The Mortgage Industry in the Era of COVID: 2020 Storylines and A Look Ahead to 2021

A calculator with the 2021 on the display

To say that 2020 was an eventful year for the mortgage industry could be the biggest understatement in history. A global pandemic that decimated many sectors of the economy fueled record low mortgage rates which, in turn, drove record high volume. Add to that the fact that lockdowns in many areas forced people to start working from home as pipelines were bursting at the seams and you have a recipe that gave everyone from frontline Mortgage Loan Originators to underwriters to ops and secondary-marketing managers heartburn.

So, as the dust settles on the strangest year of our lives, let’s take a look at some of the industry storylines that may not have received a lot of mainstream media attention and what they might mean for the future.

Technology Takes Center Stage

The mortgage industry has traditionally been slow to adopt to technological advances. For example, although the Federal E-SIGN Act became law in 2000 and Freddie Mac and Fannie Mae have been allowing electronic signatures on loan documents since 2005, they didn’t gain much traction with originators until just a few years ago. The pandemic prompted a very fast re-imagining of the entire loan process with a focus on limiting personal contact. This forced many companies – and states – to confront the issue of various forms of electronic notarization, up to and including full RON (Remote Online Notarization). As of this writing, 29 States have allowed some form of electronic notarization either permanently or temporarily.

What to look for in 2021:
Continued pressure on state legislatures from industry groups like the Mortgage Bankers Association to make temporary provisions permanent and expand RON to additional states.

Working from Home Requires More Than a Laptop

In addition to the enormous IT staff challenges to rapidly equip a largely in-office workforce for remote work, compliance and licensing professionals in many states had to deal with regulatory requirements that MLOs complete their work at a licensed branch location. To their credit, many of these states worked quickly to provide temporary regulatory relief of in-office work requirements where possible, but long-term questions remain.

What to look for in 2021:
A state-based regulatory system is one of the strengths of the modern non-depository financial services sector; what works in Texas may not work in Massachusetts, Oregon or Iowa and states have the freedom to address their own concerns in their own ways. That being said, should the demand for remote work continue for an extended period of time (or permanently), some states – especially those that license branch offices – will need to reevaluate their licensing regulation to ensure it remains effective and relevant to the current situation. Additionally, companies and MLOs in certain areas may need to determine whether it’s necessary to obtain a branch license for an individual originator’s home. Finally, with the constant threat of wire fraud (attempts up 62% in 2020) and other issues, expect a continued intense regulatory focus on cybersecurity. Now is a good time for your company to do a full review of your policies and procedures to ensure proper data integrity and security.

Servicing Lessons Learned From the Last Financial Crash Are More Relevant Than Ever

One of the cornerstones of the response to COVID-19 is a temporary moratorium on foreclosures on most Federally-related mortgage loans via the FHFA and HUD in addition to many state-level moratoria on foreclosures and evictions. Given the shift to a truly borrower-centric approach to handling distressed loans after the financial crisis of 2008, servicers are well-positioned to provide the support necessary to mortgagors who have taken advantage of the many loan forbearance options available to them via the CARES Act.

What to look for in 2021:
While deadlines for exiting/resolving forbearance have changed several times, one thing is certain: at some point, borrowers will need to resume making timely payments on their mortgage loans. Servicers will need to dust off their loss mitigation playbooks and provide loan modifications to a segment of the borrower population that has returned to work but with a long-term reduction in income. Additionally, there will undoubtedly be many borrowers who won’t be able to reinstate their loans even with a modification. It is likely we will see some form of federal relief to assist these individuals in their transition to alternative housing similar to post-2008 programs. As forbearance programs end, economists and financial analysts will be focused on how the expected increase in foreclosures and deeds-in-lieu will affect available housing inventory (which has been extremely tight in many places) and potentially slow the rate of appreciation.

In addition to the storylines discussed here, 2021 is going to bring a new administration with new priorities and new people leading critical entities affecting housing policy such as HUD, the CFPB, Treasury and (very likely) the FHFA. Expect a realignment of policies relating to fair lending, affordable housing and the ongoing conservatorship of Fannie Mae and Freddie Mac (which will also be getting a new CEO). We’ll certainly be keeping an eye on what transpires and will be ready to discuss critical issues in upcoming blog posts, courses and speaking engagements.

In the meantime, from our family to yours, have a wonderful and safe holiday season and a happy new year.

Peter


Real Estate Institute offers NMLS-approved Mortgage Loan Originator Continuing Education and Pre-License courses in all three formats: Classroom, Live Webinar and Online, Self-Study. These courses were designed BY loan originators FOR loan originators covering topics you need to know to navigate today’s ever-changing lending landscape. Please don’t hesitate to contact us online or at 800-995-1700 with any questions about loan office training or requirements. 

