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.

CFPB Plans to Limit Mortgage Origination Fees, Compensation

By Kate Davidson MAY 10, 2012 8:04am ET

WASHINGTON – The Consumer Financial Protection Bureau outlined rules Wednesday that would place new restrictions on mortgage origination points and fees, as well as originator compensation.

The proposals, which are mandated by the Dodd-Frank Act, would require originators to reduce interest rates when customers elect to pay discount points; offer consumers a loan product with no discount points; and would ban origination charges that vary with the size of the loan.

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

“Mortgages today often come with so many different types of fees and points that it can be hard to compare offers,” CFPB Director Richard Cordray said in a press release. “We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.”

The rules would also impose new requirements on originators themselves, including brokers and loan officers, and would build on a Federal Reserve rule that prohibits compensation that varies with loan terms.

The agency detailed the rules in documents released Wednesday that will be reviewed by a panel of small business experts. The CFPB, which also issued a list of questions for panel participants, must convene the panel pursuant to the Small Business Regulatory Enforcement Fairness Act.

The SBREFA process, which must be completed before a formal rule is proposed, could take a few months.

A panel is expected to meet in the next few weeks, a senior CFPB official said Wednesday, after which the bureau has 60 days to prepare a report on its findings that would be released in conjunction with the notice of proposed rulemaking.

The agency said the rules – which would include an implementation period – would simplify mortgage points and fees, and make it easier for homeowners to understand mortgage costs and compare loans so they can choose the best deal.

The proposals would require that any discount point that a consumer elects to pay be “bona fide,” meaning that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point. It would also require that borrowers be offered a no-discount-point loan.

“This would enable the homebuyer to better compare competing offers from different lenders,” the agency said in a press release.

Under the proposal, brokerage firms and creditors would only be allowed to charge flat origination fees, rather than origination fees that vary with the size of the loan. Those are often confused with discount points, the agency said.

The proposed rules are separate from the qualified mortgage rule the bureau is considering, which would require mortgage originators to verify a borrower’s ability to repay a loan unless it meets the definition of a so-called qualified mortgage. But the senior CFPB official noted that the “bona fide” point concept is also an element of QM, and the agency thought it would be helpful to include the provision in these rules as well.

In addition to rules limiting points and fees, the proposals would impose strict screening and qualification standards on mortgage loan originators, which includes mortgage brokers and loan officers who take applications from consumers seeking to buy a home.

The Dodd-Frank Act requires that originators be qualified, and the new rule would subject them to new standards for “character, fitness and financial responsibility,” screen for felony convictions, and require new training related to the types of loans they originate, the press release said.

Dodd-Frank also codified a rule that the Fed issued in 2010 prohibiting loan originators from steering borrowers into higher priced loans so they could earn more money. The statute required CFPB to issue similar rules, and a senior CFPB official said this proposal closely aligns with the Fed regulation, which bans the practice of varying compensation based on interest rates or certain other loan terms.

The bureau is taking comments from the public through its website and through email at this address.

New Rules May Curtail Some Fees in Mortgage

May 9, 2012 By EDWARD WYATT

WASHINGTON – The Consumer Financial Protection Bureau said it planned to propose tighter mortgage lending regulations that would limit the ability of banks and mortgage brokers to charge certain transaction fees, possibly ending one of the most abusive costs levied on consumers when they buy a house.

Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan.

Those fees are sometimes referred to as origination points and are disclosed in a blizzard of documents and fees that most home buyers face at closing. But they can easily be confused with the upfront discount points that borrowers often pay to secure a lower interest rate.

The consumer bureau also said it would require that lenders offer a reduced interest rate when a consumer opted to pay upfront discount points and would require lenders to offer a loan option without points. During the financial crisis, some lenders charged the points without lowering the interest rate.

Changing that rule, the bureau believes, will make it easier for consumers to weigh offers from multiple lenders.

“Mortgages today often come with so many different types of fees and points that it can be hard to compare offers,” Richard Cordray, the director of the consumer bureau, said. “We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.”

