News From NAMB: August 4, 2017

Without giving a reason, Freddie Mac suddenly announced it was discontinuing its Home Possible Advantage program that allowed borrowers to have as little as a 1% down payment.  Lenders were allowed to fund up to 2% of the borrowers down payment by slightly increasing the interest rate.  The lone exception was UWM who did not require a rate increase for borrowers.  Instead, UWM increased the FICO score requirement.  This change will require at least a 3% down payment but only grants from those associated with the lender are curtailed.  Other eligible sources of funds may still fund the down payment such as gifts and gifts of equity.  Changes are effective form mortgages with Settlement Dates on and after November 1, 2017.  Some believe Freddie didn’t want this to be a topic of discussion at the Senate Hearings on Affordable Housing this week.

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Last week, I noted that only 36 people had commented on the Ability to Pay/QM Rule re-evaluation.  After the comment period closed this week, we had 484 comments.  All I can say is Wow!  People really do care and NAMB members are ready to turn on the grassroots again like we used to.  The big banks have the money but we have people who care.  Way to go!

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David Stevens, MBA’s CEO, is out pushing the MBA GSE plan.  He recently spoke at length to the Scotsman Guide on why the MBA plan to make the GSEs more like a utility would protect small lenders.  Stevens opposes recap and release, where Fannie and Freddie would be restored to something of their old selves.  Stevens believes the biggest lenders like Countrywide and Wells Fargo received special deals from the old GSEs that made it hard for small lenders to compete.  The core of the MBA plan is a common securitization with multiple guarantors.  The first two guarantors would be Fannie and Freddie with more added later.  FHFA would likely istill be in charge as the regulator.  You can read the MBA’s plan on their web site.

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Mortgage companies must continually reinvent…or leave.  The marketplace is constantly changing at an incredible pace for companies, especially mortgage companies.  What worked before the bust no longer works.  What happened for half a decade after the bust no longer works.  Interfirst, who became one of the largest wholesale lenders in the nation after the bust, surprisingly just called it quits because the paradigm changed.  Interfirst was based on a refinance model, higher-quality loans, and reasonable margins.  That isn’t today’s model, so, the company paid off its few debts and the owner decided to look for other opportunities.  Will that be the fate of many of the lenders, and even brokers, who are out there today?  Without being nimble, it is easy to have your competitors zoom past you.

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In its Summer 2017 Housing and Mortgage Market Review, Arch MI projects that home prices are expected to escalate sharply while incomes will increase very slowly over the next 2 years. But it won’t be just home prices that will make owning a home unaffordable for many.  Arch is projecting that interest rates will jump to 5% to 6%.  That is a 33% increase over current rates.  You should have potential borrowers look at page 3 of the report.  Currently, homeowner DTIs are in the low 40% range.  If rates hit 6%, average DTIs would jump into the upper 50% range.

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America’s Homeowner Alliance, whose mission is “to protect and promote sustainable homeownership,” is very upset with FHFA’s policy of allowing the GSEs to fund massive rental housing owners.  AHA claims the GSEs are “facilitating the ability of big Wall Street related investment groups to snap up single family homes to flip into rental housing.”  They believe the appetite of these large companies for rental homes is starving out first-time and lower-income borrowers by scooping up affordable homes.

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Two weeks ago, it seemed like the Louisiana Real Estate Appraisers Board was tucking its tail and surrendering over its attempt to have appraisers paid fairly.  The governor had issued an executive order that effectively repealed the law that dictated that AMCs pay appraisers an average wage set by the Board. The FTC was not satisfied and decided to proceed with regulatory action.  This week, the FTC Chief Administrative Law judge granted a stay of the FTC’s action for 90 days.

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The U.S. Census Bureau’s housing statistics showed the homeownership rate is beginning to improve.  The rate increased by .1% this quarter, .8% better than last year, to reach 63.7%.  The rate had dropped to 50-year lows at 62.9% a year ago and appears to be gaining ground again.  The category that showed the strongest growth was folks 35 and younger. This was no doubt driven by the very aggressive lending programs that are available again.  Meanwhile, rental vacancies jumped 6.7% from last year.  Little wonder; rents jumped from an average $750 to over $900 since 2015.

