The questions and answers posed for background for today's Arizona Republic article by Catherine Reagor called "Housing recovery threatened by 'strategic defaults'".
AZ Republic: "What were the forces behind the Phoenix area housing crash and the 50% drop in home values? What made it so bad here compared to other parts of the country?"
Amy Swaney: I had the unique opportunity in 2006 to see a lot of things about the mortgage industry en masse that other people did not. I am a producing Loan Officer, so I got to see the Main Street or homeowner side of the market. I am a non-depository mortgage banker so I got to see products available from many different lenders, but I was also President of the Arizona Mortgage Lender Association, so I got to hear and interact with MANY lenders, trade groups as well as regulatory bodies and hear their experiences as well. From that perspective, I think it was "perfect storm."
To begin we had a good investment property market, good rents, lower home prices and lots of land to build. In fact at one point our market had 25% higher number of legitimate investment properties than the rest of the nation. The secondary market made it easier to qualify for an investment property with lower down payments, lower credit scores and income documentation flexibility. The ease of becoming a real estate investor gave way to a mass of inexperienced buyers.
This new pool of buyers gave our market a hefty boost in home price, which gave homeowners a nice equity position in their homes that could be tapped into by way of more aggressive lending options. There were not many controls in place to deter the everyday homeowner from trying, what they perceived as their neighbor to be doing, getting rich in real estate.
As the home prices continued to go up and more and more people had access to equity in their homes, the pool of buyers continued to grow. But for those that still could not meet the qualifications of a very loose investment market, buyers started taking advantage through intent or by accident, of an over-capacity industry trying to keep up with the business coming through the door. The industry was blindly hiring anyone they could to handle the volumes, with no background, no education and no controls.
Buyers were now speculators. People didn’t think they were doing anything wrong, because they could not fail…as long as the market kept going up. The loans were easy. Stated income became “state an income”, no one said it had to be THEIR income, at least that is what they claim. The demand just kept growing, builders kept building, Realtors kept selling, lenders kept lending and buyers kept buying.
But the demand was not all that it was cracked up to be. The numbers were skewed. There was a false barometer in play. In 2006, the numbers of homebuyers were not the same number of home Owners in the marketplace. Somewhere borrower ignorance or greed or whatever else you want to call it, became criminal. Lending was easy, regulatory enforcement was zero and volumes were up. The criminal element found a safe haven in big money and low risk.
As the market in 2007 started leveling out and the fall out in the secondary market began to trickle down, aggressive loan products started going away thus shrinking the pool of legitimate borrowers. The declining market uncovered a massive web of inexperienced speculation and huge numbers of fraudulent transactions that without new homeowner’s entering the market, landed a significant amount of inventory in delinquency and foreclosure.
Arizona was a speculative market. The economics of our state relied heavily on the success of our real estate market. Thus over time it has become a severe economic issue, which continues the downward spiral of the property values.
AZ Rep: What are the prospects for a stabilization and gradual recovery in home values here?
AS: As an economy, we have to avoid the mistakes of the past. Solutions don’t always come easy, but I think solutions will come over time. We are starting to see light of stabilization. Recovery can only come if the private sector is given the opportunity to provide jobs and opportunity. One issue that can cripple the recovery is over-reaching regulation with unintended consequences that will stifle protracted and deliberate growth.
Some people view a house as their longtime home. Others, particularly in Phoenix, view a house as a short-term investment or source or equity with a good return. What are the dangers or problems with viewing a house as equity?
Real estate traditionally has been a longer term investment. What defines “longer term” however, is relative. For some, a home is similar to a retirement account. Something that provides financial security. For others it could be a stable slow growth investment with sustainable returns year over year. Viewing your home as an ATM will never be a winning investment strategy.
AZ Rep: Many homeowners in Phoenix are facing foreclosure. What are their options?
AS: A homeowner that faces foreclosure has many more options today than they did even three or four years ago. Depending on their specific circumstances, will determine the which option they have available.
AZ Rep: There is a growing sentiment among homeowners who now owe far more than their homes are worth that it is OK to walk away from a mortgage? What is your view on that sentiment?
AS: Each individual circumstance is different. I can’t be the judge as to why someone should or should not walk away from their home. As long as people understand there are ramifications for breaking a contract.
AZ Rep: How will banks react, especially if a significant number of people just walk away?
AS: Banks will continue to react the same way they have been reacting. They will continue to tighten lending guidelines, continue to make borrowing money more difficult and will be more selective as to who they lend their capital. More banks will shut down or be sold, and the options for consumers will shrink. Costs will continue to rise to consumers as banks try to offset their losses. Without question it will slow the recovery.
