July 23: Notes on current legislation, retail vs. wholesale pricing differences, and appraisal trends helping lenders & borrowers

From Maryland Steve Greene contributes, “I do business in the DC Metro area and years ago a prominent Realtor offered the following observation: ‘Lenders should root for a Democratic victory. When they win, a bunch of new Democrats move to DC, buy homes, and apply for mortgages. When Republicans win, they move here and pay cash.’”


Scott Olson, Executive Director of the Community Home Lenders Association, writes, “In your daily commentary I noticed your extensive comments about the CFPB, including comparisons of banks and non-banks. Our press release below relates to a big disparity between treatment of banks and non-banks – 99% of banks are exempt from CFPB exams and primary enforcement authority – but zero non-banks are treated that way. That is why the Williams bill is important – it would move modestly toward more parity on this issue.


The second point – the qualifications of individual loan originators – remember 100% of individual non-bank mortgage originators have to pass the SAFE Act test, pass an independent background check and must take SAFE Act pre-licensing and continuing education courses – while zero bank loan originators have to comply with these things.


“Community lenders are community lenders, whether bank or non-bank – and therefore we believe smaller community non-bank lenders should be receive comparable treatment – thus our focus on the Williams bill. The CHLA offers its strong support for H.R. 5907, the ‘Community Mortgage Lender Regulatory Act of 2016,’ legislation introduced by Rep. Roger Williams (R-TX).  The bill would make better use of the CFPB’s resources to protect consumers – streamlining CFPB regulation of smaller community-based non-bank lenders by providing exam and primary enforcement exemptions that 99% of banks (those under $10 billion in assets) already enjoy.


“The bill would target CFPB supervisory and enforcement resources where they are most needed – on the larger lenders, while maintaining strong consumer protections. The bill extends the same type of CFPB regulatory authority that currently applies to 99% of banks to smaller ‘responsible community lenders.’  To qualify a non-bank mortgage lender must have net worth of less than $50 million, have originated fewer than 25,000 loans or $5 billion in loans the preceding year, and have originated at least 95% of their mortgage loans as Qualified Mortgage (QM) loans the last three years.


“As currently applies to most banks, a qualifying ‘responsible community lender’ would not be subject to a CFPB exam – although such lenders will continue to be regulated and examined by every state they do business in.  Similarly, like the banks, the CFPB could not initiate enforcement action unless such action is requested by a lender’s primary regulator or any federal agency or regulator.


And Glen Corso, Executive Director of the Community Mortgage Lenders of America, writes, “The CMLA applauds Rep. Roger Williams (R-TX) for introducing legislation that will bring common sense to regulatory oversight of small, community-based mortgage lenders. CMLA has called for equitable regulatory treatment of small lenders and the Community Mortgage Lenders Regulatory Act of 2016 would achieve that. CMLA Chair Brooke Anderson Tompkins noted this legislation ‘would prioritize CFPB oversight where it will most directly benefit consumers: onto our nation’s largest lenders and lenders that have clearly run afoul of sound lending rules. Responsible community lenders offering plain vanilla mortgage products did not cause the downturn or harm consumers. Rep. Williams’ bill strikes a balance of maintaining safe lending while freeing up resources so that more qualified Americans can get a mortgage to help build their families’ futures.’ Importantly, the bill codifies the definition of a ‘responsible’ community mortgage lender and exempts them from CFPB examinations and enforcement absent a separate referral from a state or Federal regulator.”


And for anyone wanting to compare wholesale and retail rates to consumers, I received this note from California concerning some research done on the difference between retail and wholesale originations. “The group at Eikon (namely Adam Q. & Michael E.) is making it easy to access loan level data for agency sales (I am sure you have seen much of their research). This data enabled me to research/validate a theory I had regarding wholesale versus retail mortgage originations in terms of what is better for the borrower.


“In short, I sliced the data to get a homogenous data set (loan amounts, LTV, FICO, Occupancy, state, etc.) where the market has one set of pricing in terms of LLPAs to compare H1 2016 agency loan sales that were broker originated vs. those that were retail originated (I also excluded anything with a 1st payment date before Feb 1st to exclude the seasoned sales some of the banks made off their portfolios).


“As I expected to see, borrowers that were originated through a wholesale channel received a lower interest rate for: (75.01%-80% LTV, Owner Occupied, purchase, 740+ FICO, 100-417k, CA, 30-year, 1 unit, 1st payment date of Feb 1, 2016 or later to ensure the data set was apples to apples). In California, for example, the average wholesale Note Rate was 3.902% and the average retail Note Rate was 3.948%.


“While that may not sound like a big deal, .046% to rate is over 30bps in price which is $~1,000 upfront savings per borrower in California based on a $300k average loan amount. So the next time somebody thumbs their nose regarding wholesale lending you can cite this, along with the fact that wholesale has outperformed retail credit since the crisis (since the wholesale model was completely revamped with a giant microscope on top of it). By the way, also interesting that the spread has increased a bit during recent months – it makes sense that retail originators would be faster to widen margins as their business is captive and obviously less price sensitive.