The proposals were intended to fulfill requirements of the Dodd-Frank Act, which was enacted in response to the financial crisis. They were not a surprise to banking groups, but those groups still expressed dismay, saying that they essentially repeat changes that the Federal Reserve put in place just two years ago to address some of the same problems.

“They are adding a whole new set of additional rules and regulations onto what we already have,” said Rod Alba, a vice president in the mortgage markets division of the American Bankers Association, an industry group. “It is this rapid succession of rule-making after rule-making that is so worrisome to banks.”

Consumer groups, however, said the proposals were necessary to protect borrowers from being taken advantage of in what is usually the largest single financial commitment in their lives.

“The provisions in Dodd-Frank were added in response to specific abuses that were well documented during the mortgage boom,” said Barry Zigas, housing director for the Consumer Federation of America. “Too often, home buyers found that the fees they were being charged were not as advertised.”

The proposals outlined Wednesday will be reviewed by the public and a small-business panel to be convened by the consumer bureau. The panel is required by Dodd-Frank as a way of trying to limit the effect of new regulations on small businesses.

After taking comments, the bureau will formally propose the rules this summer and, after another round of comments, hopes to make them permanent by January.

Consumer bureau officials said that unscrupulous mortgage lenders sometimes tried to disguise origination fees by calling them origination points. Expressed as a percentage, the origination fee paid then varied with the amount of the loan.

But bureau officials said that because the fees covered paperwork that was the same whether the loan was for $100,000 or $1 million, they were proposing that mortgage brokers and creditors be allowed to charge only flat origination fees. That in turn will promote competition among mortgage lenders and brokers and lower consumer charges, the officials said.

Mr. Alba of the bankers association said that whatever origination fees were charged, they were reflected in the loan’s annual percentage rate, which is disclosed on the mandated forms that a home buyer is given at closing. “To the extent that any of the fees are outrageous, they will be reflected in the pricing disclosures that are in place today,” he said.

Other provisions required by Dodd-Frank are also being proposed by the consumer bureau, including qualification and screening standards for loan originators. Those proposals are intended to make different types of originators – banks, thrifts, mortgage brokers and nonprofit organizations – subject to the same qualification requirements.

Dodd-Frank also prohibits the payment of incentives by mortgage lenders to the loan originators. and requires the consumer bureau to write a rule prohibiting it. The Federal Reserve issued a rule in 2010 to address the issue; the consumer bureau rule will incorporate the Fed’s guidance while trying to clarify some issues, the bureau said.

Are Liar Loans Going to Get Principal Reductions?

Clifford Rossi

MAY 9, 2012 8:30am ET

The announcement by Bank of America (BAC) of their plan to offer up to 200,000 struggling homeowners a new lease on life for their underwater mortgage through principal reduction at first glance seems like a major step forward in addressing a nearly 5-year old problem.

Principal modifications are the mortgage industry’s third rail issue, fraught with passion on both sides of the debate over the merits of such programs. The attention given to FHFA Acting Director DeMarco’s seeming reluctance to allow the GSEs to deploy such measures is a case in point.

Many economists favor principal forgiveness over interest rate reduction or term extension modifications based on the idea that reducing principal will lower the likelihood that the borrower will redefault by lowering the negative equity position.

Moreover, some embattled lenders seem to have capitulated against federal and state mortgage legal actions by touting principal reductions that up to now were used only sparingly.

The real value of principal reduction comes down to determining the borrower’s behavior toward that program. For current but underwater borrowers, a concern that’s been levied and to this day remains unknown is the ruthlessness by which such borrowers, realizing that there may be an opportunity to receive a principal modification upon going 60 days delinquent, exercise their default option to obtain this lucrative debt elimination offer (often referred to as strategic default). Much depends on the friction costs such borrowers face in the form of damaged credit, relocation expense and other assorted costs.

