NMLS to Help Monitor Loan Officers

One of the most common questions we get from borrowers is whether we know a licensed loan officer in their area. Sometimes we do and sometimes we don’t. However, soon the question will be even easier to answer. Bob Tedeschi’s Mortgage column in the New York Times today focuses on the ways in which NMLS, the Nationwide Mortgage Licensing System, is growing in importance and will become accessible to consumers within the next year.

Currently, the Nationwide Mortgage Licensing System (NMLS) is being used by 48 states with California set to join soon. Minnesota is the loan holdout, but if it does not comply, it is likely to be forced to do so by HUD as a result of the Secure and Fair Enforcement for Mortgage Licensing Act. As a result of the act, all states are required to participate in the licensing system. NMLS requires all loan officers at state-chartered banks to complete at least 20 hours of prelicensing education, to pass a test, and to complete 8 hours of continuing education annually. Those with a felony conviction in the last 7 years are not eligible for a license.

Perhaps most importantly for consumers, NMLS is establishing a database of complaints against loan officers, which will soon be searchable by the public. The searchable database will also include loan originator’s licensing credentials and employment histories. This information should help protect consumers from bad loan officers, and provide consumers with just another safeguard in the process.

Countrywide Can Be Sued by Investors, Rules Federal Judge

A federal judge in Manhattan ruled yesterday that the Helping Families Save Their Homes Act of 2009 did not exempt Countrywide from investor lawsuits. Countrywide had argued that the federal legislation automatically voided its pledge to buy back loans from investors if those loans were modified for troubled borrowers. The Helping Families Save Their Homes Act of 2009 was meant to help encourage servicing companies to modify loans, in part by providing some protection under liability arising from loan changes.

However, many of the mortgages owned by Countrywide (which has since been purchased by Bank of America), are owned by investors. The investors receive interests and principal payments from borrowers over the life of the loans. When the loans are modified, these payments are typically reduced. The investors are arguing that when Countrywide and Bank of America agreed to modify the loans, they breached their contract with the investors.

The ruling in the case said that the legislation did not prevent Countrywide’s investors from trying to enforce their rights under the mortgage servicing contracts. It would be up to the investors to prove that Countrywide’s pooling and servicing agreement requires it to repurchase the loans the bank modifies. The case would be in state court, outside of federal jurisdiction. Countrywide wanted the case to take place in federal court, due to the law being a federal law.

This case has some interesting implications. Right now, the Obama Administration has made it their priority to modify mortgages for borrowers, attempting to help the over 13% of homeowners who are currently delinquent on their mortgages. However, this case shows that even if the servicing companies and lenders agree, other parties, such as investors and hedge funds, may object. Certaintly there are bound to be losers from the housing bust and subprime mortgage crisis- the question is who will bear the brunt of the blow. As individuals argue in their self interest, it appears dangerously likely that the good of the collective whole will suffer.

Concerns with Appraisals Captivate Major Papers

Appraisers are under pressure to inflate property values.

Over the last two days, both the New York Times and the Wall Street Journal have published lengthy articles on the effects of the new Home Valuation Code of Conduct on appraisers. The Home Valuation Code of Conduct, which went into effect May 1, has made lenders responsible for ordering appraisals and negotiating with appraisers. As a result, appraisal companies are complaining that they are being paid less to do more work. In addition, appraisers are often required to travel farther to appraise homes, raising questions as to whether they are familiar enough with the area to provide a valid appraisal. A case highlighted in the Wall Street Journal article was that of a homeowner in Palm Beach Gardens, FL where the appraiser drove 44 miles to evaluate the home and came back with an appraisal that was around $70,000 less than the second appraisal. Furthermore, while the fees the appraisers are being paid have been decreasing, the cost to the consumer has risen by $100 in the past year, with most of the proceeds going to middle men.

Another concern raised by the industry is that being hired by lenders puts more pressure on the appraisers to return with a value that makes the deal possible. Appraisers need to keep the lenders happy to stay employed. If they demand fees that are higher than another appraiser or produce an unfavorable result, the lender may look elsewhere. As a result, some feel that the legislation risks putting ethical appraisers out of business.

Appraisal issues are common in reverse mortgages, and many of the issues raised in the article extend through both the conventional and reverse mortgage industries. As appraisals travel farther, there are more opportunities for mistakes. As appraisers worry about their fees and costs ride, the burden on consumers grows. Thus while the legislation has attempted to curb price inflation in appraisals and reduce the conflicts of interest, it appears to have arguably caused more problems than it has solved. Some in Washington are trying to get the legislation postponed until 2011.

