The Nation’s Housing Column: FHA may ease rules for mortgages on condos

By KENNETH R. HARNEY May 18, 2012

Thousands of condo unit owners and buyers around the country could soon be in line for some welcome news on mortgage financing: Though officials are mum on specifics, the Federal Housing Administration is readying changes to its controversial condominium rules that have rendered large numbers of units ineligible for low down-payment insured mortgages.

The revisions could remove at least some of the obstacles that have dissuaded condominium homeowner association boards from seeking FHA approvals or recertifications of their buildings for FHA loans during the past 18 months. Under the agency’s regulations, individual condo units in a building cannot be sold to buyers using FHA insured mortgages unless the property as a whole has been approved for financing.

According to condominium experts, realty agents, lenders and builders, FHA’s rules have become overly strict and have cut off unit buyers from their best source of low-cost mortgage money, thereby frustrating the real estate recovery that the Obama administration says it advocates.

Christopher L. Gardner, managing member of FHA Pros, LLC, a national consulting firm based in Northridge, Calif., that assists condo boards to obtain FHA approvals, said barely 25 percent of all condo projects that are potentially eligible for FHA financing are now approved. That is despite the fact, says Gardner, that FHA financing is the No. 1 mortgage choice for half of all condo buyers and is crucial to first-time and minority purchasers.

Moe Veissi, president of the National Association of Realtors and a broker in Miami, says FHA’s strict rules “have had an enormous impact on individuals” across the country, especially residents of condo projects who suddenly find they are unable to sell their units because their condo board has not sought or obtained approval from FHA as the result of objections to the agency’s strict criteria. This, in turn, depresses the prices unit owners can obtain and ultimately, said Veissi, harms their equity holdings and financial futures.

FHA officials defend their requirements as prudent and necessary to avoid insurance fund losses, but have expressed a willingness to reconsider some of the issues that have upset condo owners and the real estate industry. Among the biggest areas of criticism of FHA’s rules are its limitations on:

. Non-owner occupancy. The agency requires that no more than 50 percent of the units in a project or building be non-owner-occupied. This rule alone has made large numbers of condominiums in hard-hit markets ineligible for FHA financing, where investors have purchased units for cash to turn into rentals.

. Delinquent condo association fee payments. FHA refuses to approve a project where more than 15 percent of the units are 30 days or more behind on payments of condo fees to the association. Given the state of the economy, this has been a problem for thousands of associations, even in relatively prosperous markets. Steve Stamets, a loan officer with Apex Home Loans in Rockville, Md., says some unit sellers and buyers have been so frustrated by the rule that they have offered to pay the amount of delinquent fees needed to bring the overall project into compliance “just to get the deal done. This is a ridiculous situation,” said Stamets, who added: “When somebody calls up now and says they want to buy a condo with an FHA loan I cringe.”

. Non-residential space usage. FHA has set a cap of 25 percent of the total floor space in a project for commercial use. Critics say this is too low and unrealistic for condo projects in urban areas, where retail and office revenues can be important to overall financial feasibility.

The agency has imposed a long list of other requirements on insurance and reserves, plus a highly controversial rule that associations interpret as creating severe legal liabilities for condo board officers if applications for FHA approvals contain inaccuracies. Andrew Fortin, vice president for government and public affairs at Dallas-based Associa, one of the country’s largest homeowner association management firms, says that many boards, facing the prospect of up to 30 years in prison and heavy financial penalties, have refused to apply solely because of this personal liability requirement.

FHA is expected to clarify the personal liability language and make other modifications in its forthcoming rules. Whether the changes will be enough to convince condo boards to apply for approvals in large numbers is uncertain, but industry experts say they – and condo unit owners – are likely to welcome whatever loosening of the current restrictions FHA can offer.

CFPB Confidentiality Bill Runs into a One-Man Roadblock

By Kevin Wack

MAY 15, 2012 5:33pm ET

Despite strong bipartisan support, a bill that would provide banks greater assurance of confidentiality when they provide information to the Consumer Financial Protection Bureau remains mired in the Senate.

Exactly why is hard to unravel, but most industry representatives point to Sen. Bob Corker as the chief roadblock. The Tennessee Republican acknowledged in an interview this week that he is blocking the bill’s enactment even though he supports the idea behind the legislation.

“We understand that’s a problem in giving up confidential information, and we’d like to see a fix,” Corker said Tuesday.

According to Senate rules, a single senator can hold up legislation through a maneuver known as a hold, which required 60 votes and precious time on the Senate calendar to overcome.

Corker argued his delay wasn’t technically a “hold” but instead a desire to attach the bill to a larger package of technical fixes to the Dodd-Frank Act.

“I think it’d be too strong to say we have a hold on that right now,” Corker said. “We would like to see some other things – again that are technical in nature and have bipartisan support – fixed also.”

Both Corker and industry representatives said the Tennessee Republican is not the only lawmaker to hold up the measure, but he is believed to be the key obstacle.

Still, several industry observers worry that Corker’s gambit has the potential to derail what they see as a small but meaningful correction in federal law.

In addition to having near-unanimous support on Capitol Hill, the House-passed bill also has the endorsement of the CFPB.

The bill would address banks’ concern that under current law, if they share information that is subject to the attorney-client privilege with the CFPB, that action could later be construed by a court as a waiver of the privilege, which could result in the bank having to turn the information over to other parties in litigation.

The problem with Corker’s attempt to pass the measure as part of a package of fixes to Dodd-Frank, industry representatives say, is that there is no consensus in Congress about what constitutes a technical fix to the 2010 reform law.

Corker did suggest in Tuesday’s interview that he has not dug in his heels too deeply regarding the House-passed bill.

“We understand we may get to a point where there’s no other avenue but to let this go through,” he said.

In the meantime, a separate, broader legislative proposal has been circulating in the House Financial Services Committee.

This second legislative proposal, a copy of which was obtained by American Banker, would broaden the protections provided to financial institutions when they share privileged information with the CFPB.

The second bill would offer protection to financial institutions with regard to information they provide to the CFPB and the bureau in turn shares with a state regulator.

The proposal would appear to benefit non-bank lenders, such as mortgage brokers, which have reason to expect that the CFPB will be sharing examination information with their state regulators.

In a recent letter to the leaders of the House Financial Services Committee and the Senate Banking Committee, the American Financial Services Association, the National Association of Mortgage Brokers and other groups that represent non-bank lenders expressed support for broadening the language in the bill already passed by the House.

“Our goal is to provide parity among examined companies of all types,” the groups wrote, “and we do not seek to advantage any type of creditor.”

Within banking industry circles, reaction was split on whether the broader legislative language being circulated in the House is a positive development.

Christopher Willis, a lawyer at Ballard Spahr, said that the new legislative language would address a problem with the House-passed bill – that it leaves unresolved the status of documents that the CFPB shares with the states.

“I’ve referred to the legislation that’s come through the House as a partial fix,” he said.

But others cautioned that broadening the legislation is a risky move that could jeopardize the support of the CFPB and Democrats in Congress.

One former Hill staffer was critical of Corker in the context of the changes being contemplated in the House, saying: “I think it does show that the delay is going to have untold consequences, which is unfortunate for the core bill, which needs to be streamlined in order to get through the Senate.”

Other bank industry officials expressed greater patience with the Tennessee Republican.

“Sometimes a meal takes a little bit longer to cook than you anticipate,” said James Ballentine, executive vice president of congressional relations at the American Bankers Association, adding that he would like to get the bill passed before the end of the year. “Time is certainly slipping through our fingers quickly.”

Paul Merski, executive vice president and chief economist at the Independent Community Bankers of America, also declined to criticize Corker.

“I don’t have any concerns with a senator using his Senate powers to bring attention to his other concerns. That’s part of the Senate process,” Merski said. “It’s a very deliberative body.”

Why CFPB Must Share Oversight on Consumer Policy

By Joe Adler

MAY 14, 2012 7:23pm ET

WASHINGTON – The conventional wisdom is the federal agency born out of the crisis – the Consumer Financial Protection Bureau – is the last word on financial consumer regulatory policy, with other more established regulators playing a supporting role.

But a growing number of experts are putting more stock in the authority older agencies kept in the Dodd-Frank Act to enforce consumer rules at small banks they supervise, and see one policy in particular – the ban on “unfair, deceptive or abusive acts or practices” – where the prudential regulators could carry substantial weight.

“Even though it is clear today the CFPB is the leader on consumer rules, that doesn’t have to be the case for every aspect of consumer issues going forward,” said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick.

Dodd-Frank gave the CFPB vast authority to write rules for banks and nonbanks to comply with preexisting and new consumer statutes, as well as enforcement powers over larger institutions. But the bank regulators – Federal Deposit Insurance Corp., Federal Reserve Board and Office of the Comptroller of the Currency – kept authority to ensure their institutions under $10 billion in assets were in compliance with the statute and any implementing regulations.