As one can imagine, the value of that option depends on how much principal reduction the borrower might receive. In the Bank of America announcement, this could be as much as $150,000, certainly an amount that would make most people take notice. Bank of America has taken actions to forestall such attempts to allow strategic default by requiring all borrowers for principal reduction to pass a hardship test. That would eliminate those borrowers current on their mortgage but otherwise with motive (i.e., underwater) and intent to default. For eligible borrowers that are both delinquent and underwater, the prospect of principal reduction is conveyed in terms of net present value against alternatives. A primary determinant of whether a principal reduction modification is economically attractive over other modification alternatives is the borrower’s propensity to redefault on the new modified mortgage later.

The poor results of the government’s modification efforts provide some evidence that interest rate and term extension modifications have not worked, leaving the door open for more principal reductions. In option theory terms, a principal reduction modification reduces the option strike price, which lowers the attractiveness of defaulting in the future. But while lowering the borrower’s loan-to-value ratio to 100% from say 140% certainly helps lower that chance of redefault, it does not eliminate it and much depends on what’s going on inside the head of the borrower. And as it turns out, there is a large segment of the borrower population that is eligible for a principal reduction modification that may have already tipped their hand in terms of their intent to take advantage of such programs.

Lurking below the surface is an ugly and messy public policy problem – namely what to do about the group of delinquent and underwater borrowers who were not truthful with lenders regarding their ability to repay their contractual debt obligation. In the vernacular, so-called “liar loans” typified by the alphabet soup of products with such names as SISA (stated-income, stated-asset) and NINA (no income, no asset) blossomed during the housing boom. But what is interesting is the virtual silence on the millions of borrowers who consciously signed loan documents knowing that their income was overinflated well beyond justifiable levels. Quality control departments during the boom tracked these developments against actual IRS 4506 tax documents with common results showing that high percentages of these loans had overstated their incomes by at least 50%.

Now, to be sure, some coaching and documentation errors by lenders and mortgage brokers explain some part of this phenomenon, however, it cannot explain the majority of this problem. The Bank of America program does not disqualify such borrowers from receiving principal reductions and therein lays a terrible credit and public policy precedent. Beyond the fact that rewarding such borrowers that intentionally deceived lenders and security-holders by making false statements regarding their income and assets goes against principles of living by the golden rule, it exacerbates a troubling trend in borrower behavior that developed during the housing boom. That is, historical stigmas of excessive leverage and delinquency, which were powerful drivers of low mortgage delinquencies for decades, underwent a fundamental yet subtle transformation, exhibited by radical changes in borrower payment hierarchy and a higher incidence of personal bankruptcy observed in recent years as well as in other forms.

Anyone with a mortgage – delinquent or current that went through the effort to fully document their income and assets ought to be incensed over this policy and demand that no principal reduction program – private or public be permitted for borrowers who took out these more egregious form of low doc mortgages. It incents some borrowers to pursue strategies to game the system, and while great focus has been given the other direction; namely establishing policies to mitigate predatory consumer lending practices, lenders and policymakers must not reinforce behavior that also contributed to the collapse of the mortgage industry.

UDAP, Fair Lending Issues Causing CRA Downgrades

By Kate Davidson

MAY 8, 2012 4:27pm ET

WASHINGTON – With regulators increasingly cracking down on unfair and deceptive acts or practices, more banks are seeing the heightened scrutiny reflected in lower Community Reinvestment Act ratings.

That trend is likely to increase now that the Consumer Financial Protection Bureau has joined the team, industry observers say. Although the bureau does not have authority to enforce CRA, it has a broad mandate to root out fair lending violations, and plans to coordinate closely with the prudential regulators to ensure those findings are factored into CRA ratings.

“We’ve had a downward trend for a while,” Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors, said of CRA ratings. “But the fact that UDAP is now being brought more proactively into the CRA evaluation process does mean that there will be an increasing impact on CRA by what the bureau does with UDAP.”

Regulators have been handing out harsher CRA ratings since the financial crisis began. While many of those downgrades could arguably be linked to the crisis – with banks focusing more on problem loans than lending in underserved communities – recent results indicate a strong link with UDAP.

