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. 

Not So Fast: HUD Rescinds MI Premium Cut

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As you may have heard in various media reports, HUD issued Mortgagee Letter 2017-07 on Friday, January 20, rescinding the annual Mortgage Insurance Premium (MIP) cuts announced in Mortgagee Letter 2017-01. While there has been much news and opinion analysis on this story, the only effect on your daily business is the annual MIP will not change effective with closings on or after January 27.

The actual impact on the mortgage market is likely very minimal, with the most likely outcome being that some loans on which disclosures were sent to borrowers between January 10th and 20th – showing the reduced premium – will have to be re-disclosed. Before re-disclosing, I suggest doing a quick double-check to ensure that the change has been applied throughout the loan file, including the APR on the Loan Estimate. It remains to be seen whether the new administration will decide to move forward with any premium cuts in the months to come.

Peter

FHA Lowers Mortgage Insurance Premiums Again

OLYMPUS DIGITAL CAMERAToday, HUD released Mortgagee Letter 2017-01, announcing a reduction in the FHA annual mortgage insurance premium by 20-25 basis points across the board and eliminating MI surcharges on loans over $625,500 in high-cost areas. This announcement, sure to please originators across the country, comes on the heels of the FHA Mutual Mortgage Insurance Fund (MMIF) once again reaching its statutory-mandated reserve of 2% in 2016.

The premium cut goes into effect with closings/disbursements on or after January 27, 2017. This is a slight departure from typical FHA policy changes which are usually implemented by the date the case number is obtained. Note, the UPFRONT MI Premium (UFMIP) is not changing and remains at 1.75% for forward mortgages.

The new annual premiums, effective January 27th, are highlighted below.

Happy originating!

Peter

More FHA MIP Hikes in the Works

It appears as though FHA is poised to increase the annual premium on new applications for FHA insurance starting in January.  Look for a Mortgagee Letter to be issued soon that increases the annual MIP by at least 10 basis points and eliminates the expiration of premiums on certain loans.  I’ll be sure to post an update when final details are known, so stay tuned.

That being said, increasing premiums across the board is NOT the answer.  As FHA gets more expensive, it just causes more borrowers to self-select out of the FHA program and into a comparable conventional program.  As it stands today, 95-97% LTV programs on the conventional side are already less expensive for borrowers with good FICO scores who elect the monthly PMI option, AND conventional MI does not have an up-front payment (outside of split-premium).  There is no incentive for low-risk borrowers to select a 30-year FHA loan, and maybe that’s as HUD wants it.  We know they’ve been trying to pare-down their portfolio.

Unfortunately, HUD needs to face the truth and admit that it simply does not have the luxury of focusing only on its core clientele.  To do so in the current context of “one size fits all” MI premiums is nothing short of suicide because it ensures deterioration in FHA’s credit quality (which has been quite high for the last few years).  A deterioration in credit quality leads to a higher default rate, which leads to more claims paid, which leads to another hike in premiums, and so forth and so on.

It is time for HUD to go back to 2008 and re-institute the risk-based MI premium that was stopped with the passage of the Housing and Economic Recovery Act.  Insurers can’t afford to pretend that everyone is equal in terms of risk; when someone with a perfect driving history purchases auto insurance, they aren’t charged the same premium as someone with two accidents and a DUI.  Mortgage insurance is no different.  It’s time for reality to set-in at the Federal Housing Administration, or endless taxpayer-funded bailouts are a virtual certainty.

HUD Rescinds "Disputed Item" Guidance for FHA-insured Mortgages

Last week, the Department of Housing and Urban Development issued Mortgagee Letter 2012-10 which rescinded the guidance that was published March 1 in ML 2012-03.  I wrote about those updates as part of a larger post dealing with the MIP changes that were front-and-center at the time.

The guidelines, which many complained (rightfully so, in my opinion) would add undue stress to FHA’s targeted demographics and further strain the housing market, were scheduled to go into effect on July 1.   They would have required borrowers with disputed credit accounts in excess of $1,500 to resolve all of the disputes before a loan could be eligible for FHA insurance.  Further, the guidelines would have required all collection accounts to be paid off if the aggregate balance of the accounts exceeded $1,000.  As you’ve likely seen in your origination business, a healthy number of applicants for FHA-insured mortgages show some older, unresolved collections exceeding that $1,000 amount.

This is welcome news to those of us who work with borrowers using the FHA product.  Yes, the volume of FHA-insured purchase and credit-qualifying refinance loans has dropped since the recent MIP changes took effect, but HUD still captures a large market share, and artificially limiting homeownership opportunities for creditworthy borrowers with older blemishes on their bureaus is just bad policy.  It’s refreshing that HUD came to that realization before July 1and took these actions, although we do expect them to “provide further clarification” on disputes and collection accounts again in the future.

