Scott Olson, Author at Scotsman Guide

Viewpoint: Consumers Deserve a Mortgage Bill of Rights

Scott Olson — Sun, 01 Oct 2023 08:00:00 +0000

Digging out from the 2008 housing crisis has not been easy. Americans were harmed by predatory mortgage lending practices, a collapse in home prices and a steep drop in the national homeownership rate. Since then, the U.S. housing market has experienced a slow but steady recovery.

Census data shows the national homeownership rate was 65.9% as of second-quarter 2023, up a full 3 percentage points since 2016. But challenges remain. The National Association of Realtors found that the gap in the homeownership rate between Blacks and whites is the biggest in a decade.

“When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers.”

And a report this past June from the National Association of Homebuilders showed that while wage gains boosted affordability at the start of this year, the trade group’s first-quarter 2023 affordability index was still significantly lower than one year earlier.

When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers. But now that interest rates have skyrocketed, protecting people from glitches in consumer protections should be more of a priority than ever.

This past summer, the Community Home Lenders of America released its Consumer Mortgage Bill of Rights. This document identifies specific areas where consumer protections need to be strengthened. Mortgage professionals should advocate for these positions to ensure a fair and thriving mortgage market.

Pricing policies

One consumer right should be robust competition in the mortgage services market. For instance, the opposition of the Federal Trade Commission (FTC) to the Intercontinental Exchange (ICE) purchase of Black Knight was a meaningful step. One company with quasi-monopoly power over mortgage origination software services should not increase its market share.

The divestitures of Black Knight’s Empower and Optimal Blue platforms were designed to win FTC approval and helped to ease the deal’s many problems. The merger approval facilitates vertical integration of mortgage origination and servicing tasks.

There are ways that a company like ICE with such a large market share can impose anti- competitive measures on the mortgage industry. For instance, it charges so-called “user seat” fees based on the number of loan originators who use its software. By increasing these fees as originator numbers go up but not reducing them as numbers go down artificially inflates the costs of the mortgage process.

“Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices.”

Pressuring lenders into buying discretionary services (what’s known as tying and bundling) just to continue using the basic mortgage origination software service also increases costs. The same goes for charging junk fees — so-called “click fees” — to electronically access various vendor information such as the appraisal, credit report, title insurance and flood certification.

Inflated fees caused by these practices will inevitably be passed along to consumers. These practices should be scrutinized as a merged ICE-Black Knight entity grows. For example, the Consumer Financial Protection Bureau (CFPB) should monitor and address consumer mistreatment.

A different area that includes not only a dominant market power, but an actual monopoly, is credit scores. In November 2022, FICO raised its fees for credit scores by 400% — with the exception of an arbitrary and select group of about 50 mortgage lenders. The lenders pay these fees directly, but they’re ultimately passed along to borrowers, since a credit score is a required element of a mortgage. Underserved borrowers are hurt the most. This creates a disincentive for mortgage originators to work with and improve the scores of underserved borrowers with credit blemishes, since the 400% price hike will be compounded over multiple credit pulls.

The long-term solution is to create competition. Sandra Thompson, director of the Federal Housing Finance Agency, is trying to do this by initiating a process for conforming lenders to use VantageScore. Until there is real competition, however, FICO should rescind its 400% price hike and scale it back to something that resembles its true inflationary costs.

Abusive practices

Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices. So, another right should be the option for consumers to say no to trigger lead solicitations. Too often, when a loan originator pulls a credit report on a mortgage application, the borrower is immediately inundated with an avalanche of intrusive texts, emails and phone calls.

There are powerful financial forces that will fight any effort to end or limit trigger lead solicitations. A simple solution would be to create a credit-reporting portal so that consumers can be given the power at the time of the loan application to decide whether or not they want to receive trigger lead solicitations.

Another non-price-based consumer protection deals with so-called “dual compensation,” in which an individual acts as both the agent on the purchase or sale of a home and as the loan originator on the purchase mortgage for that home. Reasonable people disagree on whether this is a good or bad idea, but no one should disagree on basic protections for consumers.

Consumers should have three basic protections in regard to this practice. First, an individual representing the property seller should not simultaneously serve as the loan originator for the buyer. Second, there should be uniform nationwide disclosures. Third, a loan originator who also makes money from the real estate transaction should be licensed.

In fact, this licensing requirement should be universal for all registered mortgage originators. The CFPB should use its authority under the Dodd-Frank Act requirement that all loan originators must be “qualified.” This would close the loophole under which bank-based originators do not have to pass the Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act test, pass an independent background check or complete eight hours of continuing education each year.

Uniformity of rules should also apply to the loan originator compensation requirements under the Truth in Lending Act. This rule prohibits originator compensation to vary from borrower to borrower, but independent brokers can evade it by using different channels to charge different fees to similar borrowers who utilize the same type of loan. This loophole should be closed or enforced as appropriate.

Unfair premium

Finally — and yes, this may not technically be a consumer protection — but borrowers should have the right to have their mortgage insurance premiums canceled when their loan-to-value ratio reaches 78%.

This right actually exists in the 1998 Homeowner Protection Act statute, but not for loans through the Federal Housing Administration (FHA). The agency used to adhere to this, but in 2013 it changed the policy and the FHA now charges premiums for the life of the loan (unless the borrower made a downpayment of at least 10%).

Ten years ago, this might have made sense as a temporary step to help the FHA build up capital after the 2008 housing crisis. But the FHA is now flush with capital, and with today’s skyrocketing mortgage rates, the exit option to refinance with Fannie Mae or Freddie Mac has closed for many homeowners. ●

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Viewpoint: Homeownership Should Be a National Priority

Scott Olson — Wed, 05 Jul 2023 18:51:00 +0000

As National Homeownership Month comes to an end in June, everyone in the housing and mortgage industries should think about a collective press to legislators in Washington, D.C., to make affordable homeownership a top priority.

The 2024 presidential election is in its infant stages, but once again, neither major party seems to be elevating homeownership as a top-tier issue. This is troubling. While the U.S. doesn’t have a full-scale housing hurricane like it did in 2008, there is a silent storm brewing.

