As I prepare to head to Florida, Kansas, and North Dakota this week (talk about a packing challenge!), I am reminded that many of the concerns and topics facing the industry are indeed industry-wide and impact borrowers across nation. Senior management continues to grapple with staffing, usually friendly competition, and increasing revenue & capital while LOs and support staff are focused on helping their clients as best they can given the regulatory and documentation environment in which we find ourselves. Talk about challenges!
“Rob, what is the scoop on the FHFA’s new minimum capital requirements? Is it a cakewalk?” That depends. First off, the FHFA released proposed new minimum capital requirements for mortgage sellers/servicers. Servicers will need to hold minimum capital of 25 basis points of servicing UPB and equity capital of 6%. The capital requirement will be at the seller/servicer level and not at the institutional level. From what I have heard most of the non-bank servicers will not have an issue complying. Things might change, of course, between now and when the new rules are expected to be finalized (second quarter of 2015) – all servicers must comply within 6 months of finalization. Look at your company’s financials. The new requirements for sellers/servicers include 1) minimum net worth of $2.5 million plus an additional 25 basis points of total Unpaid Principal Balance (UPB) of all loans serviced (not including subservicing); 2) tangible net worth to total assets of at least 6%; and 3) minimum liquidity of 3.5 basis points of total agency servicing as well as an additional 200 basis points of total nonperforming agency servicing that exceeds 6% of the servicers total agency servicing UPB. (And you can always contact Dan McPheeters who runs the MBA’s capital markets committee for more information.)
Doug writes, “When there is talk of mergers and acquisitions, has there been any discussion about how M&A impact of the quality of mortgages and their impact on current or future value? I would expect due diligence focus to be strong on what has been written and the potential exposures there…”
I relayed the question to STRATMOR’s Jeff Babcock who answered, “I presume that you question about loan quality relates primarily to legacy lending risk — a buyer’s exposure to current or future investor repurchase/indemnification claims? This issue would have been front-and-center in 2012 and 2013, but fortunately has faded into the background as investor repurchase claim activity has really backed off over the last 12 months. Since the great majority of transactions within STRATMOR’s M&A practice have been asset purchases, legacy risk is theoretically not a true liability exposure which passes through to the buyer. In reality, however, successor liability might be raised by a creditor/investor, but the burden of proof is quite high. Also, the buyer has a hefty financial set-off in the earn out which typically represents 2/3’s of the premium value. So if unforeseen losses occur, they will offset them with a deduction from the earn-out payments. Loan quality is also factored into a buyer’s initial qualitative assessment of a prospective seller. That due diligence begins with a review of the seller’s recent investor report cards. Following the signing of a Letter of Intent, the buyer’s detailed due diligence will carefully examine a sampling of loan files to determine loan quality, understating practices, average FICO scores/LTV ratios, etc.” Thanks Jeff!
“It’s going down,
I’m yelling timber!
You’d better move,
You’d better dance…”
I am sure that Kesha & Pit Bull know nothing about Ability to Repay documentation, and their song is not about lenders’ documentation requirements. But many industry observers are concerned about current trends in non-QM lending, the number of tax returns being reviewed, and (in general) the amount of loan documentation that lenders will need to defend their Ability to Repay calculations. George Ostendorf, president of Illinois’ American Mortgage Capital Group, contributes, “As a guy who has personally reviewed thousands of defaulted loans both for non-performing loan funds that I have managed in the past six years, and as part of my consulting activities with large banks being sued for mortgage securities fraud, I am very familiar with why loans went bad and the mistakes that plaintiffs say lenders have made in their loan decisions. Lenders have paid staggering sums of money in the last few years, partly because they did not have sufficient documentation to defend their previous loan decisions. The CFPB’s Addendum Q (‘Standards for Determining Monthly Debt and Income’), sets forth a number of instances where two years of tax returns would definitively verify previous income streams used to determine ATR. But I am seeing certain lenders and investors giving that up voluntarily.
“It’s foolish to require less documentation on non-QM loans when there are so few competitors in the non-QM business that you shouldn’t need reduced docs to boost volume. It’s also foolish to leave yourself open to regulatory penalties which can be so large that they can take away whatever profit you might make on non QM products. Non-QM is an important product for the mortgage industry. I hope that the industry doesn’t screw it up by returning to reduced document programs that got us into trouble in the first place.”
Extending past simply non-QM, And Dick Lepre with Northern California’s RPM Mortgage writes, “There was an article in Bloomberg about the return of subprime. While subprime is not something which I do or which RPM does this is worth discussion because it affects the housing, the home loan business and the economy. There is absolutely nothing wrong with subprime lending. It was around for as long as I can remember before the home loan mess and it had worked well and served those who could not get prime home loans. “Subprime was essentially designed for people with bad credit histories. For whatever reason there are people who have sufficient income to make payment of their home loans have a history of lates. For some it is because of irregular income. For others it is because the simply do not value the importance of making their payments on time. Subprime was also for folks with slightly higher debt ratios than allowed by FNMA. “Sane subprime had two characteristics. First, it was always fully documented. The lenders wanted to be sure that the borrowers had sufficient income to make the payments. Second, it was priced so that the riskier clients paid higher rates. These were rated B, C, and D paper and the higher the risk the higher the rate. Investors who purchased subprime wanted reward (yield) commensurate with the risk.
