HUD's response to my question

Well, I got a response from HUD, but it wasn't the most helpful thing in the world. It looks like they haven't thought about, and don't intend to think about, the way their new rules interact with the existing rules of other federal agencies like the VA. This is unfortunate since these interactions are critical to the way things actually work in the real wold. Of course, the problem may be that the people making the rules don't actually work in the "real world" of mortgage finance.

Here is the exact quote in answer to my questions from my last post:

"It is recommended that you discuss the VA guidelines with their office, HUD cannot interpret regulations promulgated by another federal agency."

It's very frustrating when you have two federal agencies making rules that are in direct conflict with one another and that somehow both have to be applied in the same transaction. I wonder if I should take this question to VA... or will they just respond that they don't interpret HUD's regulations?

VA Loans under the New RESPA

If you've heard anything about the new RESPA rules going into effect in January 1, 2010, you've undoubtedly heard that there are issues. One issue that jumps out at me is the handling of the VA non-allowable closing costs. I was all over HUD's RESPA site and VA's website and could find no answers, so I wrote an e-mail to HUD's RESPA questions address. Since I know I'm not the only one with this question I'll be sure to post any reply I get as well. Here's what I wrote to HUD:

I'm wondering how to handle "non-allowable" borrower fees like the ones in a VA loan. Certain fees, such as underwriting, processing, and the buyers part of the escrow fee for example, are "non-allowable" borrower fees in a VA loan. Traditionally these are paid by the seller in a purchase and paid with rebate pricing by the lender in a refinance.

First, on a purchase do we still disclose those fees even though the borrower cannot by law pay them? The FAQs say we should include the owners title policy in the GFE even though the seller traditionally pays that, so is it the same with the non-allowable fees? Is there a way to show seller paid closing costs on the new GFE at all?

Second, on a refinance those non-allowable fees are typically paid by the broker/lender using SRP or rebate pricing because there is no seller to pay them and the borrower is not allowed to pay them. Since any rebate must now go directly to the borrower that option is no longer available. Consider the fact that VA limits the origination fee to 1% of the loan amount and the fact that VA non-allowable fees are usually between $1,000 and $1,300. If the loan amount is anywhere near $130,000 the originator would be doing the loan for nothing, which is obviously not going to happen. If I'm reading the new rules correctly, VA refinances will be a thing of the past as of January 1st.

Since I'm sure your intent was not to deprive veterans of the opportunity to refinance or purchase a home, I'm assuming there is some exception or workaround that I'm not aware of. For VA loans the new GFE is unclear and leaves the originator in a position where they may end up covering those non-allowable fees, which is not a risk I think any of us are willing to take.

Thank you in advance for your response.

RESPA Reform effective January 1, 2010

Here are highlights of the new RESPA rules:

Standardized Good Faith Estimate form that all lenders must use. You can view the new three page GFE at http://www.hud.gov/content/releases/goodfaithestimate.pdf. It will be worthwhile for you to familiarize yourself with this form since it is what all everyone will be using.

This new form groups fees into subtotals rather than itemizing each one. The idea is that buyers can compare the total of the fees rather than adding up the various individual fees and trying to determine which ones vary from lender to lender.

New HUD-1 Settlement Statement corresponds to the GFE allowing buyers to easily compare the quoted fees to the actual fees at closing.

Certain fees, including all lender fees, can not change (0% tolerance) once they are quoted unless there is a change in circumstances (loan amount, down payment, etc.) or a change requested by the borrower (loan term, etc.). Even in these cases, only the charges directly affected by the new circumstance can change.

Even third party fees that are required by the lender, like title and escrow, must be accurately disclosed to within a 10% tolerance. Ideally these tolerances will finally put an end to the “bait and switch” tactics employed by some lenders.

The new GFE also makes the loan terms very clear right on the first page. It includes “yes or no” checkboxes for things like variable rates or payments, negative amortization, balloon payments, and prepayment penalties.

We've been creating regulations like this for almost as long as lending has been around, and so far they still haven't come up with a way to keep dishonest lenders from cheating unsuspecting borrowers. I don't have much confidence that they've finally figured it out now either. These new rules certainly aren't perfect and certainly won't prevent all predatory and dishonest lending practices, but they are the reality we have to deal with for now.

