Primer on The False Claims Act; FHA, Wells, Agencies, and MI Companies Fight Over High LTV Ground
Rates have crept back up to pre-Brexit levels. Will the rates borrowers locked in during the last week of June be the stuff of cocktail party bragging for years to come for those owners? One person who probably won’t care is mortgage broker George Bernard, owner of Capital Financial Mortgage Corp., from 2005 through 2013. He’s been indicted for a $13 million fraud scheme.
One of the most common, yet vague, catch-all reasons for a penalty is the False Claims Act, dating from the Civil War. This body of legislation was basically created to make it against the law to cheat the government - a fine purpose. I am not smart enough to use all the legal jargon, but here's a layman's explanation about how the government can collect triple damages due to the FCA when lenders are found guilty of misrepresenting to the government (what they were under contract to do).
Let's say the lender makes a $100,000 FHA loan. So far so good. The lender certifies to HUD that it is eligible for insurance and HUD issues the MIC (mortgage insurance certificate).
But then the loan goes bad. The servicer forecloses and has a $20,000 loss for which they put a claim into HUD for the $20,000. HUD plays the claim and later reviews the file and finds a non-material issue. HUD charges the lender $300k: triple the $100,000 insurance policy. This is why for small losses lenders are not making the claims. And the government argues that a small sample can be extrapolated, like what is happening with Quicken. Buckley Sandler has a good write up about it.
Addressing the current & historical FHA situation, the Mortgage Bankers Association reports that, "Since 2011, the distribution of credit scores for newly endorsed FHA insured single family mortgages has begun to return to a pattern closer to historic norms. The share of FHA loan endorsements to borrowers in the 720 to 850 credit score range has decreased to 18.3 percent of endorsements from an abnormally high 38 percent share in the first quarter of 2011. At the same time, the share of borrowers in the 640 to 679 score category has increased. Since 2013, the share of endorsements for loans to borrowers in the 500 to 619 and 620 to 639 categories has also grown. Last year there was a slight resurgence among 720 to 850 borrowers following FHA's reduction of the annual mortgage insurance premium but this increase in share appears to be subsiding.
"Overall, the average credit score has trended downward from 700 in 2011 to around 680 thus far in 2016 for all fully underwritten loan purposes - purchase, as well as conventional to FHA and FHA to FHA refinances. We estimate that FHA's share of total originations has declined to 15 percent from its post-recession peak of 21 percent as FHA's counter-cyclical role in the market has receded."
Luke Slivkoff writes, "It's interesting to hear folks befuddled at why 30% of FHA borrowers have 700+ credit scores. It's simple: (1) expanded DTI ratios, (2) DU calibration is more liberal than for Conforming loans, (3) for 95% or 97% LTV the mortgage insurance may actually be less, and (4) many of them have some type of severe derogatory credit (i.e. previous bankruptcy, foreclosure, or short sale) which FHA offers a much shorter waiting period to obtain financing than the GSE's. One other reason could also be higher margins than conforming loans. Hence, in a market with falling rates, more entrants into the marketplace, and margin compression occurring to garner every scrap of business, perhaps some of these lenders are showing a 'lean' toward FHA over Conforming products."
And Robert Geiler sends, "I read the article Patrick Sinks with MGIC had in your Saturday commentary, and the private sector has not stepped up to the plate to replace FHA financing. The private sector cannot offer DTI up over 50%, foreclosure wait period of only 3 years, 2 years wait period for bankruptcy, alimony subtracted from income instead of including in ratios, disputed accounts on credit reports allowed, credit scores below 600 without increases in MMI, no reserve requirements, no income restrictions, no census tract restrictions, and more. It's ridiculous to say the private sector can replace FHA...who would take the risk?
