Jan. 28: Vendor news; letters on incentives & MSAs, housing and a recession, the CFPB, and LLPA pricing & processing confusion
Phyllis Diller said, “The only time I ever enjoyed ironing was the day I accidentally got gin in the steam iron.” The need to borrow money hasn’t changed much throughout history, unlike home appliances. (I still use an iron… with water.) This year will continue to see consolidation in the residential lending biz. Do you really think we’ll only have five or ten lenders in the U.S.? It is not likely, unlike… washboards? The Columbus Washboard Company is the last manufacturer of washboards in America. Columbia sells 11,000 washboards a year, down from a million boards per year in the 1940s. One model going for $27.49. (During the pandemic sales rose 57 percent.) But get this: folk music percussionists account for about 40 percent of sales. The implement would make a good wedding shower gift, not so much a birthday present for your daughter-in-law. Lenders and vendors in our biz are always faced with change and shifting topics, and let’s dive in to some of the various matters on the front burner for lenders.
The CFPB: probably not going anywhere
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Ed Groshans with Compass Point Research & Trading, LLC, reminds us that in October, “the Fifth Circuit Court of Appeals ruled that the CFPB’s funding structure was unconstitutional. In November, the CFPB filed a writ of certiorari with SCOTUS (Supreme Court of the United States). The Community Financial Services Association of America (CFSAA) filed its response earlier this month. The 5th Circuit opinion has not inhibited the agency’s operations, a point noted in CFSAA’s filing, “the mere existence of the opinion below has had little apparent effect on the CFPB, which has continued to pursue enforcement actions throughout the country and even initiated new rulemakings.”
“The CFPB requested that the case be heard during the current term. The last day for oral arguments is scheduled for April 26. CFSAA requested the Court to ‘set the case for ordinary briefing and argument next Term.’ The decision in the Order List (page 7) or Miscellaneous Lists do not list when the case will be heard. If the petition is granted, the argument date will be added to the court docket. The expectation is the case will be heard, the question is will it be heard this term or next?
“SCOTUS potential outcomes.
“SCOTUS can hear the case and rule that the CFPB’s funding is constitutional. This outcome would have no bearing on the CFPB and it would continue its normal operations.
“SCOTUS could hear the case and concur with the 5th Circuit opinion. In this scenario, we expect the CFPB would have to cease its operations until such time that it receives appropriated funds from Congress. If this opinion was issued in June, we expect that the CFPB’s activities would be halted until December 27 (page 3), at the latest. Congress must address FY2024 funding at some point this year. It can pass appropriations bills, a continuing resolution, or an omnibus spending bill. We project that Senate Majority Leader would use his position to ensure that some level of funding is provided to the CFPB regardless of the type of legislative vehicle.
SCOTUS could deny the petition, in which case the 5th Circuit ruling would stand. This is an interesting outcome. As noted, the CFPB has not altered its operations since the opinion was issued.
“It appears that the CFPB has been ‘besieged’ by a number of motions [to dismiss] in district courts, especially in the 5th Circuit (Figure 1), following the 5th Circuit opinion. The CFPB could face a crisis should courts in the 5th Circuit and the other federal circuits use the 5th Circuit opinion as a or the basis for dismissing CFPB actions and/or overturning CFPB rules, regulations, settlements, and enforcement activity.
“There is also a risk that one or more parties enter a motion requesting a district court in the 5th Circuit to order a nationwide injunction on the CFPB’s operations. The 8th Circuit issued a nationwide injunction prohibiting the Department of Education from canceling student loans.
In this scenario, either of the issues could prevent the CFPB from operating on a limited or national basis. Again, we expect this disruption would be temporary as we don’t foresee Senate Democrats passing appropriation bills or government funding legislation that excludes funds for the CFPB.”
MSAs: An annuity for mortgage attorneys?
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From Minnesota came, “Regarding referrals and kickbacks, how do the big builders such a Pulte, Lennar and the like get by with enticing a borrower to use them in lieu of a finished basement or a deck? Wouldn’t this be considered a kickback?” For an answer I asked attorney Brian Levy. “The incentive is provided to the consumer, not the referral source. It’s no different than offering a discount, like with a grocery store discount card, or a free car wash with a fill up. In an affiliated business situation, RESPA requires that the incentive be ‘reasonable’ and not amount to a ‘requirement’ to use the affiliated provider. I’ll leave it to other lawyers to fight over how much of a discount is reasonable and not amounting to a requirement.”
