Oct. 26: Notes on the mortgage “experience,” market share shifts, appraisal waivers; state laws in flux

As usual there are a lot of crosscurrents of thought in residential lending, touching on psychology, behavioral economics, mathematics, fortune telling… Let’s see who’s saying what out there.

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Regarding a question my commentary raised this week asking how the “mortgage process” became the “mortgage experience, Cloudvirga’s Dan Sogorka weighed in. “I always appreciate some good banter, as well as the service you provide our industry, but I do feel compelled to answer your question of “when did a ‘mortgage process’ become a ‘mortgage experience’?”

“To me, mortgage went from process to experience when customers started demanding the same from lenders as they do from Amazon, Apple, and Netflix. Customers can buy stuff, compute, and watch TV using any number of other companies. But they love these brands because of the whole experience. Everything is elegant and easy. The mortgage industry is just now catching up and making the ‘process’ an elegant and easy ‘experience’.

“We have also come to the realization that people actually want ‘homes’ not ‘mortgages.’ Cloudvirga is proud to help lenders and their LOs deliver that experience. The POS world was never just about a loan application process. It’s about a wonderful home buying and financing experience from loan application to home shopping to close and move-in. That’s how we view it and what we’re constantly working on improving for lenders. Hope that helps.”

On the question of market share, Julian Hebron from The Basis Point relayed, “I think the question is less about whether a few mortgage companies dominate, and more about which companies can serve the entire customer financial/housing lifecycle. Companies who have maintained or grown mortgage leadership in the last 10 years aren’t mortgage-only shops. They serve customers and make money across full lifecycles, not just mortgage transactions. The top two are clear examples. Number one Wells Fargo serves customers throughout their financial life by covering budgeting, saving, borrowing, and investing. Number two Quicken Loans serves customers throughout their homeownership life with home search, buying, financing, selling, credit/financial monitoring. I think the top 30 will increasingly be dominated by multi-product shops going forward.”

And wouldn’t home loans be streamlined if the owner of the loan/investor didn’t care about the value? No appraisals! On the flip side, what if every home loan required three appraisals? That would sure bog thing down. The topic of waiving appraisals (who, what, where, when, why) is a hot one. The general belief is that the PWI is not as much predicated on the home, nor the loan structure, and more in the availability of prior appraisals in the area. Appraisals being in “machine language” making them readable, and the data more subject to compiling and valuation algorithms is hot stuff. And some wonder that if Freddie and Fannie are under government conservatorship, could that information be subject to a FOIA request?

Mike Simmons, co-President of California’s AXIS Appraisal Management Solutions, thought, “The GSE’s have been collecting data from appraisal reports for many years. The number most often referenced is on some 25 million properties. Whether or not that number includes the same property multiple times or it represents unique properties is not entirely clear. Either way, it’s a lot of data.


“A caveat: data isn’t information. Fannie and Freddie (like everyone else in the data aggregation space) believe that they’re extracting credible information from all that data. My experience with the wide spectrum of varying quality in some substantive percentage of appraisals tells me much of that data is inaccurate, hence the information becomes tarnished. A good example would be using information or factual data on the subject property from tax records to determine square footage rather than an actual measurement. And then there’s the whole issue of bias and how it’s perpetuated; from individual appraisers on the small scale, to data aggregators on a macro scale, and to the data scientists who build in bias to their automated value models (AVMs) before they even get to the actual information… but that’s another – and very long – story.


“So … what the GSEs say they do is base a PIW on properties where they have a history on in their giant database. And not just any history, but one that (at least historically) needed to include a transaction within the last 12 months. Here it gets a bit murky. Is this a hard and fast rule? Do they make exceptions? Does it apply equally to purchases and refinances? Are the LTV’s the same for both? Do the current studies and pilot programs that are looking at an enhanced inspection process indicate additional potential changes?


“These are at their core political questions – and like most political questions today, they’re deeply unclear. It’s good to remember too that Fannie and Freddie are in the ‘risk’ business. They don’t make loans, they buy (and sell) loans that others make and determine the inherent risk in that security. It also doesn’t hurt that they have the implied faith and credit of the government backstopping those loans (i.e., securities). It’s arguable whether they – or anyone else in that chain – cares what a property is worth in the same way you and your customer do. Their concern is whether the risk of buying a loan falls within an acceptable tolerance level. It’s neither ‘good nor bad’; it’s just fundamental to the process of lending. (It’s also why appraisals were required after the 1929 Depression – and why, in my opinion, all borrowers should always have an independent appraisal of some type to better understand the value of their property)


“Your readers should know that data on the subject’s neighborhood is part of the equation, but to get a waiver, it’s necessary to have some recent history on the subject property. At least it is today.”

State laws

Of curse they’re always changing, ratcheting up costs for any lender doing business in more than one state.