"The 3% down payment being offered by conventional loans is so restrictive it's nearly impossible to use in higher priced areas like San Diego. I have many reasons to use FHA financing for some of my clients to help them get into a home, and it has helped home ownership tremendously even in our higher priced areas. A first-time buyer in San Diego is buying a $500,000+ home these days. A market with conventional financing only would leave many buyers out on the street. I hear MI companies always touting the lower costs of PMI, but those low down payment conventional loans cannot serve everyone whether they are first-time buyers or not."
No, the high LTV realm isn't the sole playground of the FHA program, but the stock prices of MI companies are impacted by the FHA's future. Amy DeBone with Compass Point LLC writes, "Uncertainty regarding the impact of a November FHA MIP cut on new business volume continues to weigh on PMI stocks. Industry growth concerns are also being driven by competitive pressure from smaller MI players looking to grow market share, as well as limited progress on the upfront risk-sharing pilot...current PMI valuations reflect a worst-case scenario for the impact of a 30 basis point cut to FHA's annual premium."
KBW reported in on Wells Fargo's yourFirstMortgage program - and not the fact that it violates every spell check routine. "Wells Fargo noted on its earnings call that its yourFirstMortgage program has had a strong start and the program received $1 billion in applications in the first 30 days. The company also noted that this is not necessarily incremental volume but volume that is coming from other programs, which we believe refers to the FHA. These loans go to Fannie Mae and require mortgage insurance, so we believe that it essentially results in volume moving from the FHA to the mortgage insurers...this program could be meaningful and Wells Fargo is the second largest FHA retail originator in the country. This should be a positive for mortgage insurer market share growth versus the FHA."
Zelman Research took a look at June applications and notes, "...efforts by Fannie Mae and Freddie Mac to increase credit availability among entry-level and under-served borrowers coupled with competition among lenders for purchase business is expected to continue to support a gradual expansion of the borrower pool despite challenges from ongoing regulatory scrutiny. Most notably, several of the largest lenders have recently introduced low down payment mortgage programs that will utilize a combination of private mortgage insurance and non-profit grants to offer LTVs of 97-100% for low-income or first-time buyers. In addition, Fannie Mae announced an expansion of its 97% LTV affordable loan program to serve a wider segment of low-income borrowers, which is modestly beneficial for the mortgage insurers."
FHA published Mortgagee Letter 2016-10, Home Equity Conversion Mortgage (HECM) Program - Servicing Fee Set-Aside Growth Rate; Third Party Property Tax Verification Fees; and Financial Assessment and Property Charge Guide. This Mortgagee Letter announces and transmits an updated HECM Financial Assessment and Property Charge Guide; revises the calculation of the growth rate (compounding interest rate) for HECM Servicing Fee Set-Asides to use the Note Rate; and adds the Third Party Property Tax Verification Fee to the list of allowable fees and charges. The revised Financial Assessment and Property Charge Guide and the Servicing Fee Set-Aside policy become effective for FHA case numbers assigned on or after October 3. The Third Party Property Tax Verification Fee update is effective for FHA case numbers assigned on or after July 13.
FHA published updates to its Single Family Housing Policy Handbook 4000.1 (SF Handbook), and launched a number of updated training and information tools for mortgagees and other stakeholders. Mortgagee Letters 2015-08 and 2016-08 have been superseded in full by the SF Handbook.
FHA is changing the definition of the Required Investment field in its Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard and FHA Connection (FHAC) technology, effective for case numbers assigned on or after August 22. The new definition reads: Borrower's Investment into the Transaction: If the borrower is receiving cash back, the amount should be a negative number.
After passing in the House of Representatives earlier this year, the U.S. Senate passed H.R. 3700, the "Housing Opportunity Through Modernization Act." This legislation includes reforms to current FHA restrictions on condominium financing, among other provisions. Changes include efforts to make FHA's recertification process "substantially less burdensome," while lowering FHA's current owner-occupancy requirement from 50 percent to 35 percent. The bill also requires FHA to replace existing policy on transfer fees with the less-restrictive model already in place at the Federal Housing Finance Agency. It now goes to the President.
NewLeaf Wholesale updated its NewLeaf FHA & VA guidelines.
