Getting a mortgage for less

Julian Castro, the current Sec for the US Dept of HUD, testified before the Committee on Financial Services on Wednesday, February 11, 2015 regarding the reduction of the Mortgage Insurance Premium

Before your eyes glaze -this is important.  A reduction in the premium has huge benefit to everyday people buying a home and financing it with an FHA loan.  About 5-years ago, HUD raised that premium and that cost borrowers a significantly higher amount to close their loans - money out of their pocket to HUD.  And, each month, their monthly payment included hefty monthly premiums that went to HUD.

Castro is seeking to reduce this amount for two reason.  1. The high premium is forcing borrowers to look at big banks offering 3% down payment mortgages with lower insurance.  2.  By reducing the premium and by offering a truce with banks who refuse to do FHA loans (by not forcing them to buy back FHA loans for immaterial defects), Castro is hoping that more people will apply for and get an FHA loan. 

This is important to HUD and frankly to the US.  First, HUD has seen a large drop in FHA loans for the reasons cited above.  Consumers don't want to pay and banks don't trust FHA to punt loans back to them for small defects that don't affect the material soundness and quality of underwriting a borrower.

But, FHA loans provide borrowers who can't get a 3% down loan at a bank with the ability to get a mortgage.  Those much talked about low down payment loans at major banks and bankers come with tougher credit, employment and asset requirements than an FHA loan

Since the 1930's FHA has played an important role in housing - providing loans to people who otherwise would not get one.   So, HUD is an important player in the US economy.

The US Congress cares about this reduction because not so long ago FHA and HUD ran out of money as the foreclosures went through the roof.   Castro stated that in response to this HUD increased the insurance amount from borrowers and toughened underwriting which brought in a 21 billion improvement to the insurance fund.

HUD remains under the limit required to have in reserve - a violation that a regulatory like HUD would not tolerate in a lender.  Congresspersons grilled HUD about this very fact in light of the reduction of the insurance premium, which goes to increase their reserves. 

Subprime lending back

Subprime mortgages are back

Subprime mortgages - what most consider the epicenter of the financial meldown - are coming back.

Sub prime mortgages were meant for borrowers with less than prime credit.  It started out that a subprime loan came with a higher interest rate and a larger down payment.  It slid into not requiring any income verification of the loans, then no asset verifications (with yet higher rates and higher down payments) to offering literally lowering the down payment and increasing the rate higher and higher.  In fact, lenders were so hungry for the returns that they offered adjustable loans with teaser interest rates and moved into "interest only" mortgages  - requiring the borrower to only pay the interest and never pay the debt off.  If not bad enough, there were negative amort loans - which allowed the borrower to pay less than was required to pay the mortgage, which meant that their mortgage debt increased, not decreased.  And, let's not forget that lenders got into giving out home equity loans with the subprime loans - so you got two mortgages.  One for 80% of the value and one for 10%, 15% of the value - which meant you only put down 5%.   It actually got worse when lenders came out with the "125's".  Those were 125% loan to value loans - which meant if you bought a 100,000 dollar house, the bank would happily lend you 125,000.00 to buy the house..... The appetite for those loans by investors was voracious.  Big banks bought sub prime lenders and got in the game.  It got huge.  In fact, in 2006 and 2007, more people were doing subs than doing your normal Fannie Mae or Freddie Mac loans.  And, forget FHA - they required too much verification and too much insurance premiums - and Realtors steered borrowers away from an FHA for fear of the appraisal - which was more stringently done on an FHA financed property.

Subs are back.  Now they are being hawked to borrowers who have fallen outside the tight lending criteria that came into place after the crisis.  When lenders would lend without regard to income, now they lend with regard to ability to pay and most won't lend to someone with less than a 640 credit score - and that credit score will cost you in points and fees.  Over 700 and maybe you won't have points.  So, young people starting out are locked out of the housing market.  And, we wonder why the housing market has stumbled and stumbled since 2010.

The new subprime loans come with higher interest rates than being offered to borrowers with 640 abd higher credit scores.  The loans can not have rates that increase if a borrower defaults nor any pre payment penalty should the borrower pay off their mortgage sooner (inheritance, sale, re-finance).   And, the borrowers do need to complete homeownership housing counsling.

But, while not as wild as before, they are back.  Some do not call them sub prime, they call them alternative mortgage products.  They argue it opens to doors to people who in other days easily qualified.

What ever happened to the days when common sense underwriting was done on each loan?  No two borrowers and no two mortgage applications are the same.  With automated underwriting and investment firms seeking every higher returns - all that went out the window.  For every borrower who lied and fabricated supporting documentation for their loans - lending became a nightmare.  In the good days, those who say got hit with a medical emergency were approved because an underwriter underwrote the loan and got the documentation proving they were on time with their payments prior to the emergency, have stable income and all that portends stability and ability to pay.  But, that is all gone now and those and new home buyers are the ones aone's who today are paying the price.

Loosen lending?

Reuters reports BOA won’t take the bait from government policy makers to loosen credit
Here’s the rub.  While government leaders bemoan the real estate market lackluster recovery and go on Sunday morning talk shows ginning up need for looser mortgage underwriting credit --  one wonders if they are surprised that banks are not only ignoring their cries, but are openly saying “no”.
First, the government called for more home ownership in the 1990’s and pushed for greater capacity by increasing the amount of one’s income used for housing expenses (higher DTI).  Then, the government enticed that by tying the higher DTI to handing out candy to banks via CRA credits.  Without those CRA credits, banks could not operate fully.  So, out came “Low to Moderate Income” loans (“LMI”) and the slippery slide to no income verification loans and the sub prime was greased all the way to 2008 when it crashed.  
During the crash the government sold banks on acquiring the now defunct banks.  The Banks followed through.  BOA took over Countrywide.  Wells took over Wachovia.  You remember the famous picture of the banks lined up alphabetically in a room with government regulators looking for bail outs for failing banks?
Fast forward from 2008 to 2013 and 2014 and the regulators created by the government went on a PR campaign to blame banks and then fine banks – billions of dollars – for the acts that the government asked them to do.
Politicians felt pretty good.  They had banks save the failing banks (and they lent a large sum of money to failing banks themselves) and the went on a new PR campaign blaming banks (not themselves) for the reckless lending, tying it to high profits over sound lending.
So, lending got tight.  Now the economy is not recovering as quickly as they would like. So, now they want the banks to loosen up again.
So – after creating the mess, blaming it on the banks, lending untold billions to bail everyone out, failing to tell anyone they got their money back with interest, now the government wants banks to loosen lending?
JP Morgan Chase already said they are re-evaluating FHA mortgages and may exit from it.  HSBC pretty much has throttled back.  Mortgage brokers are for the most part, extint.  Small mortgage bankers are closed.  Mid sized mortgage bankers are seeking out marriage partners to survive.  Big banks won’t loosen lending.  Bank of America said “
In October, the top regulator for the U.S. housing market announced plans to allow many more Americans to buy homes by making a down payment of as little as 3 percent of the purchase price.
But Bank of America CEO Brian Moynihan said at an investor conference his bank hosted on Wednesday that it will require borrowers to make larger down payments "to make sure that can withstand the bumps in the road" of homeownership, such as "unemployment, divorce or sickness."
"I don't think there's a big incentive for us to start to try to create more mortgage availability where the customers are susceptible to default," Moynihan said.
"I know that that doesn't sound good for an instant housing recovery and faster housing markets but it's actually good because in the long term it keeps the housing more fundamentally based," Moynihan added.
Now, is that not what the regulators and government screamed on top of Mount Rushmore about?  Isn’t Moynihan giving them what they demanded?  As one said, be careful of what you ask for – you may get it.
Harsh?  Perhaps.  The losers?  Sound borrowers with credit scores in the low to mid 600’s who had an issue that they got past and want to buy into a home – who just a few years ago a good underwriter would have worked hard to get them approved for their mortgage.  Today – no way without a large down payment and higher credit score. 
Why after paying billions of dollars, facing exuberant regulators who do not know the 5-C’s of underwriting but are quick to judge a file’s compliance to underwriting.  Years of regulators issuing out “Sanctions” that lenders have to sign or face more severe penalties.  Years of dealing with regulators like the North Carolina Commissioner of Banks who simply make decisions and issue out findings without rationale or the New York State Financial Services Department who literally employs individuals who not only have no clue about lending; but can not speak English.   Yet, these people can and will close down a company or fine another or issue out edicts.  And, that’s the state level.  Try facing the feds.
Why would anyone lend a penny more that could default or comes within 10 feet of what was “wrong” two-years ago?
That is like you being told by a policeman that you went 35 miles an hour three years ago when the speed limit was 35 mph, so now you face a 10,000 dollar fine and they release your mug shot.   Then, the mayor complains that people are literally doing 30 miles an hour and encourages people to take it up to 35 MPH, the posted speed limit.
I’d be the first to keep it at 30MPH, below the posted high speed limit and above the minimum – just in case someone gets in an accident at 35mph and the police go backwards in time to issue out more tickets again……
Silly?  That’s what happened.  And, now we must live with that irrationality.