As California goes, so goes the nation? What are the fundamentals of the California Consumer Privacy Act of 2018? The CCPA’s initiative is privacy control and transparency in data practices. The CCPA declares that the right of privacy is an inalienable right, and fundamental to privacy rights is the ability to control the use, including the sale, of personal information. It applies to residents of California and takes effect on January 1, 2020.

The Texas Finance Commission has adopted provisions regarding licensing requirements for certain licensees. The new provision states that a license for a new residential mortgage loan originator is effective from the date of issuance until December 31. A license must be renewed annually. Once a license is renewed, it is effective for a term of one year, from January 1st until December 31st. Under the new provision, annual renewal fees are due by December 31st. A license will expire on December 31 if the annual fee has not been paid by this date. After expiration, a license may be reinstated any time between January 1st and the last day of February. Read the full provision here.

The State of Illinois will be phasing out its franchise tax beginning in 2020 and it will be fully eliminated in 2024. But in the meantime, it is rumored that several banks around the state are saying that Illinois has stepped up its reviews of holding company franchise tax filings in effort to collect any underpaid franchise tax.

The inquiries by the Secretary of State appear to be focusing on the apportionment factors used by some corporations to reduce their franchise tax liability. As part of apportionment, corporations need to determine if their bank stock is considered Illinois or non-Illinois property. Because the state rules focus on the physical location of assets including intangible assets, a number of bank holding companies have historically held their bank stock certificates outside of Illinois to avoid having them classified as Illinois property and thereby reducing their franchise tax liability.

Although the rules regarding Illinois franchise tax apportionment have not changed, the state appears to be reinterpreting the historic practice of holding stock certificates out of state in order to reduce franchise tax. Numerous holding companies have already received inquiries from the Secretary of State, but many are still waiting to hear back on final resolution of the issue.

A new amnesty program is available for corporations that may have underpaid their franchise tax liability. The program, which continues until November 15th abates penalties and interest associated with unpaid or underpaid franchise tax. However, all outstanding franchise tax due must be paid as part of the program, which has a look back period of seven years.

Missouri passed significant tax legislation in 2018 that will impact both businesses and individuals in coming years. Community banks will want to carefully consider how these new provisions will impact their institutions.

For years beginning on or after January 1, 2020, the corporate income tax rate is reduced from 6.25% to 4.00%. The bank franchise tax rate is also reduced from 7.00% to 4.48%. In future years if there are further reductions in corporate income tax rates, there will also be corresponding reductions in the bank franchise tax rate.

However due to the interplay between the bank franchise tax and corporate income tax, if your bank earns a large amount of tax-exempt income, you could find your Missouri bank franchise tax liability increasing even though Missouri corporate income tax rates are decreasing.

Though tax rates are decreasing, a credit (equal to 0.01677% of total assets less total deposits), which can currently be used to reduce the Missouri bank franchise tax or corporate income tax, has been repealed for tax years beginning on or after January 1, 2020. More favorably, effective August 28, 2019, interest income earned on deposits held at a Federal Reserve Bank may be deducted in calculating Missouri taxable income.

On the personal tax front, for 2018 Missouri enacted a 5% business income deduction for individuals reporting “pass-through” business income on their personal income tax returns from S corporations and partnerships. For 2019 this deduction increases to 10% and may increase further in future years to a maximum of 20% if Missouri meets certain general revenue budget thresholds.

The Mortgage Bankers Association submitted comments in strong support of HUD’s proposed rule outlining how to prove disparate impact under the Fair Housing Act. The proposal seeks to align HUD’s Disparate Impact Rule with the analysis and guidance articulated by the Supreme Court in its 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Under the proposed rule, a plaintiff must plead facts to support five elements – most importantly, that a specific challenged policy or practice is “arbitrary, artificial, and unnecessary” to achieve a valid interest and a “robust causal link” between the specific challenged policy or practice and the alleged disparity. As the Court explained in Inclusive Communities, these requirements serve as safeguards that are necessary to protect defendants from being held liable for disparities they did not create. Along with incorporating these and other Inclusive Communities safeguards, HUD’s proposal creates defenses through which defendants can rebut claims of disparate impact. The proposed rule closely followed MBA recommendations made in response to HUD’s 2018 Advance Notice of Proposed Rulemaking.

A pirate and a sailor were exchanging stories. The sailor pointed to the pirate’s peg leg and asked, “How did you get that?”

The pirate said, “Aye, I wrestled a shark and lost me leg.”

The sailor pointed to the pirate’s hook and asked, “How did you get that?”

The pirate said: “Aye, I fought Red Beard’s crew and lost me hand.”

The sailor pointed to the pirate’s eye patch and asked, “How did you get that?”

The pirate said, “Aye, a bird came by and left droppings in me eye.”

The sailor said, “That’s not as impressive as the other two. …”

“Aye,” the pirate answered. “It was me first day with the hook.”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “How Productive is Your Origination Team?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman