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FHA Commissioner Stevens clears the air: David H. Stevens details the new RESPA rule and the role of the broker and stabilization in housing

Mar 01, 2010

National Mortgage Professional Magazine recently had an opportunity to chat with David H. Stevens, Assistant Secretary for Housing at the U.S. Department of Housing & Urban Development (HUD), and 27th Commissioner of the Federal Housing Administration (FHA). Established in 1934, the FHA was designed to promote stability in the housing market by insuring fixed-rate mortgages for qualifying applicants. Commissioner Stevens is responsible for oversight and administration of the $600 billion FHA insurance portfolio. Today, nearly one in four new residential mortgages carries an FHA guarantee. Stevens also has responsibility for other programs within HUD, such as multifamily subsidized housing, healthcare facilities, and manufactured housing. HUD is the agency charged with administering and interpreting the Real Estate Settlement Procedures Act (RESPA). A graduate of the University of Colorado, Boulder, Stevens has a strong background in housing, including experience in finance, construction, sales, mortgage acquisition and investment, and regulatory oversight. He began his journey to HUD at the dining room table, where he listened to stories about the creation of FHA and other efforts to stabilize the housing market from his father, who started as a runner on Wall Street during the depression. The dining room table soon became the board room as Stevens started his professional career with a 16-year tenure at the World Savings Bank. He later held positions as senior vice president of single-family business at Freddie Mac, and then executive vice president, national wholesale manager at Wells Fargo. Prior to his nomination and confirmation as FHA Commissioner, Stevens was president and chief operating officer of Long and Foster Companies, which include Long and Foster Real Estate and its affiliated businesses, including mortgage, title insurance and home service connections. You have requested this interview in response to quotes attributed to you in an article that ran in the January 2010 edition of National Mortgage Professional Magazine on the RESPA rule titled, “A Walking Contradiction.” Before we begin, would you like to comment further on that story? The first committee to address the RESPA rule convened in 2005. From 2005 until the end of 2008 when the final rule was announced, there were multiple hearings, meetings with industry participants, members of Congress, and all stakeholders involved in the process were involved in working to create RESPA reform. There were quite a few comment periods during that time that culminated in that final rule. As part of one of my past roles, I was president of a large real estate firm that was a member of an association called RESPRO, the Real Estate Services Providers Council Inc., and one of the core items in the proposed RESPA rule we were concerned with was related to the required use provision. As a representative of RESPRO, I testified in a committee about the general confusion to the rule, but more specifically, about required use. The required use provision was ultimately struck from the rule, long before I was in discussion for the position of FHA Commissioner. We are at a time where the collective representatives in the mortgage finance sector have a pretty significant credibility issue as a result of the housing correction. The RESPA rule is used by both consumer groups and others concerned about consumer protection as an enhancement to consumer protection, considering the fact that through the housing correction, many consumers claimed they were not knowledgeable of the programs they were getting and the fees they were charged, etc. The outcome is this current rule, which had 14 months notice and multiple years of planning, before it was implemented in the marketplace. My view as FHA Commissioner is that it is somewhat disingenuous of the industry to attack this particular rule after there was so much preparation, particularly after the housing crisis we just went through. Considering the RESPA rule has been in place for only a few weeks, have you seen much reaction to the rule as far as consumer and industry groups are concerned? The reaction has been mixed. This is a huge change for the industry. I’ve spent my entire professional career in the mortgage finance industry, in both the primary and secondary markets. A change like this does not come easy. To put it in perspective, the existing RESPA rule had been in effect for 14 years, and we were getting questions on that old RESPA rule up until the time when this new rule went into effect. The general sense about RESPA is that it is complex, and just like the old rule, I’m guessing there will be questions about what this rule covers and does not cover for years to come. So far, the implementation has gone as expected. We are doing extensive training and follow-ups with the industry, and there is clearly some confusion and implementation challenges, but these are the documents everyone uses to provide disclosure to consumers and manage the settlement process. The first few weeks, we are finding some gaps in the process and are looking at how it should be implemented, and are getting feedback from the larger financial institutions and the settlement service companies. Is there any sense of the timetable on whether changes should be made to either the new RESPA rule or the Good Faith Estimate (GFE)? There is no specific timetable, because we need to gauge how the implementation will go, as this is such a dramatic change to the disclosure process. We are getting a great deal of feedback from around the county, and are following up with members of the industry. In terms of when we would decide, if any, to make policy changes … at this point, we are not planning on making many. We’ll have a better idea after a few months pass, but its clearly still too early. As you know, we issued a statement that we weren’t going to enforce the RESPA rule for the first few months of the year. We want to get people out there using it. There are a lot of issues out there that have blown up. There are those out in the field using worksheets they are creating because they don’t want to get blocked out by the limitations on fee disclosures and fee assessments. We are working on providing guidance on that level. We have cases where loan officers are putting high fees on the GFE, because as per the rule, you could always lower the fee, not increase it. The transitioning to the new Good Faith Estimate (GFE) is well underway. Many originators have spent considerable time and expense ensuring compliance with the new RESPA reform rules. Because the new GFE does not provide certain information, some originators are resorting to “worksheets” to fill the void. For instance: the new GFE does not provide an estimate for total cash the consumer needs at the actual closing itself. All you have is the total estimate of closing costs. The downpayment, seller or lender-paid closing costs are not accounted for, cannot be accounted for, and no estimate or articulation of options is provided. And the new GFE, though it is now three pages, does not provide sufficient information for a consumer to make an understandable comparison between different loan scenarios based, for the most part, on any other factor than costs. An unintended consequence of the new GFE may be this make-shift response on the part of originators to provide information that they consider necessary for a consumer to make an informed decision. Can you comment on HUD’s position with respect to these “worksheets,” and do you expect further revisions to the GFE to respond to this apparent need? Let’s remember what the purpose of the GFE is. It’s intended to allow consumers to shop for mortgage loans on an “apples-to-apples” basis. It makes it extremely difficult for consumers to do this comparison shopping if you include all of the estimated fees in their loan closing that are not associated with the loan itself. Having said that, there’s nothing to prevent a lender or broker from disclosing these other costs to the borrower. Again, the GFE is a shopping document for loan comparison and was never intended to be the primary document to disclose the required cash to close. We’ve heard a lot about the use of these worksheets and we believe they can, under certain circumstances, be legitimate if lenders and brokers use them when a casual shopper is looking for a simple rate and fee quote. But if originators are using these worksheets to do an end run around the new requirements, then we’ll have a big problem with their use. This shouldn’t be that difficult. The borrower applies for a mortgage and within three days, the originator provides the borrower a GFE. In short, our message to loan originators should be clear … use the new GFE. Is HUD committed to making the GFE distribution channel neutral so that no matter what channel originates the loan—banker, broker or other originator—that the consumer can compare “apples to apples?” It is. I know there has been cause for discussion, and I want to keep in mind that the rule was established in 2008, before I was sworn in as FHA Commissioner, so the way various individuals in the practice, whether it be mortgage broker, mortgage banker, employee of a bank, loan originator, etc., have to disclose the way the fee structure is broken down does vary in the new forms. What is good about it for comparison shopping is they all total up at the end of the day in one column. Whether one is paid by YSPs or by points, the nice thing is you take the total boxes and add them up. To that extent, I think that is an improvement for the consumer, so they can see what the loan is costing them. World Savings Bank, a division of Golden West, started pick-a-pay loans shortly before your arrival in 1983. For over 20 years, this product performed well for Golden West. How did this product, one that worked so well for Golden West, become such a problematic issue for the industry? Do you feel that the misuse of the products we now call option ARMs comes from the lenders, loan officers or the borrowers? I worked for Golden West from 1983 until about 1998. It was a very different program back then because when it started, the loan required a substantial downpayment and there