Cost of Regulations

According to the MBA,  higher costs and concerns about buybacks are driving the decline in mortgages for home purchases. It will slow to $635 billion this year, a 13 percent drop from 2013.
Banks have constrained home lending to many borrowers deemed creditworthy by mortgage finance companies Fannie Mae (FNMA) and Freddie Mac. Applicants approved for mortgages to purchase homes had an average FICO credit score of 755 in August, according to Ellie Mae, a company that makes software used to process mortgage applications. In contrast, Fannie Mae and Freddie Mac guidelines allow for credit scores as low as 620 for fixed-rate mortgages in some cases.
Lenders reported a 30 percent median increase in compliance costs this year from 2013, according to a survey by Fannie Mae released this month. And 72 percent of lenders surveyed said they spent more on compliance this year compared with last year

FHA Flipping

FHA flipping policy

In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.

Editorial: What are we to think about M&T sanction?

M&T Bank (Buffalo NY) was recently fined by the Consumer Financial Protection Bureau (CFPB).

The CFPB stated that the fine centered around M&T's advertisements to the public about free bank accounts.  In essence, M&T ran ads stating that consumers could get free checking at M&T Bank if they signed up for a specific account.

The CFPB stated that M&T bank failed to 1. Notify customers that to maintain their status of free checking, they needed a certain amount of activity in the account and; if they did not do so they 2. Would no longer qualify for the free checking account, 3. M&T Bank would not tell them they no longer qualified, 4. M&T would put them in a fee based account 4. The consumer would only find out after being billed a monthly maintenance charge in a new, fee based, account with a different name on it.

M&T Bank, in essence, stated that this happened prior to the creation of the CFPB (true) and that laws and regulations are have dramatically changed over the past few years (true).  Furthermore, they have tried to keep inline with the regulations and currently are compliant (we should take them at their word on these last two points).

However, what M&T failed to address in their statements is that deceptive advertising is not a new regulatory issue.  In fact, deceptive ads have been a focus on government regulators going back to the 1960's or further back. 

As for the financial world, to thwart deceptive ads, the State of New York (where M&T is domiciled) specifically has financial and consumer laws that address this.   Transparency are utmost importance and some regulators, long in existence prior to the CFPB, have gone so far as to mandate the size of fonts and what is and is not misleading or deceptive threatening fines and sanctions.

So, for M&T to say they are just going to agree with this -and refund the fees and pay a 200,000 fine to the CFPB to put it behind them continues to muddy the waters that M&T swims in.

Truthful advertising is a mainstay of any business.  It is unethical otherwise.  Period.

M&T should have fessed up to what, in the end, probably was really just an oversight on their part - where someone in some department who approved the ad did not vet it for compliance.

Had M&T stated that this was an oversight on their part, it would have been the ethical thing to do.

Ethics, especially in banking, is the cornerstone to a bankers lifeline.  M&T stumbled here and is bruised.

CFPB Takes Action Against M&T Bank for Deceptively Advertising Free Checking

http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-mt-bank-for-deceptively-advertising-free-checking/