Sunday, May 23, 2010
Tuesday, May 18, 2010
Controlling Human Behavior
“The measure of a man's real character is what he would do if he knew he never would be found out.” ~Thomas Babington Macaulay
Unfortunately, society does not have the ability to rely upon character anymore. If you look around, the value of good character has been replaced with regulation, rules and laws. In mortgage lending we see it in tightened underwriting guidelines, documentation requirements and increased regulatory compliance. Every day I must make calls to borrowers explaining why information that they have provided is not satisfactory to meet the increased scrutiny of the regulators, investors or the secondary market. I find myself in a delicate position of getting good borrowers into homes which assists in economic recovery and still being able to maneuver through the unbelievable maze of quality and regulatory compliance to protect the company from default, fraud or a lender buyback request three years down the road.
It is disheartening to see that character has become a useless currency in our environment today. What happened to the four legs of the lending table, where we measured Capital, Capacity, Collateral and Character? It seems as the 4th C has been replaced with Control. This is evident in so many changes that are taking place today both in our market and in our government. The changes are not so subtle anymore and they remind us that we live in a society that will no longer assume one has character.
Fannie Mae Rolls Out Quality Control Initiative
Let’s call it what it is. Fannie’s “We Don’t Trust You At All” Program begins June 1, 2010. Although it did not feel like we could add any more documentation requirements to the home loan process, Fannie Mae has found a way to do just that. The following additional steps will be required for all loans closed after June 1st.
Undisclosed liabilities:
The Lender must determine that borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan. Lenders are required to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan.
Lenders may accomplish by:
• Refreshing a credit report just prior to closing to uncover additional debt or credit inquiries.
• Utilizing services available to provide borrower credit report monitoring services between the time of loan application and closing.
• Credit inquiries listed on the credit report will be investigated to determine whether the borrower did in fact open additional debt resulting in repayment obligations. Direct verification with the creditor associated with the inquiry may be required prior to closing.
• Fraud-detection tools will be used to assist lenders in identifying undisclosed mortgages or other potentially fraudulent scenarios.
Impact to your customer
This will be a great impact to those customers who think once the loan is approved or signed, they can go out and start purchasing items for the new house. This could also delay closings of borrowers who have recently acquired credit that has not yet reported on their credit report.
Borrower identity:
Lender MUST confirm borrower’s identity. Any borrower, key principal, or principal that is indicated on the “specially designated national and blocked person” list (SDN List) maintained by Office of Foreign Asset Controls (OFAC) is not eligible for a mortgage loan through FNMA. All Borrower Names and aka will be checked against OFAC’s SDN List.
Social Security Number or Individual Taxpayer Identification Number (ITIN):
All borrowers must have valid SSN or ITIN. Lenders must resolve any Social Security number issues that are identified including invalid formats, numbers not issued, borrower age/issue date discrepancies, or Social Security numbers associated with deceased individuals.
If a lender cannot resolve any inconsistencies:
• The lender must validate the Social Security number with the Social Security Administration (SSA).
• If the Social Security number cannot be validated with the SSA, the loan is not eligible. Borrower’s social security number must be able to be validated with the Social Security Administration.
Borrower occupancy:
Lender must obtain documentation confirming the borrower’s intent to occupy the property. FNMA’s Automated Underwriting System (AUS) will issue verification messages when it appears that the loan may not be a primary residence, because FNMA may have recently purchased a loan for the borrower that was secured by a property that was identified as their principal residence. Documentation may be required confirming the borrower’s intent to occupy the subject property.
Validation of qualified parties:
Lender is required to use GSA and HUD excluded party lists. FNMA will confirm that companies or individuals involved in the origination, underwriting, or servicing of the mortgage transaction are not on the General Services Administration (GSA) Excluded Party List or the HUD Limited Denial of Participation List (“LDP List”).
Regardless of the reason for the party being excluded, any party to the transaction included on either list will result in the loan being ineligible for sale to FNMA. Any company (mortgage broker or banker) or individual that is involved in the origination, underwriting, or servicing of your client’s mortgage must not be on the GSA or LDP list.
Specifically: loan officers, underwriters, appraisers, and loss mitigation specialists.