For more information you can go to the 51 page FAQ section of HUD’s website at http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf

A Vast Anit-Consumer Conspiracy

Today another new disclosure law goes into effect. This one is called the Mortgage Disclosure Improvement Act, or MDIA, and it really doesn't add much except additional time to the process. You must wait so many days after each set of disclosures to move on to the next step such as ordering the appraisal, signing loan docs, and so on. The MDIA doesn't actually improve the disclosures as the name would suggest, it just adds some waiting periods to the disclosures we already have.

This new regulation got me thinking about the sheer number of disclosures that are required in any loan package. I won't go into all the details, but I can assure you that anything that anyone thinks is important will show up on multiple forms and that every minute detail is covered ad-nauseum on densly packed legal size forms. The stack of papers that a borrower must sign at escrow typically exceeds one inch in thickness.

I'm sure that each form, taken by itself, has some value. I can see how the rulemakers, who are perhaps too isolated from the real world, might think that each one is vitally important. However, the actual effect of all these required disclosures is that borrowers aren't reading any of them. They are simply overwhelmed by the sheer volume of paper and most just sign and hope.

With a good loan officer that's fine. However, if anyone wanted to slip something in or change loan terms without anyone noticing, what better opportunity than to bury it under mounds of meaningless paperwork? I begin to wonder if it could all be part of a vast anti-consumer conspiracy. Are all these forms part of an industry effort to make sure borrowers don't really know what they're getting and what they're paying? Could they be intentionally overwhelming and confusing borrowers while making it look like consumer protection?

When you think about the money some of the largest banks in the country made by selling loans to borrowers who didn't understand them, you can see where my suspicions come from. I can't count the number of homeowners, especially older folks, I've talked to who are just now realizing what the "Payment Option Arm" they were sold really is. They were the wrong borrwer for that loan, they never understood it, and now they're upside-down in their homes with payments about to skyrocket. These loans were sold over the phone by big banks like Countrywide, and the scary details were hidden in the reams of paper the borrowers were asked to sign.

The greatest service we could do for consumers is to junk all the forms and start over. With just a note, a trust deed, and a few choice disclosures to sign, borrowers would actually have a chance to understand what they're getting. If the documents were easy to understand, most of the exotic loans with negative amortization, balloon payments, etc. would never have been done. Of course, our legislators and the big banks who own them probably realized this long ago. . .

It's HVCC Day

Today is the day that the Home Valuation Code of Conduct goes into effect. This is the set of rules designed to keep fraudulent lenders and appraisers from conspiring to inflate appraisals. The actual effect is more likely going to be to harm the real estate market and consumers.

The main change is that loan officers can no longer order appraisals or communicate with appraisers. For mortgage brokers this means that the wholesale lender will order the appraisals through an Appraisal Management Company, or AMC. These AMCs have been around for some time and can be useful for lenders who do business out of their local area. You can simply contact one of these AMCs and let them find the appraiser.

Unfortunately, the result is often an inferior appraisal with an inflated fee. The reason is that these AMCs are taking a cut out of the appraisal fee, so it costs the consumer more than it would if ordered directly and the appraiser is paid less than they otherwise would. Up until now appraisers would only accept AMC work if they weren't busy with local lenders. Why do the same work for less money? So basically if the lenders who know you don't want to hire you, you take work for less money from people who don't know you. Not exactly a recipe for selecting the best appraisers.

Even now with the HVCC in place, a small bank exception will still allow good appraisers to do work for local lenders for higher fees than the AMCs pay. So who's left doing these appraisals ordered anonymously through AMCs? Are they any good? Will they be done on time? In my experience, the answer is too often "no."

Another problem is that these appraisals will be ordered by the lenders, not the brokers. This is fine if everything goes smoothly, but sometimes for one reason or another a loan needs to be moved. There is a procedure for this, but it remains to be seen how cooperative lenders will be and how much extra this will cost the borrower.

By far the biggest issue with the HVCC is that it simply won't work. Large lenders like Countrywide and Wells Fargo are simply using AMCs that they own and control. These AMCs in turn have increased influence over appraisers because of the market share they control. The HVCC was clearly written by people too far removed from the real world of real estate to understand what they were doing.