M&T to Refund $2.9 Million to Approximately 59,000 Account Holders Who Paid Fees for Free Checking
http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-mt-bank-for-deceptively-advertising-free-checking/
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) took action against M&T Bank for deceptively advertising free checking accounts. The CFPB found that M&T lured in consumers with promises of “no strings attached” free checking, without disclosing key eligibility requirements. When consumers failed to meet the requirements, M&T automatically switched them to checking accounts with fees. M&T will provide $2.9 million in refunds to the approximately 59,000 consumers deceived into paying fees and it will pay a $200,000 penalty for the violations.
“Although M&T promised people free checking, tens of thousands of consumers ended up paying for a product they had thought was free,” said CFPB Director Richard Cordray. “This is an important reminder to all banks and credit unions that they cannot misstate to consumers whether a financial product or service is free. Today we are putting $2.9 million back in the pockets of consumers as a result.”
The M&T consent order can be found at: http://files.consumerfinance.gov/f/201410_cfpb_consent-order_m-t.pdf
M&T Bank, headquartered in Buffalo, N.Y., is a retail bank that offers various deposit account products and has hundreds of branches in the northeastern U.S. During a routine CFPB supervision exam, the CFPB found that M&T was advertising a “Free Checking” account, then converting many consumers into a fee-based “M&T First” account. Banks and credit unions are prohibited from deceptively advertising deposit accounts. If an account is described as free or no cost, it cannot, for example, have any maintenance or activity fees, or any fees to deposit, withdraw, or transfer money.
The CFPB found that M&T:

• Deceptively advertised checking accounts with no strings attached: M&T’s free checking account advertisements included such ads as, “Untangle yourself from monthly service fees. Get a free checking account at M&T. No strings attached.” But M&T did not disclose in such ads that the free checking account customers had to maintain a minimum level of account activity with deposits and withdrawals to maintain the free account. These kinds of ads for free checking ran in various geographic regions through mediums including television, print, and radio. M&T also marketed the free checking accounts to its customers on their account statements and on ATM screens and receipts.

• Automatically converted many free checking accounts into accounts with fees: If there was no account activity for 90 days, M&T automatically converted the “Free Checking” accounts to “M&T First” checking accounts. Consumers with “M&T First” accounts who failed to maintain an average or combined monthly balance of $1,500 were charged fees of $5 to $14 per month.

• Did not adequately alert consumers to the account conversions: The only indication customers received that their “Free Checking” account had been converted to an “M&T First” account due to account inactivity was that “M&T First” would appear on account documents, such as paper statements.

During the period covered in today’s order, M&T converted approximately 80,000 “Free Checking” accounts to “M&T First” accounts. Of those, about 59,000 were charged account fees because they did not meet the $1,500 threshold required in the “M&T First” accounts. M&T assessed approximately $2.9 million in monthly maintenance fees from these consumers.

Enforcement Action

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions violating consumer financial laws, including engaging in unfair, deceptive, or abusive acts or practices. Today’s order covers from Jan. 1, 2009 to Sept. 25, 2012, when M&T stopped the conversions. Among the things the CFPB’s order requires of M&T:

• Refund $2.9 million to consumers: M&T must refund each of the approximately 59,000 affected consumers the sum of all monthly maintenance fees they paid under the “M&T First” accounts. If the consumers have a current checking, savings, or money market account with the bank, they will receive a credit to their account. For closed or inactive accounts, M&T will send a check to the affected consumers or reduce charged-off balances by the amount they were charged in fees.

• Update credit reports: In the cases where M&T closed an account due to a negative balance, M&T will provide updated information to each credit reporting agency to which M&T had previously furnished information.

• End all deceptive advertising: M&T cannot misrepresent, or assist in misrepresenting, that a checking account is free when the terms and conditions of the account impose account activity requirements or when the account will convert to an account with monthly maintenance fees if the account activity requirements are not met.

• Pay a $200,000 fine: M&T will make a $200,000 penalty payment to the CFPB’s Civil Penalty Fund.

CFPB Takes Action Against M&T Bank for Deceptively Advertising Free Checking

M&T to Refund $2.9 Million to Approximately 59,000 Account Holders Who Paid Fees for Free Checking

 http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-mt-bank-for-deceptively-advertising-free-checking/

WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) took action against M&T Bank for deceptively advertising free checking accounts. The CFPB found that M&T lured in consumers with promises of “no strings attached” free checking, without disclosing key eligibility requirements. When consumers failed to meet the requirements, M&T automatically switched them to checking accounts with fees. M&T will provide $2.9 million in refunds to the approximately 59,000 consumers deceived into paying fees and it will pay a $200,000 penalty for the violations.

