Oct. 25: Letters on MSAs, expanded criteria loans, 97% LTV loans, and trends in regulation

The residential mortgage industry is filled with some heavy-duty issues, and the commentary definitely has some heavy duty letters this week – not all of them filled with rainbows and unicorns.


A reader wrote in with some cold water on the goings on with Fannie and Freddie. “So, at the bottom of a long term rate cycle, coinciding with the ending of QE, the agencies have decided to offer 97% LTV loans to buyers who should probably be renters for a few more years to save for a down payment. When rates rise, we will have created another generation of people jailed in their own homes for lack of equity. With a wink and a nod, the MBA backs such a move to keep its members happy so they keep paying their dues. All impartiality Mel Watt may have had has been squandered given his announcements were made at the MBA convention in Las Vegas, a month before a mid-term election. Feels like an episode of Boardwalk Empire. The future of the mortgage business is not being written in Las Vegas. With 300 to 500 basis points on the table for the taking, marketplace finance firms and platforms will disintermediate a chunk of that income. This is just a contrarian’s view, but it does seem obvious what the future holds.”


Switching tracks to subprime and expanded criteria loans, Freddy Martino writes, “In early 2014, subprime lending was re-released to the wild with some new regulations to help it make a smooth transition back to market. ‘The definition of subprime has changed quite a bit since the credit crisis,’ notes Tom Hutchens, senior vice president of sales and marketing at Angel Oak Mortgage Solutions. “Stricter regulations on ability-to-repay (ATR) requirements as well as more prudent loan-to-value ratios have led to a significantly decreased number of loan defaults. In fact, since we began issuing non-agency, low-credit loans early in 2014, we have not had a single borrower default. We are at the beginning of a new credit cycle in which investors are looking for new ways to create return. Tapping this dormant market not only provides investors with higher yields but also provides brokers with a variety of new products that enable them to satisfy the needs of borrowers outside of agency lending guidelines.”


Doug Cooper contributes, “In your commentary [from early September], you had an excerpt from an article sighting a study by the NY Fed which said which concluded with the statement: ‘Also, relaxing credit standards may, of course, have undesirable consequences down the road, since borrowers with lower credit scores are at higher risk of default’ for which your comment was ‘Yup, not everyone should own a home…’. Did you think before you made that comment? I am an avid and daily reader, but was totally taken aback by it, and here is why. The article sights a number of reasons why homeownership has declined, most of which are by consumer choice, even with the relaxing of credit standards. It also appears to focus most heavily on those who it appears to assume have not yet been homeowners, and of which I agree with its assessment.


“However, during the last 3 years, I have seen a developing phenomenon that in my opinion, presents far greater risk than lending to those with lower credit scores. What? Lending to those with high credit scores who figured out early on that they would be forgiven of their irresponsible and speculative real estate borrowing/buying practices and purposefully defaulted on any and all financed properties in their portfolio while continuing to make good on all other debts, ultimately leaving them with all of their worldly possession a GREAT credit score 2 years later! I have lost track of how many credit reports I have seen where the person, who is attempting to borrow again and buy more property, has numerous foreclosures showing on their credit report within the last 3-4 years yet has a credit score well into the 700’s, some higher. If you pay attention to those who are professing a double dip in housing and the economy, look no further, because history appears to be repeating itself!”


Doug’s note concludes, “On the other hand, there are those who have done, and are still doing everything in their power to keep their homes even if they are underwater on value. They have struggled to keep their families in their homes, and if they have had diminished income, their other credit has suffered leaving them with low, and less than desirable credit scores. So where does that leave us in many cases. Denying access to credit to those who have shown they hold their mortgage obligation as the highest priority, or at best charging them ever increasing MI and or rate premiums, while giving credit to those who have demonstrated they have no intention of making good if housing or the economy should take a turn for the worse. I think that the terms ‘credit standards’ and ‘credit scores’ as they pertain to mortgage credit risk still have room to evolve and at this point are looked at a little too synonymously.” Thank you Doug.


When the issue of Marketing Service Agreements arose, I immediately heard from several sources that, off the record, the CFPB believes that the MSA itself is a thing of value and companies should act accordingly. (As best I can tell, this means they aren’t long for this world – but don’t take my word for it.) John Hale with New Jersey’s Glendenning Funding contributed, “My partner, James Anzano, and I believe that there are two areas of corruption: 1) non-compliant MSA’s; and 2) non-compliant L.O. Comp. If remedied, this would create a level playing field for industry competitors and significantly enhance consumer protections. We believe that the most effective way of stopping this corruption would be to punish the recipients of the ill-gotten gains. Regulatory enforcement actions against the individual recipients will quickly create a ‘sea change’ in the collective consciousness of industry participants and produce a far more dramatic impact on behavior and ethical conduct than merely holding settlement services entities accountable.


“Specifically, it seems that the popular argument in defense of the legality of Marketing Services Agreements (‘MSAs’) between real estate settlement services providers and referral sources is posited on permissibility under RESPA for settlement services providers to pay market rate compensation to parties, including referral sources (with proper consumer disclosure), in exchange for the actual receipt of goods and/or services supplied or performed by the party receiving the compensation. This theory is advanced by erroneously equating the goods and services supplied by non-arm’s length referral sources (real estate agents & builders) under an MSA to services that would otherwise be purchased from disinterested, 3rd party advertising companies  and/or media outlets by settlement services providers.  In my opinion, this is a materially flawed comparison for a number of reasons.


