Feb. 25: Letters on the likelihood of repealing Dodd-Frank, VA IRRRL lender abuse of our vets, why banks should do HECMs
The world is filled with people saying “this or that might happen.” The shift in residential lending from banks to non-depository mortgage banks has been well documented, as has the move away from FHA lending by large depositories such as Chase. There is too much potential liability, and UDAAP violations and penalties are a huge risk for banks that mortgage banks are willing to take, given the potential profits. That could change, however, and here is one news story that opines with Trump’s deregulation plan, big banks could get back into those programs. And small independent mortgage bankers should be pretty nimble and have great real estate agent relationships in the market if this happens.
Recently I had a write-up about reverse mortgages, and the move of some forward lenders to set up separate divisions to help their clients in light of declining forward mortgage volumes. The note prompted Kelly Kelleher with ReverseVision to write, “We’ve seen a fair number of banks interested in offering reverse mortgages, so your readers may want a white paper about why banks should do HECMs. Here you go.” Thanks Kelly!
Several weeks ago, I wrote, “I certainly am hearing some dire numbers from appraisers out there – like their business, … is down upwards of 50%. Let’s hope it’s a temporary blip.” Certainly some LOs and companies whose business models rest on refis have a different approach to the declining business. I received a note from Bill who observed, “It’s no blip and it’s MUCH worse. Here’s why. VA IRRRLs and FHA streamlines don’t require an appraisal and with the .500% to .625% increase in rates since the election, that segment of the market is GONE. Everyone I know has either funded out or is funding out their October and November locks and their pipelines are dry. The refi games is over. 2017 was a record year for VA refi’s. We won’t ever again see those numbers again.
“As for FHA, it’s toast too. Most borrowers refi’ed to approx. 3.25% and when you add the .85% MIP you’re STILL lower than today’s rate on a 30-year fixed. Batten down the hatches as massive layoffs are inevitable. In Orange County, California, VA & FHA streamline shops are everywhere and neither of those programs require an appraisal. Those shops are rolling up the carpets and passing out pink slips like it’s 2008. I know of one that told all LOs, ‘Don’t come to work, go to every real estate office and beg for purchase deals.’ Wanna guess how that’s going?”
Yes, rates have gone up, and lenders or LOs whose entire business model is/was based on refis are ailing. I received this note from an underwriter in Michigan. “Rob – I was disappointed to read about a couple of lenders who were recently talking up that they do VA IRRRLs with less than six payments made, and they seemed to be promoting the fact that they somehow solved this problem and they are open for business, eagerly doing these loans. These two lenders may not fully appreciate why Ginnie Mae made this change, and how the repeated IRRRL refinances of Veterans, particularly in a rising rate environment, is detrimental to Veterans and our industry?
“There is a small subset of lenders who mine the public records data and bombard newly funded VA purchase borrowers with offers to refinance, often from 30-year fixed rates into 3/1 ARMs. They promote the fact that the Veteran gets to skip two months of payments, and gets cash back equal to their escrow balance. There is no free lunch, so of course these amounts are added to the Veteran’s loan balance, along with thousands of dollars in new lender fees, often in exchange for a very small reduction in the Veteran’s monthly payment. The lender will then offer a new IRRRL refinance a few months later and in many cases, will do 3-4 IRRRLs to the same borrower in a calendar year.
“This behavior harms everybody: The Veteran loses because they go deeper underwater in their home equity with every new IRRRL refinance, the original purchase lender gets an EPO (early pay off) bill, the MSR investor gets and immediate write down to zero of their MSR investment at month two, and the Ginnie Mae bond investor who paid a high price premium for the security (103-106) receives a month #2 prepayment at 100 and loses the entire premium amount paid on these loans.
“All of this drives up the cost of VA lending, and drives up the rates for every Veteran getting a new loan. Many of the lenders who are churning the same IRRRL borrower every few months are very small shops, under the radar, without Ginnie Mae approval. The companies who readily provide the secondary Ginnie Mae liquidity to these churners are contributing to the harm to Veterans, and should re-think their promotion of IRRRLs less than six months.”
This year the link between lending, politics, and lenders will continue to be examined with changes in rates and the regulatory environment. Todd Hathorne spoke out on a piece I had in the commentary recently on some of the pressures on interest rates. “I see other pressures that reside outside of the control of the normally regarded monetary policy gurus. What happens if the Financial Choice Act actually moves to the floor of the House and passes the Senate? Some have suggested that this legislation could be used to modify more of the Dodd Frank bill. Steve Pearce sits on The House Financial Services committee and has appropriately raised questions about the impact of privatizing securitization of mortgages on low volume states like New Mexico. In a scenario like this, I say rates and the minimum requirements for obtaining credit will go up as a result.”
“The Fed is not the only element that can cause rates to increase. That would be a major shift to the monetary policy in that the tax payer would no longer be on the hook for those codified banks that are too big to fail. (SIFI’s) Inflation is an evil monster that robs from consumers. Rate discussions here should center around defining inflation. The standard definition of too much money chasing too few goods does not seem to work in our ‘new normal’ economy. I would encourage a careful move to release tax payers from the harness of Dodd Frank. Stay tuned.”