was no secondary financing on those loans. The borrower typically came in with a 25 percent downpayment on those loans. You were dealing with a different sort of clientele. At the institution I worked at, Golden West, all the loans were held in portfolio, so the entire credit risk and interest rate spectrum was held on balance sheets. The scrutiny on qualification and scrutiny on property value was infamous at World Savings, where we personally appraised every single property. As a manager at World Savings, we rented caravans and loaded them with underwriters and originators, and drove to the properties that had been appraised over the previous month with loan files in hand, to evaluate the quality of loans we were doing. That focus on credit quality that Herb and Marion Sandler instilled in that company over the years is why Golden West was such a darling of Wall Street for decades. What I saw when things started to change began with the securitization of the program. When the securitization side was created, then you had a flow channel for it and the private label market began finding ways to credit enhance structures, get them rated, and there was a flow of capital toward the option ARM product improved dramatically. That is really what brought it out on Countrywide’s balance sheet, Washington Mutual, etc. and it became a broader vehicle used for mortgage finance. Then, what occurred was this incredible competition of getting lower teaser rates, so the spread between the teaser rate and the fully-indexed rate widened. New indexes were brought in, and they began tying them to LIBOR and Treasury Security indexes which had more volatility … appraisal control went completely by the wayside. I think the failed organizations that were selling the loans had no discipline around credit risk management or how to explain the product, which is very complicated to explain. It all ties into a product that was overly distributed with a lack of controls in place. Had the program continued without securitization, staying as a portfolio lender with the sizeable downpayments and a hands-on individual evaluation on the borrower or the property, do you feel pick-a-pay and option ARM products could have survived in today’s market? We have learned a lot of lessons from this housing correction. It is a whole new reference point for any analytic model on risk management that will ever be created going forward. Option ARMs will certainly be a part of that reference point, as will sub-prime loans, interest-only ARMs, even 30-year fixed-rate mortgages run through Loan Prospector and Desktop Underwriter for the secondary market. I cannot really make a judgment. I know how that particular product behaved up until this correction. I think, going forward, that product, along with everything else introduced in the marketplace, will come with a whole new set of guidelines that will feel much more secure for the consumer. Concerning the new appraisal rules coming out of HUD, would you consider permitting a “blind ordering” so that any originator, no matter what channel of origination, can order the appraisal in an effort to accommodate the portability of an appraisal from lender to lender and save the consumer additional expenses? I do think the blind ordering of appraisals is the one thing that was the strongest piece of the Home Valuation Code of Conduct (HVCC) that everyone universally understands and agrees with … taking away the influence factor in the appraisal ordering is critical. We also believe that portability is important, so controlling the appraisal channel and having it directed is a concern to me because should that loan be turned down and the borrower wants to go somewhere else, do they need that appraisal at the next firm or do they need to pay a new appraisal fee? It continues to be an expensive way to complete the transaction. However we get there, I think the idea you presented is the kind of concept that we continue to talk about … how to make the appraisal stay and take away that influence factor, keep it arms-length, but also not make this another setback to the consumer who needs that appraisal and may need an appraisal for a different institution. Is the book of FHA loans in the past year performing well enough to be supported by the premiums in effect Jan. 1, 2010? FHA is required under the National Housing Act, and this is not an option, to maintain a two percent capital reserve ratio. That ratio has dropped below two percent as of year-end 2009. We don’t have an option and are working aggressively to get that reserve back up. We are obligated by law to get that reserve back up quickly. The purpose of the premium change is to do just that … get the reserves back up. I continue to reflect back when I started in the industry back when rates were in the 20 percent range and we actually filled out loan applications with a pen … I think the FHA premium was 3.8 percent back in the day. The move we made from one-and-three-quarters to two and a quarter, 50 basis points, is extraordinarily marginal in its impact to the consumer because it gets financed in as just a few dollars in the payment. Through our modeling exercises, it has a zero impact on production, in terms of