J. Steven Lovejoy, Esq. with Shumaker Williams, P.C. notes, “There continues to be confusion over marketing service agreements. There is increased interest by mortgage professionals in partnering with real estate brokers and agents, in addition to MSAs (which can be trickier) and things like joint marketing and desk rentals. All of those things are options, but you have to do them correctly. And ‘correctly’ sometimes means that you have to operate in ways that seem counter-intuitive.
“For example, if the mortgage company enters into a joint venture affiliated business arrangement LLC with a real estate broker, the conventional business sense would have there being shared employees with the parent mortgage company, shared space, shared most things. But the RESPA rules and guidelines we have say no, the joint venture must stand on its own and operate like an independent business.”
“Marketing Service Agreements have a tortured past. During Cordray’s tenure as head or CFPB, I don’t think it was possible to fashion an MSA that the agency viewed as compliant. Under the Trump administration there was little oversight. But the Democrats are back, and while I don’t believe things are as extreme as during Cordray’s tenure, your advice to the industry to work with regulatory counsel is right on the money.”
Loan level price adjustments’ ripple effect is not good
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Bryan Filkey, the COO of California’s Interfirst Mortgage Company, did a bang-up job summing up the confusion and ramifications of Freddie and Fannie’s (these government sponsored enterprises overseen by the FHFA) recent pricing grid changes. He writes, “As part of the updated loan level price adjustments (LLPAs), the GSEs are now charging an adjustment if a borrowers Debt-to-income ratio (DTI) is over 40%.
“To calculate the DTI, an underwriter needs to know all the sources of income the borrower has and then they compare that to the monthly payment on all debts (credit card debts, mortgage payments, alimony, car payment, etc.). To determine the borrower’s payment on their mortgage, the underwriter must know their interest rate. The interest rate is a function of which LLPAs apply. To know whether the DTI LLPA applies, the underwriter would need to know the borrowers interest rate (so they can calculate the mortgage payment). To know the borrowers interest rate, the underwriter needs to know if the DTI LLPA applies.
“Do you see this circular logic conundrum?
“Additionally, in order to know the payment, the borrower/underwriter has to know the property taxes, PMI payment, HOA dues, etc. Keep in mind that a lender is required to disclose the interest rate and fees etc. (loan estimate) within 3 days of receiving the application. Within 3 days of application, it is unlikely the income on the file is correct (borrowers don’t know how the GSEs calculate income) and also unlikely an UW has looked at the file to calculate income. This makes it very difficult for lenders to follow CIC re-disclosure timelines, and potentially, would require determining a rate, sending the loan to UW, finding out the rate needs to be adjusted and then talking with the consumer.
“Did the FHFA foresee this likely conversation?
LO: “Hey Borrower, sorry but your interest rate is higher now because your DTI is over 40%.”
B: “Hmm, I don’t like the sound of that. Well, what if I put more down and I go from 95 LTV to 85 LTV?”
LO: “Well Borrower, if you do that your rate will actually get worse!”
B: “If I put more down, my rate gets worse? So first you tell me my rate is X, now you tell me my rate is X+0.125% due to DTI even though I gave you all my income docs before you disclosed and now you’re saying if I put 15% down, my rate goes to X+0.375%? I am going to call the CFPB since this clearly can’t be accurate.”
Bryan’s note went on. “This is a big loss for transparency since ‘common sense’ no longer applies in some/many scenarios. Borrowers may feel they are being misled and it will reduce trust. Additionally, this also makes it more difficult to help the borrower make the best decisions.
“Also, keep in mind the reverse of the above situation can also occur. Borrower was going to put 15 percent down, finds out they get a DTI hit so the LO will tell them they can put less down and keep the old rate (assuming they still get an AUS approval). This injects uncertainty of keeping AUS approval and the tradeoff between monthly MI vs a lower interest rate. What’s best for the borrower? All of this will have to be solved by lenders in 30 days or less at a time when resources are very thin in terms of money and personnel.” Well done, Bryan!
Capital markets staff are equally as confused, and concerned. One question was posed through the MBA’s Capital Markets forum, run by Sasha Hewlett. “How is anyone going to implement the new LLPAs for DTIs greater than 40 and LTVs greater than 60? It is in the same camp as the first time homebuyer 80-100 AMI fee caps that are not a valid change of circumstance (COC). Are you requiring/trusting the LO to have complete and accurate calculated income/debts prior to lock, or are you going to manage with a new High DTI Fannie product/program, or other solution?”