“An MSA engages the real estate firm to exclusively promote the mortgage originator through proactive solicitation efforts to its customers.  Certain states actually define ‘solicitation’ as an activity that requires licensure and employment as an MLO in their licensing codes. The issue of MSA’s and SAFE Act compliance needs to be solidly drilled down on. Trying to draw a material distinction between “promoting” and “soliciting” could prove a difficult and expensive proposition given the way that most MSA’s function in practice.  Many MSA’s contain unwritten targeted capture ratios and the understanding that the real estate broker will suppress competing service providers from gaining access to the agents and the buyers. It has become common practice, in clear contravention to RESPA, for real estate brokers to incentivize their agents through commission bonuses tied to the underlying real estate transaction to drive their customers to the “preferred” lender source to help the real estate broker meet the targeted capture ratio objectives of the MSA. Most of the agents are unaware that they are violating the law in accepting these bonuses.  Other problems: service delivery levels to consumers can suffer because the settlement services provider has carved off margin to compensate the real estate agent and short-changed itself of the financial resources necessary to maintain its operational capacity or, in the alternative, the lender funds the MSA “marketing” costs by inflating its margin so that the consumer ultimately, bears the cost of compensating the real estate broker through higher rates, points and fees. My advice to consumers is that the price that they will most likely pay for the convenience of “One-Stop Shopping” made possible through an MSA is code for “Hold On to Your Wallet!”.


Steve E. contributes, “’…Only then will the goal of consumers becoming the beneficiaries of free will, merit-based referrals from real estate professionals as envisioned by RESPA, sections 8(a) & 8(b), stand a chance of being fully realized…’ Most of us knew most MSA’s were problems. To me, this excerpt from the CFB consent order is great news. There are some compliance departments that want to stop referrals completely or at least require multiple referrals for each service. This statement shows CFPB is fine with referrals when they are done with the right intentions.”


On the subject of a recent MBA regulatory conference, from out in California Mortgage Grader’s Jeff Lazerson summed up his observations. (Please note this is not an official press release.) “I attended the MBA Regulatory conference in Washington D.C. Here are some of my observations. First, the upcoming 8/1/15 Loan Estimate (LE) and Closing Disclosure (CD) were front and center. Does the broker disclose or does the lender? The broker should be the one disclosing. Whose loan number goes on the initial LE, the lender or broker or can we leave it blank if the broker is delivering to the consumer? You’ll still need the 6 points of borrower information to trigger a Loan Estimate. The tolerances will be a lot tighter: fewer 10% tolerances and more zero percent tolerances. AMCs are going to have to be firmer on the pricing since appraisal tolerances go away. New: you’ll need an overt intent to proceed. Escrow officers are going away as the lenders will issue the CD. Wells Fargo already announced it would provide that CD on all of their deals. Another lender is soon to announce the same. Transfer tax disclosure is still a must-with zero tolerance to boot. Owner’s title policy disclosure goes away from LE requirements unless borrower is likely to have to pay it.


“Going from float to lock requires a new LE. If the broker discloses with lender A but then the broker and borrower decide to go to lender B, the broker should issue an adverse action notice first. Then, submit to lender B.


“You must manage expectations of Realtors, builders and borrowers since the new CD is required to be issued 3 business days ahead of closing. Any mistakes or changes mean the 3-day clock starts over. You can fund on the third business day. You won’t have to wait until the 4th day.


“Fourth, regulators are starting to bust lenders for investor steering. Discretionary pricing is a big no-no. Exception pricing better have a defendable story. Even though the Supreme Court will be hearing a FAIR lending, disparate impact case, the issue is not going away-even if/when the Supreme Court shuts the door on disparate impact.


“Marketing agreements and servicing agreements are going to be closely scrutinized by examiners…looking for RESPA violations (disguised kickbacks).


“Sixth, liability on L.O.’s and non-licensed employees for nefarious behavior is on the table. No point banks. No pick-a-pay compensation plans.


Mini-correspondents are pretty much dead. The regulators made it clear that investors have regulatory and consumer exposure when they are involved in sham mini-correspondent activities because licensing disclosures and fee disclosures are not accurate in a sham situation in which a lender is buying loans. Key indicators are how mini’s are licensed, how’s underwriting and making credit decisions on majority of files. They made a special point about CA minis in that RML or CFL licensing is where it’s at, not BRE licensing (in addition to the other walk like a duck tests).


Eighth, last year I conducted a very condensed seminar about the highlights of the 2 ½ days of meetings at the 2013 regulatory conference. I will be glad to do it again this year. I don’t charge. I just figure it’s payback for all of the above and beyond effort my wholesalers and other providers do for me throughout the year.” Thank you very much Jeff!



(Rated PG: Parental Discretion Advised)

A large, powerfully-built guy meets a woman at a bar. After a number of drinks, they agree to go back to his place. As they are making out in the bedroom, he stands up and starts to undress.

After he takes his shirt off, he flexes his muscular arms and says, “See that, baby? That’s 1000 pounds of dynamite!” She begins to drool.

The man drops his pants, strikes a bodybuilder’s pose, and says, referring to his bulging thighs, “See those, baby? That’s 1000 pounds of dynamite!” She is aching for action at this point.

Finally, he drops his underpants, and after a quick glance, she grabs her purse and runs screaming to the front door.

He catches her before she is able to leave and asks, “Why are you in such a hurry to go?”

She replies, “With 2000 pounds of dynamite and such a short fuse, I was afraid you were about to blow!”





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Rob Chrisman