People determined to commit fraud will always find a way no matter how many new rules pop up. Things like the HVCC only make it more difficult for the honest people. The only way to fix the problems that exist in the real estate/mortgage market is to aggressively pursue and weed out the bad actors one at a time.

Save Oregon's 1031 Exchange

This week in Salem the 1031 Exchange tax deferral is coming under fire. The 1031 Exchange is a way for investors to defer paying capital gains tax on the sale of an investment property when they use the proceeds to buy another "like property."

The 1031 Exchange is not a true waiver of the tax like the one you get when you sell your owner occupied home. The taxes are simply deferred until you finally cash the property in when you sell and keep the money. This deferment essentially pushes investors toward buying more real estate whenever they sell.

The ability to sell one property to buy another is obviously something we don't want to inhibit in economic times like these. I understand that the state is hard up for cash and looking for ways to increase revenue, but anything that hurts the already reeling real estate market is a huge mistake.

If you're reading this you at least have some interest in the real estate market, so I probably don't have to work too hard to convince you that this is a bad idea. What is needed is for you to contact your representatives and make sure they understand what a bad idea it is. There is a hearing on Tuesday, March 10th at 8:00 in Hearing Room A for any of you who can make it. Tell your representatives to vote no on House Bill 2696.

Financial Stability Plan Details

The details of Obama's Financial Stability Plan are officially out, but there are still unanswered questions. The official website is up with the specifics of the two plans, one for high loan-to-value refinances for good borrowers and the other providing modifications for borrowers in danger of losing their homes.

The basic idea is to first find out if you are eligible by following the steps on the website, next call your loan servicer, and then be patient. The servicers are no doubt being inundated with more requests than they have the ability to deal with.

You'll need patience since it sounds like even the refinancing part of the plan is to be run through the servicers. Typically servicing loans, i.e. opening envelopes and posting payments, is a completely separate operation from originating loans, i.e. evaluating income, assets, credit and appraisals. Many lenders specialize in one or the other function while a few of the big ones do both.

Those large lenders who do both are going to be overwhelmed with applications, and it wouldn't surprise me to see refinances taking two or three months to complete. Interest rates are low right now, but they're also volatile. Hopefully borrowers won't start the process with rates in the 4%s and end up in the high 5%s because it takes so long. A much more efficient way to do these refinances would be to offer this program through all Fannie/Freddie lenders and let the existing force of loan officers and underwriters close the loans.

The other thing that is still not clear in all this is the pricing. Politicians who are far removed from the real world can say things like "market rate" without really understanding what that means. In today's mortgage market there is no such thing as a single rate on any given day. Most important is the fact that rates are partially based on loan-to-value, and there is no pricing for a 105% loan. In fact, the rate often gets better just over 80% LTV because the presence of mortgage insurance decreases the risk to the lender. Will there be MI on these refinances? We still don't know, and these are the details that determine whether the program will be a success.

On the modification side, the only question I still have is how to get the investors to go along. One thing that will help is the passage in congress of the mortgage bill allowing bankruptcy judges to modify loans. Hopefully it won't come to that, but having that "stick" to go along with the financial "carrot" already announced should help motivate lenders to play ball.

The difficulty is knowing who really owns these loans after they've been converted, shuffled and repackaged. A recent Time Magazine article gives a great glimpse into the complexities of mortgage bonds and CDOs. Anyone wanting to understand the challenges to loan modification and how a relatively small number of foreclosures can wreak so much havoc in the financial world should take a moment to read this story.

Even with the poor performance of modifications to date, with as many as 59% already being back in default, it still remains the best option we have for troubled mortgages. This new plan's success rate should be better since it includes debt-to-income guidelines that should work for most families. People who really can't afford their mortgage at any interest rate will not be able to modify. Even if the success rate is the same, stopping 41% of the foreclosures is a lot better than doing nothing and should have a positive effect on the housing market.

The New Mortgage Fraud

Unfortunately mortgage fraud has not fizzled out along with the real estate market. It's just changed. The new mortgage fraud preys upon desperate homeowners threatened with foreclosure, and these tough economic times are creating plenty of potential victims.

