Jan. 20: Tiny home underwriting, blockchain & MBS, cryptocurrency volatility, digital mortgages, the govt’s shutdown & lending

What do tiny homes, bitcoins, eNotes, a government shutdown, and tax jokes have in common? They’re all in today’s commentary!

What if the government shuts down and no one noticed?

The mainstream press is certainly focused on it. The last shut down was in 2013, and there were many before that. Contractors may see a delay in payments. Social security checks still go out. The bond markets will continue to trade. Freddie & Fannie will still buy loans and are functioning, as are Ginnie Mae, FHA (with no manual intervention), and the VA. The IRS can’t do Social Security number or income verifications, or offer transcripts, however, which means a delay for applications, and things don’t look great at the USDA. This is the time for LOs & brokers to add valuelet your borrowers know what is happening!

Teensy-weensy residences

“Rob, have you heard problems with investors accepting ‘tiny homes’ due to minimum square footage requirements? There is certainly an interest in them, and would help the inventory crunch and lack of buildable land near city centers. Have you heard about investors changing their guidelines?” I’m no underwriter but maybe no change is needed. Fannie, for example, takes them if the value is supported: here’s a link to an FAQ document that addresses eligibility of tiny homes – see Q25.

Recall that the Federal Housing Finance Agency (oversee of F&F) proposed a pilot program that would allow the Agencies to provide financing for buyers of manufactured homes. Per Bloomberg, the program could go into effect as early as…now. I don’t believe that there are guide prohibitions, but the home must meet standard agency requirements: marketability must be demonstrated through similar nearby comps. As there isn’t a standard definition of “tiny houses,” the product may not meet building codes and demonstrate marketability as highlighted.


“Rob, I am hoping that you could provide some insights into deductions for mortgage interest under the new tax law. I have asked around and gotten very inconsistent feedback. My questions are: 1. Are piggyback seconds, used to purchase the property in the past, now non-deductible? 2. If you consolidate a second into a new first (below $750K) is all the interest deductible even if the second wasn’t used for acquisition or improvements to the property?” Taxes are a huge concern right now, and I turned to accountant Jeff Spiegel. Jeff replied, “Beginning in 2018, you cannot deduct seconds. And regarding consolidating a second into a new first (below $750K), technically interest is deductible on debt to buy property and to improve property and cannot exceed the cost basis in the property. If you do combine the loans and it is under $750k, I believe most taxpayers will deduct the interest on schedule A. That said, taxpayers should be aware that there would be some tax risk in the event of an audit if this is done.

Technology, cryptocurrency, digital mortgages, & blockchain

A group of big financial institutions wants to use the blockchain to help resurrect the packaging of home mortgages into securities, a business that almost destroyed the global banking system in 2008. Credit Suisse Group AG, U.S. Bancorp, Wells Fargo & Co. and Western Asset Management Co. said Thursday that they successfully tested the distributed ledger technology as a way to make it easier to track securitized home loans.

Regulators worldwide have taken aim at the cryptocurrency market, which has lost hundreds of billions of dollars in market value within days. Bitcoin’s market share has declined. Yes, bitcoin and other cryptocurrencies took a serious this week, with Bitcoin’s value dropping almost 25 percent in 24 hours and down by 47 percent from its all-time high in December. There were similar double-digit drops for Bitcoin Cash, Litecoin, Dash, Monero and Ethereum. But really… is the average person even involved in this market?

How about a primer on them? Things have shifted in the banking world too over time, as can be seen with cryptocurrencies. These digital currencies are created using computers and are built on cryptography. That is needed to secure transactions (coins). Transactions are stored in a digital ledger (mine). When people transfer funds in and out of the ledger they use an encrypted digital signature. The process of adding coins to the ledger (mining) is really a very complex computation that fits within a puzzle of sorts. As each puzzle is solved, it adds a permanent block of coins to the ledger.

If anything has become clear in the years since cryptocurrencies came on the scene, it is that they are certainly a harbinger of change. As banks and others scramble to understand it all, some cryptocurrencies have gone from being a niche payment method known primarily to techies to something that has become part of the worldwide vernacular.

None of this has been lost on the world’s central banks, which is why the Bank for International Settlements (BIS) said the world’s central banks will at some point have to decide whether to issue digital currencies of their own and regulate them.

Not only is the rapid growth of cryptocurrencies on the radar of central banks, but some have begun aggressively experimenting with electronic currencies to determine how they might ultimately be used as a formally recognized form of currency. The Dutch central bank has created its own version of a cryptocurrency. It has tested its workings internally to get a better understanding of the ins and outs of how such things operate. Similar experiments are being undertaken by central banks in Singapore and Russia, among others.

