July 12: Input on proposed MI changes, 1099 vs W2 for LOs; primer on down payment assistance programs

Yesterday, 7-11, was a day of free give-away Slurpees. Dan cleverly asks, “I wonder if the California, Colorado, and Washington dispensaries will act accordingly on 4-20.”

Yes, the industry is ruminating on the Consumer Financial Protection Bureau’s (CFPB) guidance regarding mortgage brokers transitioning to a “mini-correspondent” lender model. “The CFPB is concerned that some mortgage brokers may be shifting to the mini-correspondent model under the mistaken belief that identifying themselves as such would automatically exempt them from important consumer protection rules affecting broker compensation. The guidance sets out how the Bureau evaluates mortgage transactions involving mini-correspondent lenders. It confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. More about this on Monday, but the policy guidance is available here.

Did you hear the story about the pilot that bought pizza for 160 passengers that were grounded by a storm? Brian observed, “Sadly if this was a mortgage broker it would violate the MLO comp rule.”

Regarding that exact issue, David P. writes, “Per the CFPB guide, LO Compensation rule was designed because ‘there was significant concern about the incentives that loan originators have to steer consumers into more expensive loans in order to increase their own compensation’. Now, QM’s coming into effect has put a cap on the broker’s compensation through its 3% points and fees test. Why should the consumer, who gets a qualified mortgage, be restricted to get a more beneficial mortgage by not allowing brokers to decrease their compensation? It’s time to think about a consumer who gets a qualified mortgage.

Apparently the 1099 versus W2 issue is still causing confusion, and I received this note from the West. “I was recently out recruiting and came across a former employee who has gone to work for a large regional mortgage broker and they are being paid via 1099. With all of the recent rules governing LO compensation, I thought the days of ‘pay as you‘d like’ were over?  Is this something you see as a viable alternative to ‘standard’ LO comp with set schedules and W-2 comp?  Shouldn’t the LOs be concerned with the possibility of the CFPB holding them responsible as well?”

“In response to the question from your reader, as a general rule, we would say paying your loan officers via 1099s is not a viable, trusted and tested alternative to the standard W-2 payment schedule.  It is important to keep in mind that whether an individual qualifies to be paid via 1099 is also governed by IRS requirements and may also have state law implications. The fact that the vast majority of states do not allow an MLO to be sponsored by more than one company in NMLS (licensed versus registered MLOs) also limits the ability for a company to argue that the individual would not rise to a level of ’employee’ but is rather a traditional ‘independent contractor.’  While some companies may be taking a 1099 approach, we cannot recommend that as a safe and fully compliant alternative to W-2 at this time.” So weighed in James Brody of American Mortgage Law Group. Thanks James!

Derek Becker writes, “The “history lesson” in your recent commentary was pretty right on but it should be also noted that not all subprime lenders believed in irresponsible lending. I worked, as a regional, for Chase Subprime for a number of years and we really did underwrite to the risk and we watched delinquencies carefully.  Additionally the Agencies (read: Fannie and Freddie) were pushed by congress to increase the number of LMI (low to moderate income for those not around in those days) loans they were doing. In fact I was in a meeting with a Freddie rep in 2006 and was told that the Congressional Mandate to Freddie for 2007 was that they must do something well north of 50% of their production in LMI loans. I believe the same was true for Fannie. The only way for the agencies to effect this was to lower underwriting standards significantly. Amazingly, the lower the standards the higher the default rate (hah!). In today’s world common sense seems to have left the building and replaced by a bureaucratic morass of rules and regulations apparently designed to confuse and confound.”

Cody Miles writes, “MortgageDashboard published an article recently titled ‘Toward the eClosing Era’. Electronic closing (eClosing) is not a new concept. Fannie Mae had already closed a mortgage electronically as far back as 2000. As the market has recovered, it appears there has been a renewed interest in an online and electronic closing platform. This is especially true in light of the CFPB’s recent announcement to pilot new eClosing programs in the upcoming year. But, moving a closing packet into digital format does not make the closing table any less stressful. This article demonstrates the issues the CFPB hopes an eClosing solution can overcome during the closing process and how it will save the industry millions.”

This week the FHFA set forth a proposal for its Private Mortgage Insurer Eligibility Requirements (PMIER) rules, with comments due by 9/8. Will it lead to a higher cost for MI, therefore for lenders, therefore for borrowers? Most are saying that the entire PMI industry is likely to see an increase in operational expenses as a result of the proposed capital requirements. And as we know, the cost to comply with risk-based capital requirements can prove comparatively costly.

I received this note from an MI industry insider. “It is pretty much a sure thing that the risk-based proposal at the heart of this draft is comparatively burdensome for legacy companies like MGIC, Radian, and Genworth Financial. But newer PMI industry entrants like NMI, Essent, and Arch MI are not burdened by the onerous capital treatment of 2005-2008 vintage loans and therefore appear better positioned. But we can all expect the older MI companies, and maybe even Congress to pushback against this proposal which is likely to result in a softening of this rule prior to its finalization.

“Your readers should know that the basis of the FHFA’s proposal is a shift from the broader risk-to-capital requirement to a more granular risk-based approach – but this may not impact MI companies until 2017. The FHFA said, ‘Approved Insurer using a grid of factors based on vintage (origination year), original loan-to-value ratio (LTV) and credit score for performing loans, and the depth of delinquency for non-performing loans’ in pages 37 to 42 of the draft detail the proposed calculation. While the proposal effectively sets a 17.9:1 risk-to-cap, the introduction of risk-based overlays and the definition of eligible assets are far more onerous than expected.