Verify your lender is not on these lists…
https://www.epls.gov/
http://portal.hud.gov/
/portal/page/portal/HUD/topics/limited_denials_of_participation
What Affects Wall Street, Affects All of Us
The term regulation can be defined as controlling human or societal behavior by rules or restrictions. Like any type of coercion, regulation has benefits for some and drawbacks for others. This is indeed the case with the current Senate Bill 3217, The Restoring American Financial Stability Act of 2010.
We have heard all the noise about this bill from the media about how it will protect consumers from the misbehaviors of Wall Street. How scandals like “Goldman Sachs” will be prevented through strict government oversight. What you don’t hear about little known “human side” and the impact it will have nationwide to employment, cost to consumers and to the real estate industry in general. In addition to the 1300 pages or so of the original bill the Senate has heard an additional 326 proposed amendments and so far have rejected or withdrawn 10 of those amendments. Within those pages there is bound to be unknown impact that will not just create regulation of Wall Street but will make significant changes to the daily lives of Main Street.
One unknown example of this concept located within the bill is called Risk Retention. This topic was discussed recently in an article from the MBA Newslink.
Simply put, the risk retention provision in RAFSA instructs regulators to set risk retention requirements, or “skin in the game,” up to 5 percent. (This would be capital that is left of the book of mortgage originators even after the loan is sold into the secondary market.)
“The risk retention requirement would require a company our size to either sell, merge with another firm or go out of business,” said Michael McQuiggan, managing partner of Tri-Emerald Financial Group Inc., Lake Forest, Calif. “We do not have the capital base to own assets.” The Mortgage Bankers Association said the risk retention requirement, as written, would have a crippling effect on lenders. Lenders agreed.
“It would severely limit competition in the marketplace,” said Bill Cosgrove, CMB, president and CEO of Union National Mortgage Co., Strongsville, Ohio. “Interest rates would increase because of a lack of competition. The cost of a mortgage loan would increase, so that increase would be passed on to consumers in the form of higher closing costs or interest rates. Many mortgage bankers would be forced to downsize and lay off staff. Holding large sums of capital in reserves would limit lending and retard the U.S. housing recovery.”
John Johnson, an independent mortgage banker and CEO of MortgageAmerica Inc., Birmingham, Ala., said a 5 percent risk retention requirement would be a “door-closer.” James Danis II, CMB, AMP, president of Residential Mortgage Corp., Fayetteville, N.C., echoed those sentiments. “So what the 5 percent risk retention requirement actually means is that I absolutely will not be able to meet the requirements and will have to shut my doors. It is absolutely impossible for any independent mortgage banker to operate under that those requirements. In my city easily 80 percent of the mortgage providers are independent mortgage bankers. We all would be out of business under these terms. Now expand that across the country and you can easily see how devastating this very well could be.”
“These provisions should be considered additional risk retention, because today when a residential mortgage originator sells a loan into the secondary market, they retain legal representations and warranties that require them to buy the loan back from the investor where there is proof that the loan was not properly underwritten,” MBA said. “Requiring residential mortgage originators--especially small, locally-based lenders--to retain a certain percentage of the loan on their books threatens a business model that offers consumers affordable choices and competition.”
"This problem would not be confined to independent mortgage bankers,” Johnson noted. “Most community banks would not be able to comply with a 5 percent risk retention requirement. Their mortgage operations would be shut down or severely curtailed. Risk retention even in large banks will result in the reallocation of capital, resulting in higher rates and/or reduced lending. All of this will result in loss of jobs--not just in the mortgage industry and banks--but among attorneys, appraisers, title companies, software vendors and others supporting the mortgage industry.
Danis said one study suggested the cost of lending could rise by 300 basis points overnight if risk retention goes through as is. “So what would definitely happen is that interest rates would go up overnight,” he said. “The cost of financing a loan would increase so much that potential home buyers may not qualify at the higher rates or have enough funds to pay those costs. Home ownership rates in this country would plummet. Only the very fortunate would be able to qualify for a home loan.
The question is, if rates go up dramatically, over 50% of the small to medium sized mortgage lenders in the country shut their doors and with that letting go of tens of thousands of employees so all loans would have to be closed by the few large remaining banks, would that impact your real estate or related industry career? Is that really a Wall-Street Only bill?
The Senate as a whole will be voting on the Regulatory Reform bill shortly and upon approval will be sent to a Conference Committee to hammer out the discrepancies between this and the House Regulatory Reform Bill. If this item remains without exemptions for those loans that are prudently underwritten, the damage will be done.
A man is walking in a graveyard when he hears the Third Symphony played backward.
When it’s over, the Second Symphony starts playing, also backward, and then the First.
"What’s going on?" he asks a cemetery worker.