“Although M&T promised people free checking, tens of thousands of consumers ended up paying for a product they had thought was free,” said CFPB Director Richard Cordray. “This is an important reminder to all banks and credit unions that they cannot misstate to consumers whether a financial product or service is free. Today we are putting $2.9 million back in the pockets of consumers as a result.”

The M&T consent order can be found at:http://files.consumerfinance.gov/f/201410_cfpb_consent-order_m-t.pdf

M&T Bank, headquartered in Buffalo, N.Y., is a retail bank that offers various deposit account products and has hundreds of branches in the northeastern U.S. During a routine CFPB supervision exam, the CFPB found that M&T was advertising a “Free Checking” account, then converting many consumers into a fee-based “M&T First” account. Banks and credit unions are prohibited from deceptively advertising deposit accounts. If an account is described as free or no cost, it cannot, for example, have any maintenance or activity fees, or any fees to deposit, withdraw, or transfer money.

The CFPB found that M&T:

• Deceptively advertised checking accounts with no strings attached:M&T’s free checking account advertisements included such ads as, “Untangle yourself from monthly service fees. Get a free checking account at M&T. No strings attached.” But M&T did not disclose in such ads that the free checking account customers had to maintain a minimum level of account activity with deposits and withdrawals to maintain the free account. These kinds of ads for free checking ran in various geographic regions through mediums including television, print, and radio. M&T also marketed the free checking accounts to its customers on their account statements and on ATM screens and receipts.

• Automatically converted many free checking accounts into accounts with fees: If there was no account activity for 90 days, M&T automatically converted the “Free Checking” accounts to “M&T First” checking accounts. Consumers with “M&T First” accounts who failed to maintain an average or combined monthly balance of $1,500 were charged fees of $5 to $14 per month.

• Did not adequately alert consumers to the account conversions: The only indication customers received that their “Free Checking” account had been converted to an “M&T First” account due to account inactivity was that “M&T First” would appear on account documents, such as paper statements.

During the period covered in today’s order, M&T converted approximately 80,000 “Free Checking” accounts to “M&T First” accounts. Of those, about 59,000 were charged account fees because they did not meet the $1,500 threshold required in the “M&T First” accounts. M&T assessed approximately $2.9 million in monthly maintenance fees from these consumers.

Enforcement Action

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions violating consumer financial laws, including engaging in unfair, deceptive, or abusive acts or practices. Today’s order covers from Jan. 1, 2009 to Sept. 25, 2012, when M&T stopped the conversions. Among the things the CFPB’s order requires of M&T:

• Refund $2.9 million to consumers: M&T must refund each of the approximately 59,000 affected consumers the sum of all monthly maintenance fees they paid under the “M&T First” accounts. If the consumers have a current checking, savings, or money market account with the bank, they will receive a credit to their account. For closed or inactive accounts, M&T will send a check to the affected consumers or reduce charged-off balances by the amount they were charged in fees.

• Update credit reports: In the cases where M&T closed an account due to a negative balance, M&T will provide updated information to each credit reporting agency to which M&T had previously furnished information.

• End all deceptive advertising: M&T cannot misrepresent, or assist in misrepresenting, that a checking account is free when the terms and conditions of the account impose account activity requirements or when the account will convert to an account with monthly maintenance fees if the account activity requirements are not met.

• Pay a $200,000 fine: M&T will make a $200,000 penalty payment to the CFPB’s Civil Penalty Fund.

Mortgage Loans

Mortgage Banking Regulatory Compliance - you can't afford not to!

Mortgage Banking has evolved, as life seems to, and change demands change.  There was a time when Mortgage Bankers served a vital link between borrower and access to credit that large banks did not serve and Mortgage Brokers could not provide.

Mortgage Bankers set up a Sales Department to reach out to borrowers, a Risk Management Department to set interest rates and sell the loans to secondary, an Accounting Department to settle out the financial transactions, a Processing and Underwriting Department to process, underwrite and approve the loans, and of course a Closing Department to work with title companies to close and fund the loans.

In 2008, as the sub prime market imploded there was a tremendous shift to mainstream mortgage bankers from sub prime lenders who no longer could access credit on Wall Street.  This intense volume that was also under pressure by borrowers seeking to refinance at lower interest rates, as those begin to tumble downward. 