"Cram Down" Legislation Threatened

US Rep. Barney Frank (D-MA)

In the wake of a meeting between mortgage servicers and representatives of the US Treasury Department last week, US Rep. Barney Frank (D-MA), chair of the Financial Services Committee, threatened to revisit the “cram down” legislation that had failed in the Senate last year. The legislation, which passed the House last year and is supported by the President, would allow bankruptcy judges to rewrite mortgage contracts when homeowners file for bankruptcy. While it remains to be seen what effect this would have on both the mortgage companies, and the borrowers, some believe that borrowers would be granted a great deal of relief from bankruptcy judges if the cramdown legislation were passed.

The problem is that there is no reason that a borrower should have to declare bankruptcy to get their mortgages modified or refinanced. And as more and more homeowners fall behind on mortgages, find themselves with motgages that are greater than the value of their homes, or both, the number of homeowners either unable or unwilling to make their mortgage payments will only increase. We talked yesterday about the problem of upside down homeowners encompassing about 32% of homeowners. The category of homeowners potentially in need of a refinance or modification is even larger.

And so while there are times when it might be useful for bankruptcy judges to be able to rewrite mortgage contracts, hopefully the government and the mortgage industry can work together to make mortgage modifications a more workable reality before the “cram down” legislation becomes necessary.

Increasing Number of Homeowners Upside Down on Mortgages

At the end of June, 24% of homeowners were upside down on their mortgages. In other words, 24% of homeowners owed more on their mortgages then their homes were worth. When added to those with no equity remaining in their homes, the percentage climbs to 32%. Nevada, Arizona, California, and Colorado are the biggest offenders with rates of 40%, 37%, 33%, and 31% respectively of homeowners whose homes are worth less than their mortgages. In some of these markets, homeowners are walking away from homes where they may owe twice as much as the home is worth or more. And when the home is worth less than the mortgage, borrowers no longer qualify for some of the programs that might be able to help them, such as a reverse mortgage.

In response, some are urging the government to begin reducing loan balances to help borrowers cope with the problem. Lowering loan payments or rates will only make the mortgages drag out interminably, and still not recoup the home’s equity (unless it appreciates again over time back to levels that are higher than during the time of the boom). If the government reduces the loan balances, borrowers will be inclined to continue to invest in their homes and stay in their residences, rather than walk away. This will reduce foreclosures, hopefully, as well as abandoned properties.

What do you think?

Housing Market Rebound Freezes Out The Previously Well-Off

A front page story in the Wall Street Journal this morning highlighted an interesting trend; high-end homeowners are being left behind in the housing market rebound. Stimulus programs, such as the $8,000 new homebuyer tax credit and low mortgage rates, are dependent upon income and home values. The jumbo mortgages necessary to take out a high-cost home have come with higher rates and lenders requiring an increasingly large portion as the down payment (20-30% of the property value). All this comes at a time when prospective buyers have had an even harder time selling their homes, making coming up with money up front difficult. As a result, while the market has begun to turn upwards for many first-time buyers and lower value homes, the market is still stagnant for those in the upper and upper-middle classes.

While it is perhaps unsurprising that stimulus programs might choose to target those with lower incomes, the recession has hit those with higher incomes as well. Many of the people affected by the stock market crash and financial fraud scandals are those who were making upwards of $150,000/year. After losing their jobs and/or the majority of their 401Ks, some members of this group are taking pay cuts in order to land new jobs. As home values decline however, this group also is beginning to have a hard time making mortgage payments and qualifying for relief. Jumbo mortgages are currently the type of mortgages with the highest default rate.

The government should do something to make sure that the upper middle class and upper classes are not completely cut out of the stimulus programs–at least so far as real estate is concerned. Their homes are taking some of the largest hits in a distressed market, to the point where selling is not possible without losing hundreds of thousands of dollars. And in markets such as California, some are extremely upside down on their mortgages. While they may be well off in comparative terms, they could still lose their homes (and many are), could still lose their jobs and source of income (and many have), and they still should be granted some form of relief.

HB610 Bans Yield Spread Premiums in New Hampshire

In the beginning of July, New Hampshire passed HB610, a bill banning yield spread premiums (YSPs) and including more restrictions about cross-selling. The bill goes into effect tomorrow, and, as it does, Generation Mortgage announced to its brokers that it is pulling out of the state. The bill was passed to help ensure that brokers are not compensated extra for selling borrowers higher interst loans (which is an even larger concern on the forward mortgage side).