The policies of the Federal Reserve over the past few years are a key contributor to these conditions. The Fed kept benchmark interest rates low, leading to a run-up in home prices, then quickly shifted in the other direction and threw a beachful of sand into the gears of the home purchase market. But today, as the supply of homes outpaces demand, prices have only softened slightly even in the face of a doubling of mortgage rates. The result is brewing storm of high home prices and high mortgage rates.

A newly released annual study from the Joint Center for Housing Studies of Harvard University explains these underlying dynamics. It concluded that higher home prices are forcing first-time buyers to save even more for downpayment costs and upfront fees to secure a mortgage, and borrowers require ever-higher incomes to afford the monthly payments.

Industry leaders and lawmakers need to confront head on the reality that an entire generation of young families faces unprecedented barriers in being able to buy a home — even at a time when wages are surprisingly robust. There is talk about a wealth gap based on basic job-related income disparities. But a generational wealth gap has also been created by the run-up in home prices.

Older Americans are flush with equity in their homes due to the price boom over the past 15 years. But younger Americans are increasingly locked out of homeownership and the resulting wealth it creates, consigning them to ever-increasing rent payments.

Take, for example, areas such as Northern Virginia and Southern California. Million-dollar homes are the rule, not the exception, in these regions, and rates for 30-year fixed loans frequently exceed 7%. Younger residents wonder how they’ll be able to afford a home under these circumstances and their parents usually don’t have a good answer.

So, what should be done? Congress has launched some constructive proposals, such as the HELPER Act (a program that offers zero downpayment loans to police officers, firefighters and other first responders) and the Neighborhood Homes Investment Act (which creates tax credits to rehabilitate single-family homes in underserved communities).

Earlier this year, the Federal Housing Administration (FHA) cut mortgage insurance premiums by 30 basis points, which will benefit an estimated 850,000 borrowers in the coming year by saving them an average of $800 annually. The Federal Housing Finance Agency rescinded loan-level pricing adjustments on Fannie Mae and Freddie Mac loans that were based on the borrower’s debt-to-income ratio. These measures are consistent with the Biden administration’s objective of closing the homeownership gap for minorities and other underserved borrowers.

But some would argue that, in the face of competing priorities, the White House is not showing sufficient energy and commitment to making homeownership the top policy priority it deserves to be. Others argue the same is true of the major Republican candidates for president.

Meanwhile, some federal and state regulators don’t seem to understand the critical role that independent mortgage banks (IMBs) play in access to mortgage credit, particularly for underserved borrowers. With the failures of Silicon Valley Bank and Signature Bank, regulators are understandably focused on shoring up regional banks. That is important for the economy and activities such as small-business lending.

Clearly, however, this will do virtually nothing to help create more homeownership opportunities. When it comes to mortgage lending, banks have pulled back considerably since the 2008 housing crisis.

Back then, banks responded by imposing credit overlays to limit mortgages to well-heeled borrowers, obstacles that are still in play. IMBs have sought to pick up the slack. As the Community Home Lenders of America highlighted in a 2022 report, IMBs now originate two-thirds of all mortgages, as well as 90% of all FHA and U.S. Department of Veterans Affairs loans. IMBs demonstrably outperform banks in lending to minority, low-income and underserved borrowers, as reports by the Urban Institute and the Greenlining Institute show.

But instead of embracing and strengthening IMB efforts, bank executives and think tanks continue to fall back on an old canard that “IMBs are risky” and need to be reined in. Lawmakers should not listen to such baseless rumors. Instead, they should take action to boost IMB efforts that will increase access to mortgage credit.

For example, since IMB servicers are essentially bankers for borrowers who miss mortgage payments, liquidity support systems that are routinely provided to banks should also be made available to IMBs. These include an enhanced Pass-Through Assistance Program (PTAP) from Ginnie Mae and advances from the Federal Home Loan Banks.

To boost homeownership for underserved families and communities, instead of extending Community Reinvestment Act bank requirements to nonbanks, a plan has been laid out to address the cost barriers for loan originator licensing requirements at IMBs, which are much stricter than for banks. This is a much more impactful way to help IMBs to do a better job of lending to borrowers and communities in need — by creating thousands of new independent loan originators.

Beyond these changes, bolder actions are needed, starting with the Federal Reserve swinging the pendulum back toward lower interest rates. The mortgage industry also needs to think about and act big when it comes to programs targeted at younger families, including significant downpayment assistance for first-time homebuyers.

Six years ago, Congress ended the mortgage tax deduction for the nation’s most affordable homes. Lawmakers should consider a new provision for first-time buyers, such as a downpayment tax credit, an above-the-line mortgage deduction or a downpayment grant program. And more emphasis on financial literacy is needed in schools. This will prepare the next generation to save and buy a home they can afford.

Ultimately, leadership matters. Any candidate running for president should pledge to make affordable homeownership a top priority — and back that pledge with concrete proposals. In swing states across the country, this will serve as good politics. And there is still time to make the next election different.

The post Viewpoint: Homeownership Should Be a National Priority appeared first on Scotsman Guide.

This Fix Fails to Solve the Problem

Scott Olson — Mon, 01 May 2023 08:00:00 +0000

New York and Illinois recently joined Massachusetts in adopting state-level versions of the Community Reinvestment Act (CRA), the 1977 federal statute designed to encourage banks to serve low- and moderate-income households in the same communities where they take deposits and have branches. These state-level statutes go further than the federal law by extending the same requirements to nonbank mortgage lenders.

People can debate the impact of the federal law for banks — whether it has any teeth or whether it makes any difference with respect to mortgages. What seems clear, however, is that it makes no sense to try to adapt the same law — which was specifically designed for banks with branches and deposits — for independent mortgage banks (IMBs). This is the epitome of trying to fit a square peg in a round hole.

The Community Reinvestment Act was designed to prevent banks from taking federally insured deposits from underserved communities and diverting them to provide credit in wealthier communities. But independent mortgage banks don’t have access to insured deposits, to Federal Home Loan Bank advances or to the Federal Reserve’s discount window.

“Year after year, (independent mortgage banks) decisively outperform banks in originating mortgages to minorities.”

Independent mortgage banks don’t take money out of underserved communities. They bring mortgage credit into underserved communities by accessing Ginnie Mae mortgage- backed securities, cash windows from Fannie Mae and Freddie Mac, or by selling loans to aggregators. Unlike banks, only a small fraction of the mortgage business for these institutions is generated through physical offices.