“Keep in mind that much of retail is also bank retail where it is well known that the borrowers pay more points upfront for their loans (Wholesale CA is well known to be ‘no cost’ or close to it). The data didn’t have APR, but likely the APR for wholesale over 5bps better than retail. There is no question retail is the more profitable model for the banks, which in itself is a sign that wholesale is better for the borrower. Someone should tell the successors to Dodd & Frank that the reason banks want to bury wholesale was because it is bad for their profit margins (not because it is bad for the borrower).   It really wasn’t that difficult to put the reigns on the brokers (no stated income, no ordering appraisals…took care of the vast majority of problems that differentiated wholesale credit in the past).


With the continued flow of heavy application business for many lenders, there are inherent bottlenecks – a common one being the appraisal process. To address a growing appraiser shortage, the Appraiser Qualifications Board (AQB) is considering whether to remove college requirements from its criteria and shortening the time appraiser candidates need to be mentored by certified appraisers. William Fall, CEO of The William Fall Group, thinks these are great ideas—but says the board should go even further.


“Many new appraisers who want to work with us indicate it’s hard to find a committed and qualified appraiser to mentor them,” said Fall, who testified before the AQB last month. “The problem is that most highly-qualified certified appraisers don’t want to train someone who is likely to become their competition. Appraisers in most markets are overworked as it is—they just don’t have the time.”


Fall is an advocate of alternatives to appraiser mentoring, such as combining real-world experience with broad, simulated classroom learning, including virtual reality. In such a scenario, a candidate’s competency could be demonstrated through exams. “This is not some revolutionary idea,” Fall says. “It’s basically the same learning structure that commercial pilots and physicians go through.”


“Not to take anything away from mentoring—learning from a local certified appraisal expert has tremendous value,” Fall is quick to add. “However, the quality of mentoring depends largely on location. An intern could complete hundreds of hours of training and still never observe an oil-burning furnace or a concrete example of ‘functional obsolescence.’ I’m delighted that the AQB and others are looking for solutions to the appraiser shortage, but I think we need to think outside the box on this one.”


From Axis AMC, Co-President Michael Simmons writes, “Back in June I responded to a couple of your readers who were frustrated and concerned over the current state of the market and the impact it was having on the appraisal piece. In the ensuing month, if anything, it’s become increasingly dire. Appraisal fees have risen and delivery times have lengthened in most markets. Some of it’s because we’re all ‘suffering’ from the good fortune that low rates and increasing confidence in our economy brings. Other factors include the simple fact that it’s summertime and appraisers and staff at banks and mortgage banks take vacations, which puts an even bigger strain on an already overworked industry.


“But that’s not why I wanted to check back in. I want to draw attention to what I think will be viewed over time as a watershed moment for the appraisal industry. It occurred two weeks ago in Baltimore. At an AMC Committee meeting of the Collateral Risk Network during the Valuation Expo conference, three of the most significant lenders in the industry – US Bank, Quicken Loans, and one of the largest Banks in the nation – made it known that they were supporting the use of appraiser trainees for property inspections as part of their development to become full-fledged appraisers.


“In order to do this effectively and safely, there needs to be robust training programs developed and in place – not just for the trainees, but for the supervising appraisers as well.  As the Chairman of CRN’s AMC Committee, I asked a senior representative of this large bank if he would be willing to share the thoughts on the guidelines and processes they’d developed … and he said yes. Later the discussion turned to the challenges other lenders would likely have from the standpoint of quantifying whether this use of trainees might constitute elevated quality issues. Zach Dawson, the Director of Collateral Policy and Strategy for Fannie Mae, who participated in that conversation, asked me if I thought some data from Fannie, assessing if there was any risk differential evident to them from reports already being submitted between trainee-only inspections versus higher credentialed appraisers might be useful in answering that question. My answer was a simple yes … Actually, what I said was “yes please”.


This might also be a good time to dispel a semi-common urban myth. Zach reiterated that, contrary to some beliefs, Fannie Mae does allow the use of appraisal trainees with appropriate supervision and does not require the supervisor to inspect. For those of you who are history buffs, you’ll recognize that this has always been Fannie’s policy.


“In one 24-hour period, the two most significant concerns involving the use of trainees for inspections were addressed: help in establishing comprehensive training & supervision protocols for trainees – some of which developed through a group within CRN and our AMC Committee; and the sharing of data defining the issue of risk. This information is now destined to be available in a way it has never been before.


“What’s perhaps even more important, we experienced real leadership in an industry where little guidance existed. Collateral is something all lenders need and it’s not a field that should be an area of competition – at least not from a quality or standards standpoint. Fannie recognizes that their vast reservoir of data can provide illumination in a way that will support the industry and also support their charter. And US Bank and Quicken demonstrated their courage and leadership in being part of the first wave.


“The ability to monetize the use of trainees, and so having a justification for paying them to assume the responsibility of inspecting properties such that they can afford to live through an already much too lengthy training process, will sow the seeds for a new generation of appraisers. Higher credentialed appraisers will be able to focus their time and energies on developing the critical analysis that they’re trained to provide. This can enable a vehicle where new trainees enter the profession while improving the economics for experienced appraisers. This will ultimately ease some of the market driven pressures on turn times we’re all currently suffering under.”



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~Henry Cate, VII

We hang the petty thieves and appoint the great ones to public office.


If we got one-tenth of what was promised to us in these political speeches, there wouldn’t be any inducement to go to heaven.

~Will Rogers

Those who are too smart to engage in politics are punished by being governed by those who are dumber.






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Rob Chrisman