chairman Tim Rood published an blog titled “Zillow,Trulia Combo: How Real Estate Portals Are Transforming Home Buying and Selling”.


This on fees charged by real estate agents: “You mentioned a 7% RE fee in Indiana. What is the average price of a house in Indiana? Thought you might like to know that many real estate markets in Indiana are now at 7% for Realtors.  Granted this market consists of a lot smaller price points, but aren’t those the folks that need their equity to begin with? The cost of doing business is probably close to that of business costs anywhere else, but the income opportunity is lower than out here. Do you think RE agents in Indiana are making more money than agents in CA or NV?  I doubt it. I would much rather make 4% on an $800k property in SF than 7% on a $250k property in Indianapolis. Maybe the CFPB will come up with a way to make values the same everywhere.  Is it disparate that you pay less in city than another?”


And recently the commentary mentioned couples about to be married registering, not for a Cuisinart, but for a down payment. Pete Lansing with Universal Lending writes, “Rob, I saw your article regarding gift funds and wedding registries.  I put together this program in 1996 and got it approved by the HUD secretary. I checked with the FHA resource center who says it is still available and can be used. We did all kinds of marketing and advertising to consumers who were getting married and wanted to use a bridal registry method for their down payment and closing costs. We had a method of documenting each gift from family and friends and the total was used to acquire a new FHA loan (no seasoning necessary). When lending became easy a few years later (2002) and the down payment either was not necessary or seasoned funds not important the program became less utilized.  Now I chuckle at the fact that we the industry are bringing this back to the marketplace as a new idea.  Really … Old ideas, become new again!”


Speaking of a combination of old and new, many banks are reviewing and revising their policies and procedures in light of growing expectations for an increase in interest rates. (Unfortunately for all the experts out there, the market has proved them wrong so far in 2014 – rate have gone down, not up. Remember that when you’re listening to someone who says they can read the future.) Banks have concentrated (appropriately) on the impact rising rates will have on the loan portfolio and deposits with a focus on managing changes that are likely to occur with higher rates. One other area that has grown in most banks over the past few years and therefore deserves attention is the securities portfolio, because it too can damage a bank’s capital as rates rise. Most bank investment portfolios hold a significant quantity of mortgage-backed securities (MBS). As long as interest rates have declined, there has been refinance activity in the underlying home loans and this has flowed through to MBS, creating cash flow beyond the level that ordinary buying and selling of homes would support. This is not new: lenders know that mortgage rates have been dropping for more than 30 years since they peaked in 1981 at about 16.5%.


Even if MBS prices rally, actual mortgage rates seem unlikely to go lower than the last 2 years as costs have gone up, and we have seen a significant drop in refinancing activity. This has slowed the cash flow of MBS securities and major extension of the duration and life of these types of securities is likely. By policy, banks look at yield tables and pre-purchase packages in order to assess extension and prepayment risk on these kinds of securities. The problem is that all of the analytics and tables used to calculate these speeds are based on history, dominated by the activity of the last 30 years. No one knows what could happen once rates rise from historic lows, and investment policies usually specify an average life or average duration that is considered acceptable in light of managing interest rate risk in the portfolio may or may not work. Average life and duration should also be shown with various levels of stress, but if the calculations to arrive at these figures are based on assumptions from the last 30 years of history, the level of extension in these securities could be far more. Many banks are willing to take more risk in their loan portfolios than in their securities portfolio. This is especially true of credit risk, but generally for interest rate risk as well. Bankers are busy looking at their policies to see if they take into consideration that the behavior of MBS securities may be different in the future than it was in the past, so the underlying models also have built-in risk that may not be easily measured. Also, it would be a good idea to run some analysis considering the possibility of very long extension in the MBS your bank currently holds.


“Rob, has anyone gone to prison over the mortgage meltdown?” Yes they have – certainly at the broker fraud level. There are many examples of lenders defrauding borrowers, and engaging in mail fraud, in states like Florida, Kansas, Missouri, Texas, Nevada… you get the picture. In the bigger picture, Ex-Jefferies & Co. Managing Director Jesse Litvak, deemed an “elite” fraudster by prosecutors for being the only person convicted of fraud related to a $20 billion government bailout program, was sentenced to two years in prison and fined $1.75 million for lying to customers about mortgage-backed securities. Litvak, 39, was found guilty of securities fraud and making false statements, as well as fraud connected to the U.S. Treasury Department’s Troubled Asset Relief Program. His March conviction was the first tied to the Public-Private Investment Program, an initiative that used TARP funds to spur investments in mortgage-backed securities after the 2008 financial crisis. (In January, Jefferies agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage- backed securities.)