impact to volume expectations. Its specifically in response to our legislative mandate to fund the two percent reserve. We are a not a private, independent bank, depository or supervised financial institution, so the use of the Troubled Asset Relief Program (TARP) and those type of options are not applicable. In terms of the mission that we serve, the thing we focus on with FHA and the changes we made were to make sure we didn’t impact our mission, in particular, core demographics that have depended on FHA for financing. So the changes made take that into context. There is also a focus on sustainability. To put it in perspective, when you get FICO scores below 580, the default rate gets extremely high. If you end up putting out a program where one in four borrowers are modeled to go into default over time, that’s not a very responsible program. We tried to balance the two together. If you put down a big enough downpayment, a low FICO can work. The borrower still needs a 10 percent downpayment, and that is still, without question, very aggressive financing compared to what other capital is available in the market. All of this together, will help make sure the nation remains on track. The mortgage broker has been portrayed as a major culprit in the mortgage mess by both the media and select legislators. How do you feel about that portrayal and how do you feel about the future role of the mortgage broker in getting our economy out of this mess? I shudder whenever I see someone point the finger of this housing problem at any one particular area of the market. At the end of the day, and I tell this to any audience I speak to, we are all responsible. Anybody in the mortgage and housing finance sector during this boom period and saw the type of financing that was going on, I don’t care whether they are a real estate agent; a mortgage broker or mortgage banker; a loan officer at a bank; people in the ratings industry; economists at virtually all the major banks and the GSEs who said there was no housing bubble; David Bach, who went around on speaking tours and had a number one best-seller with “The Automatic Millionaire,” saying to buy up real estate … everybody is responsible for this issue. At the end of the day, mortgage brokers are not, by any stretch, the culprits of the mortgage industry’s issues. Mortgage brokers play a very important role because they will reach into areas and serve communities where large institutions do not have the resources to do so. Having access to mortgage financing is a critical aspect of homeownership and mortgage brokers have clearly filled that need for decades. The key to all of this is responsibility. There are good brokers and bad brokers. Just like the lenders that I have taken action against since I became FHA Commissioner, you have to eliminate the rogue behavior of an industry or the whole industry’s reputation will suffer from it. I think that is the objective of the moves we are making. In a recent study conducted by Newsday, it was revealed that of every 10 homes sold on Long Island in the past nine months, eight of those homes started the foreclosure process. Out of those 10 homes, five of them eventually foreclosed. Looking forward, it looks like the housing market is continuing to spiral downward, foreclosures are on the rise and attempts at loan modifications are not working to the degree they were expected. What is HUD’s plan to get something in place and get it to work to stop this cycle? To put it into perspective, the three million goal for the Home Affordable Modification Program (HAMP) was over multiple years, as the program was initially announced. There are over 900,000 people currently in trial modifications in the HAMP program … that’s 900,000 people who are not in foreclosure, but would have been otherwise. That’s almost a million at this point. There are certainly issues in getting the trial mods to permanent mods at the core focus of the Administration right now, and I am confident that we’ll see those numbers pick up significantly. We are still running at about 25,000 homeowners entering trial modifications per week, and again, these are people who would be in foreclosure if that initiative wasn’t happening. This certainly does not cover the broad market, it covers a piece of the market, its part of this balanced recovery program that the Administration has instituted. At the FHA, which is not accounted for in HAMP, we did 460,000 loss mitigation actions last year which prevented foreclosures to a huge population. Buying mortgage-backed securities and having kept rates near five percent has put $10-$12 billion in the hands of consumers over the past year that they wouldn’t of had if the Fed hadn’t been buying mortgage-backed securities out of the marketplace. In my opinion, I don’t think the Administration is getting the credit it deserves for the programs … it is very difficult to create programs like this out of thin air. Quite frankly, the health of the bank stocks has been reflected and the huge mortgage years that these banks had is really as a result of the Administration’s policy helping to stabilize that market. Real foreclosures are still expected to remain relatively high, because we have a