That is still the rule of thumb under UDAAP. The law took rule-writing for the old “unfair or deceptive acts or practices” standard for banks away from the Fed – giving it to the CFPB – and also authorized the bureau to write rules around the new “abusive” standard. (The Federal Trade Commission retained rule-writing authority for certain nonfinancial companies.)

But absent a rule, some observers say, the prudential agencies have the ability to put the new standard to work if they see an institution under their watch committing an infraction.

If there is not a rule on the books, “there is an obligation for them to make sure their institutions are not violating the law,” said Michael Calhoun, president of the Center for Responsible Lending. “The CFPB has signaled that certainly in the short run they’re not going to come out with a wide range of specified unfair, deceptive and abusive rules. . Historically, the CFPB is following the tradition that how this is enforced is through enforcement in individual cases.”

In a recent American Banker interview, CFPB Director Richard Cordray said the new “abusive” standard was “pretty well-defined” in the law, and indicated that enforcement actions may be the model for how the standard is established.

“We have given some exam guidance around these concepts, and I think maybe we’ll have more to say over time. I don’t anticipate us writing a rule around UDAAP,” Cordray said. “Again, I think a lot of the law is really clear in that area, and what is maybe not clear to people because they haven’t had experience with it has been specifically defined by Congress, so that is what it is. We’ll continue to develop as we go.”

While interpretations of the law are still being debated, many believe the agencies’ surviving authorities – cast against Cordray’s remarks – give them significant authority in the UDAAP regime for institutions they supervise under the $10 billion threshold. In addition to outlining the preexisting UDAP framework, Dodd-Frank said abusive acts or practices, among other things, are those that interfere with a customer’s ability to understand terms or take advantage of someone’s lack of understanding about a product’s risk.

The other agencies “could look at whatever regulation is adopted by the bureau down the road, but there is a statute out there that defines abusive. I don’t think the bank regulators, if they see a practice that is unfair or deceptive or abusive, I don’t think they’re going to feel constrained not to use their enforcement powers,” said Michael Mierzewski, a partner at Arnold & Porter LLP. “I don’t think they have to wait.”

With the regulators still in an aggressive stance coming out of the crisis and Dodd-Frank passage, the bureau will likely set the tone for all the agencies on UDAAP and other measures. But if the CFPB does not promulgate a rule, the other regulators would have a strong device for acting in the future if the bureau became less aggressive under different political leadership.

“The whole legislative scheme envisions that new” practices subject to UDAAP “may arise in the future. At that point we may be in a different political environment with different leadership of the agencies,” said Weissman. “If in the future the bureau is headed by a less aggressive director and another banking agency is more consumer-oriented, we could see another agency take the lead.”

But even though Dodd-Frank gave some guidance about how UDAAP is defined, the path forward is still marked by uncertainty, especially since there have not been any enforcement actions in the new regime.

The industry has been most concerned about the addition of the new “abusive” standard, which some say could cover relatively benign practices, and there is additional confusion about how the three different standards – unfair, deceptive and abusive – could overlap.

“Everything about UDAAP is in flux and to the extent we’re trying to pin down clear guidance we’re going to have to be patient. It’s going to unfold over time,” said Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors.

Barefoot said without an implementing rule for the new “abusive” standard, all the agencies have found the pre-Dodd-Frank UDAP authority sufficient in monitoring institutions for compliance.

“The other agencies have been aggressively enforcing UDAAP and will continue to do so. What I hear from the other regulators is the ‘abusive’ standard isn’t an essential tool, since ‘unfair and deceptive’ is covering the issue,” she said. “Over time we’ll have more clarity, but right now the regulators are taking the broad mandate under UDAAP and they’re all enforcing it, including the bureau.”

However, she added, ultimately it will be the bureau that will set the tone.

“My prediction is the bureau will dominate this issue with its enforcement actions and interpretations. It’s possible though that one of the other agencies will take a different view,” she said. “There is a lot of interagency dynamism. . But the more likely scenario is the bureau will take enforcement actions that amount to guidance for the other agencies.”

But some noted there is precedent in the old UDAP regime – which was part of the Federal Trade Commission Act – for a regulator that lacked rulemaking authority to act without there being a specific regulation. Specifically, in 2000, the OCC took action against San Francisco-based Providian Bank for allegedly deceptive credit card marketing practices. At that time, only the Fed had authority to issue FTC-related rules for banks identifying unfair and deceptive practices. (The now-defunct Office of Thrift Supervision had rulemaking authority for savings-and-loan institutions.) But no such rules existed.

