Nov. 22: Attorney weighs in on Franklin consent order; notes on Basel III, manufactured homes & Dodd-Frank, 97% LTVs

Pressing issues won’t stop in spite of the upcoming holidays…


Communication is a good thing, right? Catherine Coy writes, “Over the years, it’s been difficult to maintain a professional “water cooler” for mortgage professionals to meet and exchange ideas.  For a while, we had Broker Outpost but a technical glitch occurred recently that our host has failed to address. We established this site to begin anew:”


Regarding the recent CFPB consent order against Franklin, Colgate Selden (with Alston & Bird LLC) writes, “The CFPB is looking closely at business practices of all companies, despite their size, and it should not be a surprise that they focused on Franklin Loan. Apparently, the CFPB did not impose a civil penalty to avoid the company filing for bankruptcy, which could result in consumers not receiving anything in the near term. There could, however, still be private civil actions, which may take a significant toll on the company in addition to the compensation recovered for consumers. The new Loan Originator Compensation Rule eliminated the legitimate business expense safe harbor due to potential abuses such as ‘expense accounts’ in this case funded through loan terms that paid loan originators excess funds after expenses were paid. The industry should expect that the CFPB will pursue further actions similar to this even for compensation methods only used under the old Loan Originator Compensation Rule. The CFPB is also looking at how compensation plans were changed just after the old rule came out. In this case, the violation was a result of the company wanting to pay people effectively the same as before the old rule but through a different mechanism. The CFPB will likely use the timing of such changes (that effectively maintained old or similar transaction term-based compensation practices through different mechanisms) as evidence of intentional violations of TILA.  The new CFPB Rule does have a limited profit sharing safe harbor that could provide relief for certain types of bonuses, which otherwise would violate the rule.”


Bill Chudy from Parkside Lending writes, “Not all of BASEL III is bad for mortgage borrowers.  Anyone who got a mortgage this year can thank BASEL’s LCR (Liquidity Coverage Ratio) for mitigating the impact QE tapering may have otherwise had on bond yields. The large banks have been drastically changing their balance sheet in response to the LCR requirements.  For example, Bank of America has increased treasury holdings from $6.2B in Q4 ’13 to $54.8B in Q3 ’14 while Wells Fargo has grown treasury holdings from $.5B to $37.8B. These net purchases will be slowing down as initial LCR requirements are met by January. Like the Fed they will be replacing runoff, but their influence to marginal demand will be negative after December. Perhaps Euro zone QE will take their place to replace demand? If not, we may see the impact many expected from the Fed’s taper. For now, in part we should thank BASEL for keeping rates relatively low this year.”


Thanks Bill. Indeed, banks big and small are keenly aware of Basel III’s impending rollout and should be considering the ramifications of increased risk weightings for past due or non-accrual loans and the possible consequences in an economic downturn. The Pacific Coast Banker’s Banc notes, “The OCC in its stress testing guidance indicates expectations that a bank should assess its capital adequacy in relation to its overall risks and have a plan for maintaining appropriate capital levels. Therefore, a bank should understand what effect an economic downturn could cause related to credit problems and capital. This implies that a stress test of some sort is required and that stress testing should include the ramifications of Basel III. In addition, the OCC indicates that a bank’s board and management should be prepared to take appropriate steps to protect the bank if the results of a stress test indicate that capital ratios could fall below the levels needed to support the bank’s risk profile. In the end, the implementation of Basel III points to the need for banks to update their contingency capital plans to reflect the ramifications of the new law.” PCBB states, “In terms of immediate ramifications of the implementation of Basel III on Jan 1, an important deadline is the accumulated other comprehensive income (AOCI) opt-out election…it is very important for banks to make a permanent election to opt-out in the first Call Report the bank files after Jan 1, 2015 or you will automatically stay in.”


By the way, a while back GNMA reported punitive Basel III treatment of mortgage servicing rights has driven the share of bank controlled servicing of GNMA mortgage issuance to 56% this year vs. 87% in 2011.


On the subject of the intersection of Dodd Frank and manufactured homes, we have, “There are many factors in lending which enable the secondary markets to work: sound underwriting practices, accurate cash flow models, and borrowers making timely payments. I would argue ‘appraisals’ should be right at the top of that list too. Recently, the six federal financial regulatory agencies issued a final rule that creates exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The appraisal requirements for higher-priced mortgages were established by Dodd-Frank, and under the act, closed-end mortgage loans are considered to be higher-priced if they are secured by a consumer’s home and have interest rates above a certain threshold. Under this rule it requires creditors to obtain a written appraisal based on a physical visit of the home’s interior before making these loans. The final rule provides that loans of $25,000 or less (along with certain “streamlined” refinancing) are exempt from the Dodd-Frank Act appraisal requirements, which went into effect earlier this year. For manufactured homes, which I’ve been told can present unique issues in determining the appropriate valuation method, the requirements for manufactured home loans will not become effective for 18 months as to allow creditors to make the necessary operational adjustments. Starting on July 18, 2015, however, loans secured by an existing manufactured home and land will be subject to the Dodd-Frank Act’s appraisal requirements. Loans secured by a new manufactured home and land will be exempt only from the requirement that the appraiser visit the home’s interior. For loans secured by manufactured homes without land, creditors will be allowed to use other valuation methods without an appraisal, such as using third-party valuation services or “book values.” The complete 283 page supplement to the final rule can be found on the Federal Register.”