Most importantly, there is no evidence that IMBs fail to work with underserved and minority borrowers. Year after year, these financial companies decisively outperform banks in originating mortgages to minorities (e.g., see the annual reports from The Greenlining Institute) and to underserved borrowers (e.g., see the monthly reports from the Urban Institute).

Unlike banks, independent mortgage banks generally do not impose credit overlays, or additional guidelines to prevent default, which in effect limit loans to wealthier borrowers. And unlike correspondent lenders such as Wells Fargo, independent mortgage banks don’t exit the mortgage market when times get tough.

Simply put, CRA statutes for independent mortgage banks are solutions in search of problems. Still, with states like New York and Illinois joining Massachusetts in adopting legislation, this seems to be a trend. So, let’s take a look at what these states have done and what the likely impact will be.

Massachusetts experiment

Advocates of CRA for independent mortgage banks point to Massachusetts, which adopted its law in 2007. Let’s take a look at how this turned out. Home Mortgage Disclosure Act data for Massachusetts since it adopted CRA for nonbanks (2020 versus 2008) showed that growth in nonbank lending within the state significantly trailed the national average.

When Massachusetts adopted its CRA, the 26% independent mortgage bank share of mortgages in the Bay State in 2008 was above the national average of 24%. Twelve years later, however, the IMB share of mortgages in Massachusetts (55%) had fallen significantly below the national average of 63%.

In these 12 years, the IMB share of mortgages to low- and moderate-income borrowers in Massachusetts increased from 27% in 2008 to 62% in 2020, while the national average of IMB lending to such borrowers increased at a faster pace, from 29% to 67%. The IMB share of mortgages to borrowers of color in Massachusetts increased by the same percentage (from 27% in 2008 to 62% in 2020). But the national average of IMB lending to minority borrowers increased even more rapidly, from 33% to 71%.

You can’t pinpoint cause and effect here. But clearly, the Massachusetts experiment has not lived up to its billing. And it is possible that the Massachusetts CRA was a factor in discouraging IMBs from coming into the state to make mortgages.

Plaguing questions

New York’s CRA law was enacted in 2021 and went into effect one year later on Nov. 1, 2022. It directs the superintendent of the New York Department of Financial Services (DFS) to assess the performance of a mortgage banker in helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods.

Specific factors to consider in this assessment include efforts taken by the mortgage banker to ascertain the needs of their community; marketing to members of their community; community outreach and educational programs; participation by management; any practices intended to discourage applications; and the geographic distribution of loan applications and denials. The New York state law also requires DFS to monitor the mortgage banker’s record of opening and closing offices; its participation in government-insured, guaranteed or subsidized loan programs; and the mortgage banker’s ability to meet community credit needs based on their company’s financial condition, size, legal impediments and local economic conditions.

The law provides for the assessment and all communications by DFS to be available to the public upon request. Furthermore, the superintendent may conduct public hearings when an objection to an application has been submitted. Therefore, in addition to the normal risks associated with noncompliance, there is a substantial reputational risk for failure to meet the department’s standards.

A fundamental question raised by this law is what constitutes the “community” of the mortgage banker. Under the federal Community Reinvestment Act, regulators such as the Office of the Comptroller of the Currency have defined the assessment area of a bank based in part on the location of its principal office, branch office or another deposit-taking facility.

A mortgage banker who is licensed in New York is not required to maintain an office in the state — and many do not. What is the “community” in New York for an out-of-state mortgage banker? The industry will look to DFS for clarity in areas such as this, as this is the sort of question that plagues any state-based effort to apply CRA to independent mortgage banks.

Recipe for retreat

The Illinois CRA was signed into law in March 2021. In December of last year, the state released draft regulations on how to implement the law. This draft exemplifies the problems of applying CRA to independent mortgage banks. The proposed regulations show a fundamental lack of understanding of these financial companies’ business models.

For example, one assessment criteria is “innovative or flexible lending.” So, will an independent mortgage bank that overwhelmingly originates Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans — which include low- or zero-downpayment terms designed for underserved and first-time homebuyers — be penalized because they are not “innovative” or “flexible”?

“For states determined to adopt CRA, it matters how they do it. There should be appropriate volume-exemption levels to avoid deterring nonbanks in nearby states from deciding to lend in that state.”

The same goes with requirements for loss mitigation. Independent mortgage banks predominately originate FHA, VA and conventional loans that have the strongest loss-mitigation requirements — much stronger than banks typically have. As long as an IMB follows these requirements, it makes no sense to have an additional test.

The regulations show a bias toward banks and against IMBs. They disallow credit for loans that independent mortgage banks originate and sell to banks, if a bank claims federal CRA credit for the same loan. This is backward. The loan would not have been made if the IMB didn’t originate it. And if a specific bank didn’t buy an FHA, VA or conventional loan, another bank would have done so.

Finally, like in New York, the Illinois regulations are unclear as to whether they impose a requirement that if a lender enters a state, it has to serve all geographic parts of the state. Combined with low loan threshold for CRA applicability, and new CRA exam costs and burdens, this is a recipe for discouraging lenders in adjoining states from expanding into Illinois.

Sensible alternatives

There are more effective ways for states to encourage mortgage lending to minority and underserved borrowers. For example, one way to generate more mortgages to minority borrowers is simply to have more minority loan originators.

The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act creates high qualifications standards for independent mortgage bank originators. This is fine, even though for some reason the standards are much lower for bank-based originators.

But states should also look at ways to lower the hurdles for a nonbank originator to become licensed. States should waive SAFE Act exam fees and subsidize these courses for minority and low-income originator candidates. Additionally, states should not deny licenses to loan originators who have blemishes on their credit reports, which have nothing to do with their qualifications to be an originator.

For states determined to adopt CRA, it matters how they do it. There should be appropriate volume-exemption levels to avoid deterring nonbanks in nearby states from deciding to lend in that state.

The CRA process should be streamlined with appropriate safe harbors. If an IMB has loan statistics showing they are adequately serving low- and moderate-income borrowers, they should not have to undergo extensive and costly exams. And these institutions should not be forced to contribute to community development funds of nonprofits, because that is not their mission.

