How Many Banks Were Created Last Year? CFPB and Others Tackle Appraisals - Still Waiting on QM
Who doesn't like to have a little exercise when they travel? But this
might make some nervous.
This morning we had the weekly Initial Jobless Claims numbers. But gosh, think
of how much money mortgage banks would make if they didn't have any paid
employees! The Census Bureau actually tracks these things. "The majority of
all business establishments in the United States are 'nonemployers,' yet
these firms average less than 4 percent of all sales and receipts nationally...Nonemployer
Statistics is an annual series that provides subnational economic data for
businesses that have no paid employees and are subject to federal income tax...Most
nonemployers are self-employed individuals operating unincorporated businesses
(known as sole proprietorships), which may or may not be the owner's principal
source of income. For anyone interested in learning more...
I have a buddy that likes to say, "I always look for a woman who has a tattoo. I see a woman with a tattoo, and I'm thinking, 'Okay, here's a gal who's willing to make a decision she'll regret in the future.'" (Catchy quotes are always...catchy. Many liked what Paul Ryan had to say this weekend: "We promise equal opportunity, not equal outcomes".)
One wonders if the decisions regulators and politicians make will ever be regretted. The Financial Times reported that not one new, or de novo, bank was created in the U.S. in 2011. (The FDIC actually lists three new bank charters for 2011 - the lowest number in more than 75 years - but they all involved bank takeovers of other failed banks.) What are some of the possible implications? First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses' access to loans could limit future employment growth as well. The dominant narrative in 2011, like the 2010 version, was one of bank failures and distressed acquisitions. The FDIC reports that about a hundred banks failed and another hundred were absorbed in 2011. But industry consolidation has been prevalent since the 1990s, and overall, the number of banks declined by 15 percent in the past five years, to 7,357, while revenues decreased for the fourth consecutive year, to $737 billion. Although this is partly due to the Federal Reserve's low-to-zero interest-rate policy, which reduces interest income, non-interest income also fell in 2011 for the second consecutive year.
The CFPB has not issued underwriting guidelines for loans yet (in the form of QM), and it is moving on to appraisals. (Read: New Appraisal Rules Proposed for High-Risk Mortgages) Yesterday the CFPB, the Federal Reserve Board of Governors, the FDIC, FHFA, National Credit Union Administration, and the Office of Comptroller of the Currency proposed rules that would ban the practice of "drive-by" appraisals and require a physical inspection of the home. But the rules, required by the Dodd-Frank financial overhaul of 2010, would only apply to a small slice of the mortgage market - loans defined by regulators as "higher risk." Regulators define high risk ones in which the rate is at least 1.5 percentage points above a market average.
Yes, lenders don't make many loans above this threshold. In 2010, for example, using this definition such high-risk loans made up only 3.2% of the overall lending market, according to the Federal Reserve. And on the surface many of the proposals make sense, especially when presented to the public. But once again it is a slippery slope, like the potential of eminent domain usage moving from private-label securities into government agency loans, or the Fed setting LO comp standards and then setting compensation levels for all jobs.
The regulators also said they aim to combat fraudulent property flipping schemes in which a developer or individual buys a property, makes minimal repairs and tries to sell it at an inflated price. In an effort to combat this property flipping, the regulators propose to require lenders making higher-rate mortgages to obtain an additional appraisal at no cost to the borrower. In addition, lenders will be required to provide consumers a free copy of their appraisal no later than three days before the property sale closes - apparently this has already become a standard around the industry. The rules which will be published in the Federal Register" allow for a mandatory 60 day comment period.
For the origins of this we can thank the Dodd-Frank Wall Street Reform
and Consumer Protection Act. It established a new section in the Truth in
Lending Act (TILA) which does not permit a creditor to extend credit in the
form of a higher-risk mortgage loan to any consumer without first obtaining a
written appraisal performed by a qualified appraiser who conducts a physical
interior inspection of the property. Many argue that using interest rates to
determine risk, while practical from a theoretical viewpoint, does not include
the whole scenario. Regardless, the new section defines a "higher
risk" mortgage with reference to the annual percentage rate (APR) of the
transaction with thresholds substantially similar to rate triggers in
Regulation Z. In general the definition includes loans where the APR
exceeds the average prime offer rate (APOR) by 1.5 percent for first-lien
loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent for
subordinate-lien loans. The proposal would exclude "qualified
mortgages" from the definition when the rules for that category are
finalized. The regulatory agencies also propose to rely on their
exemption authority under Dodd-Frank to exclude reverse mortgage loans and
loans secured solely by residential structures such as many types of manufactured
homes from the requirements.
The proposed rules also require a second appraisal by a different qualified
appraiser if the property will be the consumer's principal dwelling or if the
seller acquired the property within the previous 180 days at a lower price than
the sales price at which it is currently being sold. The second appraisal
must include "an analysis of the difference in sale prices, changes in
market conditions, and any improvements made to the property" between the
two transaction dates. Other proposed parts of the new rules include a
provision requiring the applicant be provided a statement regarding the purpose
of the appraisal at application and receive a copy of any written appraisal at
least three days before closing. The applicant may also choose to have a
separate appraisal conducted at his/her own expense.