“But essentially two things went wrong. First, HUD demanded that FNMA and FHLMC purchase loans which would previously have been subprime. The result was that FNMA and FHLMC collapsed. And second, Wall Street investment banks and the three debt rating firms constructed a B.S. method of making subprime home loans into A-rated bonds. They did this by blending together good and bad loans and giving investment quality bond ratings to even the pools of bad loans.
“As long as we avoid those two things there is nothing really wrong with subprime lending. One problem is that CFPB has defined Qualified Mortgages (QMs). If a lender makes a QM then they have significant protection from getting sued by the borrowers. Subprime is not QM so it has risks. The main risk is that the lender did not sufficiently document the fact that the borrower can afford the payment. Again, this is why subprime should require full documentation and highly scrutinized underwriting. Once the securitization of subprime is firmly in place it will enable those who cannot qualify for QM’s to buy house and it will furnish higher yields to investors willing to buy riskier paper. One underlying problem is that the Federal government has ignored the role of HUD in destroying the GSEs, and Congress even formed committees which refused to hear the testimony of anyone who suggested that HUD was complicit and produced a bogus report asserting that HUD had no role in the home loan mess. Consequently we have a misinformed public. The public knows about Wall Street’s role but is almost totally unaware of the effects of HUD and The National Homeownership Strategy. If people are predisposed to think of non-QM as something shady and anti-consumer then lenders will have issues in court. This had the effect of chilling some lenders and investors from getting into subprime but subprime will happen.” Well said Dick!
In my regular STRATMOR blog I discussed the unnecessary paperwork plaguing LOs and in turn their clients.
Attorney Brian Levy sent, “The discussion about excess documentation requirements and self-employed borrowers needing an accountant struck a nerve. Here’s my own personal example of why mortgage consumers think getting a loan is worse than a colonoscopy. As Counsel to my firm, I am a 1099 contractor. When my wife and I refinanced a few years ago, they asked me to have my accountant confirm that the money I took out of my business account to pay for the loan costs, roughly $1,500, would not adversely affect my ability to operate my business. No one at the lender wanted to risk making a judgment call that amount was immaterial to a legal practice. Seriously? That kind of decision could be second guessed without ‘documentation’ and result in a repurchase demand later if the loan were to default. When I told them my wife would be the person to sign off on that since she does my books, they of course replied that it would not fly. I had my tax guy do me a favor and write the note since without it I wasn’t going to get the loan. Good thing I didn’t use Turbo Tax.
“As silly as that was, defending repurchase requests has taught me that originators who sell loans on the secondary market are not crazy for being unwilling to take these seemingly innocuous risks and instead document like mad and ask for all these stupid verifications. Unlike many of the mortgage industry’s woes, however, this problem has nothing to do with regulations arising out of the Dodd Frank reforms. Rather, this hyper-documented underwriting environment is self-inflicted, stemming from the indiscriminate repurchase risk embedded in our industry’s standard agreements that investors have enforced in a hyper-technical fashion. We are free to change the language of our agreements and how we chose to enforce them, but, to their credit, only the GSEs appear to have taken any leadership on that front. The rest of the industry has accepted this state of affairs as normal. Make no mistake, however, our customers think we are absolutely nuts for what we require, and this creates opportunity for market disruption.
“We need to recognize how efforts to strictly draft and enforce life of loan rep and warrants, for immaterial items, unnecessarily hinders credit availability and leaves consumers wondering why it can’t be easier. Life of loan rep and warrants in our standard agreements loan purchase and sale agreements seek to allow loan investors to pass back to originators unrelated credit losses for defects of any kind or import. The language typically says, ‘if the investor finds any defect, regardless of materiality, they can seek indemnification for the entire loss. ‘Hard to believe that language is enforceable, let alone something an originator would sign with the lessons of the repurchase demands that continue to be made by investors still fresh. I think the GSEs rightfully recognized that if a loan performs well for 3 years that any subsequent default probably wasn’t due to the original credit decision, but why hasn’t the rest of the industry followed? Frankly, I am amazed that despite the helpful GSE moves, correspondent investors still demand the same life of loan language in their agreements. Investors say, ‘Don’t worry, we won’t enforce our agreements in that way.’ Fool me once….” Thanks Brian!
Hospital regulations require a wheel chair for patients being discharged. However, while working as a student nurse, I found one elderly gentleman already dressed and sitting on the bed with a suitcase at his feet, who insisted he didn’t need my help to leave the hospital.
After a chat about rules being rules, he reluctantly let me wheel him to the elevator.
On the way down I asked him if his wife was meeting him.
“I don’t know,” he said. “She’s still upstairs in the bathroom changing out of her hospital gown.”
(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.)