Here Come the Changes! Fannie Mae Sets Release Weekend for Desktop Underwriter™ 10.0

Here Come the Changes! Fannie to release DU 10.0

Well, we finally know a *LITTLE* more about Fannie’s plan to release the brand-spanking-new version of Desktop Underwriter™ (DU™).

If you took Real Estate Institute’s live Mortgage continuing education class last year, you heard me talk about Fannie’s plans to revamp and update their underwriting engine to take into account “new and improved” (*your mileage may vary) credit report data that the mortgage industry has not previously utilized. The data to which I’m referring is called trended credit data, and it incorporates much more information about consumers than most of you have ever seen before.

Right now, our mortgage credit reports are basically “snapshot” reports – that is, they show the consumer’s payment history, current balance, credit limit, dates opened, etc. That data is updated typically once per month from each reporting account, and what we know about our customer is what is reported on that day from that creditor. Thus, if Joey Bagadonutz is someone who pays off his credit cards in full each month, but his outstanding balance on the day the account reports to the bureaus is $3,500, we see that balance as $3,500 with no indicator of how long it has been that high. Now, imagine that the limit on Joey’s account is $4,000. Our current underwriting algorithms see him as a SIGNIFICANT CREDIT RISK because of his credit utilization. Not good for Joey.

With trended data, not only will we be able to view the outstanding balance and limit, we’ll be able to see how much Joey has paid on his accounts each month for the past two years! For a guy like Joey who pays his account in full, this is fantastic; we’ll be able to really dig into his excellent credit history beyond today’s “well, he’s never been late.” Thus, Joey gets a better risk evaluation, which leads to a better rate, which leads to happy Joey, pink unicorns, rainbows and Santa Claus! Can’t get any better than this, right?

Well, if you’re Joey, yes.

However, if you’re someone who carries a balance each month, not so much. Let’s say you’re working with Bubba Buysalot on a purchase of a new home. Bubba is a guy who has 6 open credit cards, is under 50% utilization on all of them, and has never missed a payment. In today’s credit world, our algorithms see him as a TOP-TIER RISK LEVEL because of his utilization and payment history. Good for Bubba. Now, with the new trended data, we dig deeper and see that Bubba has made just the minimum payment on all six accounts and his balance over time has been increasing. Now, Bubba is no longer a top-tier borrower. He gets a worse risk evaluation (due to the fact that those who make minimum payments default on debt at a rate 3 to 5 times higher), which leads to a higher rate or a declined loan, which leads to sad Bubba, rain clouds, bee stings and Lucy pulling away the football when he tries to kick it.

You can see both sides of this coin, right? Deeper information and improved risk assessment is good for creditors, Fannie Mae and MBS investors, but it’s not good for every applicant.

OK. So WHEN is this new version of DU coming out? Good question. According to Fannie’s preview document released at the end of January, we can expect the rollout to occur on the weekend of June 25, 2016. We also can expect a series of training webinars and informational communications in the months leading up to the roll-out date. As of right now, all we really know is that this new release will evaluate trended credit data, as well as simplify the process for applicants with multiple financed properties. We’ll learn a lot more when Fannie issues the release notes sometime later this month. It will be interesting to see if they also incorporate some of the other changes they’ve been working on, such as creating a way for DU to evaluate borrowers with non-traditional credit histories, or if those will be relegated to a future release.

Now that you have this knowledge, it’s time to get out there and start educating your prospective borrowers about it, especially those who are sitting on the fence about purchasing a home. While you’re at it, start informing your referral sources, too! I’m sure there are gaggles of real estate agents and financial planners out there who’d like to know about these changes well in advance.

More to come when the Release Notes are, well, released. Until then…

Happy Originating!

Peter



Real Estate Institute is an NMLS-Approved Course Provider, #1400102. Each year, thousands across the country choose Real Estate Institute for its mortgage pre-license, SAFE test prep and continuing education programs. If you have questions about your education requirements, our compliance experts are available at 800-995-1700 from 8 a.m. – 6 p.m. (Central Time), Monday through Friday.

FANNIE AND FREDDIE LIMITED TO QUALIFIED MORTGAGES

In response to a directive last week from the Federal Housing Finance Agency, both Fannie Mae and Freddie Mac today issued bulletins indicating that they will only purchase qualified mortgages when the Ability-to-Repay rule goes into effect on January 10, 2014.  EFFECTIVE WITH APPLICATIONS TAKEN ON OR AFTER JANUARY 10, 2014, both Fannie and Freddie will rely on selling lender Representations and Warranties that all loans purchased are, in fact, qualified mortgages or are otherwise exempt from the ability-to-repay rule (i.e. the loan is secured by an investment property).