A reader wrote in and asked, “We are a mid-sized lender struggling with increased costs to originate loans and a process largely controlled by an underwhelming loan origination system.  The result is an inefficient process with manual workarounds. We don’t have the budget to make technology investments that would help us improve our efficiency.  Any advice?”


I checked with Matt Woods, president of Genpact Mortgage Services, and he shared these thoughts: “We are all feeling the pressure, with volume largely on the decline and costs on the rise. There have been some great recent advancements in technology that can improve production efficiency and aid in adherence to compliance requirements. The problem is that most lenders don’t have the wherewithal to afford them.  Replacing your loan origination system (LOS) is a big undertaking.


“Another thing to consider, however, is whether the company really needs an entirely new LOS.  It could be that budgetary concerns and operational efficiency might be better served by considering an alternative approach that is complementary rather than a complete replacement.  Genpact’s Quantum platform is a cutting edge end-to-end LOS, but also offers the ability to integrate with existing legacy LOSs to address a specific pain point in the current platform, such as workflow, communication, 3rd party ordering/retrieval of services, etc.”

Matt also indicated that the pain points might not entail solely software concerns, but process issues as well.  More lenders are looking for ways to lower production costs by sending tasks to outside parties to complete, he said, and Genpact has developed a new way to do this.

“Genpact uses the technology-enabled approach called ‘Business Process as a Service,’ or BPaaS for short. BPaaS allows lenders to utilize third party process providers through a secure, seamless connection with the existing LOS. With BPaaS, mortgage originators can acquire robust and cost effective turnkey operations with a very modular functional scope and the ability to turn much of the traditional fixed cost base into a more variable one.   Instead of sending workflow items like verifications or other repetitive manual tasks to someone in the office, they are sent to experts at Genpact.  We have had dramatic success with BPaaS, lowering origination costs by 50 percent and more for some lenders.” Thanks Matt!


Mark Weber writes, “I have a comment on low down payments and a survey for your readers.  From 2008 to 2012 new home starts were low or non-existent in many markets. That means we have a lot of homes that need updating.  Instead of jumping on the 3% down payment bandwagon, why don’t we modify seller concessions? We have thousands of homes that need improvements, we have sellers barely with enough equity, and we have buyers that want updated homes but don’t have the funds to fix up existing homes.  So why not bring those HomePath guidelines over to conforming?  Or how about allowing appraisals on existing home sales to be done as “subject to” so buyers can update kitchens and baths when they buy the home? On a $300,000 purchase, a 3% home improvement concession could make a big difference to the buyer.  Some of that $9k could be absorbed in the purchase price subject to appraisal and some by the seller. Thousands of construction jobs could be created and Home Depot and Lowes could be major partners with Fannie and Freddie. Perhaps you could put your Secondary hat on again and crunch out a scenario. Would this guideline be an economic game changer and the boost housing and the economy need?”


[Editor’s note: Fannie’s HomePath product was designed for a particular time in the industry when REO disposal was paramount. The glut has passed, foreclosures have dropped, REO at the Agencies has plummeted – just ask the folks that have been reassigned – and the specific need for those HomePath guidelines to dispose of foreclosed properties is gone.]


“Rob, regarding 97% LTV loans,  here we go again with innovative ways for the mortgage industry to create loan programs that have, in most instances,  proven to be a future disaster. We, mortgage bankers, are geniuses at “inventing” new mortgage programs in order to artificially (and for the wrong reasons) increase loan production. Today, refi opportunities are all but exhausted, purchase money deals are hard to come by and, we are now entering the winter months where origination activity cyclically declines further.  So what happens now—-lower down payment requirements to prop up production by bringing in a group that is not prepared for home ownership? It has been proven out in the late 80’s — un-capped neg am ARM’s, and into the late 90’s and up to our recent recession —- subprime and ‘fog the mirror’ NINA loans, that there is no substitute for guaranteeing quality of a loan like having skin in the game with an adequate and verifiable down payment.”




The year is 2016 and the United States has elected the first woman President, Susan Goldfarb.

She calls up her mother a few weeks after Election Day and says, “So, Mom, I assume you’ll be coming to my inauguration?”

“I don’t think so, honey. It’s a ten hour drive, your father isn’t as young as he used to be, and my arthritis is acting up again.”

“Don’t worry about it Mom, I’ll send Air Force One to pick you up and take you home. And a limousine will pick you up at your door.”

“I don’t know. Everybody will be so fancy-schmantzy – what on earth would I wear?”

Susan replies, “I’ll make sure you have a wonderful gown custom-made by the best designer in New York.”

“Honey,” Mom complains, “you know I can’t eat those rich foods you and your friends like to eat.”

The President-to-be responds, “Don’t worry Mom. The entire affair is going to be handled by the best caterer in New York, kosher all the way. Mom, I really want you to come.”

So Mom reluctantly agrees and on January 20, 2017, Susan Goldfarb is being sworn in as President of the United States. In the front row sits the new President’s mother, who leans over to a senator sitting next to her and says, “You see that woman over there with her hand on the Torah, becoming President of the United States?”

The Senator whispers back, “Yes I do.”

Mom says proudly, “Her brother is a doctor.”





(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.)


Rob Chrisman