Defense of VA Fees; Force-Placed Insurance Update; Overcoming Non-QM Loan Liabilities

Suddenly the entire industry seems interested in three things: using the Federal Home Loan Banks as a pseudo-warehouse line, jumbo deals, and force-place insurance. Regarding this last issue, Kate Berry with American Banker wrote an article of interest: "FHFA Should Sue Banks on Force-Placed Insurance: Watchdog". "The Federal Housing Finance Agency should sue force-placed insurers and large banks for inflating prices and generating losses for Fannie Mae and Freddie Mac, the agency's inspector general says. Fannie and Freddie suffered $158 million in 'financial harm' in 2012 alone from reimbursing servicers for 'excessively priced' force-placed insurance. The government-sponsored enterprises reimbursed servicers for $327 million in force-placed insurance premiums last year and for $587 million in premiums from 2009 to 2011, the report found. The 24-page report by the inspector general recommends that the FHFA assess whether to sue insurers and banks to recover damages. The FHFA has agreed to complete an assessment on whether to litigate within a year. Two insurers, Assurant Inc. (AIZ) and QBE Holdings, write more than 90% of force-placed insurance coverage. They priced premiums paid by the GSEs that were 79% above what was considered 'reasonable' to cover claims, the inspector general's report found. Yet the FHFA, as the conservator of Fannie and Freddie, never determined whether to sue to recover damages. FHFA officials 'cited competing priorities, such as finalizing other financial settlements, as the reason for not completing such an assessment,' the report found. Force-placed insurance made headlines in 2011 when mortgage borrowers were hit with hefty premiums, usually after they defaulted and went into foreclosure. The hazard insurance is purchased by the servicer or creditor when a struggling homeowner fails to maintain coverage on the property."

So let's dig into this a little. The Federal Housing Finance Agency Inspector General conducted an audit on the lender-placed insurance premiums Freddie & Fannie paid on homes that have defaulted in the past several years. In the audit, the FHFA IG found the GSEs suffered $158M of financial harm due to excessively priced lender-placed insurance coverage in 2012 alone. The report states the GSEs paid $914M of insurance premiums during the years 2009-2012. As part of the audit findings, the FHFA IG recommends the FHFA sue the servicers and insurers to recover damages related to the excessive premiums that were charged. Those "in the know" think that if the FHFA were to attempt to recover damages related to excessive fees on lender-placed insurance, we should not expect any potential litigation to be a significant hit to the large banks involved in servicing large delinquent portfolios. But it could have a material impact on special servicers that have a less diversified revenue base and service highly delinquent GSE mortgage portfolios.

(Read More: OIG to FHFA: Be More Litigious Over Force-Placed Insurance)

Saturday's commentary had a note from an LO about calibrating VA fees with other programs. I received several notes to the contrary. "What am I missing something here? Is the originator forced to provide VA loans? If someone doesn't like the program, don't participate in the program. VA does not say you cannot charge, it says the Vet cannot pay. The seller, realtors, and originators are allowed to cover any fees they want to cover. Maybe LOs don't make as much, but the program is a good one and has been around for a long time. The program is pretty much as it has always been. Don't like it, don't do it."

And Theresa Springer, CGA, CAPS and Senior Loan Officer and Sales Manager with Eagle Home Mortgage writes, "All I can say to that Arkansas LO that wrote in on VA loans today, is 'SUCK IT UP.' I write many VA loans monthly along with my other loans and if the seller is not going to pay those non-allowables, our company surely will without a peep, so they can send their VA clients our way. These men and women help to keep us free so we CAN write loans and argue with the CFPB and complain about all our issues in a free press and do what we want in our lives FREELY.  I make enough profit on my other loans to cover all my VA loans and then some very nicely, especially with selling the SRP."

Finally, Guy Keith contributed, "The 'intent' of the VA loan program is to 'help' the veteran, who has served our country and helped preserve our freedoms at the risk of their lives, to buy a home.  The VA program is one of the rewards for their service to our country. This is not a program to make it easier for lenders and affiliates to make their fees. The VA decided that they did not want the veteran to pay certain fees in the loan process. The VA no-no came about where the veteran had no down payment and the seller paid the closing costs which allowed the veteran to buy a home with no money.  Many veterans coming home from military service don't have money for a down payment. The military is not known for paying exorbitant salaries to its soldiers. So helping the veteran buy a home needed to have something in it to help them.  Thus the VA no-no and the limitation on what the veteran can pay.

"Forward to today's home market and the VA no-no does not work nearly as well since there is a shortage of homes compared to the number of buyers.  Because of this, sellers won't pay for anything right now. That being the case, the only way the non-allowables can be paid it by the lender through premium pricing. It may not seem fair to the lender, but the market drives these things. So in the short term, the veteran pays a slightly higher interest rate (although in some states the 1% the veteran can pay usually is more than enough to pay the non-allowables), but the offset is that their closing costs are several thousand dollars less.  They pay a higher interest rate, but the market is driving this based on supply and demand.  VA rates are always among the lowest available and with no mortgage insurance, even with a slightly higher interest rate to cover these costs; their payment is lower than with any other loan program. Since a termite report and clearance is required on all VA loans, the loan officer needs to communicate with the real estate agent so they know this when they make an offer.  This can definitely be an issue if the seller does not want to pay it. But again, the termite requirement is to protect the veteran.  We may not agree with some of the requirements, but if that's the case, then don't do VA loans."