The Foreclosure Rescue Scam is probably the most common and one that I have fielded many calls about. These companies offer to help negotiate with your lender to avoid foreclosure and modify the terms of your loan. First of all, there's nothing that even a reputable firm can do that a persistent homeowner can't do themselves. You're better off calling yourself to negotiate a modification. The real problem, however, is that the scammers will collect money up front and then do little or no work. Homeowners end up still facing foreclosure and out hundreds or even thousands of dollars.

The Mortgage Elimination Scam is another popular one today. In this scenario the scammer prepares paperwork that appears to eliminate the mortgage. There is, of course, a fee for this service and, of course, it doesn't actually work since the only way to eliminate your mortgage is to pay it off. The homeowner stops making payments and by the time they receive notice that they're in default the scammer is long gone.

The Equity Theft scam is essentially a version of the foreclosure rescue scam. To avoid foreclosure homeowners are convinced to execute a quitclaim deed transferring the property to the scammer for very little money. The scammer promises to rent the home back to the homeowner with the option to buy it back down the road. Of course, these promises are never in writing and the scammer proceeds to evict the former owner and sell the property. This one only works if the owner has significant equity.

The newest scams involve the Federal Stimulus Bill and other mortgage relief legislation. Basically these are the same basic scams, but by invoking the legislation or government agencies we've all been hearing about on the news they lend themselves instant credibility.

Scam artists will continue to come up with newer and more clever ways to commit mortgage fraud as long as there's money to be made. However, there are some basic guidelines that should keep most homeowners out of trouble. The oldest piece of advice on the topic is still the best, "If something seems too good to be true, it probably is." If you keep this one concept firmly in mind, you will be very difficult to take advantage of.

The other big one is to be wary of anyone who requires payment up front. Also avoid anyone who wants to rush you into things and won't allow time for you to check it out. Another common red flag is being told not to contact family, friends, attorneys, financial advisers, etc. Desperate people make the easiest victims, so take a step back to be sure you understand everything. When in doubt, take the time to check with the Better Business Bureau or the State Attorney General's office.

New Reverse Mortgage Limit

As part of the recently passed Economic Stimulus Bill, the loan limits on Reverse Mortgages have been raised to $625,500. The previous limit was $417,000 based on the Fannie Mae/Freddie Mac conforming loan limit. The new limit is set at 150% of the Fannie/Freddie limit, so it will adjust with the conforming loan limit.

This is a huge jump for us here in Josephine County where the limit has gone from about $271,050 to $417,000 and finally to $625,500 in a matter of months.

What this means is that seniors can access more of the equity in their homes. In our area it seems that many of the most expensive homes are owned by retirees, and the previous loan limits represented a small fraction of those values. Now more people can get a reverse mortgage large enough to pay off their existing loans and maybe even leave them with some extra cash.

While this improvement won't do much for the housing market, the extra cash it frees up for seniors could translate into much needed consumer spending in the larger economy. Also, a reverse mortgage can be a great tool for avoiding foreclosure, and the higher limit makes that option available to more people.

Obama's New Mortgage Plan

Yesterday President Obama unveiled his new Homeowner Affordability and Stability Plan. Giving money to the banks to encourage lending has been a complete failure, so this new plan aims to help individual homeowners instead. Helping homeowners will, in turn, help the banks and the overall economy. That is, of course, if it works.

This plan has two main parts. The first is designed to allow homeowners to refinance at today's low rates even if they've lost much of their equity to declining home values. The other is aimed at struggling homeowners and involves modifying loans and subsidizing payments to bring them in line with the borrower's income.

To me the first part is the most exciting as previous efforts at modifying loans have not been very successful. According to one report 58% of loans that were modified are right back in default within six months. Maybe with government subsidies the modifications will be significant enough to really make a difference.

In fact, the goal seems to be to bring the housing payment down to 31% of the borrower's income, which sounds like a good target. Hopefully they will also look at the total debt-to-income ration and not just the house payment. If another 31% of income is going out to car loans and credit cards then you're up to a 62% debt-to-income ratio, which is not sustainable. Unfortunately the people who buy more house than they can afford are often the same ones who overindulge in other credit as well. These are the details that we haven't heard yet and that will determine whether or not this part of the plan is effective.