The full mortgagee letter detailing the credit guidance rescission (but leaving other guidance intact) can be found here.

Happy originating!

IMPORTANT – Upcoming FHA MIP and Underwriting Changes

MIP Changes

In order to continue stabilizing the mutual mortgage insurance fund, and due to requirements in the payroll tax extension bill passed at the end of 2011, HUD has announced the following MIP increases for forward mortgages:

Effective with case numbers assigned on or after APRIL 1, 2012:

1)      The up-front mortgage insurance premium will increase from 1.00% to 1.75%, regardless of loan term

2)      The annual premium will increase by 0.10% for all loans.  A summary of the new premiums is below:

Loan terms greater than 15 years Loan terms of 15 years or less
LTV > 95%:    currently 1.15%   NEW: 1.25% LTV > 90%:     currently 0.50%  NEW: 0.60%
LTV </= 95%: currently 1.10%  NEW: 1.20% LTV </= 90%: currently 0.25%  NEW: 0.35%

3)      Additionally, the annual MIP will increase by an additional 0.25% for loans over $625,500 effective with case numbers assigned on or after JUNE 1, 2012.

Underwriting Changes

On March 1, 2012, HUD published mortgagee letter 2012-3 (dated February 28th), containing some significant underwriting changes regarding self-employed borrowers, disputed credit accounts and identity-of-interest (non-arms length) transactions.  A copy of the mortgagee letter can be found here.  The underwriting changes detailed in this letter are effective with case numbers assigned on or after APRIL 1, 2012, so plan accordingly.  As usual, these updates do not apply to non-credit qualifying streamline refinances or HECM (reverse) mortgages. 

Friendly reminder: FHA requires mortgagees to have an active loan application for both the borrower and property before requesting a case number (see Mortgagee Letter 2011-10).

SELF EMPLOYED BORROWERS

1)      Self-employed borrowers MUST show a year-to-date P&L (Profit-and-Loss) and Balance Sheet if more than one calendar quarter has elapsed since the filing of the most recent tax return (annual or fiscal-year).  This requirement applies regardless if the loan is AUS-approved or not.

2)      If the income used to qualify the borrower exceeds the average of the previous two years’ tax returns, an audited P&L or a signed quarterly tax return obtained from the IRS must also be provided.  Again, this applies regardless of AUS decision.

HANDLING OF DISPUTED CREDIT ACCOUNTS, COLLECTIONS AND PUBLIC RECORDS

1)      Disputed accounts will no longer trigger an automatic review by an underwriter if BOTH of the following requirements are satisfied:

     a.   The outstanding balance of all disputed accounts is less than $1,000
     b.   Two years have elapsed since the date of last activity listed on the credit report for all disputed accounts

2)      If the aggregate dollar amount of disputed accounts exceeds $1,000, all of the disputed accounts must be resolved.  In other words, the accounts must be paid in full at or before closing or a payment agreement must be in effect on the account(s) and the borrower must show that three months of payments on the payment agreement(s) has been made in a timely manner.

3)      Disputed accounts resulting from identity theft or fraudulent or unauthorized use of credit cards can be excluded from the $1,000 limit if the borrower provides documentation of the circumstances (a police report, for example). The lender must also include documentation that the account(s) in question are verified as not the borrower’s debt in the final case file.

4)      If the aggregate total of collection accounts exceeds $1,000, ALL collection accounts must be resolved (paid in full or a payment agreement established with a minimum of three months of timely payments).  If the total of collection accounts is less than $1,000, they are not required to be resolved/paid.

5)      FHA continues to require all judgments to be satisfied or an acceptable payment agreement established (with 3 months of on-time payments) before a loan can be insured.

IDENTITY-OF-INTEREST TRANSACTIONS

The  definition of “family member” has been expanded to include brothers, sisters, step-brothers, step-sisters, uncles and aunts.

FHA Extends Anti-Flipping Rule Waiver Through 2012

On Friday, the Federal Housing Administration announced that the ‘anti-flipping rule,’ which prohibits a buyer from purchasing a property using FHA financing if the seller has owned the property for fewer than 90 days prior to the date the contract was written, has been waived through December 31, 2012.

 HUD initially waived this rule in 2010 in order to remove barriers for individuals wanting to purchase properties that were recently acquired by investors through the foreclosure sale process.  Recognizing that the foreclosure rate is still dramatically elevated across the country, HUD has taken the necessary steps to ensure that the waiver remains in place through 2012.  We expect a notice about this action to be posted on HUD.gov and/or FHA.gov soon.