Riding herd on appraisals

By Kenneth R. Harney

Aug 24, 2012

The Consumer Financial Protection Bureau wants you to see the full appraisal report on the house you’re buying or refinancing as early in the mortgage process as possible, and without your having to ask the lender for it.

This means all the “comparable” properties the appraiser selected, adjustments for property condition or location, plus all additional data – especially computer-generated estimates – that may have been used to arrive at the final value. It also means you would get to see who performed the appraisal and whether he or she is merely licensed in the state or carries a professional designation – letters such as “SRA” after the name indicating higher levels of training and experience. Plus it would give you an idea about whether the appraiser is locally based and thus knowledgeable about neighborhood sales and listing trends, or has traveled from another part of the state.

Information like this can be crucial in an environment where home sellers, buyers and realty agents routinely complain about botched appraisals that complicate or kill deals by coming in thousands of dollars below the contract price. In many cases, critics say, appraisers continue to inappropriately select distressed-sale comparables to value non-distressed transactions in areas where property values are now rising. In a May survey of its members, the National Association of Realtors found that 33 percent of agents reported problems connected with appraisals that endangered sales.

The consumer bureau also wants to open the door to disclosure of fee-splitting information that typically is kept hidden from you: How much of your $450 to $600 in appraisal charges at closing will go to the appraiser, and how much to an unseen appraisal “management company” that may be owned by or affiliated with your lender and is also getting a cut of the action?

In a proposal Aug. 16, the bureau said that under its plan, mortgage lenders would be required to provide copies of all written appraisals and other data used in the valuation “promptly after receiving them,” but in no event later than three business days prior to the closing. This would include the electronic “automated valuation models” (AVMs) widely used by lenders and management companies to supplement standard reports.

AVMs, which depend on public records rather than on-site observations, have been criticized by some appraisers and realty agents as being tools to keep appraised values below contract prices agreed upon by sellers and buyers in rebounding markets. Banks defend their use as safeguards against overvaluation and subsequent losses in the event of default.

Pat Turner, who has a “senior residential appraiser” (SRA) designation and is active in the Richmond, Va., area, has a different term for them: “interference” in the work of the local appraiser. He says appraisers often submit their reports to management companies only to hear back that an AVM has located alleged “comps” indicating the value should be below what the appraiser reported. In one recent appraisal assignment, said Turner in an interview, a bank’s management company told him to consider two lower-cost comparables identified by an AVM that would have significantly depressed the valuation he submitted. He refused, he said, because he knew the objective was simply to “push the value down” so that the bank could limit the loan amount.

The consumer bureau also has issued proposals for revisions to the current closing cost sheets used nationwide for real estate transactions. Among the changes: an option to include a breakout of the appraisal charges paid by borrowers. The first would be the amount the appraiser actually receives. The second line would be what the appraisal management company takes.

The fact that appraisal management companies are pocketing big chunks of the borrowers’ appraisal payments generally is unknown to most consumers. In some cases, the appraisal charge may be $500 and the appraiser is being paid $200 to $250 – much less than the traditional fee before the advent of management companies. Critics connect these low payments with the rising level of complaints about incompetent appraisals, often performed by newcomers to the field or less experienced individuals who agree to work for less.

The consumer agency’s proposals won’t be finalized for months, but in the meantime you as a consumer can ask: Where are my hundreds of dollars going? To the appraiser? Or into the coffers of my lender? If it’s the latter, what’s the justification for the extra charge? The answers could be troubling.

Senate Refi Bill Bogged Down By Battle Over GSEs, Housing Issues

By Kevin Wack

AUG 21, 2012 5:13pm ET

WASHINGTON – Democratic legislation that would allow more Americans to refinance their mortgages has stalled in the Senate amid a partisan dispute over whether to allow votes on other housing measures.

The procedural stalemate appears likely to deny President Obama a victory on one of his top economic agenda items for 2012 – which, some Democrats argue, is precisely what Republicans want.

The parties are at odds over a bill sponsored by Democratic Sens. Robert Menendez of New Jersey and Barbara Boxer of California that would make refinancing easier for millions of homeowners with Fannie Mae and Freddie Mac mortgages.

At a May hearing on the legislation, Republican Sen. Bob Corker of Tennessee raised a number of specific concerns about the refinancing bill, but he also expressed openness to supporting the measure if those issues were addressed.

In the nearly three months since then, negotiations between the Democratic-led Senate Banking Committee, chaired by Sen. Tim Johnson of South Dakota, and the committee’s top Republican, Sen. Richard Shelby of Alabama, have failed to yield tangible progress.

The negotiations have not faltered as a result of any specific Republican objections to the refinancing bill, according to sources. Rather, Shelby has been seeking an agreement by committee Democrats to allow votes on amendments to the bill on other housing policy issues.

Specifically, Republicans have expressed interest in securing votes on amendments that would address the reform of Fannie Mae and Freddie Mac, as well as reform of the Federal Housing Administration, according to sources. Another potential amendment that Republicans have raised in the talks would provide lenders a legal safe harbor if they meet the terms of a so-called “qualified mortgage,” a term that must be defined soon by the Consumer Financial Protection Bureau.

In the view of one Democratic Senate aide, Republicans have been trying to load up the Menendez-Boxer bill with extraneous amendments that go beyond the scope of the refinancing measure, some of which could doom the bill’s chances for passage.

A safe harbor amendment, which would draw opposition from consumer groups, is seen as particularly problematic for Senate Democrats, because it could peel off Democratic support for the refinancing legislation.

The aide said that Democrats have been making a sincere effort to work with Republicans on the bill, but that they believe Republicans want to deny the president a policy victory prior to the election.

“If they’re trying to stick a poison pill on it, that doesn’t do anyone any good,” this aide said.

But William Duhnke, the Banking Committee’s Republican staff director, said that his side is not going to enter into an agreement on behalf of committee GOP members that limits their ability to offer amendments to the refinancing bill.

“We’re willing to say, ‘Keep it to housing-related things,’” Duhnke said. “But apparently that’s a bridge too far for them when it comes to this particular bill.”

A senior Senate Democratic aide said that the Banking Committee has frequently limited amendments to the underlying legislation, and the measures Republicans want to consider are “outside the scope” of the refinancing bill.

“When we did our transit bill, there were only transit amendments,” the senior aide said. “When we did flood insurance, there were only flood insurance amendments.”

The Menendez-Boxer measure is not the only refinancing bill under consideration by the Banking Committee, but it is seen as the measure that is most likely to get 60 votes in the Senate.

Democrats control 53 seats in the chamber, but with Senate bills routinely requiring 60 votes for passage, they would need at least seven Republican votes to pass a refinancing bill.

A broader refinancing measure – also backed by President Obama and sponsored by Democratic Sen. Dianne Feinstein of California – is seen as less likely to attract Republican support because it would require the federal government to increase its exposure to the mortgage market.

The Menendez-Boxer bill would not require the government to assume more mortgage risk because it would only affect mortgages that are already backed by Fannie and Freddie.

The measure has drawn support from the housing industry, though the Federal Housing Finance Agency has raised certain concerns about it.

Facing a stalemate with Republicans, Senate Democrats are not without options. They could bring the bill straight to the floor of the Senate.

But without an agreement between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell over which amendments will get votes, Democrats would face similar issues to those they face at the committee levels.

Even if the bill does pass the Senate, it appears unlikely to advance in the Republican-controlled House of Representatives. All along, the Democratic strategy has been to pass a Senate bill, and then to pressure the House to follow suit. With the clock ticking on the legislative year, what once appeared to be a long shot now looks like a Hail Mary.

President Obama refocused attention on the refinancing legislation at a White House news conference Tuesday, but even he seemed resigned to its likely demise.

“I would love to say that when Congress comes back – they’ve got a week or 10 days before they go out and start campaigning again – that we’re going to see a flurry of action. I can’t guarantee that,” Obama said.

With Congress unlikely to act, one Democratic senator is pressuring the Obama Administration to take unilateral action to help more homeowners refinance.

Sen. Jeff Merkley, D-Ore., argues that already appropriated housing funds could be used to launch pilot programs that would allow the government to buy underwater mortgages and provide a government-backed refinancing, though questions have been raised about the legal authority for such programs.

“The current gridlock in the Senate Banking Committee over refinancing legislation further underscores the need for the administration to use the tools and authorities it currently has to expand refinancing opportunities for Americans underwater on their homes,” a Merkley spokesman said.

CFPB Scraps Flat-Fee Mortgage Proposal

By Kate Berry

AUG 17, 2012 5:08pm ET

In a surprising reversal, the Consumer Financial Protection Bureau proposed rules on Friday that will allow lenders to continue offering discount points and fees rather than a flat fee when originating home loans.

The agency departed from its original proposal in May, which met stiff resistance from mortgage brokers and loan officers, largely because the CFPB found a benefit to some consumers who want to retain the option of paying discount points to “buy down” or reduce their interest rate.

The proposed rules, which are mandated by the Dodd-Frank Act, would still require that lenders offer a no-point, no-fee loan product as an option so consumers can compare various combinations of points, fees and interest rates. Lenders also would be required to reduce interest rates when customers pay discount points or fees.

“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray said in a press release. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”

Even though the Dodd-Frank Act specifically prohibits the payment of upfront points and fees for most mortgages, the CFPB dropped the controversial requirement of only allowing a flat origination fee after it heard from a panel of consumer experts.

“They backed off and we commend them for that,” says Rod Alba, vice president and senior regulatory counsel at the American Bankers Association. “They listened to industry, consumers and the.panel, which said going forth with a flat fee would have limited consumer choice and would have affected borrowers with smaller loan amounts.”

The CFPB also is proposing changes to existing rules governing mortgage loan originators’ qualifications, though it fell short of imposing state licensing requirements on banks and thrifts. Instead the proposal would provide qualification standards to loan originators that currently are not subject to state licensing requirements.

Now depositories and nonprofit lenders would have to determine that loan originators meet character and fitness standards and can pass criminal background checks. Banks also would have to provide training to loan originators.

“Knowing that every loan officer has passed the same qualifications is probably a good thing,” says David Stevens, head of the Mortgage Bankers Association. “Getting rules in place that eliminate bad actors is going to be really helpful.”

The CFPB said in a press release that the proposals “would help level the playing field for different types of loan originators.”

The rules also would build on a Federal Reserve rule that prohibits loan originators from directing consumers into higher-priced loans based not on the consumer’s interest but on the possibility that the loan officer or broker could earn more money. The CFPB’s proposed rules would also place restrictions on mandatory arbitration clauses in loan documents and prohibit increasing loan amounts to cover credit insurance premiums.

The agency plans to formally propose the rules this summer and finalize them by January 2013.

An alternative to credit scores

By KENNETH R. HARNEY Aug 17, 2012

Do you ever get the feeling that your credit score doesn’t adequately portray your true risk as an applicant for a home mortgage?

If your FICO score is a subpar 690 but you know that you are a solid candidate for a loan, do you think that lenders’ heavy dependence on credit scores is unfair to you as an individual?

You’ve got some company. Digital Risk, a mortgage analytics firm, is mounting an unusual frontal assault on one of the lending industry’s sacred cows. It argues that credit scores such as FICO failed to predict large numbers of defaults during the mortgage bust years – most notably thousands of “strategic” walkaways by borrowers with high scores – because they could not anticipate homeowners’ reactions to economic stress. Unless lenders use more sophisticated assessment tools that incorporate far more than credit histories, Digital Risk says, they may be misjudging not only many of today’s high-risk borrowers but other applicants who are safer bets than their credit scores suggest.

“The mortgage industry is relying on outdated methods to determine risk,” says Peter Kassabov, chairman and chief executive of Digital Risk, which is based in Maitland, Fla. “During the mortgage crisis, high-FICO borrowers encountering distress defaulted in huge numbers, yet we still depend heavily on that one score along with (down payments) to make lending and loan modification decisions.”

According to one study conducted in 2009, 588,000 homeowners walked away from their homes strategically during 2008 alone. This amounted to 18 percent of all serious defaults that year and shocked the mortgage industry. Fair Isaac, creator of the FICO score, acknowledged the problem, and last year released an “analytic tool” that lenders can use to detect potential strategic defaulters – high-scoring, credit-savvy borrowers primarily – before they stop paying.

Digital Risk, however, says strategic default is not the only weakness of traditional credit scores. The company describes itself as the “nation’s largest provider of mortgage risk, compliance and transaction management solutions,” and claims to have seven of the top 10 mortgage lenders as active clients. In early August it introduced a multidimensional risk evaluation system it calls “Veritas,” which it claims integrates borrower credit characteristics with property and local real estate market data along with proprietary behavioral prediction models. The behavioral component includes what the firm calls statistical “clusters” of borrower, property and market situations – 123 in all – that give lenders a better idea of how an applicant will react to financial problems, such as the next recession or housing downturn.

The system is based on analyses of more than 5 million loans originated between 2006 and 2011, plus a separate study of how 100,000 borrowers performed after having their loan terms modified, according to the company. Alex Santos, president and co-founder of Digital Risk, said in an interview that the models have been “validated” on large batches of clients’ loan files. Veritas separated out applicants destined to default in a future period of financial stress from those likely to keep paying on time, even when credit scores and other data were similar.

The value of this for mortgage applicants whose scores don’t meet today’s high requirements is significant. For example, according to Santos, two home buyers with identical 690 FICO scores and down payments might be rejected – Fannie Mae and Freddie Mac both have average FICOs in the 760 range. Yet using the Veritas system, one of them could be identified as a safe bet and the other a future disaster.

Fair Isaac isn’t taking critiques of its scoring lightly. Anthony Sprauve, a FICO spokesman, said, “We continually work with our customers to make sure the FICO score is the best predictor of a person’s likelihood to repay a debt. Our customers vote with their feet since, according to (research firm) Tower Group, lenders ask for FICO scores more than 90 percent of the time when buying scores from the big credit bureaus.”

Veritas is already being used by a small number of lenders, according to Santos, but as a newcomer to the mortgage risk-scoring marketplace it will take time to be validated and widely accepted – if ever. But the issue it raises is intriguing: Are there better technologies to evaluate loan applicants than scores based on credit histories?

The jury is out. But in the meantime, if you plan to buy or refinance, keep your FICO score as high as possible because FICO is still what your lender is going to check.

Ginnie Mae Mulls Raising Hurdles for Mortgage Issuers – And Fast

By Kate Berry

AUG 13, 2012 3:48pm ET

Don’t call us, we’ll call you.

That’s the feeling at Ginnie Mae, which is being bombarded by requests from small mortgage banks to become issuers of its mortgage-backed securities. Fewer large banks are willing to purchase their loans, so the mortgage banks are throwing themselves into the arms of Ginnie.

They have become spooked by the exit of Bank of America (BAC), Ally Financial (ALLY) and MetLife (MET) from correspondent lending. Wells Fargo (WFC) may have intensified their worries by refusing in July to fund mortgages through its wholesale channel from independent mortgage brokers.

But Ginnie officials are reluctant to take on more lenders, especially those who do not have the financial strength to share the risk of loan defaults. The agency is considering raising minimum net-worth requirements for its MBS issuers to thresh out weak applicants.

“We’re thinking long and hard about our minimum requirements right now,” says Gregory Keith, Ginnie’s senior vice president and chief risk officer. He found many applicants are ill-equipped for the role.

“We’re getting people with fairly low levels of capital, fairly low levels of sophistication and understanding of the program, and low levels of investments in technology,” Keith says. “Some new applicants think they’re ready for the NFL but they maybe need to stay in college for another year.”

The net-worth requirement should be raised to between $3.5 million and $5 million, says Joe Murin, vice chairman at the consulting firm Collingwood Group and a former Ginnie president. It is currently $2.5 million; it was $1 million in 2010.

“It’s well justified and they should go to $5 million, but they’ll probably jump to at least $3.5 million,” initially, Murin says. “They approved a lot of folks that just didn’t pan out, and now they have to rebuild a more diverse stable of issuers.”

Ginnie does not purchase mortgages but rather guarantees the timely payment of principal and interest on $1.3 trillion of outstanding securities.

The underlying loans are already insured by other agencies, predominantly the Federal Housing Administration, so investors do not have to worry about losing principal.

But Ginnie has to make sure that when borrowers fall behind on their mortgage payments, the servicer is still able to advance payments to bondholders until the loan is resolved. If a Ginnie loan goes delinquent for 90 days, the servicer may continue to make the bond payments or buy the delinquent loan out of an MBS pool.

At the end of June, 9% of FHA-backed loans were either 90 days or more past due or in the process of foreclosure, up from 8.9% in the first quarter and 7.8% a year earlier, according to the Mortgage Bankers Association.

Because it can take up to two years to process a foreclosure these days, servicers can be expected to advance principal and interest to bondholders for an extended period of time. Those advances can quickly add up, eating into a mortgage bank’s profits. A lack of cash to pay investors is the primary reason for servicer defaults.

“When you have a higher net worth, it means you have better financial systems and capabilities for reporting and compliance,” says Barb Cutillo, the chief financial officer at Stonegate Mortgage Corp., a Ginnie issuer. “When a government loan goes bad FHA insures that, but Ginnie has to ensure that companies can cover the principal and interest payments.”

Last year, Ginnie approved 35 new issuers out of 85 applicants. It currently has fewer than 300 issuers overall.

Some lenders have complained about the slow approval process, which can take 10 months to a year, largely because applicants usually fail to submit all the materials needed. Ginnie has hired a handful of employees to oversee the new issuers and to create more sophisticated models that track stresses to its portfolio like higher unemployment.

Part of the reason for the dearth of issuers is that many applicants do not have the ability to collect data, trade the bonds, deal with broker-dealers and report on a continuing basis a high level of detail about the bonds, Keith says.

Though most mortgage bankers do not service loans they originate, they are considering becoming servicers because of the higher prices paid by investors for the government guarantee for Ginnie securities.

“They do make a profit for taking on that additional risk,” says Joel Harrison, a director of business development at Banker’s Portfolio, LLC, an Irvine advisory firm.

Mortgage bankers want to pocket the higher spreads for Ginnie securities and often “treat their company like an ATM,” taking out a majority of income every year in dividends, Keith says.

When Ginnie’s current president, Ted Tozer, joined the agency in 2010, he spoke at many events about reducing the concentration of large banks. That was misinterpreted as an invitation to all comers.

Combined with the pullback by some of the largest banks, which can be attributed in part to Basel III capital rules, fear has become a contagion among small originators.

“Some of it is knee-jerk as lenders panic because of the exit of larger players,” Keith says. “We are very interested in the diversification of our issuer base, but it is diversification with the right kind of lenders.”