In 2009, main stream mortgage bankers and Banks began to realize that the unsavory types had crept into the mortgage world previously occupied by the professional lenders.  All the Tom, Dick's and Sally's who put a shingle out and were fleecing borrowers with 120% LTV loans, Neg Amort loans and other predatory types of loans - came running to Bankers and Banks because they could not deal with "change" as they found their mortgage brokers closing in response to Wall Street's inability to purchase those previously hot loans that came with great rates for investors.

As a result of that and the economy, which saw unemployment well above 8% and people were losing jobs everywhere, mortgages began to default left and right.   All of a sudden a lender with a .80% 2-year default or a 1.02% default were seeing defaults rise to 3% and higher.  This caused panic in the mainstream lending environment.

No one knew if it was fraud or the economy, but no one cared either way.  They wanted the defaults to stop because big banks who sold loans at a great profit to one another began litigating over whether a loan was improperly underwritten which could then trigger a buy back.  It became an intense case of a hot potato - who had the loan and who was trying to get whom to buy the loan back because it was 30 or 60 days late.

In came the US government.  First they put in rules to license and professionalize those individuals in the mortgage world; to weed out the unsavory individuals who had come from the brokers that were doing subprime loans - and many of whom were thieves working with straw borrowers and stealing money by lying on mortgages unknown to banks, bankers and other parties who were severely hurt financially and who's reputation were negatively hurt by such acts.

Then came the many, many underwriting changes that tightened credit access to borrowers.

And, in the interim, HUD (who had taken control of Fannie and Freddie) and the new Federal oversight - the Consumer Protection Financial Bureau (CPFB) began to enact laws and regulations that dictated lending.  Those laws and regulations impacted everything from mundane disclosures, timing of said disclosures to what constituted "predatory lending" including "high cost loans" and what was a proper loan - i.e. not lending to those who could not afford a loan, also called the "Ability to Repay" loans under the Qualified Mortgage "QM" theory.

 These seem rationale and in fact, they are.  However, to comply with these things required an army.  Lenders were scrambling to A. Figure out the new law.  B.  Figure out how it affected them.  C. Figure out how to implement it. C. Figure out who was responsible in the company to make sure that these things were happening.

All of a sudden, Mortgage Bankers saw that instead of the five (5) departments outlined in the beginning paragraph, they needed a sixth (6th) department.  An Internal Auditing Department also known as a "Compliance Department" that reviews all the forms and systems and audits select files to insure compliance with hundreds of federal, state, agency, investor and internal credit overlay regulations and guidelines.

If this department did not exist a lender faced serious consequences that include:  1.) Buy back of loans from banks who find the loan does not conform to lending requirements and 2).  Serious regulatory retaliation for flouting the rules and regulations of state and federal Regulators.

One buy back, one regulatory fine could and does wipe out profits and could result in a company facing serious financial challenges and stresses.  Just ask Bank of America, JP Morgan and others who have paid billions and now have openly questioned the wisdom of lending FHA loans in a move to defend themselves from government regulators.

This sixth (6th) department is costly, however.  Typically, it needs to be headed by an attorney who can interpret legal regulations so that those can be implemented by management and the Compliance Department that oversees compliance and internal auditing.

Any company putting out a product has someone on board reviewing the quality of the product that is put out to accomplish basically two goals:  1. To get repeat business because the product is of excellent quality.  2. To defend against lawsuits brought against sloppy products or dangerous products that harm a consumer on some level.

This is a new concept to Mortgage Bankers who never had to deal with this before.  They view this as a cost of doing business that can't be passed onto the consumer (pricing doesn't price in this cost as it has remained flat).  But, regulators require that lenders eliminate mistakes in mortgages and that loans are perfected at point of origination.   In addition, there are reports to managers and internal reviews that must be done and must be produced to an outside audit to show the company is actually doing these things and is on the look out to make sure their products conform to the laws.

The bottom line is that these departments are a cost of doing business for a mortgage banker and these departments will bring with them significant costs that Regulators in their "high cost" calculations have pretty much made sure lenders can not "price in" these costs to the consumer to offset them to a net zero effect. 

In other words, expect to spend a lot of money in this department.

