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.