Finally, to other states considering the adoption of CRA for independent mortgage banks, consider one thing: Look before you leap. This all sounds like a good idea. But you will discourage the very thing you want to encourage. ●

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The Midterms Are a Yawner for Mortgage Professionals

Scott Olson — Mon, 31 Oct 2022 08:57:00 +0000

The national midterm elections take place on November 8. The outcomes of these races could have major consequences for all Americans.

Control of the Senate could determine whether President Joe Biden can confirm new federal judges and potentially move the center of gravity on key social issues in the U.S. Supreme Court. The midterms will decide whether Democrats add another senator or two to their razor-thin margin, enabling the party to enact some or all of its sweeping $2 trillion in tax, housing and social policy provisions from the Build Back Better Act that were scaled down in the recently enacted Inflation Reduction Act.

The midterms also will determine whether Republicans regain the House of Representatives, enabling them to conduct aggressive oversight of federal policies and agencies while laying out a conservative legislative agenda heading into the 2024 presidential election. Elections also have life-or-death consequences for members of Congress and their staffs. Congressional jobs and careers can hang by a few thousand votes or less.

When it comes to mortgage policies in Washington, D.C. — i.e., when it comes to things that make a difference for mortgage professionals — this election is not likely to have much of an impact, if any. To use the well-worn adage, the more things change, the more they stay the same.

Partisan gridlock

Why is this the case? When it comes to mortgage policies, Congress has been largely absent in recent years and is likely to continue to be. Remarkably, unless something surprising happens between now and January 2023, the current 117th Congress will expire without having passed any major (or even minor) legislation that affects the mortgage industry.

There are many reasons for this. The most obvious one is partisanship. Congress used to resolve differences in legislation by giving the party in power more favorable consideration than the minority party but including good provisions and ideas from both parties. Both sides would compromise and pass legislation rather than let things bog down in gridlock. Today, neither party in power seems willing to even consult the other side on most bills.

The most important reason for congressional inaction is the Senate filibuster. Under the quilt of current rules, the Senate can pass certain items such as mandatory spending changes with a simple majority (which today means the 48 Democrats and two independents who generally vote with the Democrats, plus the vice president). All other policies effectively require 60 votes. This means Republicans have a key role in passing most legislation — including housing and mortgage policies.

It is possible that the Senate will eventually end the filibuster. If that is accomplished — and done at a time when the same party also controls the House and the presidency — Congress will no longer be characterized by gridlock but by unprecedented activity.

Since Democrats currently control the White House, the only way this could happen in 2023 is if they maintain their majority in the House while picking up at least a few Senate seats, then decide to pull the trigger on ending the filibuster early next year. But even if that happens, Congress is likely to focus on other hot-button issues it views as more politically consequential than mortgage policies.

True sway

Moreover, congressional differences over mortgage policies are usually not that partisan — not so much Democrats versus Republicans or left versus right. A case in point is the congressional effort to take Fannie Mae and Freddie Mac out of federal conservatorship, which lawmakers have failed to accomplish.

Congress failed not because of ideological differences, but because the issues are too complex and intractable for Congress to resolve. Since these issues often pit one powerful industry sector against another, there is not much political upside to tackling hard issues that could alienate one group or another. For this and many other reasons, there is an argument that the Federal Housing Finance Agency (FHFA), not Congress, should take charge of the conservatorship debate.

Regarding the other federal mortgage agency programs — such as the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture’s Rural Housing Service — Congress generally seems willing to defer to the agencies to set policies, unless there is a crisis.

What about regulation? Surely that is more partisan? The answer is yes. But even if Republicans take back the House and Senate in 2023, Biden is likely to veto any legislation that rolls back the Consumer Financial Protection Bureau (CFPB) or other key provisions from the Dodd-Frank Act, which created many federal oversight rules that mortgage originators follow today.

The main point here is that when it comes to mortgage policy, the real action is not with Congress — it is with the federal agencies themselves. Since the Biden administration is only two years in, control of these critically important agencies will not change after this month’s election. And neither will their policies.

Marginal impact

So, do the midterm elections matter at all to mortgage lenders and servicers? The answer is yes, but only at the margins. If Republicans win the House and/or the Senate, they have the power to hold oversight hearings or insert riders in spending bills to try to pressure federal agency heads to modify their policies.

Case in point: Senate Republicans have criticized FHFA director Sandra Thompson’s equitable housing initiative. They argue that it exceeds the agency’s basic responsibilities to supervise Fannie Mae and Freddie Mac — and that it amounts to FHFA pursuing a policy agenda.

Same with the CFPB. Congressional Republicans have criticized CFPB director Rohit Chopra for what they claim are disproportionate enforcement activities; an unwarranted broadening of the authority to use unfair and deceptive acts or practices rulemaking; and an inappropriate intervention into market activities such as the levels of bank overdraft fees.

In these cases, if Republicans have the committee gavel, their criticisms will be front and center in congressional hearings. It is not unreasonable to conclude that this enhanced scrutiny could have some impact on how the heads of agencies conduct their business. At the same time, the fact that these are independent agencies means that their directors are legally free to run their agencies as they see fit until their term expires or they are removed by the president.

● ● ●

Let’s check back a year from now. Your world as a mortgage professional may be profoundly affected by a host of things, such as interest rates, housing prices and how the industry shakes out in what may be a difficult economic period. But you can be relatively confident that you won’t be saying the 2022 congressional election changed the way you do business in any meaningful way. ●

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Viewpoint: An Invisible Monopoly Isn’t Needed In the Mortgage Process

Scott Olson — Tue, 30 Aug 2022 19:43:12 +0000

Only a few decades ago, a mortgage application was a cumbersome and complicated process. Consumers copied and faxed in reams of documents, then waited weeks for a loan approval. The loan closing was an endurance test of signing documents that few people understood while hovering over them.

Today, the process is significantly streamlined. Personal financial input for mortgage applications is typically submitted electronically and is often instantaneous. Applications are usually approved in a fraction of the time and borrowers can close the loan from the comfort of their living room via e-signature.