Yes, lenders are focused on rates and regulations. Will either one stimulate business? Steve Brown with PCBB writes about this from a banker’s perspective. “Bankers hoping that the changing of the guard in Washington will bring swift reversal of the current regulatory environment may be sorely disappointed, per a new regulatory research report. Efforts to ‘dismantle’ Dodd-Frank will likely run up against the political reality of the U.S. Senate, where the thin Republican advantage will make broad and immediate legislative changes exceedingly difficult.
“’Banking Regulatory Outlook 2017,’ by the Deloitte Center for Regulatory Strategy, looks at where banking regulations stand now, what types of changes might be in store, and how bankers can position themselves. At the center of the discussion, of course, is the fate of Dodd-Frank, whose future is being closely watched throughout the banking industry. While most agree there is little likelihood of an immediate reversal of Dodd-Frank, this report anticipates that the new “business-friendly” climate in Washington could result in numerous modifications and changes that still could have significant impacts on banks. Regulatory agencies have some discretion in implementing laws like Dodd-Frank, and it is at this level that changes could soon show up. Enforcement of existing rules could be eased, while pending rules could be left unfinalized.
“By tweaking existing rules, regulators could give community bankers more breathing room and less worry of audits and sanctions. That would no doubt be a welcome change for community bankers, who have protested that regulations enacted after the financial meltdown were far more difficult for community banks to manage than for large banks with more resources. If community banks can free up resources that are now being devoted to compliance, they might have more time and money to spend on service enhancements like digital banking or additional relationship managers.
“But any loosening of regulations could be both a blessing and curse. Deloitte’s report cautions banks against a strategy of curtailing compliance functions in anticipation of a corresponding relaxation of enforcement. First, there is still no guarantee that enforcement will actually become less strict. By redirecting resources away from compliance, banks may be making themselves more vulnerable to regulatory actions. Second, the compliance efforts of the past few years have probably made banks more resistant to problems. Dodd-Frank regulations were put into effect to make banks adhere to standards of conduct and operations designed to avoid problems such as excessive risk. A move to weaken compliance might result in a slide toward greater risks and more future problems for a bank. So, be mindful to wait and see what happens as things start to unroll.
“Even if regulations do change, ‘don’t throw the baby out with the bath water.’ It would be wise to review your past investments through the filter of more stringent regulatory guidelines to see what elements can be kept in a lighter regulatory environment to remain compliant and manage risk appropriately. In making its recommendations, the Deloitte report stated that the last financial collapse may have first been regarded as a cyclical event but has since come to be regarded as an event brought on by structural problems within the global banking industry. What this means is regulations enacted after the collapse were also structural rather than cyclical and so might be far more difficult to reverse. As such, regulatory compliance will most likely remain without the deep relief some believe is coming. The best course of action is to remain vigilant in following all regulatory requirements until anything concretely changes.”
Certainly the lending industry follows court cases. Recently the DC Circuit Court of Appeals reformulated the inquiries addressed in the initial Court review for PHH Corporation v. The Consumer Financial Protection Bureau issuing an official order. Joseph Lynyak III is a partner at the international law firm Dorsey & Whitney and one of the nation’s foremost experts in the county on regulatory reform, and the CFPB, and he raises many questions and concerns. “First, can a so-called ‘independent’ agency be created with only a sole director? If not, was the remedy utilized by the Court appropriate (i.e., striking the ‘for cause’ language and making the CFPB’s Director subject to dismissal ‘for cause’)? Stated another way, is this an improper act of legislating by the Court?”
“Second, should the Court have shown judicial restraint, which is a rule whereby a court avoids addressing a constitutional problem in circumstances in which a statutory or regulatory remedy can avoid having to determine the possible constitutional infirmity?”
“The time frame for submitting briefs (late May) suggests strongly that a decision would not be issued until late summer at best. Because the order vacates the existing decision, the clear statutory determinations completely favorable to PHH are now on hold, but the language of the order indicates that the factual determinations by the three-judge panel are not the focus of concern of the entire panel,” Lynyak says.
An Irish World War II Spitfire pilot and flying ACE, was speaking in a church and reminiscing about his war experiences. “In 1942,” he says, “the situation was really tough. The Germans had a very strong air force. I remember,” he continues, “one day I was protecting the bombers and suddenly, out of the clouds, these Fokker’s appeared.”
There are a few gasps from the parishioners, and several of the children began to giggle. “I looked up, and realized that two of the Fokkers were directly above me. I aimed at the first one and shot him down. By then, though, the other Fokker was right on my tail.”
At this point, several of the elderly ladies of the church were blushing with embarrassment, the girls were all giggling and the boys laughing loudly.
The pastor finally stands up and says, “I think I should point out that ‘Fokker’ was the name of a German-Dutch aircraft company, who made many of the planes used by the Germans during the war.”
“Yes, that’s true,” says the old pilot, “but these Fokkers were flying Messerschmitt’s.”
(Copyright 2017 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.)