"It’s Beethoven," says the worker.
"He’s decomposing."
Is your lender aware of the change taking place in the marketplace?
Let me know if I can be of assistance to your clients.
Unfortunately, society does not have the ability to rely upon character anymore. If you look around, the value of good character has been replaced with regulation, rules and laws. In mortgage lending we see it in tightened underwriting guidelines, documentation requirements and increased regulatory compliance. Every day I must make calls to borrowers explaining why information that they have provided is not satisfactory to meet the increased scrutiny of the regulators, investors or the secondary market. I find myself in a delicate position of getting good borrowers into homes which assists in economic recovery and still being able to maneuver through the unbelievable maze of quality and regulatory compliance to protect the company from default, fraud or a lender buyback request three years down the road.
It is disheartening to see that character has become a useless currency in our environment today. What happened to the four legs of the lending table, where we measured Capital, Capacity, Collateral and Character? It seems as the 4th C has been replaced with Control. This is evident in so many changes that are taking place today both in our market and in our government. The changes are not so subtle anymore and they remind us that we live in a society that will no longer assume one has character.
Fannie Mae Rolls Out Quality Control Initiative
Let’s call it what it is. Fannie’s “We Don’t Trust You At All” Program begins June 1, 2010. Although it did not feel like we could add any more documentation requirements to the home loan process, Fannie Mae has found a way to do just that. The following additional steps will be required for all loans closed after June 1st.
Undisclosed liabilities:
The Lender must determine that borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan. Lenders are required to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan.
Lenders may accomplish by:
• Refreshing a credit report just prior to closing to uncover additional debt or credit inquiries.
• Utilizing services available to provide borrower credit report monitoring services between the time of loan application and closing.
• Credit inquiries listed on the credit report will be investigated to determine whether the borrower did in fact open additional debt resulting in repayment obligations. Direct verification with the creditor associated with the inquiry may be required prior to closing.
• Fraud-detection tools will be used to assist lenders in identifying undisclosed mortgages or other potentially fraudulent scenarios.
Impact to your customer
This will be a great impact to those customers who think once the loan is approved or signed, they can go out and start purchasing items for the new house. This could also delay closings of borrowers who have recently acquired credit that has not yet reported on their credit report.
Borrower identity:
Lender MUST confirm borrower’s identity. Any borrower, key principal, or principal that is indicated on the “specially designated national and blocked person” list (SDN List) maintained by Office of Foreign Asset Controls (OFAC) is not eligible for a mortgage loan through FNMA. All Borrower Names and aka will be checked against OFAC’s SDN List.
Social Security Number or Individual Taxpayer Identification Number (ITIN):
All borrowers must have valid SSN or ITIN. Lenders must resolve any Social Security number issues that are identified including invalid formats, numbers not issued, borrower age/issue date discrepancies, or Social Security numbers associated with deceased individuals.
If a lender cannot resolve any inconsistencies:
• The lender must validate the Social Security number with the Social Security Administration (SSA).
• If the Social Security number cannot be validated with the SSA, the loan is not eligible. Borrower’s social security number must be able to be validated with the Social Security Administration.
Borrower occupancy:
Lender must obtain documentation confirming the borrower’s intent to occupy the property. FNMA’s Automated Underwriting System (AUS) will issue verification messages when it appears that the loan may not be a primary residence, because FNMA may have recently purchased a loan for the borrower that was secured by a property that was identified as their principal residence. Documentation may be required confirming the borrower’s intent to occupy the subject property.
Validation of qualified parties:
Lender is required to use GSA and HUD excluded party lists. FNMA will confirm that companies or individuals involved in the origination, underwriting, or servicing of the mortgage transaction are not on the General Services Administration (GSA) Excluded Party List or the HUD Limited Denial of Participation List (“LDP List”).
Regardless of the reason for the party being excluded, any party to the transaction included on either list will result in the loan being ineligible for sale to FNMA. Any company (mortgage broker or banker) or individual that is involved in the origination, underwriting, or servicing of your client’s mortgage must not be on the GSA or LDP list.
Specifically: loan officers, underwriters, appraisers, and loss mitigation specialists.
Verify your lender is not on these lists…
https://www.epls.gov/
http://portal.hud.gov/
/portal/page/portal/HUD/topics/limited_denials_of_participation
What Affects Wall Street, Affects All of Us
The term regulation can be defined as controlling human or societal behavior by rules or restrictions. Like any type of coercion, regulation has benefits for some and drawbacks for others. This is indeed the case with the current Senate Bill 3217, The Restoring American Financial Stability Act of 2010.
