FHA Raises and Lowers Mortgage Insurance Premiums with RBP Moratorium

The Department of Housing and Urban Development has published a notice in the Federal Register to provide guidance for the upcoming moratorium on risk based mortgage insurance premiums.  The moratorium on risk based premiums (RBPs) is in accordance with Section 2133 of H.R. 3221 otherwise known as the FHA Modernization Act which is part of  the Housing and Economic Recovery Act of 2008. This act was signed by the President on July 30, 2008 making it public law # 110-289.  To view the HUD notice [Docket No. FR-5171-N-03] signed by HUD Assistant Secretary and FHA Commissioner Brian Montgomery, click here. 

In addition to instructions for transitioning from risk based premiums, the notice provides for a change in mortgage insurance premiums during the moratorium period which applies to loans with case numbers issued between October 1, 2008 and September 30, 2009.   The new premiums are an increase to the premiums that were in effect prior to the implementation of risk based premiums (RBPs), and are also an increase for high credit score borrowers under existing RBPs.  However, the premiums are lower than current risk based premiums for low or no score borrowers, and are substantially less than authorized under Section 2114 of the Housing and Economic Recovery Act of 2008.  

The new upfront premiums are 1.75% for purchases and fully qualifying refinances, 1.5% for streamline refinances, and 3.0% for FHA Secure.  The annual premiums, which are paid monthly, are .55% for loans with amortization periods over 15 years and loan to values over 95%.  Loans with amortization periods over 15 years, and loan to values at or below 95% will have a .50% annual premium.  For 15 year loans with a loan to value over 90%, annual premiums will be .25%.  There will not be annual premiums for 15 year loans with LTVs at or under 90%.   FHA Secure annual premiums will be .55% for loan to values over 95% and .50% for loan to values at or under 95%.  Note: for premium purposes, the loan to value must be calculated to two decimal places- meaning that 95.01% is over 95%.   

Prior to the implementation of risk based premiums on July 14, 2008, premiums were 1.5% upfront for all loans, and .50% annually for loans with amortization periods over 15 years.  The annual premium for loan terms of 15 years or less was .25%, and no premiums annual premiums were required for LTVs below 90%.  Click here for more information.   

In contrast, current risk based premiums for loan terms exceeding 15 years range from 1.25% to 2.25% upfront and .50% to .55% annually depending on loan to value and credit score.  The premiums for loan terms at or below 15 years range from 1.00% to 2.00% upfront and 0-25% annually, again, depending on credit score and loan to value.  Click here for more information on risk based premiums.  

The Risk Based Premium Debate:

The moratorium on risk based mortgage insurance premiums (RBPs) provides a welcome sigh of relief for many in the mortgage and real estate industry who oppose credit score based premiums.  Because credit scores only encompass one area of underwriting and aren’t always reliable, they are poor determiners of actual risk.  Considering that mortgage risk is based on a variety of factors, such as: debt to income ratios, savings history, reserves, amount of debt, credit usage, employment and income stability, increase to monthly payment (known as housing shock), source and amount of down payment, loan purpose and loan type/amortization, credit scores do little in the way of assessing overall risk. By basing risk premiums exclusively on credit score, loan to value, and amortization, actual risk is concealed resulting in lower premiums on higher risk loans.  As an example, a 97% loan with a gifted down payment to a borrower with a 680 score who is a heavy credit user, has minimal savings, short term employment, large increase to housing expense, high debt to income ratios, and no reserves would only have to pay 1.25% upfront and .55% annually.  Yet a borrower who saved 5% down, has no or minimal debt, long term employment, ample reserves, minimal increase to housing, and a low debt to income ratio but has a low or no credit score (despite sufficient alternative credit) would be charged 2% upfront and .55% annual.  

Although high credit score loans outperform low credit score loans, it is because borrowers with good credit pay better than those with bad credit regardless of score.  Where scores become problematic is when they are relied upon too heavily and are used to justify a layering of underwriting flexibilities.  When underwriting risks are layered, it negates the benefit of higher credit scores and creates an overall risk that is on par with weaker credit borrowers.  Hence, the reduced premiums for high-risk, high-score borrowers represents an unacceptable risk to the FHA program.  

