June 3: Notes on early payoff penalties, appraisals & appraisers, wire vs. mortgage fraud, and housing ’round the world

Is every lender with a computer a “fintech” company? No, but the definition is vague. Recent meetings in Washington, D.C., brought together members of the financial-technology community with financial institutions and regulators to discuss the regulatory landscape for new technologies. “A strong feedback loop between innovators, their financial institution partners and the regulators tasked with keeping our financial system sound and fair will help accelerate the adoption of new technologies, creating a more resilient and responsive financial services industry.”

Housing finance reform around the world

Speaking of Washington, D.C., Jay Brinkmann penned, “The organization that has been responsible for fostering discussions of housing finance in different countries for over 100 years is the International Union of Housing Finance. The IUHF holds its World Housing Congress every two years, and for the first time in several decades, it is being held in Washington, DC June 25-27 in conjunction with the Mortgage Bankers Association. I will be attending because I am still the US representative on the organization’s executive committee, and because it gives me an opportunity to be exposed to housing finance challenges around the world that often mirror our own.

“One of the things I used to hear quite often prior to 2007 was that the United States had the best housing financing system in the world.  What was interesting was that I only heard that in the US. When traveling or meeting with housing officials from other countries, not once did I ever hear anyone say that they wanted a housing finance system just like the one in the United States. Most often the discussion involved how to avoid some of the mistakes we made. It was clear that every system had its pros and cons, and we had as much to learn from other countries as they did from us.

I think anyone involved in housing finance policy and interested in international developments should attend, not just for the formal presentations, but for the hallway and cocktail party conversations with lenders and from around the world who are facing many of the same issues we are facing here.  While you won’t hear the latest on surviving a CFPB exam, you may hear about successful strategies in dealing with British and EU regulators. While you won’t hear about changes in FHA credit requirements, you may hear about how Mexico, South American and African countries are meeting the demands of financing housing for low income populations. While you won’t hear about the latest in marketing reverse mortgages, you may learn how Japan and Germany are dealing with housing an aging population.”

Mr. Brinkmann finished up with, “I have benefited from every Congress I have attended, and I am looking forward to attending one that does not involve a long flight and going through passport control. If you are interested in more information, please check out this link to the IUHF website.” Thanks Jay!

Appraisal/appraiser comments

Terry Aikin writes, “Your commentary on capacity issues related to appraisals and appraisers to allow temporary work in other states is likely to cause considerable pain if exercised in many areas of the country.  First, why would a competent appraiser seek work in another state? …… Answer: a favor to a lender or they don’t have enough work in their state or geographic area – and both have inherent problems. The second concern and in my opinion, a much deeper issue, is related to the appraiser’s geographic competency and the development of the opinion of value.  Developing an opinion of value is more complicated than inspecting a house and bumping the subject against three recent home sales.”

Another industry vet had her thoughts on the appraisal situation. “Allow properly licensed appraisers to operate a business without sharing 30% of their income to an AMC. Allow originators to order appraisals direct from a properly licensed appraiser. You will have more appraisers and the appraisal will be higher quality. There are laws regarding fraud and collusion to safeguard mortgage investors and provide them with security. In my opinion, the HVCC system is ill-advised and does not provide anything better – it is just more expensive. Why is this so difficult to understand?”

Michael Simmons, Co-President of AXIS, observed, “Rob – your readers continue to raise questions about the challenges surrounding appraisals and appraisers. Let’s start with the issue of ‘scarcity’. Have we solved that problem yet? Well … no. In fact, we’re still arguing about what scarcity is, or if it really exists. So, let’s pose the question: if a typical turn time in a market leaps from 1-2 weeks to 6-8 weeks and the fees double – and those conditions persist for 6 months – does that suggest that the resource (i.e., appraisers) are inadequate to effectively meet the demands and needs of the marketplace? Well … yes.

“Of course, one could make the argument that this is only a temporary distortion and everyone should re-balance their expectations and recognize that ‘things just need to take longer’. Well (get used to seeing this word a lot), the market’s response was to demand that the GSEs increase PIWs (Property Inspection Waiver) because appraisals aren’t really necessary for every loan. By the way: PIWs are a product driven essentially by automated valuation models (AVMs) that are designed not so much to capture value but to define the level of inherent risk with waiving the appraisal. At the urging of lenders, Fannie increased their level of PIWs in the dynamic market volume of last year from what they say was a historical 3% to somewhere between 10-13% although the whisper figures push the number up closer to 20%.

“While this whole issue contains some far deeper elements, let me pose this question: what happens if Fannie and Freddie are materially changed – or eliminated as many advocate. Will the private sector (banks, mortgage banks, private investors) that will replace the GSEs offer property inspection waivers – and do it without increasing the rates? Well … no they won’t. But all this really belies what I think is the more fundamental problem.

“This isn’t so much a problem of scarcity regarding appraisers although that’s real in many places – witness the recent edict from the Federal Reserve creating two options to deal with scarcity in rural areas; (1) temporary practice permits so appraisers from other states (with no discernable geographical competency) can field orders and (2) temporary waivers where a non-appraiser can do appraisals. Who those people would be and where they’d come from and how they’d possess the competency are only a few of the questions I’d have. And it doesn’t solve the real problem, it only papers it over.