Many important details are yet to be announced on the first part of the plan as well. They say it will allow people to refinance even if they owe more than 80% of the value of their home. We can already do that right now. The only issue is that you pay Private Mortgage Insurance (PMI) if you borrow more than 80%, and that can often make the refinance less attractive. So will this plan remove the requirement for PMI on high loan-to-value loans? What would the rate be on a mortgage that is 105% of the value of the home? What kind of income, assets and credit would be required? Who will process and underwrite these loans?

Details aside I think it's the right approach. People who's only mistake was buying at the wrong time deserve the help at least as much as those trying to hang on to a house they probably shouldn't have bought in the first place. Also, allowing 4-5 million homeowners to lower their house payments is a great stimulus for the economy. A refi to a lower rate will save the average family a lot more than any tax cut, and all that money will be available to go back into the economy right away.

The basics of the plan and it's goals are great: help struggling homeowners avoid foreclosure, help responsible homeowners impacted by sagging home values, and stimulate the economy at the same time. Hopefully the details and execution of the plan allow it to live up to it's potential.

Finally, Regulation that Makes Sense

I've never liked the argument between more regulation and less regulation. Neither of those is the answer. What we need is better regulation that actually addresses the problem without bogging down the industry. I've written plenty about new regulations I don't like, but now I've found one that really seems to make sense.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, announced the new rules last week. Starting in January of 2010 individual mortgages will include loan-level identifiers on the lender, loan officer and appraiser who were involved. This means that we will be able to track the performance of individual loan officers and appraisers. Loan officers and appraisers with high default rates or incidents of fraud will be easily identified.

This computerized information will make it possible to finally weed out the bad actors in the industry. All the education requirements and additional forms in the world won't improve the industry or protect consumers nearly as much as simply getting rid of those individuals. People who want to commit fraud will find a way around most regulations, but if they're doing bad loans this system will catch them.

Of course, the real test is going to be what is done with the information. We can't simply compile information and do nothing with it. It is critical that the information gathering be accompanied by strong enforcement actions. Lenders and appraisers are licensed professionals, and the bad ones need to have those licenses revoked.

This new regulation won't single-handedly fix the mortgage industry, but at least it will give us the tools to go after the root of the problem.

Where's My Bailout?

For months we've been seeing bailouts for companies and individuals who made bad investments. The financial institutions get $750 billion, AIG gets $85 billion, the automakers get some, and homeowners threatened with foreclosure get their loans modified with lower rates and even lower principal balances.

Through it all the biggest objection has been from people who made sound decisisions. Why should my neighbor who got in over his head get his balance reduced while I still have to pay back what I borrowed? Plus, it's generally the people who aren't in trouble who end up paying the taxes that fund the bailouts. Doesn't seem fair, does it?

To all those who have made sound decisions and paid their bills on time, here's your bailout... Fixed rate mortgages are in the mid to high 4% range. I'll leave it to the advertisers to gush about how rare and wonderful a sub 5% mortgage is, but the point is here is a benefit reserved solely for you, the fiscally responsible.

I thought that we'd see first time homebuyers coming out of the woodwork when rates fell below 5%, but we haven't. It also hasn't helped the people who are in over their heads and need some relief. In fact, only people with good credit and equity are able to take advantage.

I've been shocked at the ratio of refinances to purchases, and I'm not the only one. Everyone from the big wholesale lenders to small local banks to real estate appraisers tell the same story. It's been all refinances and almost exclusively for strong borrowers.

So if you've only borrowed what you could afford, paid your bills on time and resent footing the bill for the mistakes of others, here's your bailout!

The Next Threat to the Housing Market

It's beginning to look like unemployment may be the next big threat to the housing market. Today's numbers were, once again, not good. 524,000 people lost their jobs in December for a total of 2.6 million in 2008. People without jobs can't buy houses, and people who fear losing their jobs don't buy much either.

The headlines say this is the worst since World War II, but that's a bit of an over-dramatization. It is true that this is the largest annual job loss since 1945 when 2.75 million people lost their jobs. However, in a growing country you can't just compare numbers like that without adjusting for the size of the workforce. The US population was less than half what it is now, so 2.75 million was a lot more back then.