Aren’t ALL loans eligible for sale to the GSEs automatically Qualified Mortgages?  Why is this a big deal?

While there is a “GSE Exemption” in the QM rule that grants loans eligible for purchase by Fannie and Freddie QM status for the next 7 years (or until the GSEs are no longer in receivership, whichever occurs first), those loans still must meet certain overarching guidelines.  In order to ensure that this happens, Fannie Mae and Freddie Mac are making the following changes to their product eligibility guidelines effective with applications taken on or after January 10, 2014 (note that individual lenders/investors may modify their product guidelines before this date, so be sure to watch for bulletins for those that you do business with):

  • Loans that are not fully amortizing will be ineligible for purchase (i.e. interest-only loans) except for investment properties
  • Loans with terms longer than 30 years will be ineligible for purchase
  • Loans with points and fees greater than 3% of the loan amount (or that exceed limit for small-balance loans, if applicable) will be ineligible for purchase, except for investment properties

The elimination of the interest-only and other odd products will only impact a small percentage of the GSEs’ business (based on recent origination trends), but the points-and-fees restriction could have a large impact on originators – ESPECIALLY those with affiliated business relationships – because of the way that “points-and-fees” are calculated under the rule.

We’ll be discussing the Ability to Repay and Qualified Mortgage rule in depth in our CE courses this year, so be sure to get your spot reserved early!  We’ll be publishing our CE schedule for 2013 later this month.

In the meantime, you can find the bulletins from Fannie Mae and Freddie Mac and some good information on compliance with the QM/ATR rule from the CFPB at the links below.

See you in class!

Peter

Fannie Mae Lender Letter LL-2013-05

Freddie Mac  Industry Letter 5/6/2013

CFPB Ability to Repay and Qualified Mortgage Rule: Small Entity Compliance Guide

Can You Expect a Hike in the Fannie/Freddie Guarantee Fee in Your State?

The Federal Housing Finance Agency (the agency tasked with overseeing the Fannie and Freddie conservatorship) has announced that it intends to hike the guarantee fee on all loans sold to the agencies secured by properties in the states with the highest cost of foreclosure.  Those states are:  Illinois, Florida, Connecticut, New Jersey and New York.  This fee hike would go into effect in 60-90 days (it needs to be formally published in the Federal Register first for public comment), and means that loan originators will likely see a worsening in pricing on loans made on properties in these states in roughly 45 days.  Once the notice is published, you’ll have a chance to comment on the proposal at www.regulations.gov.  It’s worthwhile to make your voice heard, so take a few minutes and give them your thoughts on the matter!  You just need to wait until after the notice is officially published.

Happy originating!

HVCC is dead, long live HVCC! Fannie and Freddie announce new Appraiser Independence Requirements.

In monarchies of old, it is said that whenever a King or Queen died, the courtiers would lament the passage of the old ruler and usher in the new in the same breath.  While chants of “The King is dead!  Long live the King!” are stuff of legend and lore, it seems appropriate to make the comparison to Friday afternoon’s announcement by both Fannie and Freddie regarding the “new” Appraiser Independence Requirements to replace HVCC effective November 1, 2010 at the latest.

As promised, we are providing you with a synopsis of the release.  Here are the highlights:

1)   Under the new requirements, lenders selling to Fannie or Freddie are still responsible for engaging (ordering appraisal reports from) appraisers.  This can be done through lender roster appraisers, lender-approved appraisal management companies or through correspondent lenders who may have their own appraisers or appraisal management company relationships.  In no case is a true third-party (including mortgage brokers) allowed to compensate appraisers or order appraisals unless through a lender-approved Appraisal Management Company (AMC).  Much to the chagrin of most mortgage brokers, there is essentially no change from the existing HVCC requirement here.

 2)   Lenders must continue to keep the origination function completely isolated from the appraisal function.  In other words, any employee who works in mortgage origination (or “sales”) should not order an appraisal or “have any substantive communications with an appraiser or AMC relating to … valuation or having an impact on valuation, including ordering or managing an appraisal assignment.”  The only change from the existing HVCC requirement is that AMCs are now explicitly included on the list of prohibited contacts for sales/origination employees.  Also, an exception to these requirements has been added for small entities who truly can’t keep the two functions absolutely separate, as long as they have “prudent safeguards” in place to ensure that no influence or interference with appraisals occurs from a sales employee.  Note that this exemption only applies to entities that are actually selling loans to Fannie and Freddie, NOT to correspondent lenders or brokers.