Ironically, before the ink from the President’s signature on H.R. 3221 was even dry, the so-called “non profit” seller funded down payment assistance providers encouraged members of the House of Representatives to introduce H.R. 6994 which uses risk based premiums as a tool for preserving their seller funded down payment grant schemes.  Click here to view a copy of H.R. 6994 that was released by Ameridream a day after the President signed H.R. 3221 into law.  

While risk based premiums have been curtailed for now, borrowers with decision credit scores under 500 (regardless of reason or error) are still limited to 90% loan to value without exception.  In the case of multiple borrowers, the borrower with the lowest credit score will be used even if they only have one score.  This is especially problematic for borrowers with minimal or no traditional credit or borrowers with substantial inaccuracies on their credit report. This also creates a barrier for socioeconomically challenged borrowers that do not use traditional credit or who have suffered from a bona fide economic hardship. For these borrowers, a better approach would be to provide manual underwriting that considers all facts and circumstances and/or mandatory financial counseling.  As is current FHA policy, all borrowers with credit scores must be scored by FHA TOTAL Scorecard. 

Whether you are opposed or for risk based premiums, one thing is certain: FHA mortgage insurance remains cheap.  Consider that some of us remember when premiums were 3.8% upfront. 

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Return of the Living Debt: How Lenders Enable Predatory “Zombie Debt” Collectors

So, you think you are safe from that predatory collection agency that is trying to collect (extort) thousands of dollars from you for an old, disputed debt that isn’t even enforceable? Well, think again. The collection agencies that specialize in purchasing time-barred debts, have a powerful ally: banks and mortgage companies.  And guess what? Banks and mortgage companies do not care about your rights.  

What you are experiencing is a phenomenon known as “Zombie Debt” collection which is more frightening than any horror movie about zombies.  The term “Zombie Debt” was derived from collection agencies practice of bringing old, long forgotten debts “back to life from the dead” via renewed collection efforts.  These debts are typically purchased by collection agencies or other debt buyers for cents on the dollar or less.  Often times, “Zombie Debts” are disputed or fraudulent debts that were sold or transferred after resolution.  Sometimes the debts were valid, but the balances grossed overstated. Occasionally, the debts were discharged in bankruptcy.  Usually, however, the debts are unenforceable due to being past the Statute of Limitations- which is why they are so cheap.  Because old debt can be purchased on the cheap, the risk to reward is very attractive to skilled collectors that are unconcerned with trivial matters such as whether the debts are valid and enforceable.  This is because skilled collectors know they can prey on the ignorance of consumers and lenders to obtain (extort) payment.  

As an example, I recently closed a sale transaction where the lender required the buyer to pay disputed collection accounts on time-barred debts in order to obtain financing. The buyers, unfortunately, chose homeownership over their legal rights (against my advice), and were bilked out of over $5,000 from predatory collection agencies who were flagrantly violating the Fair Credit Reporting Act (FCRA) and Fair Debt Collections Practices Act (FDCPA).  

In this case, not only were the debts legitimately disputed, but they were past the Statute of Limitations, legally unenforceable, and were less than a year away from dropping off the borrower’s credit report for good.  Furthermore, the collection agencies never provided acceptable debt validation or justification for demanding over twice the original debt which is a violation of the FDCPA.  The cherry on top was the collection agencies refusal to provide the original delinquency dates to the credit bureaus in an attempt to extend the reporting of the accounts and conceal that the Statute of Limitations had expired.  All of this was, of course, documented in the file and addressed in the borrower’s letter of explanation.

To make matters worse, the lender refused to allow the borrowers to have the account resolution and payment handled through a licensed, HUD approved, debt management service instead of an unskilled escrow company.  As a result, the payoffs were handled  improperly which will likely result in renewed liability for the borrower, possible future judgment, extended reporting and probable resell of disputed amounts to other debt buyers.  Why? Because making payment on time-barred debts resets the Statute of Limitations and possibly the reporting period.  If the creditor feels that the payment is insufficient, they are empowered to pursue the deficiency from the courts.  Adding insult to injury, because of the collection agencies success in collecting (extorting) amounts from the consumer, their collection “score” will actually go up which could generate lead triggers to other agencies (yes, the credit bureaus all sell products that aid collection agencies in targeting consumers). 