Recent news on “ECOA appraisal delivery to borrower” regulation caught the attention of Mike Ousley, President of Direct Valuation Solutions, Inc., and he wrote, “One misguided CFPB regulation is ‘for the best interest of the consumer’ is the 3-day appraisal rule. (Someone wrote, ‘I have a client traveling out of state. When they left we were just getting loan approval and the final u/w condition was for appraiser to correct the spelling of the HOA. This triggered the 3 day rule and my client had to sign the acknowledgment of receiving the revised appraisal. It took us 3 days for client to get to place where they could receive the document, sign it and send it back. This means from the appraisal correction received by the u/w to getting the signed acknowledgment back from the client to the end of the 3 day rule added six days to our process, and caused a lock extension—one that we could charge to the client making the rule not a benefit to the consumer but a detriment and financial liability.’)”


Mike’s note says, “Here is a link to what I’m about to provide to you, but I think the readers issue may have been avoidable. One way to avoid the trauma your reader experienced is to get a waiver from the applicant. Regulations address, ‘How can an applicant give a waiver?  You can accept an oral or written statement from an applicant.  For example, you can obtain a waiver from an applicant through an e-mail, phone call or some other means. What happens if there is a clerical error in a valuation? To avoid interrupting transactions at the last minute, when a clerical correction is made in an appraisal or other written valuation that you have already given the applicant, you can have the applicant waive the right to receive the revision three business days before consummation or account opening.  As noted above, the waiver can be oral or written. To use this exemption, you must first meet five criteria: The revisions must be solely to correct clerical errors in the appraisal or other written valuation; The revisions must have no impact on the estimated value; The revisions must have no impact on the calculation or methodology used to derive the estimate; The applicant receives the revised appraisal or other written valuation AT OR PRIOR TO consummation or account opening (suggesting at the closing table); The applicant must have already received the valuation that is being corrected (pre-correction) either promptly upon completion or three business days before consummation or account opening, whichever is earlier (Lender has adequately complied with the ECOA rule with the pre-corrected appraisal).”


And he ends with, “Another thing to note, the appraisal or other valuation need not be mailed, and by way of proper documentation, an electronically delivered appraisal is deemed delivered when the borrower has accepted the e-delivery of such (For electronic delivery, you must obtain the applicant’s consent under the Electronic Signatures in Global and National Commerce Act (E-Sign Act). The Direct Valuation Systems platform sends the completed (and updated) appraisals to the borrower electronically through a secure link to the appraisal and advises the borrower that by clicking on the link they are accepting delivery via this method, then the system tracks and advises the client that the borrower accepted e-delivery (and for that matter that they downloaded the appraisal).  If they do not click/accept e-delivery within 24 hours, the lender is automatically notified to make other arrangements to deliver the appraisal. Just thought this might be useful to the lender and hopefully eliminate locks expiring.” Thank you – if you want reach Mike, feel free to write to him.


Folks “in the know” continue to talk about private capital being brought into the market. I found this note in my in-box one day from John Jacobs at Houston’s Patriot Bank: “Rob, next time there is a discussion about private capital being brought into the mortgage market, and taking the ‘first loss’ position, I would like to know how the pricing will work. There is a continuing effort to get private capital into the mortgage market to replace or partially replace the current GSE’s risk position by placing the private capital in the first loss position. Obviously the first loss tranche, if you will, will need to receive a higher return than the lower risk tranche or tranches.  Do you have any thoughts about how that pricing might work and what the risk premium might be?  Certainly, the ‘first loss’ participants are going to want a premium, and are not going to be very supportive of the continuing push to get the low-mod buyers back in the market.  Politicians just can’t resist trying to ‘force’ mortgage participants to accept a higher default risk for egalitarian reasons, rather than rational one’s.  Private capital is very reptilian when viewing risk and won’t do anything for some ‘social’ reason. Does this all sound familiar, and can you say ‘Barney Frank’.


“My opinion is that there will never be as robust and liquid secondary market if Fannie and Freddie are dismantled.  Definitely, there will be no interest in financing higher credit risk borrowers without a large premium, which of course will be viewed as disparate pricing.  As long as there is any government involvement, albeit as last or catastrophic loss participant, there will be pressure politically to lend to less credit-worthy borrowers with no risk premium.  I see this as a conundrum, a problem with no reasonable answer.  This leaves us with either a poorly functioning private mortgage finance markets or government involvement with mandates, as the only possible outcomes.”



The vendor makes the hot dog and hands it to the Buddhist monk, who pays with a $20 bill.

The vendor puts the bill in the cash box and closes it. “Excuse me, but where’s my change?” asks the Buddhist monk.

The vendor replied, “Change must come from within.”





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Rob Chrisman