Looking at the business it is clear that small and mid-size Mortgage Bankers simply can not afford these departments and simply can not afford not to have these departments.  Many are holding out hoping to remain under the radar of regulators while issues about buy backs get sorted out (can a lender force a loan back because, in reality, it just is not performing and they scoured the file to find one, tiny, small mistake and they called out as "we gotcha, you have to buy this bad loan back now or we will sue you".   And, do not think for one minute that banks do not do that to Mortgage Bankers.

This is not going away.  Lenders need these departments.  This requires lender to either bite the bullet and open, fund and get behind this department - or they need to A. Close  B. Merge or C. Sell to another lender.  Period. 

According to industry experts, any lender not closing 25 million a MONTH is just not going to be able to afford to comply and in the end - be it in the next few months or the next one to two years, will be forced into A, B or C listed above.

Let's look why lenders under a 20 to 25 monthly million in loans won't make it:

Say you're lender is closing 12 million a month.  And, it has three to four investors.  In this environment, they already are pressured to give more to one lender to get preferred pricing but fear doing that to alienate lenders 2, 3 and 4 who they need in case lender 1 makes a negative business move.  So, that puts their gov pricing at say 300 to 250 basis points and their conforming say at 250 basis points.

Say they are doing 50/50 in business.  So, they are grossing on average 275 basis points.   And their average loan size is around 180,000 dollars, which outside of any growing market in the US is pretty much on target.

They are grossing 330,000.00 a month.  LO's will take $100,000.00 in commissions and costs (base salaries, volume bonus, company FUTA/SUTA/UI costs, benefits, et al)    The remaining 220K now goes to support staff salaries.   If you have 12M a month @ 180K average loan; you're kicking 67 files out a month.  That requires a minimum of 2 underwriters and 2 processors.  That's 25K in salaries, bene's and other employee costs right there.  Now you're left with 195K to pay for the salaries of the people in accounting, closing, pricing/secondary.   That's another 40K a month spread out over those people - which is on the low end.  That 195K is now 155K.

You need to put 10% of your gross in reserves for buy backs - so that 10% of the original 330K.  So, your 195K is now reduced to 160K.

Then there's rent, leases, phones, copiers, and all the other fixed costs which will run the gamut depending on how many offices and if you're in a high rent or low rent district.  Most lenders pay out about 50K a month for these services if doing this amount of loans.  

All of a sudden you're left with 110K and you still have to pay the receptionists, the owners and you have to save for the annual audits and the attorneys.  Financial audits alone will cost over 50K and attorney retainers run around 70K a year.  That's 120K a year - or 10K a month.  

Now you're at 100K left.  If you've invested millions into a business, you expect to make a tad more than the average salaried person as you need to return the investment.  Most owners earn over 180K a month in this area and that reduces the available cash to 85K which seems like a lot - but there are a million things not listed including E&O insurance, general liability, sexual harassment insurance, employee training, previous unpaid costs, and, of course, the costs to appraisers, title companies, Fannie/Freddie, DU/LP, credit reports et al that were not caught or borrowers refused to pay - and do not forget that one mistake on a Good Faith must be paid by the lender.  

That 85K quickly drops to 10K or less.

Which means, there is no cash left to bring on a department at will cost about 120,000.00 USD a years.

So, either you up your volume (and increase your costs) or you close, merge or sell - because you can not afford to ignore compliance and adherence to compliance.  And, at this volume, you can not afford to pay for it.

Which means that in the next few months and years there will be a migration and Mortgage Bankers who are local or regional will begin merging with bigger players leaving large Mortgage Bankers licensed in 30, 40 or all 50 states and Banks and Credit Unions providing access to credit to borrowers.

Just as the days of Mortgage Brokers has come and gone, the days of small and mid sized mortgage bankers are about to end as well faced with the regulatory changes imposed upon bankers as a result of greedy people on wall street selling sub prime loans, greedy loan officers hawking them and con artists who took on roles of loan officers, realtors, attorneys, appraisers and even the average Joe on the street - who stole from lenders; requiring these changes to defend the financial market from a repeat.

Is it harder to get a mortgage?

Has the government thrown the baby out with the bathwater? Every day we see qualified borrowers who don't quite fit the new box that the government regulated onto lenders (QM), despite the borrower having a low LTVs and other compensating factors. Yet we, as lenders, can't do those loans, or the interest rates are too onerous. Yet the government continues to beat its drum about home ownership, and have somehow shifted the blame onto the lenders that home ownership has dropped.

