Transactions Covered by the CFPB; FHA and VA Pricing Jump Explained; More on Assumability of Loan Types

Well, April 15 is past us now. The United States is dealing with the terrible tragedy in Boston, and our thoughts go out to that city. April 15 was also "tax day": in 2009, Americans paid $866 billion in taxes to the federal government with the top 1% of earners (those making more than $343,927) paying 37% of that figure. The bottom 50%, those who earned less than $32,396, paid $19 billion in taxes. Taxes do influence behavior - with the November election in California raising its state taxes, for example, a portion of high earning individuals moved to either Nevada or Texas. In addition to the federal tax, 41 states and the District of Columbia also collect taxes on income. Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. (New Hampshire and Tennessee collect state taxes on income earned from interest and dividends, but not wages.) And Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania, and Utah have flat tax rates from 3.07% to 5%. For a nifty interactive tax map, go here.

I have been asked to help a large, Irvine-based California mortgage banker is seeking an Executive Vice President of Retail Sales to oversee the expansion of its corporate retail sales division and regional branch offices in the Southeastern US.  Rated as one of America's Top 100 Mortgage Companies in 2011 and 2012 by volume, the company is committed to its steady expansion.  Reaching out to consumers nationwide from a central location in Orange County, the company has grown to be an industry leader in both the purchase and refinance markets for FHA, VA, Conventional, HARP2 & Jumbo Loans. Please send your confidential resumes to me at rchrisman@robchrisman.com. (I am traveling in Colorado today, so please excuse any delays in responding.)

And REMN Wholesale continues to do well and is looking to expand its team with experienced wholesale account executives across the country. REMN offers a full line of products that includes FHA, VA, USDA and conventional loans. "A true broker partner, REMN Wholesale prides itself on a dedication to customer service and offers same day turn times on new files submitted by 11AM EST." Interested applicants should email aerecruiting@remn.com for more information, and for more information on the company visit remnwholesale.com.

Closing departments and settlement companies should take note that the CFPB issued a proposed rule clarifying and making technical amendments to the 2013 Escrows Final Rule. For example, the proposed rule establishes a temporary provision to ensure existing protections remain in place for higher-priced mortgage loans until the expanded provisions take effect in January 2014. Find the proposal here.

In a set of charts that only a compliance person could love, a set of Morrison & Foerster charts explain coverage transactions of CFPB mortgage rules. "Morrison & Foerster LLP recently released charts relating to the Consumer Financial Protection Bureau's (CFPB) eight final mortgage rules that were issued in January. The charts lay out which mortgage rules apply to different types of transactions. The first chart is an overview, followed by charts covering the CFPB mortgage rules that apply to consumer-purpose home equity lines of credit secured by a principal dwelling, consumer-purpose home equity lines of credit secured by a non-principal dwelling, consumer-purpose closed-end loans secured by a principal dwelling (real property), consumer-purpose closed-end loans secured by a principal dwelling (personal property), and consumer-purpose closed-end loans secured by a non-principal dwelling. See them here. (Thanks to Anjali L. with Fremont Bank for sending these along!)

Quicken certainly knows a thing or two about compliance. Dan Gilbert = Quicken = Detroit... for fans of Quicken, downtown renovations, or The Tigers, here you go. This is a fine example of some positive public relations for a lender - that has been hard to find in recent years.

In case you didn't receive the memo, there are no minorities. Apparently the folks at the USDA are being told to use the term "emerging majorities"? If this is true, in this age of political correctness, it could have interesting ramifications for the entire government, including the CFPB and disparate impact.  More

Given current rates, and thus the rates at which millions of people are refinancing, the home lending industry has become keenly interested in whether or not a particular loan is assumable. On the conventional side (primarily Fannie & Freddie), I received this opinion from a well-placed person familiar with conventional loans. "Keep in mind that, to a limited extent, even Fannie and Freddie mortgages can be 'assumable'.  Here is the exact wording from what has always been called the 'due on sale' clause of a standard uniform instrument fixed-rate note:  'If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.  However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.' The clause does not say the lender 'will' or 'must' require immediate repayment. For a FRM there doesn't appear to be any language in the note that requires a lender to issue an immediate repayment demand although this is normally the case. Thus, if Fannie or Freddie wanted to launch an initiative that would stimulate assumptions of low-rate loans in the future, it would not require any modification of current security documents as far as I can tell.  They would simply have to provide guidelines around how to qualify someone for such an assumption. Depending on how the housing market and economy are doing in the future, this could be used as a possible market stimulant.  Further, I would think that it would not be a violation of terms to current security holders since the notes are standardized, fully disclosed documents that any investor in a mortgage-backed security should be familiar with."

One wonders, "If a loan is assumed, is the old borrower accountable for losses on delinquencies or foreclosure from the new borrower?" One person wrote, "My thinking is that if a new borrower can qualify according to whatever terms Fannie or Freddie set out, the original borrower may be off the hook.  Who knows?  It's just speculation. My memory is a bit vague on this, but doesn't a VA assumption leave the original borrower on the hook if the assuming borrower is not specifically qualified and credit approved?  I think that rule applies either to FHA or VA, perhaps both."

And there is more. "If you look at an ARM note, you will see additional specific language about the qualifications for assumability that is absent in a FRM note. So, it is clearly and explicitly stated that an ARM loan is assumable subject to qualifications. Fannie's standard position appears to be that FRMs are not assumable and, thus, there are no published guidelines that I am aware of that would apply.  However, imagine a future situation where we have millions of mortgages in the 3.25-3.75 range during the next real estate downturn when current rates are at 6.5%.  Wouldn't the GSE's love to have another "HARP" that involves allowing qualified people to assume these loans and avoid potential foreclosure losses? I also don't know how the MBS investor community would react, but they would not like it because in the rate scenario I described, most of the old loans would be trading below par and current re-investment rates would be a lot higher.  We'd also have to look at the standard prospectuses to see if assumptions would violate the terms."