backlog. Any economic profile will show that after a recession ends, you often have six to eight months of impacts to unemployment and the areas affected by unemployment until those bottom out. It’ll be a bumpy number of months before we are headed out of the woods from a recession standpoint, and the Administration is very focused on looking at new efforts to address some of the other concerns related to foreclosures. On Jan. 12, 2010, you announced an initiative focusing on mortgage companies with significant claim rates against the FHA mortgage insurance program. On Jan. 9, 2009, Phil Murray, HUD’s Deputy Assistant Secretary for Single Family Housing Programs, said to a meeting of the House Committee on Financial Services, that “FHA currently performs a quarterly analysis of the default and claim rate for each lender branch (approximately 25,000 branches), comparing it with average rates for all lenders located in each HUD field office jurisdiction. Those lenders with a relative compare ratio of greater than 200 percent are subject to proposed termination.” The new initiative, according to your recent announcement, is a new type of approach in which the HUD Office of Inspector General is focused on corporate offices rather than individual branch offices. Could you explain why this shift in focus? How long will this review take? The initiative Phil Murray referred to is FHA's Credit Watch Termination Initiative. It gives FHA the ability to terminate a lender branch for poor performance. Since its inception in 1999, and through fiscal year 2009, FHA has terminated 401 lender branch offices. Every three months, FHA reviews the rate of defaults and claims on all FHA-insured, single-family mortgages. The review analyzes the performance of every participating mortgagee branch in each geographic area served by a HUD field office. This review is limited to endorsed loans, based on date of amortization, within the past two years. HUD's regulations permit FHA to terminate our agreement with any mortgagee having a default and claim rate for loans endorsed within the preceding 24 months that exceeds 200 percent of the default and claim rate within that geographic area, as well as the national default and claim rate. Mortgagees whose default and claim rates exceed both the national and local rates are at-risk and may have their agreements terminated. The initiative announced recently by HUD’s Inspector General is a separate process to evaluate the compliance with FHA origination and underwriting guidelines by lenders at the institution level. The Inspector General has stated that this review is complimentary to the process used by FHA’s staff, since the lenders selected for review are those lenders with significant default and claim activity. You would have to ask HUD’s Inspector General how his office selected the 15 lenders identified. FHA Commissioner David H. Stevens (center) with NAMB's Walt Scott (left) and Mike D'Alonzo (right) during the recent 2010 NAMB Legislative & Regulatory Conference in Washington, D.C.          Although a compare ratio of greater than 200, which reflects a mortgagee’s default and claims experience, can cause a mortgagee to be subject to termination of FHA approval authority, a significant percentage of FHA mortgagees have compare ratios in excess of 200. The recent probe into excessive defaults experience of 15 mortgagees seems to be just the tip of the iceberg, given the considerable percentage of mortgagees with defaults and claims, as reflected in their high compare ratios. Are there plans being developed to bring all mortgagees into compliance with HUD’s guidelines with respect to high compare ratios? FHA recently announced the expansion of the Credit Watch Termination Initiative to include direct endorsement lenders. Under this expansion of the program, FHA will systematically review the default and claim rates of all direct endorsement lenders and will exercise its authority to terminate their underwriting authority at the institutional level should we discover excessive default and claim activity. Initially, FHA will focus its attention on those mortgagees showing particularly high default and claim rates, greater than 300 percent. But by the end of the year, FHA will exercise its termination option at the 200 percent level. To reduce overall defaults and claims, FHA uses a number of risk management tools to monitor the performance of poorly performing lenders. For example, the Post Endorsement Technical Review Process, Appraiser Watch Initiative, and ongoing Lender Monitoring Reviews all focus on evaluating the compliance of a lender with FHA origination and underwriting guidelines. Lenders are selected based on excessive default and claim rates, and/or program and loan level characteristics that demonstrate a higher risk to the FHA Insurance Fund. Lenders which are substantially out of compliance with FHA requirements face administrative action by HUD's Mortgagee Review Board. And, as I’ve mentioned, FHA can also use the Credit Watch Termination Initiative to terminate a Direct Endorsement Lender, strictly for poor performance, by analyzing and comparing default and claim rates.
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