A lot of the credit for this transformation goes to third-party fintech providers, which offer mortgage originators software packages and other services to take the lender and borrower through the loan application process — as well as optional software tools and apps to help them compete more effectively. Although consumers may not know their names or the role they play, these service providers are an invisible force that hovers over nearly every step in the application process.

Now, these nearly invisible service providers are in the headlines. Intercontinental Exchange (ICE) has offered $13 billion to buy its main competitor, Black Knight. In a formal letter dated this past June, the Community Home Lenders of America (CHLA) asked the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission to deny the merger, or to at least impose stringent conditions that protect mortgage lenders using these services from monopolistic, anti-competitive pricing. This is necessary to protect consumers from increased costs that would be passed along as an essential part of the loan process.

Why did CHLA take this action, when it acknowledges that these providers offer a valuable service? Consumers enjoy unprecedented competition among Realtors who offer their services to help them buy a home, as well as unprecedented competition among mortgage originators to help them finance it. But the same is increasingly untrue when it comes to mortgage application software service providers.

If the ICE-Black Knight merger is approved, the combined entity would control about 75% of the market for third-party software services among lenders that do not use a proprietary system. And the dominant market provider of software services for mortgage origination would be combined with the dominant software services provider for mortgage servicing. Add this to the fact that ICE already controls many other key areas of the financial system, including ownership of the New York Stock Exchange.

We already see glimpses of anti-consumer practices that could be unleashed with such a powerhouse service provider and quasi-monopoly pricing power. ICE charges “click fees” to each vendor that works with a mortgage lender — just to gain access to the lender’s own data. CFPB Director Rohit Chopra is calling out firms that charge what he characterizes as consumer “junk fees.” CHLA is suggesting that these vendor toll fees also are effectively junk fees and is asking the CFPB to reign them in.

Anecdotally, we also hear stories of tying add-on services to the core services essential to the mortgage origination process. These are services the lender may not want or need, but they may have no choice but to accept them in order to continue to use the loan origination services essential to processing mortgages.

Ultimately, CHLA’s main concern is that lenders would be most vulnerable when their contract for these services expires and must be renewed. Smaller mortgage lenders typically don’t have the resources to design their own proprietary software.

Theoretically, a lender could shift to a competitor, but this takes time. Even a short transition or changeover period to a new service provider could shut down mortgage closings, which would be costly and could permanently harm the lender’s reputation for reliable loan executions.

ICE claims the merger with Black Knight will streamline their operations, making it possible to reduce costs. Great, but there is no mechanism to ensure that these savings will be passed along to mortgage lenders. Instead, lender vulnerability to a loss of these critical services at renewal time means that they will probably have no option except to accept a significant price increase, if one is imposed at renewal time. And with their market dominance, ICE/Black Knight will probably be in a position to do so.

Competition has always been the primary market mechanism to ensure that consumers are protected on pricing, so CHLA continues to oppose this merger. But if the deal is approved, it is critical that stringent conditions be attached to it, to protect lenders and consumers alike.

First, mortgage lenders must be guaranteed a sufficient period of time to transition to a new service provider — e.g., ICE/Black Knight should be required to continue providing their services after contract expiration for six to 12 months, subject to a reasonable price cap, and must accommodate requests necessary to make the transition. They also should be required to allow five-year access to prior loan data developed on their watch, since record retention is required by regulators.

Second, ICE/Black Knight should be barred from ever owning or investing in a mortgage lender, or from receiving loan referral fees. Their access to voluminous data would give them an unfair and anti-competitive advantage, such as allowing them to target the borrowers best suited for a refinance.

Third, consumer data privacy should be paramount. The combined entity should be barred from selling or otherwise using the vast consumer data they collect while providing their services. Do we really want these providers to cull data and identify borrowers with the highest percentages of non-mortgage debt, then sell this list to payday lenders?

CHLA members appreciate and want to embrace Black Knight and ICE for the great work they do in helping to efficiently process and service mortgages. In return, all they want is a competitive market for these services, along with common-sense protections from anti-competitive practices for lenders and consumers alike. That is why we have chosen to shine a light on this critical issue.

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Viewpoint: This Voice Needs to Be Heard in the Halls of Power

Scott Olson — Thu, 30 Sep 2021 16:44:10 +0000

Small and midsized mortgage originators and servicers need their issues to be heard and understood in Washington, D.C. The influential players in D.C. — the big banks, the mortgage insurers and even the large independent mortgage banks (IMBs) — are more than adequately represented.

The largest mortgage players have political action committees designed to buy influence along with a horde of lobbyists — and all too often benefit from a revolving door between top federal mortgage positions and the major market players. Smaller financial players, particularly IMBs, need to have a measure of influence and advocacy. Otherwise, what should be a level playing field could become tilted.

Political influence

For example, the Dodd-Frank Act of 2010 established the Consumer Financial Protection Bureau (CFPB). Congress exempted 97% of banks from CFPB supervision and enforcement but made even the tiniest IMB subject to agency oversight (while also being accountable to every state an IMB does business in for compliance with both federal and state consumer-protection rules).

Similarly, in 2008, Congress beefed up mortgage originator licensing requirements by imposing a raft of new rules for IMB loan originators. These include the need to pass an independent background check and a rigorous Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act qualifications test, as well as the completion of 20 hours of prelicensing courses and eight hours of continuing education each year.

Loan originators at banks were exempted from each of these requirements. As a result, the same folks responsible for the Wells Fargo accounts scandal are able to market their institution’s mortgage products through employees that don’t have to pass even the most basic mortgage qualifications test. In fact, even if a bank originator previously failed the SAFE Act test, they don’t have to disclose this fact to their clients.

Through lobbying efforts on behalf of smaller IMBs, former Rep. Spencer Bachus, R-Ala., who drafted the SAFE Act, introduced a transitional-licensing amendment in 2013 that ultimately became law. The amendment allows originators who move from a bank to a nondepository institution, or nonbank, to continue working while obtaining their license.

Before the amendment, IMBs faced an uphill battle to recruit mortgage originators at banks because no one wanted to lose earning power while they took prelicensing courses and the SAFE Act test. Transitional licensing addressed this problem.