Lisa R. observes, “I am hearing some lenders do consider it a valid COC and also that some are even considering adjusting pricing on all loans and then at CTC offering an improvement.to the borrower.”
John C. writes, “I am hearing same from some re: always COC. The challenge I think I am grappling with is what did you know and when did you know it based on the language ‘prior to providing the GFE.’ As an example, if borrower claimed income of ‘X’ on application and loan disclosed immediately I can see any change to that being COC. However, what if LO received all documents that reflected proper income (and different than app), then disclosed that would not be COC?
“Specifically, changed circumstances do not include: The borrower’s name, the borrower’s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided; or…”
Diana R. notes, “That is correct, a COC is not an option if the LO had income documents but priced off incorrect application information. We have looked at exactly where to apply because even if you have a situation that allows for a valid COC but that COC now increases the Borrowers rate/fees does it not give an appearance of a bait and switch? It appears that FHFA/FNMA/FHLMC reviewed how this could or should be implemented. Now we throw in new LLPAs and adding new DTI fees. I am hoping the MBA can obtain an extension as the Agencies have not thought this through or provided any guidance.”
Tired of hearing about a looming recession?
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A recession, should one come along eventually, is more than just lower rates. Nadia Evangelou, NAR senior economist and director of real estate research, cagily observed, “As people realize that the 3% rates are not coming back anytime soon, mortgage applications have picked up. What should we expect from the housing market as the spring season is nearing? Generally, home sales activity increases by 33% in March compared to February, with nearly 420,000 homes sold on average in March. However, in the last couple of years, activity was even busier due to low mortgage rates. Even though rates were rising last March, many buyers were rushing to benefit from the 4% rates during that time. Given low affordability and inventory, activity may not ramp up so fast in the spring season this year, but it will definitely be busier than it currently is. Meanwhile, a stronger housing market could help the U.S. economy to skirt a recession.”
Vendor/third-party provider news from around the biz
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One of the key takeaways from the IMB conference this week was about fortifying your financials. Basically fully understanding performance across the business and stress testing your balance sheet (e.g., what if analysis). Gallus is offering such solution and more. Co-founded by Augie De Rio, formerly at Goldman Sachs and Caliber Home Loans, the Gallus BI solution takes you seamlessly from data to insight to action. It’s the Google for numbers at a mortgage lender.
Fortuna Finance’s mission is to make buying, selling and financing residential real estate much easier by providing the consumer with a Guaranteed Backup Contract through its Home Sale Assurance Program on their current home. This frees them to finance their next home without having to count their trailing debt obligation with most underwriters, including Freddie and Fannie. Fortuna gives the homeowner up to 90 days after they buy their new home in which to cancel their contract with Fortuna provided they’ve sold to a higher offer or sell the home to Fortuna. Fortuna has partnered with lenders who are willing to provide bridge financing against Fortuna’s purchase contract so they can extract their equity from the home they are selling before the sale closes. If Fortuna buys the home, it will be re-listed with the existing listing agent and refund 90% of the profits, if any, from the sale of the home back to the consumer. “We provide purchase contracts within 24-48 hours currently.”
Cognizant (NASDAQ: CTSH), a leading provider of information technology, consulting, and business process services, announced a new, 10-year services agreement valued at approximately $1 billion with CoreLogic®, a leading global property information, analytics and data-enabled solutions provider. CoreLogic and Cognizant have agreed to expand their existing alliance. “Expansion of Cognizant’s services and anticipated value for CoreLogic, leveraging Cognizant’s digital transformation expertise particularly in cloud migration, automation, and industry-specific platform innovations; Significant commitment to innovation and automation expected to benefit CoreLogic through lower technology and operations costs over the lifetime of the agreement; and, Strong focus on driving customer experience improvement through operational excellence.
Mortgage Capital Trading (MCT) a leading mortgage hedge advisory and secondary marketing software firm, announced the release of BAMCO, a new marketplace for co-issue loan sales. Also known as flow-based mortgage servicing rights (MSR) sales, Co-issue loan sales are a three-way transaction involving the sale of loans to one of the agencies with a simultaneous sale of the MSRs to a separate third party. BAMCO brings co-issue transactions directly into MCT’s whole loan trading platform and improves price transparency by connecting unapproved sellers to live executions from potential buyers.
There’s a fine line between a numerator and a denominator: Only a fraction of people will find this clever or funny.
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