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The truth is that credit scores can be manipulated.  Before DU 10.1, borrowers were always required to resolve any dispute that was on a consumer’s credit report prior to closing a loan with either Fannie or Freddie. The reason behind that was when accounts are in a “disputed status” they are removed from the FICO ® credit scoring model.  Knowing that, credit repair companies could often get you a bump in score by disputing every piece of derogatory information.  With DU 10.1, the consumer is no longer required to remove the disputes prior to underwriting.  Just put the file into DU with all of the disputed information.  It appears Fannie and Freddie are well aware of how reports can be manipulated and prefer to simply deal with the raw data rather than the score.

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Mel Watt shed some light on FHFA’s view of changing from the current FICO version for Fannie and Freddie.  Speaking to the National Association of Realtors, Watt said, “any credit score model change would not go into effect before 2019 even if I announced a decision today.”  Watt made a very interesting statement that strikes at the very core of capitalistic competition. “How would we ensure that competing credit scores lead to improvements in accuracy and not to a race to the bottom with competitors competing for more and more customers?”  A bill has been introduced in the House to end FICO’s monopoly and a companion is being dropped in the Senate this week.  The drum beat to at least update the FICO the GSEs are using from version 4 or 5 is growing louder.

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If you don’t know, it is time you learned.  Regular E-Closings are where you sit in front of a notary at a computer and click through instead of wearing out your arm.  All 50 states recognize some form of UETA compliant e-sign process.  However, only 4 states have approved Remote E-Closings.  This is where you can be anywhere in the world and the notary only sees you via your computer’s camera.  Once they conform identity, you click through all the docs.  Virginia was the first state to approve Remote E-Closings.  While it is simple for the borrower, there is quite a bit of technology that must be implemented. 

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There are a lot of small goodies wrapped into Fannie Mae’s Desktop Underwriter 10.1.  We all have probably heard about the 50% DTI ratio with no compensating factors.  Here are a few more.  On purchases, DU no longer requires a pay stub.  Prior to the borrower starting employment, they can provide an employment contract or offer letter in lieu of a pay stub. I wonder if this applies to people who are retiring on a pension or who are eligible for Social Security?  Alimony can now be deducted from income, rather than being listed as a monthly liability.  Fannie Mae is increasing the number of self-employed borrowers who will only need to provide one year’s tax returns.  Previously, the loan must have been assigned to a lender in DU to get a PIW.  Preliminary Findings will now be eligible for the PIW.

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Trump HUD Cuts Undermined in Senate

Donald Trump has as much trouble with his own party as he does with Democrats when it comes to budget cuts.  Trump proposed significant cuts to HUD housing programs, excluding FHA.  This week, the Senate Appropriations Committee voted unanimously to ignore Trump’s budget and give much of those proposed cuts back.  It is uncertain if the full Senate will buy into the Appropriations Committee largess.

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Most of us know the Libor Index as the index used for many adjustable-rate mortgages.  It is the where banks overnight exchange their U.S. Treasury bonds for cash, then buy the securities back the next day.  The rate was determined by a daily poll, which asked banks to estimate how much it would cost to borrow from each other without putting up collateral.  Because fewer banks make such unsecured loans, Libor doesn’t always reflect actual practice.  In essence, it was made up and subject to manipulation.  It appears that it will be discontinued in 2021 but no one is certain what will replace it.  Why not go back to the CMT which is based on the auction of U.S. Treasury rates?

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If you don’t know, you had better learn.  Mortgage companies and mortgage originators handle a great deal of private personal information that can be breached by cyber criminals.  Can you imagine if you were suddenly informed that someone had broken into your computer system and was using stolen information about your borrowers?  The potential liability could put you out of business.  You could be sued by the people and even third parties, such as their credit card companies.  Your regulator could determine you did not have adequate security and revoke your license.  Unless you are following a proscribed plan, this is becoming an area of increasing risk.  The Federal Trade Commission has published a Guide for Business that can be very hard to implement without an IT consultant.  Realizing this, the FTC is publishing a series of blog posts using hypothetical examples based on lessons from closed investigations.  Hopefully, it will give some easy to understand tips.

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The last time the Federal Reserve announced it was not going to continue to buy a lot of the output of Fannie and Freddie, it caused a sharp spike in mortgage rates.  This time, the Fed plans to go much more slowly.  Fannie Mae chief economist Doug Duncan says it will add only about ½% to interest rates.  He then slides in that will be in addition to what happens to interest rates in general.  So, the projections of rates over 5% and even approaching 6% may be very realistic.

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John Councilman, CMC, CRMS of AMC Mortgage Corporation in Ft. Myers, Fla. is past president of NAMB—The Association of Mortgage Professionals. He may be reached by phone at (239) 267-2400 or e-mail [email protected].

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