Feb. 2: Letters & notes on rate locks expiring, non-QM appraisals, housing & economics

With one partial government shutdown over with, and another possibly looming in less than two weeks, lenders continue to try to help their borrowers as best they can regardless of government antics. Lenders know that with the vast majority of their clients interest rates aren’t the primary obstacle. Letters to me focus on programs, products, affordability, down payment, inventory, continued compliance concerns, all rolled up into borrowers being able to qualify. Let’s see what’s on reader’s minds.

Compliance handbook for ordering lunch

ML writes, “When I first started I worked for this tiny mortgage bank where I managed secondary and operations (at the amazing age of 25 which looking back makes even less sense since I was an idiot in my 20s), helped our contractor IT guy with server maintenance when he couldn’t come in, warehouse management, DataTrac reporting, 1099 accounting, HMDA reporting and when our front desk admin was out I had to cover that also. I think at one point I became the compliance officer. Till this day I still think back that if that company was still around and I was still doing what I was doing, we’d all probably be in jail for something because I just didn’t know what the heck was going on. Now it feels like I have to consult our compliance handbook just to order lunch.”

When a rate lock expires

If a rate lock expires due to the way the lender processed the loan, how does/should the lender treat rate lock fees and what are the challenges? This is question was recently posed to Lender Compliance Group. It touches not only on regulatory guidelines but also on case law. The regulatory rules may seem straight-forward; however, this is an area of quite a lot of litigious battles. One recent case serves to highlight the nuances involved.

The Truth-in-Lending Act (TILA) and its implementing Regulation Z require creditors to disclose various charges for residential mortgage loans. Compliance with this requirement means the rate lock fee disclosure should encompass a reliable response to the information requirements.

A federal district court in California recently considered a borrower’s claim that TILA required more detail than the creditor had provided him regarding a rate lock fee.

The Wells Fargo rate lock agreement stated: “This pricing is valid until the Expiration Date of Rate Lock shown above. If loan does not close and funds disbursed on or before the expiration date, your loan will be re-priced and this may result in pricing increases. However, at the option of [Wells Fargo], you may be permitted to keep your rate the same by paying an extension fee to extend the rate lock.”

The borrower, Muniz, claimed that he diligently provided all the information the bank requested, but the process was allegedly fraught with delays caused by the bank. Muniz sued, his complaint centered on his view that he had read the disclosure to impose an extension fee only if his actions caused a delay, not if the bank’s own behavior postponed closing.

Muniz pointed to a 9th Circuit opinion which had stated that a meaningful disclosure must “anticipat[e] any reasonable questions which consumers might have.” The court, however, referred to the model “Credit Sale Sample” form in Regulation Z, Appendix H-10, which required “nothing more than numerical disclosures for ‘Finance Charge’ and ‘Total of Payments.’” Thus, the court found Muniz’s reliance to be misplaced and dismissed the claim.

Non-QM & bifurcated appraisals

Here’s a topic that hasn’t had much discussion: appraisal standards for non-QM loans. Granted, 2018 saw about $20 billion of this product (about 1.5% of the overall market) but my guess is that appraisers will need to have greater awareness for higher standards placed on non-QM loans, particularly ones for securitization. Jim Smith, President of Property Solutions, observed, “With the expected ongoing rise in the origination of non-QM loans, market participants need to be aware of more rigid appraisal requirements. While it’s business as usual for appraisals on securitized jumbo loans, non-QM loans that are to be securitized require the appraisal to have 3rd party collateral diligence performed. This type of collateral review is typically performed prior to the loan closing and therefore would need to be compliant for evaluation or appraisal standards. The reason is that non-QM loans typically have higher risk factors and therefore the collateral certainty is of greater importance to the end investor.

And Michael Simmons, co-President of AXIS AMC, relayed, “Rob, 2019 is seeing a growing push-back from a handful of state regulatory agencies challenging the efficacy of Hybrid and Bifurcated Appraisals. The issue was triggered in large part by the GSEs announcing at the end of last year their ‘support and acceptance’ of bifurcated appraisals.

“As most of your readers know, bifurcation involves a 3rd party performing the property inspection piece (i.e., utilizing a Real Estate Agent, or appraisal trainee, or a ‘home inspector’ … or somebody’s cousin named Carl) to physically inspect in lieu of the appraiser. Depending on the scope of the assignment, the inspection could include measuring, noting the property’s condition, and photographing the subject’s full interior. At that point, an appraiser would analyze all the market-based data (including data from the 3rd party inspection) and develop their opinion of value. In other words, the appraiser would do an appraisal.

“Those handful of state regulatory agencies – from Maryland, Virginia, and Illinois – are the vanguard challenging this path. It’s reasonable to expect more states, led by their Appraiser Boards, to follow in their footsteps. The core of their concerns stem from a fear that the public trust is not being protected by allowing someone other than the appraiser to inspect a property. While I would certainly agree that Public Trust is the very cornerstone of what every appraiser is charged with protecting; I take issue with the idea that having a 3rd party perform the inspection jeopardizes that trust. Especially when one considers that the Fannie Mae and Freddie Mac have independently developed automated value models that, under a widening range of conditions, obviate the need for a lender to provide any appraisal at all if the loan is being sold to one of the 2 GSEs.