However, lenders trying to avoid HB610 and similar legislation may be out of luck– the Federal Reserve is trying to push the mortgage industry to pay originators in the form of a flat fee, though some experts believe that compensation based on interest rate would still be allowed. If the federal legislation goes through, lenders will be hard-pressed to find states that allow YSPs. Even if the legislation does not pass, the debate and abuse on the forward mortgage side makes similar state legislation more likely.

Mortgage Servicers Under Pressure to Modify More Loans

Representatives from many of the mortgage industry’s leading mortgage servicing companies met with members of the Obama administration in Washington on Tuesday. The meeting was called to discuss ways to improve the administration’s housing rescue plan and loan modification program. It was called in light of the fact that the program, while launched in February to great fanfare, has only completed trial modifications on over 200,000 loans so far. The administration’s goal remains 500,000 trial mortgage loan modifications by November 1st. In what is perhaps an effort to increase the pressure on mortgage servicers to modify more loans, the Obama administration also announced that it remained on track to release a report on the individual mortgage servicing companies by August 4th. The report will contain the number of trial modifications offered to eligible borrowers and the number of trial modifications currently under way.

Some seem to fear that adding additional pressures to the mortgage servicers will cause banks to take additional losses on the loans. However, it is commendable for the administration to push for the loan modifications–especially in a program that has had so many complaints over the past few months. I’d argue that while the losses taken by the banks will in aggregate certainly be larger than that taken by the homeowner whose loan was not modified and gets foreclosed upon, the significance of the foreclosure is greater for the homeowner than for the bank. Furthermore, it is perhaps easier for the administration to then aid the bank, rather than aid each of the millions of homeowners whose homes have been pushed towards the brink of foreclosure as a result of the economy-the people who this program was designed to help.

Housing Prices Stabilize, Home Sales Increase- Is the Market Better?

The National Association of Realtors revealed today that home sales continued their increase in June, with the sale of previously occupied homes rising 3.6% from May. It was the highest number of sales since October of 2008 and beat analysts expectations by 50,000 homes. In perhaps more telling numbers, the median sales price was $181,800. While this is up from $174,700 in May, it is down from the $215,000 median sales price in June of last year.

Meanwhile, other reports are asking whether housing prices may have stabilized. The Federal Housing Finance Agency’s housing price index, based on repeat sales of the same houses, rose 0.9% in May from April. It is nearly unchanged since November (source: Wall Street Journal, front page, 7/23/09). However, the index seems to be deceiving. It does not include subprime or other unconventional mortgages, which are the source of many of the problems in the housing market and which appear to have driven down the prices throughout the country.

These signs seem to be positive for the housing industry. But jobless claims are still high, and foreclosures, new homes, and unsold properties do not seem to play a large role in these reports. While it is nice to see two indicators moving in such a positive direction, other downward indicators seem to mean that it might not be wise to get too optimistic just yet.

Leaving No Choice But to Fall Behind on a Mortgage

A new study by Northwestern’s Kellogg School of Management and the University of Chicago’s Booth School of Business revealed that 26% of borrowers who defaulted on their mortgage payments did so strategically. The study pointed out that one in six borrowers would choose to walk away if their shortfall was over 50% of their home’s equity. This finding is especially intriguing due to the falling housing prices in areas like California and South Florida, where many borrowers have found themselves incredibly upside down on their mortgages. These borrowers generally do not qualify for reverse mortgages even if they are old enough to be eligible, since they do not have enough equity in their homes.

However, it is logical that borrowers would not want to remain in a situation where the amount they owe on their mortgage is becoming increasingly more than their house is worth. And especially given the current state of the economy, some of these borrowers have found their situations change such that they can no longer afford the payments in the first place. With so many homes available at bargain basement prices, it is unsurprising that borrowers might choose to try to walk away to a better situation, regardless of the negative effect it may have on their credit.

Yet this is exactly the situation the government should be remedying. Many programs to help borrowers during the recession have left out those homeowners who are dramatically underwater on their mortgages, but these borrowers (who appear to often come in larger groups as neighborhoods fall dramatically in value) are some of the ones who need the help the most and whose mortgages, through no fault of their own, no longer make financial sense. Rather than simply becoming content to let homeowners walk away and take the hits to their credit or entrap them in their home, the government should work with lenders to establish a solution that helps bail out and reevaluate those whose mortgages are worth far more than their homes. Both sides should be able to win from the situation, rather than the current reality in which the banks, the borrowers, and the communities lose.