We've reached a level of insanity - it appears that the government is sending out two different messages. 

On the one hand, regulators and prosecutors are going after lenders for serious crimes (well deserved) committed in lending and for breaking obscure lending regulatory rules (questionable when compared to the financial bites the government takes out of the lender for this action that could be corrected with censorship and more stringent monitoring). 

On the other hand, the government has rolled out policy makers blaming lenders for not lending to people.  For "tightening credit".  Just recently, Ben Bernarke announced he himself was declined for a mortgage.

Has lending gotten tighter?   Yes, absolutely.  There's two basic reasons why:

1.  If you were riding your bike on the left side of the road and instead of a ticket you found yourself fined 10,000 dollars, what would your reaction be?  Probably to ride your bike either way off on the right hand side, perhaps on the sidewalk and off the street, maybe to not ride your bike that much at all anymore.

That's what has happened with lenders.  No one can argue that some lenders, just as some borrowers, were thieves and deserved everything thrown at them and more.  Those people ruined it for consumers and for those of us who love the mortgage industry.

But, as a result of all of that, lenders have pulled back.  Some estimates show Wells Fargo, for example, doing 82% less FHA loans in 2014 YTD than the same period YTD in 2013.  A shocking reduction in loan volume.

And, let's not forget that the CEO of JP Morgan publicly stated that they may re-think doing FHA loans at Chase, period.  He questioned if the risk exceeded the value to the bank.

Those are normal, sane responses, to what is now appearing to be a government led initiative to take as much cash as they can from banks and publicly go after them with bold print in newspapers and headline news at prime time.   Not good for business.

2.  Let's go back to Ben Bernarke's experience in getting declined.  One wonders if he's out there beating the drums to loosen credit citing a silly reason - that even Ben got declined.  Well, first off, Mr. Bernarke most likely was declined because he recently changed professions.  In the lending world, even before the meltdown, lenders want to see stable income.   If the source of your income has changed, even if your current income is in the 7 figures, it is not stable. It could end tomorrow.  And, that does not support you paying a 10, 15, 20, or 30 year mortgage.  So, you need at least 2-years worth of stable income from a current profession (you can change jobs, but you need to be in the same profession).  Mr. Bernarke went from employed status to a different field.  He fell out of the basic lending requirement.

That's not insane lending.  That's sane lending.

_____

So, on the one hand we have the government (including policy makers at HUD) stating that they don't understand why lending is tighter and others saying that lenders went too far in being conservative.

On the other hand, we have lenders that were taken into the back alley and beaten to a bloody mess for lending (again, some deserved it.  Others did not).  And, they have learned their lesson.

And, on the third hand, you have the CFPB issuing out new rules and requirements and teaming up with other federal regulators with laws and enforcement actions that actually re-enforce the beating up of the lenders that we've witnessed recently.

It's time that the policy makers and the regulators sat in the room together and talked about what they want.  Do they want stricter rules to reduce the chance that we have the economic meltdown or do they want lenders to loosen up a bit and lend more without being afraid of being faced with legal issues or delinquent borrowers?

There is a way to do this.  But not by sending mixed messages.  

One way may be for the government to admit that in 1994 they started this mess by setting up policies for lenders to lend more money to more people to encourage more home ownership.  That started the cycle to irrational lending and irrational housing increases that bubbled and burst and allowed criminals to come in and destroy consumers and bankers who were honest, ethical and doing their jobs as best they could.

The next step would be for there to be a balanced approach.  Yes, lending is too tight.  Yes, there are consumers who truly deserve mortgages who would be excellent borrowers that today are going to be declined.  But, until the regulators get on board with the policy makers, they will not get their homes.

Getting and FHA Mortgage

I don't know what you do for a living; but I bet whatever you do you know how to do it.  Ever go somewhere and expect that they're pro's only to find out they don't know what they are doing?

Today, I met with a regional lender only to find out that they can't and do not offer FHA loans.  I was stunned, to say the least. They can pull off huge mergers and are on the stock exchange. But, they can't do an FHA Loan and are not approved to do them through HUD.

So, lesson learned.  Never assume because someone's marketing, image and foot print is impressive that they have the market cornered.  Do your best at what you do.  You may find out that not only are you the best, but that those who give a great image are not even in your league!