What we really have in appraising is a capacity issue. We’ve seen the lending realm mechanize and re-engineer itself to drive efficiencies in time and cost down (well, if you don’t count the cost of compliance). The appraisal industry needs to adapt in much the same fashion. Appraisers need to aggressively embrace technology. It’s not the enemy – it offers tools to improve efficiency and eliminate errors.

“We need to re-build the mentoring aspect of growing new appraisers and make it a business model. There is no reason why an appraiser-in-training can’t become an inspection specialist with the development of national standards and focused instruction from senior appraisers. Even Fannie Mae has announced that it is still accepting inspections done by trainees within state specific guidelines. Lenders are re-adopting the use of trainees. (I say re-adopting because that’s how the industry rolled years ago until bad actors abused the process.)

“The bigger barrier is the reticence of appraisers to step up. But the context has changed today at AXIS, and other AMCs who are part of the Collateral Risk Network, we’re changing the narrative and offering support and guidance to those appraisers who want to increase their capacity and improve their opportunities. That is certainly a faster track to solving the issue of matching market needs than the current onerous process someone must navigate to become an appraiser.

“Another huge challenge is redesigning the road to become an appraiser. We need more specific training and practicum in place of obstacles that serve little purpose. I expect before the year is out we’ll have (if you’ll pardon the expression) a course of action that modifies some of the barriers to entry for appraisers without sacrificing the skills and knowledge required to fulfill their task. The big hurdle will be getting Congress to consider lifting the requirement for FHA appraisers to have a 4-year college degree. Not to put too fine a point on it, but outside of the legion of professions that don’t require a 4-year college degree, I don’t believe members of Congress and Senators bear that burden. On reflection, perhaps they should…

“It might be valuable to reflect on the purpose for which the appraisal profession was formed in the 1920’s. It was designed to incorporate a professionally trained expert, who was independent of the transaction and whose compensation was not contingent on any outcome, to be a protector of the public and the banks from possible abuse, conflicts of interest, and fraud in the valuation of collateral. While there may have been failures on the part of individuals, the institution of appraising has always kept their contract with the public – something that not all institutions can lay claim to. And the guiding principle is the Principle of Independence.”

Fraud, by any other name…

Ken S. noted, “NBC news had a story about ‘Mortgage Fraud’ – dealing with folks being duped just before closing about wiring money to an account not associated with the transaction. This is not mortgage fraud, it is wire fraud associated with the purchase of the home – not the mortgage lender. This could impact cash buyers. Mortgage has an image problem and folks lump any part of buying a home into mortgage.”

Investors & EPO penalties

“Rob, I wanted to reach out and get your take on this. I recently signed up with a well-known correspondent investor [editor’s note: I removed the name]. When I read its agreement, it seemed pretty boiler plate. Well yesterday I received an SRP recapture letter since a client did an early pay off (EPO) at 145 days. The loan priced out at 100.580, literally a ½ point in profit due to crazy lock extensions, etc. The original pricing was 101.78. Either way, the letter is demanding the entire 101.78 and when I brought it up as an error as I only was paid 100.58 the rep states that I am to be charged back the entire SRP the loan generated even before extensions, based on the contract. Is there something I am missing here? Does that happen with the larger investors? I’ve re-read the agreement and I can’t see how they are right on this. Why do my other correspondent investors do it differently and do it on the dollar amount that I was paid? What’s your take?”

Extensions are only to the base price, and have nothing to do with servicing. The base price is provided by the bond market. When you extend, you’re impacting the value to the company who has placed a hedge (to cover your financial interest to the borrower) in the form of a longer rate lock than was originally agreed upon.

The SRP portion of your price is for the value of the servicing over the subsequent expected life, and has nothing to do with the base price in the bond market. Other correspondent investors would also charge back the full SRP as well, since an EPO totally throws off the servicing economics versus what was expected. (Think about your loan amount multiplied by 0.25%, then divide by 12 and multiply by the number of months the loan was on an investor’s books. That’s all the dollar amount they made. Compare that to their investment of the SRP dollar amount, and the economics are clear.)
Put another way, this is on the dollar amount of SRP that you were paid, not the gross dollar amount that you made above par, which is impacted by discount points (rather than premium) and/or extension costs that might drive a discount down.

I don’t know who else you are transacting with, but if they are a new to the market player, or one of the investors who fill the space of brokers becoming bankers, then they may or may not be clear on the economics. OR, they might just have made the business decision that their margins are so wide, that they don’t need to think it through and separate the SRP economics from those of the loan. And you should read all your contracts. Often, to obtain and keep clients, sometimes the production folks lean on the billing folks to change their practices, and if the Capital Markets folks don’t get told, they will get a rude awakening….and start to enforce what the contract actually says.

Mom: “Son, why don’t you talk to Mark anymore? You two were best friends.”

Son: “Well, would you talk to someone who is stupid, uses drugs, and is an alcoholic?”

Mom: “Of course not.”

Son: “Well, neither would he.”

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Rob Chrisman