We have heard all the noise about this bill from the media about how it will protect consumers from the misbehaviors of Wall Street. How scandals like “Goldman Sachs” will be prevented through strict government oversight. What you don’t hear about little known “human side” and the impact it will have nationwide to employment, cost to consumers and to the real estate industry in general. In addition to the 1300 pages or so of the original bill the Senate has heard an additional 326 proposed amendments and so far have rejected or withdrawn 10 of those amendments. Within those pages there is bound to be unknown impact that will not just create regulation of Wall Street but will make significant changes to the daily lives of Main Street.
One unknown example of this concept located within the bill is called Risk Retention. This topic was discussed recently in an article from the MBA Newslink.
Simply put, the risk retention provision in RAFSA instructs regulators to set risk retention requirements, or “skin in the game,” up to 5 percent. (This would be capital that is left of the book of mortgage originators even after the loan is sold into the secondary market.)
“The risk retention requirement would require a company our size to either sell, merge with another firm or go out of business,” said Michael McQuiggan, managing partner of Tri-Emerald Financial Group Inc., Lake Forest, Calif. “We do not have the capital base to own assets.” The Mortgage Bankers Association said the risk retention requirement, as written, would have a crippling effect on lenders. Lenders agreed.
“It would severely limit competition in the marketplace,” said Bill Cosgrove, CMB, president and CEO of Union National Mortgage Co., Strongsville, Ohio. “Interest rates would increase because of a lack of competition. The cost of a mortgage loan would increase, so that increase would be passed on to consumers in the form of higher closing costs or interest rates. Many mortgage bankers would be forced to downsize and lay off staff. Holding large sums of capital in reserves would limit lending and retard the U.S. housing recovery.”
John Johnson, an independent mortgage banker and CEO of MortgageAmerica Inc., Birmingham, Ala., said a 5 percent risk retention requirement would be a “door-closer.” James Danis II, CMB, AMP, president of Residential Mortgage Corp., Fayetteville, N.C., echoed those sentiments. “So what the 5 percent risk retention requirement actually means is that I absolutely will not be able to meet the requirements and will have to shut my doors. It is absolutely impossible for any independent mortgage banker to operate under that those requirements. In my city easily 80 percent of the mortgage providers are independent mortgage bankers. We all would be out of business under these terms. Now expand that across the country and you can easily see how devastating this very well could be.”
“These provisions should be considered additional risk retention, because today when a residential mortgage originator sells a loan into the secondary market, they retain legal representations and warranties that require them to buy the loan back from the investor where there is proof that the loan was not properly underwritten,” MBA said. “Requiring residential mortgage originators--especially small, locally-based lenders--to retain a certain percentage of the loan on their books threatens a business model that offers consumers affordable choices and competition.”
"This problem would not be confined to independent mortgage bankers,” Johnson noted. “Most community banks would not be able to comply with a 5 percent risk retention requirement. Their mortgage operations would be shut down or severely curtailed. Risk retention even in large banks will result in the reallocation of capital, resulting in higher rates and/or reduced lending. All of this will result in loss of jobs--not just in the mortgage industry and banks--but among attorneys, appraisers, title companies, software vendors and others supporting the mortgage industry.
Danis said one study suggested the cost of lending could rise by 300 basis points overnight if risk retention goes through as is. “So what would definitely happen is that interest rates would go up overnight,” he said. “The cost of financing a loan would increase so much that potential home buyers may not qualify at the higher rates or have enough funds to pay those costs. Home ownership rates in this country would plummet. Only the very fortunate would be able to qualify for a home loan.
The question is, if rates go up dramatically, over 50% of the small to medium sized mortgage lenders in the country shut their doors and with that letting go of tens of thousands of employees so all loans would have to be closed by the few large remaining banks, would that impact your real estate or related industry career? Is that really a Wall-Street Only bill?
The Senate as a whole will be voting on the Regulatory Reform bill shortly and upon approval will be sent to a Conference Committee to hammer out the discrepancies between this and the House Regulatory Reform Bill. If this item remains without exemptions for those loans that are prudently underwritten, the damage will be done.
A man is walking in a graveyard when he hears the Third Symphony played backward.
When it’s over, the Second Symphony starts playing, also backward, and then the First.
"What’s going on?" he asks a cemetery worker.
"It’s Beethoven," says the worker.
"He’s decomposing."
Is your lender aware of the change taking place in the marketplace?
Let me know if I can be of assistance to your clients.
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