“If that’s not enough, it wasn’t too long ago when banks were allowed to fund loans based on BPO’s – again, without the benefit of any appraiser’s input. Even federal regulators have championed raising the ceiling from $250,000 to $400,000 to exempt lending institutions from obtaining an appraisal for non-residential real estate loans under certain conditions. Given all this, it’s beginning to feel like the definition of Public Trust may be morphing to something resembling ‘close enough’.

“This is a truly big topic, however, and one can’t do it justice in a couple of short paragraphs. Expect this discussion to grow in sound and scope throughout this year.”

Thoughts on housing & economics

Folks in lending don’t need a degree in economics, but they should have an awareness of what is going on. Plenty of forecasters think that the Fed won’t raise short term rates in 2019 given the decelerating economy. But what is ahead for housing in 2019 after home sales weakened in 2018? Some think lower interest rates might spark a rebound after the housing market lost considerable momentum over the course of 2018. Affordability waned and buyers pulled back after years of price gains that have been well in excess of income growth.

Although rates have come down, toward the end of 2018 higher mortgage rates reduced affordability even further and interest rates rose slightly more than expected, as a concerted hawkish rhetoric from the Fed likely sent many potential buyers to the sidelines. The talk from the Fed throughout the fall revolved around Fed officials indicated the Fed had a long way to go to bring the federal funds rate back to neutral. Buyer sentiment, evidenced by the proportion of consumers stating now is a good time to buy a home in the Conference Board’s Consumer Confidence Survey, trended steadily lower, a precursor to the slide in new and existing home sales. That was mirrored by a slide in homebuilders’ expectations for sales over the next six months, centered mainly around concerns that interest rates would likely rise further in 2019. Hopefully that pessimism relaxes now that mortgage rates have fallen back below 4.5%, as I have heard anecdotes from realtors and brokers that buyer traffic has revived slightly.

Companies have scaled back economic forecasts slightly for 2019 due to the recent financial market volatility and tightening in credit conditions. Real GDP is now expected to rise 2.6% this year versus earlier forecasts of 2.7%. Expectations are still for the Fed to hike interest rates two times this year but markets now see the first hike in June and expect the other in December. The bond market and federal funds futures market maintain a more cautious view, as both expect the Fed to remain on hold the entire year. A pause in interest rate increases might help revive the housing market or help stem the erosion in home buying experienced during the last nine months of 2018. Originators are optimistically holding tight to the belief sentiment on the broader economy and housing market is currently too pessimistic. The economy’s underlying fundamentals remain sound, as evidenced by strength in job growth and a pickup in the underlying demand for homes and apartments. While the underlying demand is improving, affordability remains a formidable hurdle for many households. Home prices have risen much faster than incomes for the past few years, which has caused many renter households to continue to rent.

Demand for apartments was surprisingly strong in 2018, and vacancy rates remain low across much of the country despite a surge in new completions. Moreover, strong demand for apartments has kept rents climbing, which has made it harder for young families to accumulate savings. The strongest job growth has tended to be in technology markets, such as the San Francisco Bay area, Seattle and Denver, and a larger share of the jobs created have been in urban areas, where fewer homes are available for sale.

Home prices in these metro areas have surged relative to median incomes, and prices finally appear to have risen to a point where buyers have pulled back in a significant way. Businesses and residents in these areas are also increasingly looking to relocate to other parts of the country where home prices are not nearly as high. The increase in relocations should bolster home sales in parts of the country on the receiving end of this trend, including Charlotte, Nashville, Las Vegas, Phoenix, Tampa and Raleigh. Additionally, foreign buying has slowed considerably as global economic growth has weakened and the dollar has strengthened, hurting locations such as Los Angeles, New York and Miami. Tax reform, which put limits on the deductibility of mortgage interest and state and local taxes, also appears to be slowing demand for higher priced homes in the Northeast.

In summary, modest improvement in new and existing home sales in 2019 could and potentially should come to fruition as moderation in home prices and pullback in mortgage rates should help revive demand in coming months. Most of the improvement is likely to take place at lower price points, as housing shifts away from higher cost metro areas to lower cost areas. Markets are also likely to see more lower priced product come to market, both in the first-time buyer market and the retiree market, which has been one of the few areas that has held up well in 2018.

The NFL has made its rules defining what exactly a catch is fairly philosophically, changing them over the past several years and attempting to re-define what exactly is and isn’t a catch. A survey of Americans found that 38.4 percent claimed to understand the NFL catch rule. But a recent survey indicated that only 3.5 percent of Americans can identify all three things required for a play to be a catch, and that only one out of every 18 people who claimed to understand the catch rule got it and made no errors. Now you’re a little more prepared for the game between the commercials tomorrow.

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Home Financing Despite the Partial Shutdown.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman