California Passes Homeowner Bill of Rights, Increases Liability for Servicers

By Kate Berry

JUL 3, 2012 7:38am ET

California lawmakers passed a package of foreclosure prevention bills Monday that will slow foreclosures, impose stricter rules on mortgage servicers and potentially raise the cost of getting a home loan in the most populous state.

The Homeowner Bill of Rights, sponsored by California Attorney General Kamala Harris, expands some of the requirements of the national mortgage settlement to all mortgage servicers in the state.

The state assembly approved the legislation by a 53-25 vote, and the Senate approved it by a 25-13 vote.

The legislation allows California homeowners to sue servicers to stop foreclosures under certain conditions or to seek monetary damages if the lenders intentionally or recklessly violate state law. Some lenders said the liability provision would lead to more lawsuits against servicers and force bank’s mortgage lending arms to raise borrowing costs.

The cornerstone of the legislation mirrored provisions of the national settlement earlier this year between federal regulators and the five largest servicers, including Ally Financial (ALLY), Bank of America (BAC), Citigroup (NYSE: C), JPMorgan Chase (JPM) and Wells Fargo (WFC).

The Foreclosure Reduction Act prohibits mortgage servicers from foreclosing on borrowers while they are pursuing loan modifications, a practice known as “dual-tracking.” The Due Process Rights Act requires a “single point of contact” for borrowers eligible for loan modifications. It also for the first time imposes civil penalties for “robo-signing,” the practice of signing foreclosure documents without verifying their accuracy.

The California Bankers Association opposed the legislation because it would encourage “frivolous litigation,” says Beth Mills, a spokeswoman for the trade group. She said the law also lacked clear language stating that there is no right to a loan modification. It also remains unclear how many times a borrower can request a loan mod.

But consumer advocates said the legislation will institute sensible reforms of banks’ foreclosure practices.

“This legislation finally brings some accountability to the banks for harmful foreclosure practices,” says Kevin Stein, associate director of the California Reinvestment Coalition. “Homeowners will now be able to protect themselves from the commonplace violations that banks have exhibited in this foreclosure crisis.”

Mortgage lenders and servicers say the law essentially turns California into a judicial foreclosure state, making it more difficult for banks to recover the underlying collateral in a property. There also is concern that borrowing costs would rise if Fannie Mae and Freddie Mac roll out different guarantee fees for judicial and non-judicial states.

Matt Ostrander, chief executive of Parkside Lending LLC, a San Francisco mortgage lender, described the situation as, “If someone came to you and said: “Hey, I have two borrowers that want to borrow $100. The first one gets to default and not pay you back for 3 to 5 years, and the other must pay you back within one year if they default. What do you want to charge each one for your hard-earned money?”

Christopher Thornberg, an economist at Beacon Economics, says the law will increase losses incurred by mortgage servicers when they have to foreclose.

“The evidence screams that this will do more harm than good by delaying foreclosures,” says Thornberg. “The law has all the wonderful warm fuzzies on the surface that politicians like even if it makes no economic sense whatsoever.”

Thornberg wrote in a report that there is no evidence to suggest that longer foreclosure timelines produce higher numbers of loan modifications or fewer delinquent borrowers moving into foreclosure. He argues that the large number of foreclosures in California is not attributable to misconduct by mortgage servicers but rather to “individuals who borrowed more than they could afford,” including those who took cash out of their home when they refinanced.

Only a few years ago, loose lending standards helped create a frenzy of buying activity in the state. The median price of a single-family home in California hit a peak of $519,714 in early 2007, up 84% from the first quarter of 2003, according to San Diego data provider DataQuick.

The law takes effect Jan. 1. Other bills still advancing through the state legislature include provisions to reduce blight, protect tenants in foreclosed properties, strengthen law enforcement response to mortgage fraud and allow the use of a statewide grand jury to prosecute complex, multi-jurisdictional fraud and crimes.

Sorry, SunTrust, MBA’s Stevens to Remain at Trade Group

By Kate Berry

JUL 2, 2012 9:30am ET

In a last-minute reversal, David H. Stevens, the president and chief executive of the Mortgage Bankers Association, will remain at the trade group rather than departing to run SunTrust Mortgage, as he announced plans to do a month ago.

It will be his last job change for the immediate future; Stevens, 55, has signed a long-term incentive package to lead the MBA for the next five years. Details of his compensation were not disclosed.

Stevens’ change of heart is as much a surprise as was his decision a year ago to join the MBA, leaving his job as commissioner of the Federal Housing Administration and assistant secretary for housing at the Department of Housing and Urban Development.

In an interview Sunday afternoon, Stevens said he was persuaded to remain in his current role last week, during an annual MBA chairman’s conference in Palm Beach, Fla.

“There was an overwhelming response from MBA members, large and small, and for what it’s worth, people were excited about the progress the MBA has made in the past year,” Stevens says. “I never would have made the decision to go to SunTrust had I expected this response, and I never expected the negotiations, as it were, to occur a couple of days before I was planning to leave. I underestimated what the impact was.”

Stevens was slated to take over SunTrust’s mortgage operations on July 16. He says MBA members first raised the possibility of his remaining on June 25, and negotiations continued over the next few days. Once he had decided to remain in his current post, he says he quickly informed senior executives at SunTrust Bank (STI), including CEO Jerome T. Lienhard, who was also at the MBA conference.

Lienhard “saw the pressure, and people came up and talked to him about it,” Stevens says. “Obviously they [Suntrust executives] weren’t pleased and I knew it would disrupt the excitement and changes going on there, and at the end of the day I made the call.”

Representatives for SunTrust did not return email and phone messages on Sunday.

SunTrust’s mortgage operations are still struggling with credit quality issues and repurchase requests, and the Atlanta bank has been trying to reshape the business. Last month, it appointed Peter E. Mahoney as executive vice president of mortgage strategy and Jack Wixted as executive vice president and chief risk officer.

Stevens said last month that he was attracted to SunTrust because it has “been able to take a look at both the legacy issues, which every bank is dealing with, and separate that from how they do the business on a go-forward basis.”

As an MBA member, the bank will continue to rely on Stevens and his trade group for representation. He admitted Sunday that the reversal was a surprise even to him, but said he had “the right to change his mind.”

Stevens, an articulate and knowledgeable spokesman for the mortgage industry, has been instrumental in adding new MBA members, including real estate investment trusts and lenders that had left the group years before. He also helped energize the trade group, which lost members during the mortgage meltdown and saw its reputation suffer in the aftermath, and helped frame the debate about upcoming regulations by focusing on consumer access to credit rather than the lending industry’s desire to loosen standards so its members could make more loans.

“The importance and significance of MBA’s voice during this critical time, coupled with Dave’s experience and talents, encouraged us to do all we could to retain him,” Michael Young, the MBA’s chairman, said in a press release scheduled to be published on Monday morning.

Stevens has raised eyebrows before with his career choices. He had been viewed as a driving force at HUD, which oversees the FHA, and was an advisor to the White House on housing policies before he jumped ship to join the mortgage industry trade group a year ago.

A series in American Banker last year examined emails suggesting Stevens maintained cozy ties to banks while leading the federal agency.

Stevens says his value to the MBA comes from what he calls his ability to understand and promote the mortgage business to outsiders, “and not have to read from crib notes.” He says that mortgage lenders convinced him that those skills were increasingly hard to find, and important to the industry during a period of major reforms.

“When I decided to go to SunTrust, I never expected the reaction I got,” Stevens says. “And it helped me realize there is a unique set of skills that requires maneuvering inside Washington, and for better or for worse I’ve developed unique skills that others haven’t. That recognition was thrust upon me. This isn’t just about one company, this is about the whole industry, and the fact that the industry felt I play such a unique role in that is flattering, and I can’t let them down.”

FHA rescinds strict credit restrictions Critics said mortgage policy tilted the scales too heavily in favor of creditors

June 29, 2012 11:00AM By Kenneth R. Harney

In a policy switch that could be important to thousands of applicants seeking low-down-payment home mortgages, the Federal Housing Administration has rescinded tough new credit restrictions that had been scheduled to take effect July 1.

The policy change would have affected borrowers who have one or more collections or disputed-bill accounts on their national credit bureau files, where the aggregate amounts were $1,000 or greater. Some mortgage industry experts estimate that if the now-rescinded rules had gone into effect, as many as one in three FHA loan applicants would have had difficulty being approved.

Under the withdrawn plan, borrowers with collections or disputed unpaid bills would have been required to “resolve” them before their loan could be closed, either by paying them off in full or by arranging a schedule of repayments. In effect, if you couldn’t resolve the outstanding credit issue, you might not be able to obtain FHA financing. The rescinded policy would have replaced more lenient rules allowing loan officers to discuss the accounts with applicants, and determine whether they represented material risks that the borrower might fail to make the mortgage payments.

Disputed bills are commonplace in many consumers’ files, but may not indicate serious credit risk. Rather, they might simply be a disagreement between merchant and customer over price, quality of the product or the terms of the credit arrangement. Open collection accounts are also common but tend to be viewed more ominously by lenders since they often indicate nonpayment over an extended period. Unpaid creditors frequently charge off unpaid accounts, then sell the files to collection agencies who pursue the customer and report nonpayments to the national credit bureaus – Equifax, Experian and TransUnion.

Critics of the policy complained that it tilted the scales too heavily in favor of creditors and disproportionately harmed FHA’s traditional core borrowers – low- to moderate-income families, first-time buyers and minority groups. Other critics argued that the policy would not help FHA weed out serious credit risks since private lenders already are doing so by imposing their own credit score and other restrictions on applicants, known as “overlays” in the mortgage industry.

Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif., noted in an interview that although FHA accepts FICO credit scores as low as 580 – FICO scores run from 300 to 850 with lower numbers portending higher risks of default – many large lenders require 640 scores or higher. Why? Because they are super-cautious in the post-bust marketplace and don’t want to be required by FHA to “buy back” a mortgage that had a marginal FICO score at application, then went to foreclosure.

As it is, FHA’s recent average scores are far higher than historical norms. According to an analysis by Ellie Mae LLC, a company that tracks conventional and FHA loan originations, the average FICO score for an FHA-approved loan to purchase a house in May was 713. Though down slightly from March, when average FICOs for purchases hit 724, according to Ellie Mae, both scores suggest a strong trend toward financing applicants who have relatively fewer issues in their credit files. This contrasts with the agency’s long-standing tradition of helping “low to moderate wage earners and the underserved” – often minorities – to buy homes, says Ziroli. During much of the last decade, FHA routinely financed borrowers with credit scores in the low to mid 600s.

Deputy Assistant Secretary Charles Coulter says the FHA’s ongoing interest in re-evaluating its credit policies – such as the rescinded collections and disputes rule – is “to find a balanced yet flexible approach to promote access to affordable credit while protecting the mortgage insurance fund.” FHA plans to issue a new rule “soon,” agency sources said, that addresses collection accounts and disputes separately rather than lumping them into a single standard. Meanwhile if you plan to apply for an FHA loan and you think you have collections or disputes on file, here’s the good news: You won’t be forced to pay off or resolve the accounts before closing, but you are likely to have your application referred for “manual” underwriting, where a loan officer takes a hard look at the facts and circumstances of your collections or disputed accounts. This, in turn, will almost certainly slow down your approval. There are exceptions, according to the agency, such as when the disputed account is both less than $500 and more than 24 months old.

But beware lenders’ overlay practices. They may get you turned down even if FHA’s more generous rules say you are acceptable.

CFPB Finalizes Its Own Confidentiality Rule as Legislative Effort Stalls

By Joe Adler JUN 28, 2012 5:24pm ET

WASHINGTON – Although banks are still seeking a bill that would protect privileged information they give the Consumer Financial Protection Bureau, the agency finalized its own rule Thursday meant to assure institutions of confidentiality.

The rule, which is unchanged from a March proposal, states that a financial institution’s transfer of privileged information to the CFPB does not damage the confidential nature of that material. It also protects the confidentiality of that information if the bureau shares it with another federal or state agency.

“We are committed to safeguarding the confidential information of the institutions we supervise to ensure the bureau is best equipped to do its job and protect consumers,” CFPB Director Richard Cordray said in a press release. “This new rule supports the free flow of information that is essential to an effective supervision program.”

Yet the industry may not be satisfied with just a regulation by the new agency.

The bureau has said the Dodd-Frank Act gives the CFPB enough authority to ensure confidential treatment of banks’ information obtained through the supervisory process. Yet banks and attorneys worry that authority has limits. Typically, information given to a third party loses attorney-client privilege, and prior legislation formally exempted the other bank regulators from that rule. But Dodd-Frank did not expressly include the CFPB in that exemption.

The CFPB has lent support to pending legislation that would afford it the same formal exemption as other agencies. Yet it reiterated in the final rule that its own authority is sufficient.

“Although the bureau has expressed support for legislation codifying the bureau’s view that the submission of privileged information to the bureau does not result in a waiver” of attorney-client privilege “the bureau does not believe such legislation is necessary,” the rule said.

The legislation has strong bipartisan support, but has been held up by Sen. Bob Corker, R-Tenn., among other senators, who is hoping for passage of a larger bill that would make several technical changes to Dodd-Frank.

GAO Report Raises Concerns About Appraisals

By Kevin Wack JUN 28, 2012 2:43pm ET

WASHINGTON – A new government study raises tough questions about both the growing role of appraisal management companies in the mortgage market as well as the government’s oversight of the appraisal industry.

In a report released Thursday, the Government Accountability Office was critical of the federal arm that is responsible for overseeing state regulation of appraisers. That arm, known as the Appraisal Subcommittee of the Federal Financial Institutions Examination Council, has yet to fulfill certain duties it was given under the two-year-old Dodd-Frank Act, according to the report.

The study, which was released in connection with a House hearing on the appraisal industry, also expressed concern that the appraisal management companies, known as AMCs, have hurt the quality of appraisals.

“Some industry participants voiced concerns that some AMCs may prioritize low costs and speed over quality and competence,” the GAO stated.

The rise of appraisal management companies can be traced back to housing bubble-era concerns about inflated appraisals and conflicts of interest with lenders. The firms have taken greater market share following the enactment of an industry of code of conduct that was developed by New York officials.

Concerns about the negative impact of the management companies were echoed by both lawmakers and industry participants during a Thursday hearing of the House housing subcommittee.

Rep. Gary Miller, R-Calif., said that the companies are often sending appraisers to properties where they have little knowledge of the local real-estate market.

“You’re getting them in areas sometimes they don’t have expertise,” Miller said.

Karen Mann, a California appraiser who was testifying on behalf of the American Society of Appraisers, said that the management firms are squeezing margins for appraisers.

“The problem is that the experienced appraisers don’t prefer to work with the AMCs because the fees are so low,” she said.

Don Kelly, executive director of the Real Estate Valuation Advocacy Association, a trade group for the appraisal management companies, defended the industry’s role in reforming the appraisal industry.

“Importantly, by acting as the sole point of contact between the lender and appraiser, AMCs insulate the individual appraiser from any influence or coercion by the lender,” Kelly said in written testimony.

The GAO report also blamed federal banking regulators, including the Consumer Financial Protection Bureau, for failing so far to establish minimum standards for appraisal management companies to be used by the states, which are responsible for registering the firms.

“Setting minimum standards that address key functions AMCs perform on behalf of lenders could provide greater assurance of the quality of the appraisals that AMCs provide,” the report stated.