In a 2004 American Banker interview, Jerry Hawke, who had been comptroller when the agency targeted Providian, said the OCC had found that even “without the benefit of a defining rule, we could bring an action and prove the facts of a particular case that the conduct was unfair or deceptive.” Though the OCC’s authority was challenged somewhat at the time, the agency got backing in a written opinion from then Fed Chairman Alan Greenspan.

“When Providian came out, there were those including some at the FTC who thought the OCC didn’t have authority to enforce section 5 of the FTC Act because the Federal Reserve Board had not promulgated implementing regulations. . But Jerry Hawke as comptroller wasn’t afraid to flex his muscles even in the absence of Fed regulations,” said Mierzewski. “Just as the regulators had interpreted section 5 of the FTC act, I think they’re going to feel they have the authority to interpret the new abusive standard if they see a practice that satisfies the elements of the statutory language.”

Yet industry representatives are hoping for a common approach by the agencies so enforcement is consistent across different charter types.

“Right now we’re not seeing any real regulatory activity involving the new ‘abusive’ area. It’s one which the bankers would rather have some upfront, explicit guidance about where future application might occur, rather than see it cited out of the blue in a gotcha approach during an exam,” said Richard Riese, senior vice president for the American Bankers Association’s Center for Regulatory Compliance.

“The way the statue is written it appears a bank could receive an enforcement action or a supervisory criticism under the new abusive standard without a new rule being written. From an industry perspective, we believe clarity around the new UDAAP standards should be an interagency development.”

Elizabeth Eurgubian, vice president and regulatory counsel for the Independent Community Bankers of America, agreed. “Consistent application across all of the regulatory agencies, including the CFPB” is important, she said.

Obama Travels to Nevada to Tout Refinancing Plan

By Kevin Wack MAY 11, 2012 5:01pm ET

President Obama traveled to a couple’s home in Reno, Nevada, on Friday in his effort to pressure Congress into passing legislation that would allow more Americans to refinance their mortgages.

Standing on the driveway outside the home of Val and Paul Keller, Obama said, “I’m calling on Congress to give every responsible homeowner the chance to save an average of $3,000 a year by refinancing their mortgage.”

The Kellers have a $168,000 mortgage on their home, which is currently only worth $100,000, according to the White House. Unable to get a new loan, they heard about the Obama administration’s refinancing program – known as the Home Affordable Refinancing Program, or Harp – when eligibility was broadened last year.

“So they called their lender, and within a few months, within 90 days, they were able to refinance under this new program that we set up. Their monthly mortgage bill has now dropped $240 a month,” Obama said.

The White House used the couple’s car port as a backdrop because they fit the administration’s narrative about more Americans being able to refinance in the last several months.

Harp has been considered by many to be a disappointment. Through February, 1.1 million homeowners had taken advantage of the program, which is far below a 2009 estimate that it could help as many as 5 million households.

But since last fall, refinancing activity has intensified. The White House said Friday that nationwide refinancing applications have increased by 50% since the administration announced it was making the program available to more borrowers. That rate has been even higher in states with some of the sharpest drops in real estate values, such as Nevada, Arizona and Florida. (The data released by the Obama administration did not show how many of the refinancing applications were approved, or how many of the applications were for Harp refinancing.)

Still, Obama is pushing congressional Republicans to approve three bills that would further expand eligibility for refinancing.

One of the bills, sponsored by Sen. Dianne Feinstein of California, would allow homeowners whose mortgages are not backed by Fannie Mae or Freddie Mac to participate. Under the legislation, those borrowers would be able to refinance into government-backed loans.

Shaun Donovan, secretary of the Department of Housing and Urban Development, argued Friday that the proposal is a matter of fairness.

“Most families have no idea whether they have a Fannie Mae or Freddie Mac or a private label securities mortgage,” Donovan said on a conference call with reporters.

The White House originally proposed covering the estimated $6 billion cost of the Feinstein legislation by imposing a fee on the largest financial institutions, but that idea was dropped this week with little fanfare.

Instead, the legislation calls for its projected cost to be covered by extending higher guarantee fees on government-backed mortgages for an additional year.

An extension of the payroll tax cut passed by Congress late last year imposed higher guarantee fees on Fannie and Freddie mortgages until October 1, 2021. The Feinstein legislation would extend the higher fees for 12 additional months.

But Donovan said that the Obama administration is open to other ideas on paying for the legislation.