The bigger imperative is SAFE Act parity — and the solution is simple. Dodd-Frank requires that all loan originators must be qualified. So, the CFPB can and should require all bank-based loan originators to pass the test and an independent background check, and to complete the annual continuing education requirements. With bank opposition, it will take a broad-based effort in the nation’s capital to get this pro-consumer policy adopted.

Critical advocacy

Sometimes the fault lines are not drawn between banks and nonbanks but between larger lenders and smaller lenders. Here, concerted efforts by a coalition of smaller lending groups has had a real impact in the fight for guarantee-fee parity and equitable access to loans through the government-sponsored enterprises (GSEs). Issuers of mortgage-backed securities charge these “g-fees” to lenders for the creation, servicing and reporting of a security.

In the era prior to the housing crisis and Great Recession, Fannie Mae and Freddie Mac gave pricing discounts to large, risky lenders — including Countrywide and Washington Mutual. Previous directors of the Federal Housing Finance Agency (FHFA) pursued a policy of g-fee parity, making the fees being charged the same regardless of the size of the financial institution. Efforts by small-lender trade groups supported the U.S. Department of the Treasury’s proposal to make this permanent as part of changes to the GSEs’ Preferred Stock Purchase Agreement, which became a reality in January of this year.

Several years ago, the largest U.S. banks waged a campaign to get Congress to grant new GSE charters to vertically integrated megabanks, so that they could use their dominance in secondary markets to gain an unfair advantage in primary mortgage markets. Nationwide small-lender groups vigorously opposed this effort in testimony before the Senate banking committee in 2017, which was pivotal in killing this anti-consumer effort.

Similar fault lines exist in loan servicing. Whether it is Ginnie Mae, the GSEs or the Conference of State Bank Supervisors (CSBS), it is the largest servicers that pose the vast majority of financial and systemic risk. Therefore, these agencies’ financial and supervision requirements should reflect this fact. Smaller servicers need to vigorously make this case to regulators when proposals are floated.

Another critical advocacy priority is to defend federal-agency mortgage programs, which are essential for IMBs. That’s why IMBs took the lead in 2015 by lobbying Congress for a 50-basis point cut to annual mortgage insurance premiums through the Federal Housing Administration (FHA). Ultimately, this proposal was adopted, and it proved to be a boon for affordability and for FHA’s finances.

The same is true with the GSEs. A number of banks and real estate investment trusts would like nothing more than to shrink Fannie Mae and Freddie Mac. IMBs need to explain the critical role these federal-agency mortgage programs play, and push back against proposals that seek to shrink the FHA or the GSEs. These proposals are rooted in a flawed kind of “Field of Dreams” argument, whereby the Wall Street banks that abandoned mortgage lending over the past decade will magically step in to fill an access-to-credit gap caused by the shrinking of agency loan originations.

Vital role

Lastly, a disturbing trend in recent years has been the campaign — pushed by think tanks like the Brookings Institution and silently backed by market competitors — to spread the myth that IMBs are the next major financial risk to face the nation. The risk is small and is likely overstated.

The simple truth is that IMBs have a great story to tell. These companies have witnessed phenomenal growth over the past decade. Many banks exited mortgage markets, reduced their lending activities or used credit overlays, shifting their emphasis to the cross-selling of other lucrative products to well-heeled clients. IMBs picked up the slack by facilitating access to mortgage credit — particularly for minorities, underserved borrowers and first-time homebuyers.

The IMB market share of FHA loans rose from 57% to 90% between 2010 and 2020 while IMB issuance of Ginnie Mae securities skyrocketed from 12% to 87%, according to a report from the Community Home Lenders Association (CHLA). Housing organizations such as the Urban Institute and the Greenlining Institute have documented, through a myriad of statistics, the fact that IMBs do a better job of mortgage lending to minorities, to underserved borrowers, and to borrowers with lower FICO scores or higher loan-to-value ratios.

Smaller banks have their own national association — the Independent Community Bankers of America — that educates federal officials about smaller banks and advocates for their interests. IMBs should have one, too. That’s why CHLA was formed.

The IMB model works well for consumers by offering more mortgage choices, more focus on underserved borrowers and more personalized service. This model needs a strong defense in Washington, D.C., to make sure consumers continue to have the benefits that IMBs provide. ●

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Post-Election Bounce

Scott Olson — Mon, 31 Aug 2020 18:34:13 +0000

This November, Americans will go to the polls to elect a president, choose a new House of Representatives and determine which party will control the Senate. For those who make a living in the mortgage and housing industries, how much does it matter who wins?

It’s sad to say, but with the exception of 2008 when a housing crisis was front and center, presidential candidates generally treat housing as a secondor even third-tier issue. They’ll release position papers but not talk much about the issue.

Even so, whether Donald Trump or Joe Biden wins the presidency, and whether Republicans or Democrats control the Senate, could have profound implications for the mortgage market and the way mortgage professionals do business. Mortgage originators should pay close attention to what’s at stake.

Whether Donald Trump or Joe Biden wins the presidency, and whether Republicans or Democrats control the Senate, could have profound implications for the mortgage market.

CFPB administration

A recent Supreme Court case, Seila Law vs. Consumer Financial Protection Bureau (CFPB), greenlighted the presidential right to fire the CFPB director at will (i.e., without cause). In a potential irony, a lawsuit motivated by a goal of allowing Trump to fire Democratic appointee Richard Cordray now has the effect of potentially paving the way for a Democrat to fire Republican appointee Kathy Kraninger if Biden were to be elected.

It is clear that the first two CFPB directors have had a significantly different approach to regulation, probably best illustrated by the tens of billions of dollars of industry fines that Cordray imposed. So, whoever wins the presidency could have a big impact on CFPB regulation.

Here is where it gets complicated. If Biden wins, he could fire the current director, but whether he can install his own nominee through Senate confirmation depends on which party controls the Senate. The other variable is the type of person whom Biden might nominate and what their priorities might be, including whether to emphasize the imposition of fines.

Notably, regardless of who is in charge, it looks like the much criticized practice of regulation by enforcement is out. Mortgage lender PHH Corp. was fined $109 million due to the CFPB’s interpretation of the anti-kickback provisions of the Real Estate Settlement Procedures Act. The fine was tossed when an appeals court ruled that the bureau violated the company’s right to due process and also found that the bureau was subject to a three-year statute of limitations in prosecuting violations. The Supreme Court ruling allowed that decision to stand.