The scary detail in these numbers is that 1.9 million of the 2.6 million total were lost in the last four months of the year. The job losses will likely get worse before they get better, and it could be a while if we're only four months into it.

Unemployment is really more of an indirect threat to our local real estate market. We don't have any good jobs to lose in Grants Pass. The people moving here, however, have to sell their old homes to someone, and that someone usually needs a job to afford that house. Great rates and low prices are all very nice, but they won't be enough to fix the market without jobs.

New Appraisal Rules

On December 23rd the final Home Valuation Code of Conduct was released. The HVCC is a new set of rules designed to prevent undue influence on appraisers by lenders, mortgage brokers and realtors. While inflated appraisals may or may not be a significant problem (see my earlier post), these rules are definitely not the solution.

The most significant change is that virtually all appraisals will have to be ordered through Appraisal Management Companies, or AMCs. These AMCs are essentially middlemen who take orders from lenders and assign them out to appraisers. This firewall is seen as a way to prevent appraisers from feeling pressure to hit a specific value.

Of course this assumes that lenders are bad and the AMCs are above reproach. The irony of the situation is best expressed in an article by Dave Biggers, "This massive push toward AMCs is all the more surprising given that the original lawsuit by the Attorney General was filed against eAppraiseIT, an AMC, accusing it of inflating appraisals to satisfy Washington Mutual's demands."

Even if we assume that appraisers were inflating values in response to pressure from their clients, this solution takes us in the complete wrong direction. If an appraiser is pressured by a loan officer, the worst that can happen is that they'll lose that person's business. Is one client really worth risking your license over?

Once all the appraisals are ordered by a small handful of national AMCs that becomes a whole different question. Can any appraiser afford to piss off Landsafe, LSI, or eAppraiseIT when they become the Wal-Marts of appraisal ordering? The potential for abuse is much higher in a world where there are only a few large clients ordering all the appraisals.

Scapegoating the Appraisers

We've been looking for someone to blame for the crash of the real estate market since the beginning. Maybe it was the homeowners borrowing more than they could afford. Maybe it was the subprime lenders selling those adjustable rate loans. Maybe it was the big investment bankers with their insatiable appetite for exotic mortgages. Or maybe it was the appraisers for inflating the values and allowing people to borrow more than their houses are worth.

I've heard this argument, that appraisers are to blame for people owing more than their house is worth, even from "respectable" news sources like Bloomberg. This is just ridiculous. Certainly there are bad actors in any profession and those individuals should be rooted out, but that's not why people owe more than their homes are worth.

The real estate market is like any other market, like the stock market for example. My stocks are worth a lot less now than they were six months ago. Does that mean that they weren't really worth that much when I bought them? I don't think so. Values go up and down, the difference here is that people are highly leveraged in their homes. If you took out a 100% loan on your home a year ago you now owe more than the house is worth, period. It doesn't matter what it was worth back then, it's going to be lower now because values are down.

If we all borrowed money to buy stocks we'd be in the same situation because of the stock market collapse. As it is we lament the money we've lost in our retirement accounts, but nobody looks to blame someone else for having paid too much. We accept that this is the way markets work and hope it recovers soon. We all need to take a deep breath and realize that the same is true of the housing market. Or should we go after our stock brokers for allowing us to pay too much for shares we bought a year ago?

If you got the house you want and a payment you can afford, who cares what the value is now? Most people aren't in default because of the value. They're in default because they can't afford their payments. Of course if values were still going up many of those people could have bailed themselves out by selling, but that still wouldn't have made it a good idea to take that loan in the first place.

For the most part those "inflated appraisals" were simply a reflection of the inflated home prices at the peak of the market. In addition, inflated appraisals aren't even the big issue when it comes to mortgage fraud. According to Fannie Mae's Fraud Update on loans done in 2006 and 2007, inflated values account for a whopping 5% of all mortgage fraud. Compare that to 30% for misrepresented income and 26% for doctored up liabilities and you see that appraisers are not the root of the problem after all.

Obviously there are appraisers committing fraud for their own gain, and those individuals should be punished. Appraiser's are licensed, and the licenses of bad appraisers should be revoked. The unethical will always find a way around whatever new rules we throw at them. The best solution here is to spend some time finding and removing the bad ones instead of coming down on the whole industry.