“What I would say is we are open to looking at and working with Congress on alternatives,” he said. “So we’re not taking a particular position on the pay-for at this point.”

Regardless, the Feinstein bill faces long odds, given the strong opposition of congressional Republicans to the idea of expanding the federal government’s exposure to the housing market.

A second refinancing bill, sponsored by Democratic Sens. Robert Menendez and Barbara Boxer, appears to have a somewhat better chance of passage, at least in the Senate.

That bill would address barriers that are still preventing some homeowners with Fannie and Freddie loans from refinancing.

FHA mortgages are poised to get more expensive

The FHA plans to impose limits on the amount of money that home sellers can contribute at closing and to raise mortgage insurance premiums.

March 11, 2012|By Kenneth R. Harney

Reporting from Washington – If you’re considering buying a house with an FHA mortgage and expect the seller to help out with your closing costs, here’s a heads-up: The Federal Housing Administration plans to impose significant restrictions on the amount of money that sellers can contribute at closing in the near future.

On top of that, the FHA also will be raising its mortgage insurance premiums during the coming weeks, increasing charges for new purchasers across the board.

You might ask, why hit us with additional financial burdens right now, just as housing is showing modest signs of recovery in many areas and the spring buying season is getting underway?

One big reason: Over the last six years, the FHA has been the turnaround champ of residential real estate, offering down payments as low as 3.5% despite the recession and housing bust and growing its market share to 25%-plus from 3%. The program is financing 40% or more of all new-home purchases in some metropolitan areas and is a crucial resource for first-time buyers and moderate-income families, especially minorities. With a maximum loan amount of $729,750 in high-cost areas, it is also a force in some of the country’s most expensive markets – California, Washington, D.C., New York and parts of New England.

But during the same span of rapid growth, the FHA’s insurance fund capital reserves have steadily deteriorated – far below congressionally mandated levels. Delinquencies have been increasing. According to the latest quarterly survey by the Mortgage Bankers Assn., FHA delinquencies rose to 12.4%, compared with a 4.1% average for prime (Fannie Mae-Freddie Mac) conventional fixed-rate mortgages and 6.6% for VA loans.

As a result, the FHA is under the gun – with Congress and within the Obama administration – to get its own house in order, cut insurance claims and rebuild its reserves. The upcoming squeezes on seller contributions and bumps in premiums are steps in this direction.

The seller-contribution cutbacks could be painful, particularly in areas of the country where closing costs and home prices are relatively high.

Here’s what’s involved: Traditionally the FHA has been uniquely generous in allowing home sellers – including builders marketing new construction – to sweeten the pot for purchasers by chipping in money to defray closing costs. The FHA now allows sellers to pay up to 6% of the price of the house toward their buyers’ closing expenses. Fannie Mae and Freddie Mac, by comparison, cap contributions at 3%. The VA’s ceiling is 4%.

Under newly proposed rules, the FHA cap would drop to the greater of 3% of the home price or $6,000. In sales involving houses priced at $100,000 or less, this wouldn’t change anything ($6,000 equals 6% of $100,000). But on all sales above this threshold, the squeeze would get progressively tighter.

On a $200,000 home, a buyer could today ask the seller to pay for $12,000 of a long list of settlement charges including all prepaid loan expenses, discount points on the loan, interest rate buy-downs and upfront FHA insurance premiums, among others. Under the proposed cutback, the maximum amount would be slashed in half.

On many home transactions, the reductions would force sellers to lower their prices to enable cash-short buyers to get through the closing. In other cases, sales might simply be too far of a stretch for some purchasers.

The proposed cuts are open to public comment through the end of this month but are highly likely to be adopted in much the same form soon afterward. The FHA also is restricting the types of “closing costs” that sellers can pay. Six months’ or a year’s worth of interest payments or homeowner association dues in advance no longer will be permitted – a serious blow to many builders who use these as financial carrots.

Beyond these changes, FHA also plans significant increases in insurance premiums – upfront premiums will rise to 1.75% from 1%, effective April 1, and annual premiums will increase by 0.1% on all loans under $625,000 and 0.35% on mortgage amounts above that, effective June 1.

William McCue, president of McCue Mortgage Co. in New Britain, Conn., which does a sizable percentage of its business with the FHA, said the cumulative effect of all these increases “will not just crowd first-time buyers out of the FHA market, it will prevent them from owning a home that, absent these new costs, would be affordable.”

Bottom line: Nail down your FHA money and seller-contribution negotiations as soon as you can because later looks a lot more expensive.