Of the 28 banks whose ratings were released by the Office of the Comptroller of the Currency last month, for example, five had their ratings lowered to “Needs to Improve,” and three were downgraded specifically for illegal credit practices or discrimination relating to UDAP and fair lending violations.

The OCC said it found “substantive” violations of the Equal Credit Opportunity Act and Fair Housing Act that represented a “pattern or practice” of discrimination at the First National Bank of St. Louis in Clayton, Mo.

It also found unfair and deceptive acts or practices relating to the overdraft protection program at Woodforest National Bank in The Woodlands, Texas, as well as illegal credit practices in violation of the Federal Trade Commission Act at BankAtlantic in Fort Lauderdale, Fla. (BBX)

The percentage of banks receiving failing CRA ratings – including needs to improve and substantial noncompliance – has increased from 1.7% in 2007, to 4.3% as of March 31, according to data from CRAHandbook.com.

“It’s a combination of regulators getting tougher, but the broadening of the CRA net to include fair lending, UDAP, and other issues has also contributed to the lower ratings,” said Ken Thomas, an independent bank consultant and economist based in Miami.

All of the violations identified by the OCC were uncovered during CRA compliance exams, which occur about every three years.

But with the CFPB regularly supervising large banks for compliance with consumer financial laws, the bureau is likely to soon be the one finding these violations.

Information sharing will be critical, said Ann Jaedicke, a managing director at Promontory Financial Group and a former deputy comptroller for compliance policy at the OCC.

“The prudential regulators may have a finding of their own with respect to illegal credit practices or discrimination,” Jaedicke said, “but because the predominant regulations around those issues have been transferred to the CFPB, the CFPB will actually be doing examinations that would disclose those kinds of illegal credit practices or discrimination.

“There is going to have to be sharing of information so that the prudential regulators can factor the CFPB’s findings into their ratings,” Jaedicke said.

Patrice Ficklin, the CFPB’s assistant director for the Office of Fair Lending and Equal Opportunity, acknowledged the need for cooperation in a panel discussion at a conference of housing advocates in Washington last month.

Ficklin noted that CFPB only inherited two of the four federal fair lending laws: the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. The prudential regulators will continue to enforce CRA and the Fair Housing Act.

“Because of the split among the four federal fair lending laws, we have a significant obligation and interest in coordinating with our sister regulators,” Ficklin said.

For example, Ficklin said CFPB knows that both the Fair Housing Act and the Equal Credit Opportunity Act govern real estate related lending, and that the bureau’s fair lending exams will factor into CRA ratings.

“So the need for coordination is already recognized and well under way with regard to our interactions . . . with our fellow prudential regulators,” she said.

Because the fair lending issues are so intertwined, industry observers are waiting for more specific information, including clear protocols, on how the bureau intends to cooperate with other regulators.

The agencies have been working on a formal memorandum of understanding, expected to be released in the coming weeks, that would outline such procedures.

Barefoot said the intersection of fair lending issues makes it more likely that banks will be scrutinized, possibly by several different agencies for the same practice.

“One thing I’ve been hearing from the regulators is that a lot of times they get a UDAP issue and explore it, and when they look at who was most impacted by the UDAP issue, it’s a protected class,” she said. “So it’s also a fair lending issue. They refer it to the Justice Department, and in the meantime downgrade the CRA rating.

“It can start in any direction and fill up the whole space – fair lending, CRA and UDAP,” Barefoot added.

That means a higher likelihood of CRA downgrades based on those issues, industry observers agreed. The adverse ratings, of course, would cripple a bank’s ability to make acquisitions or merge with another institution.

“If I were an executive at a financial institution I would be talking with my CRA officer about what he or she thinks the forthcoming CRA rating might be and whether or not they’re concerned about it at all,” Jaedicke said. “The other thing banks can do is make sure they scour their portfolio to capture every possible lending relationship that might qualify for CRA credit.”