GSE patch

CFPB director Kraninger seems determined to move expeditiously in finalizing the agency’s proposed rule to eliminate the 43% debt-to-income threshold for a qualified mortgage (QM). The CFPB’s proposal would change the fees for a QM by capping the annual percentage rate at 199 basis points over the average prime offer rate, and it would eliminate the patch for QM loans through the government-sponsored enterprise (GSEs).

If Biden is elected, it is possible that a new director whom he installs may want to revisit this rule, since it moves away from a metric that measures a consumer’s ability to repay. This potential change has raised concerns among some consumer and industry groups.

It seems unlikely that a new CFPB director would move immediately to change a rule recently put in place by their predecessor. If a new Democratic-nominated CFPB director was installed next year, he or she would likely monitor the types of loans made under the new rules to assess the impact on consumers, and only then propose changes if and when they conclude changes are needed.

Ending conservatorship

Although the CFPB case does not explicitly apply to the Federal Housing Finance Agency (FHFA), the two agencies have similar legal structures and the Supreme Court has announced it will consider the issue of the FHFA’s constitutionality. This raises the possibility that FHFA director Mark Calabria could be replaced if Biden is elected.

Therefore, one immediate reaction to the Supreme Court’s CFPB ruling is that it could jeopardize the course set to quickly move forward on taking Fannie Mae and Freddie Mac out of government conservatorship. Commentators have continuously speculated about the likely course of GSE reform in the 12 years since Fannie and Freddie went into conservatorship. The issues and possibilities are exceedingly complex and unpredictable.

Calabria’s determination to end the inertia of inaction and conclude the conservatorship has started a process that can be slowed down but seems difficult to derail. It also is not clear that a new Democratic president would replace him.

GSE reform does not easily fall along partisan lines, so a different director may not chart a materially different course. A Democratic appointee would be likely to modulate some on specific issues, such as dialing back on proposed capital levels for the GSEs or more emphasis on access to credit through FHFA regulation.

Mortgage credit

Both parties are committed to mortgage access to credit. But they tend to have a somewhat different emphasis for achieving that.

Republicans are generally concerned that federal agency loans, including those made by the GSEs and the Federal Housing Administration (FHA), are crowding out private-sector mortgages. They generally support actions such as making the QM rule which aims to make sure the borrower can repay a loan — more flexible. This would encourage private loans while making sure FHA and GSE loans are not unfairly priced to undercut private sector loans. Democrats tend to be more focused on maintaining a strong FHA and GSE presence, particularly for lower credit-quality borrowers.

In practice, the partisan differences on these issues are arguably not that deep. A case in point is the FHA. In general, both the Obama and Trump administrations have steered a middle course that balances the goals of maintaining an FHA presence in mortgage markets while protecting taxpayers by building up FHA’s net worth and guarding against risky lending. Housing legislation

The question of which party controls Congress should be important to the mortgage and housing industries. Increasingly, however, it does not seem to matter that much, except when there is a housing crisis as in 2008.

The simple reality is that divided government — which often is the case — is not suited to decisive legislative action on housing. One is hard pressed to name a single piece of housing legislation in the past five years.

Moreover, even when one party controls both the White House and Congress, the Senate filibuster empowers the minority party and makes it difficult to pass substantive bills. There is increasing pressure, however, to end the Senate filibuster. If either party takes control of the White House and both houses of Congress, and if that party ends the filibuster, watch out.

The result would likely be much more decisive action on issues affecting the housing industry. It also could create a potential whiplash effect if power swings back at a later date and the successor party tries to reverse course.

Coronavirus response

Finally, will the election mean anything for the federal response to the coronavirus pandemic? Hopefully, by next January, things will be largely under control, and there is unlikely to be significant housing-policy changes related to COVID-19 at that time.

COVID-19 and the impending election are arguably playing a huge role upon federal policies that impact the mortgage and housing markets. The threat of economic implosion resulting from shelter-in-place restrictions and other virus-related impacts has driven the Federal Reserve to act aggressively in keeping interest rates low — which is helping to maintain historically low mortgage rates and steady our housing markets.

The upcoming election also is driving congressional spending and other actions regarding the coronavirus. Both parties are jockeying to gain an electoral advantage by spearheading various initiatives.

For the Democrats, the House-approved HEROES Act provides significant funding to states and municipalities. Senate Republicans have prioritized liability protections so that businesses can reopen. Look for last-minute negotiations and drama as a potential final coronavirus-related stimulus bill is developed, and for both parties to struggle to reinforce the messaging they plan to take into the election. ●

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Underwriting Predictability Is the Elephant in the Room

Scott Olson — Mon, 04 Nov 2019 20:46:14 +0000

In the aftermath of the 2008 housing crisis, Congress imposed consumer protection rules on mortgage loan originators that made the underwriting process more complicated and riskier. Financial problems with government and agency mortgage purchasers also resulted in extra scrutiny of the secondary market and an uptick in indemnification and repurchase actions. Finally, the Consumer Financial Protection Bureau (CFPB) added exam costs and enforcement risks to the mix.

In this environment, it became important for mortgage underwriters to have clear guidance and, whenever possible, the certainty that if they followed the rules, their companies would not be subjected to unreasonable indemnification, repurchase requests or CFPB enforcement actions. There has been notable progress on many of these fronts in the past few years, but some issues still remain.

It is true that new rules, regulations and procedures introduced to the mortgage process in an effort to fix issues that led to the housing crisis have brought increased costs and processing time plus uncertainty around the underwriting process. Recent initiatives such as Fannie Mae’s Day 1 Certainty and the loan-review system introduced by the Federal Housing Administration (FHA) have the potential to bring more predictability to the process.

Issues still remain, however, such as uncertainty around enforcement of CFPB consumer-protection rules and regulations and issues with lawsuits brought under the False Claims Act. These problems don’t just impact lenders and underwriters, either. Mortgage originators who have their loans held up, rejected or repurchased also feel the squeeze. These issues affect the entire industry.