Did you know that the bond markets put stock markets to shame in terms of volume? Yes, rates have crept back up to pre-Brexit levels. Friday, for example, the 10-year note closed about .5 worse in price to yield 1.59% and 5-year T-notes worsened .250. Fortunately for borrowers, agency MBS prices "only" sank about .125.
That was last week. This week's economic calendar is relatively quiet in the US with some housing data being the highlight. Of course any scheduled news in the United States tends to be "overruled" by unexpected events from overseas, and the ECB meets on Thursday, July 21.
But there is a smattering of announcements this week, most of them not expected to move rates. Today we'll have the NAHB Housing Market Index at 7AM PDT. Tomorrow is Housing Starts and Building Permits; Wednesday is the MBA's application data. On Thursday the 21st we can look forward to Initial Jobless Claims, Philly Fed numbers, the FHFA House Price Index, and Existing Home Sales. Pretty much zip of consequence on Friday.
We ended last week with the 10-year sitting at 1.56% and this morning its at 1.56% with agency MBS prices also roughly unchanged from Friday's close.
Jobs and Announcements
Flagstar Bank, the 12th largest lender with over 25 years of experience originating mortgages nationally, continues to expand its retail lending business nationwide and is seeking experienced loan processors, underwriters and closers. "Flagstar offers competitive loan programs, innovative technologies and robust marketing in addition to comprehensive training programs to support successful careers. We are united by our core STAR values of service, trust, accountability, and results that value each and every employee. Positions are available in Bellevue, WA; Phoenix, AZ, Costa Mesa, CA and Troy, MI (headquarters). Opportunities to work remotely are also available. To apply, email Scott Fitzgerald. Become a member of the growing Flagstar team!"
"Have you done something awesome in the past? Want a little more access to awesomeness in the future? Now is your chance, Lakeview Loan Servicing, LLC is hiring! Lakeview is a Top 10 residential loan servicer and is expanding our Consumer Direct and Wholesale operations staff in both Fort Washington, PA and Miami, FL. Opportunities include team leadership positions, mortgage loan originator, lock desk, loan processing, underwriting, closing and post-closing. Submit resumes to Careers@lakeviewloanservicing.com and come work with the family of companies managed by Bayview Asset Management, LLC, which is a minority-owned by affiliates of The Blackstone Group, L.P. (NYSE: BX) and has assets under management of approximately $9.4B as of March 31, 2016. Join our team and get your awesome on."
Florida Capital Bank is growing and searching for additional staff to join its successful mortgage division. Andrea Lefebvre, Director of Production (617.899.1428), and Bob Eisendrath, National Account Manager (414.350.3986), is looking to hire underwriters, processors, closers and funders for the Operations department. Underwriters can work remotely while processing and closing staff will be based in Jacksonville, FL. "FLCB has cultivated a fun team environment where everyone is passionate about delivering exceptional customer experience with every loan. FLCB is committed to our employees and offers competitive compensation, valuable benefits and an energized culture, as well as a tenured leadership team with knowledgeable and experienced staff! If you are a team player, have a positive attitude toward customer service and feel you would be a perfect fit, please send your resume to our Human Resources Department."
Plaza Home Mortgage, Inc. is expanding and increasing its sales force once again in Northern California and Denver. We are excited to announce new career opportunities for multiple Inside and Outside AE positions in the Sacramento and San Jose Area, as well as in the Denver market. We have 2 Northern CA operations centers and a Denver operations center. AEs will benefit from local market experts and local underwriting. Plaza is a FNMA/FHLMC and GNMA seller servicer with a diverse product offering including Reverse and Renovation. There is plenty of opportunity for growth along with a highly competitive compensation plan. If you're interested in additional information, please contact Jeanine Thomas, Regional Manager (916-955-4211), for our open Northern California opportunities, and Sarah Pratt, Regional Manager (303-597-0440), for opportunities in the Denver market. Plaza is an EEOC employer and follows all federal, state, and local laws relating to fair employment."