“Rather than applying a haircut to the total amount of subsidiary capital, the proposal addresses the issue by counting subsidiary dividends to be paid over a one or two-year period if certain conditions are met. (‘Dividends of subsidiaries – with the GSE’s prior written approval – to be paid to the approved insurer over a time period that is no greater than: two years, if unconditionally guaranteed by a strongly capitalized company, as determined by the GSE, with at least an A- rating from either S&P or Fitch, or A2 from Moody’s; or one year, if unconditionally guaranteed by a strongly capitalized company, as determined by the GSE, with at least an BBB- rating from either S&P or Fitch, or Baa2 from Moody’s; or another period as approved by the GSE.’”

So yes, costs will go up for borrowers, something that the F&F have not shied away from in the past (like higher guarantee fees) – but fear not! The PMI industry will argue that these proposals, if enacted without changes, would result in tighter mortgage credit for borrowers and an expansion of the government’s footprint in the mortgage market as borrowers would shift to the FHA. And what special interest group wants to support that? Experts think that the PMI industry will focus its comments on credit availability and the potential unintended consequence of the FHA’s market share increasing as a result of this proposal, and that the political climate, although gridlocked now, will be receptive to this argument and that the FHFA will ultimately soften this proposal. To do a little research on your own, the FHFA’s overview can be accessed here. The draft can be accessed here. The announcement, which includes hyperlinks to other resources, can be accessed here.

Lastly, on the origination side of things, down payment assistance programs are gaining attention and traction out there. Donna Beinfeld with Donnashi writes, “There is a lot of money that states, counties, cities and non-profit organizations have available to help individuals purchase or fix up their home. Offering this to your potential borrower by accessing these programs is a healthy way to grow a mortgage lending business. Down Payment Assistance Programs, Bond Programs, Fixer-Upper, Energy Efficient Programs, Rehabilitation Loans, Mortgage Credit Certificates are all great ways to capture all types of borrowers. Fixer Uppers loans (HUD 203K, PowerSaver, EEH for example) and many state programs do not require the individual applying be a first-time home buyer. Municipalities and Non-profits are not aggressive in marketing their programs. They wait for someone to come to them for money. The good news is most municipalities and non-profits do have a website with information accessible to the public.  A good point of contact through HUD is the DSIRE (Database of State Incentives for Renewables (their spewing) & Efficiency) to locate programs for the consumer.

Donna’s note continued. “HUD has a list of approved non-profits. Simple instructions which will help eliminate errors are to sort by state (like California) and then click on ‘Secondary Financing’ since DPAs are considered second mortgages). Hint: the more fields you fill in, the more likely you are to have an error message.

HUD also has a list of state homeownership programs. Once a person chooses a state, there are also local resources: HUD Homes for Sale, Subsidized Apartment Search, Disaster Assistance, Most Requested, and Homeownership Assistance. One will see the state programs, but you can refine your search by clicking on city or county: Sorted by city, Sorted by county.

Readers should know that a short-cut to finding a DPA is to go to a search engine, put in:

CITY OF X DOWN PAYMENT ASSISTANCE PROGRAM and they will likely to discover that the city you requested has a program. If not, widen your search by County and don’t be surprised if a state offers specialized programs as well.

And for energy efficient loans, grants, rebates, and tax credits, information can be accessed through DSIRE (Database of State Incentives for Renewables (their spelling) & Efficiency).” Thank you Donna – if you’d like to reach her, contact Donna Beinfeld.

A duck walks into a pub and orders a pint of beer and a ham sandwich.

The barman looks at him and says, “Hang on! You’re a duck.”

“I see your eyes are working,” replies the duck.

“And you can talk!” exclaims the barman.

“I see your ears are working, too,” says the duck. “Now if you don’t mind, can I have my beer and my sandwich please?”

“Certainly, sorry about that,” says the barman as he pulls the duck’s pint. “It’s just we don’t get many ducks in this pub. What are you doing around this way?”

“I’m working on the building site across the road,” explains the duck. “I’m a plasterer.”

The flabbergasted barman cannot believe the duck and wants to learn more, but takes the hint when the duck pulls out a newspaper from his bag and proceeds to read it. So, the duck reads his paper, drinks his beer, eats his sandwich, bids the barman good day and leaves. The same thing happens for two weeks.

Then one day the circus comes to town.

The ringmaster comes into the pub for a pint and the barman says to him, “You’re with the circus, aren’t you? Well, I know this duck that could be just brilliant in your circus. He talks, drinks beer, eats sandwiches, reads the newspaper and everything!”

“Sounds marvelous,” says the ringmaster, handing over his business card. “Get him to give me a call.”

So the next day when the duck comes into the pub the barman says, “Hey Mr. Duck, I reckon I can line you up with a top job, paying really good money.”

“I’m always looking for the next job,” says the duck. “Where is it?”

“At the circus,” says the barman.

“The circus?” repeats the duck.

“That’s right,” replies the barman.

“The circus?” the duck asks again, with the big tent?”

“Yeah,” the barman replies.

“With all the animals who live in cages and performers who live in caravans?” says the duck.

“Of course,” the barman replies.

“And the tent has canvas sides and a big canvas roof with a hole in the middle?” persists the duck.

“That’s right!” says the barman.

The duck shakes his head in amazement, and says:

“What the *&^% would they want with a plasterer??!”

Rob

(Copyright 2014 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.)