Liability relief

One success from the issues that arose out of the housing crisis is the increased use of technology in the mortgage process. Day 1 Certainty is a recent effort by Fannie Mae to provide relief to lenders and mortgage companies from future representations and warranties liability with regard to key loan-data components of the mortgage origination process. The program provides income, employment and asset validation through Fannie’s automated underwriting systems to reduce repurchase risk due to issues with data quality.

Fannie rolled out Day 1 Certainty initially as a pilot program to several lenders with income validation. By the end of 2016, employment and assets validation also became available. Today, Fannie Mae’s Day 1 Certainty is available to any lender who is willing to opt in.

A benefit of this approach is to reduce risk and create speed, simplicity and overall certainty in the mortgage process. By allowing lenders to use electronic data — instead of collecting income documentation like pay stubs, W2s and bank or investment statements — it is possible to create a better loan and a better borrower experience.

Day 1 Certainty has reps and warranties relief for appraised values as well. With the use of the Fannie Mae Collateral Underwriter (CU) tool, appraisals with a CU risk score of 2.5 or less have the appraised value represented and warranted. Less time is spent on these appraisals, so more time can be spent on higher-risk appraisals that have a CU score of 2.6 or higher.

Lenders and mortgage companies are dipping their toes into Day 1 Certainty slowly.

In addition, with the Property Inspection Waiver reflected in the Desktop Underwriter (DU) findings on refinance transactions, borrowers are not required to pay or wait for an appraisal, which simplifies the process and lowers the cost. Lenders also receive representation and warranty relief on the property value entered on the application, condition and marketability.

Unfortunately, lenders and mortgage companies are dipping their toes into Day 1 Certainty slowly so far. One reason may be that it has taken a lot of effort for those companies that have signed up. The successful integration of loan origination systems (LOSs) with Fannie Mae and the validation services that provide income and employment verification are integral to success.

Changing the mindsets of originators about getting documentation validated rather than collecting documentation also can be a challenge. Plus, it is critical to test and re-test (and re-test) the LOS integration before rolling it out to the entire company.

Reportedly, however, for those making it work, Day 1 Certainty yields strong results — both in terms of reduced repurchase liabilities and a streamlined underwriting processing. At a minimum, it is a good option for a mortgage company’s underwriters to have available.

Transparency and clarity

In response to concerns about lack of transparency and clear standards regarding underwriting violations, the FHA rolled out its defect “taxonomy.” The taxonomy is an effort to provide a transparent and more objective identification of types of underwriting defects and their sources, causes and severities. Problems are separated by categories between minor faults and more serious defects that have indemnification consequences.

Serious problems include fraud or misrepresentation, statutory violations, significant eligibility or insurability issues and inability to determine or support loan approval — listed as Tier 1 issues — as well as material errors that impact loan approval and any failures to comply with FHA policy (the Tier 2 issues). Tiers 3 and 4 include lower-level problems, such as minor errors or issues, failure to comply with guidelines by a small degree and other minor errors that would still result in the loan being approvable.

The taxonomy was part of a broader FHA effort to provide lenders with more assurance that if they comply with the important and material FHA underwriting requirements, they will not be second- guessed for minor technical violations. A critical component of this is FHA’s implementation last year of its “Loan Review System.”

One concern still facing lenders and mortgage companies has been a perceived lack of guidance on what the CFPB expects.

Lenders have generally been pleased with the system. The most positive part is that it provides a formal appeal process to rebut allegations of lender error, which can be taken all the way to Washington, if necessary. In the past, it could be difficult for lenders to escalate findings to the FHA headquarters for review.

Unfortunately, a major cause of lender apprehension regarding FHA has not been caused by FHA, but by actions brought by the Department of Justice under the False Claims Act, which has been used to impose significant fines, generally on larger FHA lenders. This issue is commonly cited by banks as a major factor in their decision to reduce FHA loan originations or impose credit overlays.

There are some signs of potential change on the horizon, however. Ben Carson, secretary of the U.S. Department of Housing and Urban Development, appears supportive of changes to the False Claims Act. In addition, Brian Montgomery, the nominee for FHA commissioner, has said the FHA should treat lenders more like “partners than adversaries.”

Balanced enforcement

One concern still facing lenders and mortgage companies has been a perceived lack of guidance on what the CFPB expects from them with regard to specific rules. The TRID consumer-disclosure rules, for example, initially contained issues such as the so-called “Black Hole” — a potential timing conflict with disclosures that could leave lenders liable despite following the rules — and a lack of a formal safe-harbor transitional period for compliance.

The change in administration has brought a change in regulatory focus, however. Notably, Mick Mulvaney, new CFPB acting director, took a different approach last December when rolling out the new data requirements for the Home Mortgage Disclosure Act, putting in place a full-year safe harbor and seeking comments on the new requirements.

The risk of CFPB enforcement action is of particular concern for smaller independent mortgage bankers, or IMBs, which do not have the same financial resources to spread compliance costs over larger loan volumes or absorb large fines. Moreover, smaller IMBs often have not had as much interaction with the CFPB — in contrast to their state regulators, which they more regularly interact with. This often makes it more difficult for IMBs to understand the CFPB’s thinking on compliance issues.

This is especially true when it comes to what is often referred to as the CFPB’s “enforcement first” policy, where it imposes fines and enforcement actions without first giving lenders or financial institutions a chance to correct the issue. In contrast, bank and credit union regulators generally work with the entities they regulate, identifying concerns and giving them a chance to correct the problem. The goal should be working with lenders to get them to comply with rules, not just punishing infractions with fines.

A broader question is whether or not smaller IMBs should even be subject to CFPB exams or enforcement in the first place. IMBs are subject to CFPB supervision as well as exam and enforcement regulation by the states in which they originate or service loans. The Treasury Department pointed out this dual-compliance burden last year. This past March, Mulvaney also emphasized that the CFPB should defer more to primary regulators (banking regulators or state regulators). With the administration’s emphasis on deregulation, it is possible this issue could be resolved in the near future.

• • •

Mortgage lenders should have a reasonable expectation that there is predictability and certainty when they do the loan underwriting job well. Mortgage professionals should keep in mind — and mortgage programs should reflect — the importance of this reliability and predictability. Fortunately, strides have been made recently, but more can be done. Ultimately, it is borrowers, as well as loan originators, who benefit when this loan predictability becomes a reality.

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