 3)   Lenders are now explicitly permitted to order appraisals from Appraisal Management Companies who are affiliated with them, as well as staff (employee) appraisers or appraisers acting as independent contractors.  This removes all doubt of the acceptability of such relationships which were questioned by many in the industry since HVCC was first announced.  It will be interesting to see the reaction to this, as it raises serious questions about a conflict of interest in the transaction.  How can you assure appraiser independence if the appraiser is being compensated by an entity that is wholly owned by the lender selling the loan to Fannie or Freddie?  This seems to cut against the general intent of these rules.

 4)   Second appraisals should not be ordered on any transaction unless the lender has reason to believe that the original appraisal was flawed or tainted (reasons for which must specifically be noted in the file) OR the second appraisal is required by law or ordered as part of a standard appraisal review or QC process.  If second appraisals are ordered for review/QC, lenders need to have a policy of selecting the “most reliable appraisal, rather than the appraisal that states the highest value”.  This is a slightly more in-depth explanation of the prohibition on “value shopping” than appears in HVCC.

 5)   Lenders are now explicitly allowed to use appraisals transferred from another lender or lender’s AMC, including for transactions where a mortgage broker has originated the loan.  Note that if a lender elects to do so they must assume complete responsibility for that report’s compliance with the appraiser independence requirements.  This provision should come as a relief to mortgage brokers across the country who have long been fighting for the ability to transfer reports and save borrowers’ time and money.

 6)   Borrowers must continue to be provided with copies of appraisal reports “promptly upon completion at no additional cost…and in any event no less than three days prior to closing.”  This 3 day requirement can be waived by the borrower in writing, so long as the waiver request is completed at least 3 days before closing.  In practice, just as with the rescission waiver allowed in the Truth-in-Lending Act, don’t expect lenders to accept these appraisal report waivers either.

 7)   It should go without saying, but appraisers must continue to be State-licensed or certified by the State in which the subject property is located.  Additionally, all of the prohibitions on coercion, influencing or attempting to influence the value or composition of an appraisal report remain in effect.  They are too numerous to list here, but are fully detailed in the Fannie and Freddie releases.

 A document with the full requirements can be found at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/air.pdf

If you read the above document, remember that the term “Seller” refers to the entity actually selling a loan to Fannie Mae or Freddie Mac, which is not always the entity funding that loan.

***The effective date for the sunset of HVCC and implementation of the new requirements is November 1, 2010 or when the Federal Reserve issues final regulations on the Dodd-Frank bill, whichever is earlier.  HVCC remains in effect until that time.***

HVCC – Not Yet Gone and Certainly Not Forgotten

Since news of the Dodd-Frank Wall Street Reform and Consumer Protection Act swept across America this summer, it seems that the only provision that met with almost universal support from the mortgage industry is the elimination of the Home Valuation Code of Conduct (HVCC) – the appraiser independence provisions whose unintended consequences have been plaguing transactions for nearly a year now.  In the bill is contained a well known and much celebrated provision that automatically sunsets HVCC.  Less well-known, however, is the clause that says the HVCC sunset will not occur until regulations are released to enforce the appraisal independence provisions required under the Dodd-Frank bill – currently scheduled to be “on or about October 21, 2010”.  In other words, anyone who thought we were going back to the pre-HVCC business model is mistaken.

If you’ve been around the industry since HVCC went into effect, you know that there have been multiple petitions circulating concerning the law and countless columns written by mortgage and real estate professionals about the problems with HVCC and how to fix them.  Although the fixes seem second-nature to those of us who make our careers in home sales and/or finance, the concern has always been that the people issuing the regulations are not industry professionals.  While that in and of itself is not a problem, we must hope that they listen to input from the professionals who have witnessed first-hand the problems that have been caused directly by HVCC.  Some of those problems include higher costs to consumers and appraisers working outside areas with which they are familiar resulting in less accurate reports and increased processing time for loans.

On Friday, in a little-noticed release from Fannie Mae, we got a glimpse of how things are progressing.  In the notice, Fannie reminds all of its lender partners that HVCC remains in effect until new regulations are released and that “Fannie Mae is working with the Federal Housing Finance Agency (FHFA) to develop and adopt appraiser independence requirements that will replace HVCC.”  Fannie Mae states that it has received input from key industry participants.  The statement in the release that warrants some concern (if you are an industry professional) is the one that says, “Updated requirements are expected to be substantially similar to the current provisions.”  We’re wondering what “substantially similar” means.  We’ll have to wait until “on or about October 21, 2010” to find out.  You can be certain that we’ll have a post as soon as the news hits the wire.

Stay tuned.