Scores of lenders are contemplating doing non-QM loans. One of the major concerns is the potential for future liabilities. "Three companies, Strategic Compliance Partners ('SCP'), VidVerify and Litigation Guard, have laid the groundwork for a solution to assist both borrowers and lenders in overcoming the potential risks posed by the new regulations. The concept, says Ari Karen, SCP's CEO and a principal of the Offit Kurman law firm, 'is basic.' 'The major difference between NonQM and QM loans is that new rules create liabilities on loans that in reality may not necessarily be riskier simply because they fall into the NonQM box. By developing a process which marginalizes and manages that liability up front, we remove the obstacles associated with NonQM or borderline QM loans.'

"Litigation Guard's QMReview 'closes the gaps left by traditional origination, processing and underwriting protocols that often result in claims against lenders. QMReview educates the borrower at all phases of the loan process, improving the borrower's ability to properly choose a loan, and 'unequivocally ensures that borrowers understand exactly what they are getting and why,' says Karen. It provides safeguards to ensure that lenders and borrowers are 'on the same page throughout the loan process.' Further, the process provides an automated residual income analysis and decision algorithm, relying upon the borrower's actual net income, savings, and realistic spending habits, to determine the borrower's ability to repay. According to Karen, the innovative QMReview process 'will not only minimize the liability for lenders - it will result in a better experience for borrowers and overall better and safer loans.'

"From a purely legal perspective QMReview relies upon the concept of an independently based and alternative assessment to demonstrate a lenders' good faith belief that the borrower can repay the loan.  This assessment is performed in three distinct phases.  First, there is an independent certification performed by SCP that the lender maintains sufficient compliance infrastructures.  Second, a borrower receives a series of short videos (created by VidVerify and reviewed by SCP) that present information in an understandable manner to assist him or her in making educated decisions and asking the right questions throughout the loan process.  Viewership is tracked to ensure that the borrower has received and reviewed the information. Third, an automated borrower interactive residual income analysis documents and confirms the ability to repay.  It also utilizes creates documentation that prevents potential misrepresentations, omissions, steering, and other harms that have been common fodder for lender lawsuits." For more information contact Chris Tiso (CEO of Litigation Guard), and no, this is not a paid ad.

Flipping over to the markets, there is no mystery about what the Fed is going to buy in terms of securities. If you ever want to know, check it out for yourself at the Fed's schedule. It is pretty hard to attribute any market move to the Fed's activities when it publishes, in advance, what it is going to buy! The question is more like, "Will originators and MBS holders lock/originate/sell what the Fed wants to buy?"

We do have a lot of news this week, along with the bond markets closing early Thursday and being closed entirely on Friday. Today we'll have the Chicago Purchasing Manager's survey and Pending Home Sales. Tomorrow we'll have some Manufacturing and Construction Spending numbers. Wednesday we'll have the MBA lock numbers (just ask your lock desk now and spoil the surprise) along with the ADP employment data and Challenger Job Cuts numbers, and Factory Orders. Thursday all ---- breaks loose! The markets are closing early, but ahead of that we have the Trade Balance, weekly Initial Jobless Claims, and change in Nonfarm Payrolls, Unemployment rate, and hourly earnings. Friday the 10-yr closed at 2.53% and in the early going today we're back to 2.51% and agency MBS prices are a shade better.

As readers know, this commentary doesn't focus entirely on residential lending. In fact, today we have a commercial job which seems pretty interesting. Sabal Financial, LLP, a Newport Beach, CA based organization continues to expand its wholesale commercial real estate term lending platform. Specializing in the origination of small balance ($1 - $10 million) loans on stabilized properties nationally through its extensive broker network, Sabal seeks Regional Managers, Loan Analysts and Underwriters to support the company's rapid growth.   The Company has created a proprietary, innovative technology that incorporates real-time, risk-based pricing and deal management functionality that accelerate the loan process while improving transparency for both brokers and their clients. Sabal currently manages over $7.4 billion in CRE assets worldwide, encompassing all property types and is rated by both Morningstar and Fitch as a Primary and Special Servicer.   For more information on career opportunities with Sabal, please send your inquiries and resumes to Kelly Garriott.

On the residential side, one of the nation's premiere mortgage companies, Gold Star Mortgage Financial Group, is interested in speaking with the industry's finest Loan Originators and Branch Managers.  Headquartered in Ann Arbor, MI and expanding from coast-to-coast, Gold Star "has become one of the fastest growing companies and top 50 lenders in the nation. Founded in 2000 and currently operating in 21 states, Gold Star's commitment to relationship-based customer service, cutting edge technology and a superior operations infrastructure fuels its stability and success. Gold Star has been recognized as an Inc. 500/5000 company, and most recently by Mortgage Technology Magazine as one of the nation's Top Tech-Savvy Lenders." To learn more, contact Shawn Sirko.