I can't find it yet, but eventually comments can be submitted here and are due by October 15.
While we're
on the appraisal issue, a while back I received a few comments that I am
overdue in repeating. On June 12th, in reaction to the input,
"My chief complaint about the new appraisal environment is that we the lender
are not permitted to order a second appraisal for a unhappy client BUT the
client can go to another lender and get another appraisal and that happens a
lot" I received, "This may be true when going through wholesale channels, where
the lender orders the appraisal; however there are still options available. One
option would be to pull the loan and submit it to another lender. Sure, it is a
headache to do, but if you are confident in the value, it might be worthwhile after
all, the borrower would have to go elsewhere and start all over again anyway
--- only with you, all of the documentation has already been provided). On the
mortgage banking side, I have had issues over value in the past where I have
provided valid sales comps that were not used that, at least in my estimation,
were much better than the choices made by the appraiser. I followed protocol
with the AMC and filed a dispute which went through a review process and,
surprisingly - not! - they elected to stand by the appraiser's initial report.
However, they did offer me the option of ordering a new appraisal which would
be assigned to a different appraiser. Confident in my value, I took them up on
it and, lo and behold, the new appraisal came back with over $100K improvement
in value (of course, my next argument was with the AMC for charging my client
for another report when the initial one was so bad....to no avail). So, for Amy
to say or imply that the only option is for the client to be able to go to
another lender for another appraisal because she is not 'permitted' to order
another one....I am not sure if that is completely accurate. So noted Steve
Kaye with Catalyst Lending.
Joe S wrote, "You had some really interesting commentary about appraisers
and the role of the Realtors to police themselves as far as what's put on the
listing that appraisers will, at a later date, use for comparable
purposes. Those were great, yet very subtle points and speak to the
anonymous process of some appraisals. I have quite a few of my brokers whom
also receive your blog and it was quite a talking point yesterday.... The
question arose however, that didn't seem to have a definitive, real world answer:
To use a technical mortgage term, If there is a "piss poor" appraiser who is
just rouge and or unethical, who would police that appraiser?...It used to be
the OREA and I recall hearing of them taking swift action before AMCs, but now
they seem sheepish and non-committal. The AMCs don't give a poop as long as
they get paid, but who over sees the individual appraiser since free market
conditions have been set aside? Is it the CFPB? HUD? NMLS? Sherriff Joe
in Arizona? Who? We used to have a capitalistic market place for
appraisers where if they didn't do a good job, people wouldn't use them, but
now it seems to be Halloween every day and they can hide behind different AMC
masks and have no accountability to do a thorough job."
Yesterday a noticeable percentage of my e-mails were made up of price worsenings. (READ: MBS RECAP: Pain Trade Continues For Bond Markets. Will It Turn Out Like March?) And Lock Desks saw volumes shoot up - "panic locking"? One trader noted, "The GNMA market traded like it was seeing more Bonds than the receptionist as a 007 convention." We went out on the worst levels of the day with the 10-yr at 1.80%. (Three weeks ago it was 1.40%.) On the hedging side, a week or two ago Fannie 2.5's (3% loans) were above 100. Now they are two points worse, and pipeline hedgers have gone from using 3% securities and gone back to using 3.5%'s. Agency MBS prices worsened by .625.
What gives? Europe has been relatively quiet. But there is increased uncertainty that the FOMC will implement additional QE measures at its September meeting given the recent decent economic news here. Yesterday's CPI and Empire Manufacturing both came in lower than expectations, causing a small jump in prices. But that didn't last long before a decent print in industrial production pushed us back lower in price, and then the buyers were nowhere to be found as sellers starting unloading.
Today we've had Jobless Claims (+2k to 366k, but the moving average is the lowest it's been since March), Housing Starts (falling), and Building Permits (a four year high at +6.8%), and we'll have a Philly Fed number. In the early going the 10-yr's yield is at 1.79%, and MBS prices are roughly unchanged.
After 35 years of marriage, a husband and wife came for counseling. When
asked what the problem was, the wife went into a tirade listing every problem
they had ever had in the years they had been married. On and on and on:
neglect, lack of intimacy, emptiness, loneliness, feeling unloved and
unlovable, an entire laundry list of unmet needs she had endured.
Finally, after allowing this for a sufficient length of time, the therapist got
up, walked around the desk and after asking the wife to stand, he embraced and
kissed her long and passionately as her husband watched - with a raised
eyebrow. The woman shut up and quietly sat down as though in a daze.
The therapist turned to the husband and said, "This is what your wife
needs at least 3 times a week. Can you do this?"
"Well, I can drop her off here on Mondays and Wednesdays, but on Fridays,
I fish."