In the US, the Fed has acknowledged that they too are digging into cryptocurrencies. After all, the US Dollar is the global currency of choice, so we have plenty to lose if cryptocurrencies eventually take over. The Fed has been looking at the susceptibility of cryptocurrencies to crime, such as cyberattacks, counterfeiting and even any potential privacy issues that could result from their widespread adoption.

One possible scenario recently floated by the BIS would be the issuance of cryptocurrencies by central banks. These currencies would be available to the public and able to be converted with cash and reserves. That adds a fundamental support pillar to the whole thing and would be mostly welcome by financial people.

As consumers have embraced electronic payments and begun using cash less, it appears that central banks have seen the writing on the wall. While it appears unlikely that the US will be the first to go down this road, central banks in other smaller countries may see it as an edge of some sort on the global field. One of the biggest potential benefits cited by the BIS for central banks to issue their own cryptocurrencies would be the anonymity it provides and the element of speed it introduces into the monetary system. By making the transfer of currency nearly instantaneous, it could potentially be as secure as, if not more so, than the clearing system everyone currently relies on.

Excited about digital mortgages, regardless of what that term exactly means? Don’t look to the United Kingdom for a role model. There the digital mortgage process is controlled by government software, which has plenty of faults.

Freddie Mac announced its new eNote specification to help gain more traction in the eMortgage space. To allow sufficient time for testing, anticipate permitting delivery of the new format in Q2 of 2018. Read the eNote specification announcement for more details.

Acceptance has been proceeding methodically in mortgage banking, but it does not appear to be widespread – yet. Texas Capital Bank is accepting e-notes. Premium Title, a national provider of title and escrow services, announced its integration with eClosing technology solutions provider, Pavaso, enabling lenders across the country to streamline the mortgage closing process. “With this integration, Premium Title offers mortgage lenders an efficient eClosing solution, allowing them to digitally deliver all closing documents to borrowers for review prior to closing on any device — anytime and anywhere. By empowering borrowers with transparency and enabling communication and collaboration between all parties (lenders, title agents and consumers) in one virtual location, the eClosing solution can provide a more accurate and streamlined process.”

Phil Reichers, Senior Business Development Manager with Pavaso, writes, “I do want to share a running list, that we house on the Pavaso website, of those that accept hybrids (majority eSigned, note/deed wet signed) and eNotes today. It continues to grow. And assuming you are already being asked about eRecording too, so wanted to share a website I use regularly to look at counties adopting new technology.

Planet Home Lending’s Dona DeZube attended NEXT and wired this note from Dallas. “Debbie Hoffman, co-founder of Symmetry Blockchain Advisors, Inc., Orlando, told the women attending the NEXT mortgage technology conference for women in Dallas yesterday that the use of blockchain technology in the mortgage industry is about where digital mortgage technology was five years ago. The GSEs and large companies are looking at where it best fits into the industry, but there’s no centralized use and no industry consortium. “We’re still in the early stage of it. I equate it to an automobile on a dirt road,” Hoffman said. Her prediction for adoption: By the end of this year, everyone will know what blockchain is. Within three years, we’ll start seeing it used by industry innovators. In five to six years, it will become mainstream.

“If your firm is driving a horse and buggy on that metaphorical blockchain dirt road, Hoffman’s explanation will clarify what the technology is. Blockchain is a network of linked computers working together to form a public ledger by storing blocks of information that can’t be altered. To verify information, you enter data, which queries the linked computers. If they all agree, the block of information is confirmed.

“Symmetry helps companies figure out the best use case for blockchain. Within mortgage banking, applications might include verifying borrower credit or identity or storing appraisal information. Any records you currently have on paper or put into a system and pass along during the mortgage origination or servicing processes are potential targets for blockchain technology.”

(Please excuse any delays in communication this week, as I am filling the role of “weak back, weak mind” and doing volunteer work in an orphanage with a group led by Ken Perry of The Knowledge Coop.)

(Thank you to Mark S. for this, “Bar Stool Economics.”)

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

∙ The first four men (the poorest) would pay nothing.

∙ The fifth would pay $1.

∙ The sixth would pay $3.

∙ The seventh would pay $7.

∙ The eighth would pay $12.

∙ The ninth would pay $18.

∙ The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers”, he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?”

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

∙ The fifth man, like the first four, now paid nothing (100% savings).

∙ The sixth now paid $2 instead of $3 (33%savings).

∙ The seventh now pay $5 instead of $7 (28%savings).

∙ The eighth now paid $9 instead of $12 (25% savings).

∙ The ninth now paid $14 instead of $18 (22% savings).

∙ The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he received ten times more than I!” “That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking in a state with no taxes, or overseas where the atmosphere is somewhat friendlier.

(Author unknown)

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Rob Chrisman