While we're on FHA, there is a lot going on with FHA (and VA) loans, and their pricing. First, last week there was FHA Mortgagee Letter 13-10: Extension of Waiver of Annual Recertification Requirements for Small Supervised Lenders. "On April 2, 2013, the FHA Commissioner signed a waiver of the requirement for submission of audited financial statements for FHA supervised lender approval or renewal by supervised lenders and mortgagees that possess less than $500 million in assets. The current waiver is due to expire on April 7, 2013.  The extension of this waiver will be effective for one additional calendar year through April 7, 2014.  In lieu of submitting audited financial statements, supervised lenders and mortgagees that qualify for this waiver must submit a copy of their unaudited regulatory report that aligns with their fiscal year end within 90 days of their fiscal year end.  The unaudited regulatory report must be signed by a corporate officer." Here you go.  Adam Quinones with Thomson Reuters writes, "With Fannie and Freddie requiring 'audited audits,' this waiver seems counterintuitive given the new regulatory regime and FHA's poorly perceived financial condition." He asked his audience to explain why the FHA lets certain lenders submit unaudited financials since many mortgagees fall under the $500 million threshold. Besides the thinking that most lenders are not audited, perhaps the ABA lobbied for this on behalf of small community lenders to save them the audit costs.

While we're on that topic, Mr. Quinones reminded me that there are four types of FHA lender approval. The first is "Nonsupervised Mortgagee": Correspondent lenders and mortgage lenders should apply for this type of approval if they want to perform the following lender functions: origination, underwriting, purchasing, holding, servicing, and the selling of FHA insured mortgages. The second type is "Supervised Mortgagee": Banks, savings banks, and credit unions should apply for this type of approval if they want to perform the following lender functions: origination, underwriting, purchasing, holding, servicing, and the selling of FHA insured mortgages. Third, "Government Mortgagee": Federal, State, local government agencies, and public or state housing authorities should apply for this type of approval if they want to perform the following lender functions: origination, underwriting, purchasing, holding, servicing, and the selling of FHA insured mortgages. And lastly, "Investing Mortgagee": Any entity that wants to perform the following lender functions: servicing, purchasing, holding, and the selling of FHA insured mortgages should apply for this type of approval. This mortgagee type cannot originate or fund FHA loans.

"What is going on with the prices of FHA & VA loans relative to Fannie & Freddie loans?" First, remember that FHA & VA loans go into Ginnie Mae securities (GNMAs). First, we have the proposed budget, and the obvious support that the U.S. Government is willing to provide FHA. This was pretty much assumed - the explicit guarantee. But we also had the mandate from the Bank of Japan: it will be pursuing an aggressive monetary policy, and buying up large quantities of Japanese government bonds. And any government, or large institution, buying large quantities of anything shifts the supply/demand curves. Japanese institutions have always been solid buyers of Ginnie Mae securities, and if suddenly they are competing with the BOJ for fixed-income assets, the prices of other securities will increase. Clearly, the BOJ mandate has provided a backdrop for GNMAs and MBS that means, over time, there will be real demand from Japan.

Put another way, as Governor Haruhiko Kuroda's efforts to spark inflation by doubling the central bank's bond purchases shrinks the available debt in his country, traders are betting that will bolster demand for U.S-owned Ginnie Mae's mortgage securities, pushing up prices and lowering yields that guide home-loan rates. Once again, the government is involved: there are domestic implications of the bold fiscal and monetary policy initiatives and economic incentives that swept the newly installed Japanese Prime Minister Shinzo Abe into office in December as well as the unprecedented monetary policy easing program being implemented by the leader for the Bank of Japan, Governor Haruhiko Kuroda. Interestingly, if you are a Japanese consumer in your mid-30s, the primary experience you have had in your working years has been that prices for most consumer goods fall over time. This is a clear disincentive to spend today and an incentive to wait to buy tomorrow. Why lay out money on a large consumer purchase today, when the price for the same product will be lower in the future?

Yesterday the headlines belonged to the terrible bombing in Boston, the plunge in gold, and the worst day of the year for the Dow Jones. But interestingly, interest rates did very little, and bond prices improved only .125-.250. The 10-yr closed at a yield of 1.71%. Ginnie 3.5% securities are now roughly 1.5 better in price than Freddie or Fannie 3.5% securities (see notes above). Today we've had the Consumer Price Index (expected unchanged, it was -.2%, ex-food & energy +.1%) along with the Housing Starts and Building Permits pair (Starts were +7% for March, the highest level since June of '08, but Permits were light at 902k). Later we'll have the Industrial Production & Capacity Utilization duo. For now, rates are slightly higher with the 10-yr at 1.73% and MBS prices a shade worse.

My wife hosted a dinner party for family far and wide and everyone was encouraged to bring all their children as well. All during dinner my four-year-old niece stared at me sitting across from her. The girl could hardly eat her food for staring. I checked my shirt for spots, felt my face for food, patted my hair in place but nothing stopped her from staring at me.

I tried my best to just ignore her but finally it was too much for me. 

I finally asked her "Why are you staring at me?"

Everyone at the table had noticed her behavior and the table went quiet for her response.

My little niece said "I'm just waiting to see how you drink like a fish."