At this point, you may be scratching your head in confusion as to why banks and mortgage companies would side with the debt collectors rather than looking out for the best interests of their customer, the borrower.  Without putting on a tin-foil hat and exploring “conspiracy theories”, the explanation is simple, IGNORANCE.  Unfortunately, the advent of automated underwriting has resulted in an overall dumbing down of the industry, and many underwriters think the abbreviation for the Statute of Limitations (SOL) stands for something entirely different.  Needless to say, the problem boils down to the simple fact that lender’s are simply unwilling to provide appropriate staff training.  

As any professional in the industry knows, most lender’s criteria for whether collections or charge-offs must be paid are typically arbitrary and have absolutely no bearing on the law or borrower’s rights.  As an example, some lenders require payment of collections and charge-offs when the aggregate balance is over a certain amount- say $2,000 to $5,000.  Some will base the decision on the age of accounts and whether or not they are medical in nature.  Others will rely on whether their automated underwriting system (AUS) requires payment.  Although FHA, VA, FNMA, and FHLMC base their requirements for debt payoffs on potential recourse and do not require payment of legally unenforceable debts where there is a bona fide dispute or legitimate legal defense- including whether the debts are time-barred.  Yet, lenders will often blame these agencies for requiring payoff.  

While this case may seem unique, it is not. With lender’s stiff-arming borrowers to pony up and pay these collection agencies, the industry growth has been quite extraodinary. According to account receivable management (ARM) expert Kaulkin Ginsberg, expected revenues for the debt buying industry will grow from $3.7 billion in 2006 to 6.2 billion by 2011.  According to the Federal Trade Commission in their 2008 Annual Report  on the Fair Debt Collection Practices Act, more than 26.69% of total complaints received by the Federal Trade Commission in 2007 were for purported violations of the Fair Debt Collection Practices Act (FDCPA).  Of these complaints, more than 77% were against third party collectors, and over 30% were against collectors demanding more than legally permitted.  

While the courts have held that the FDCPA doesn’t prohibit creditors from attempting to collect time-barred debts, it does prohibit deceptive practices such as threatening to take legal action or misrepresenting enforcement rights.  Furthermore, the Fair Credit Reporting Act (FCRA) requires that the creditor report the actual month and year of the original delinquency to the credit bureaus.  Regardless of whether a debt is time-barred, the account can still be reported for seven years (from the date of original delinquency).  Nonetheless, the FDCPA prohibits the attempted collection of any debt that was discharged in bankruptcy.  

While the FTC will take your complaint for violations of the FCRA and FDCPA, don’t expect anything in return for your time other than a form letter.  The FTC doesn’t investigate individual complaints, but moreover, investigates aggregate complaints.  The complaints also aid them in compiling statistics for their annual report.   While the FTC will take action against companies with excessive complaints, such as NCO Financial who was fined $1.5 million in 2004, its of little solace to those who have been victimized by abusive collection practices.  Considering that most civil penalty fines are typically small compared to the profits, fines provide little deterrent and are typically factored as a cost of doing business.  

The legal system is often of little help because the penalties for violations of the FDCPA and FCRA typically range between $1000 to $2,500 per incident which is why the legal industry isn’t doing back-flips over the flagrant abuses made by the collection industry who have legal resources above and beyond the comprehension of the average consumer.  

Another disturbing trend is increase of collection agencies turning to the legal system in an attempt to collect time-barred debts.  In a recent story, the Chicago Tribune detailed how debt collectors were clogging the Cook County Circuit Court with more than 119,000 civil lawsuits, and how cases had doubled in one courtroom from just two years ago.  This is problematic for consumers because most cases are heard in small claims court where consumers cannot have legal representation, and may not be aware of having a legitimate Statute of Limitations defense. 

As for what consumers can do to protect themselves, first and foremost is to pay your bills when they are due, and maintain proof.  Next is to seek legal advice.  In the event of a dispute, communicate in writing, and use certified mail if possible.  Additionally, do not discard evidence regardless of whether the Statute of Limitations has expired.  Whenever contacted by a credit agency, immediately request validation in writing via certified mail.  If the debt is erroneous, notify the agency and the credit bureaus that the debt is disputed and provide documentation or other information. If contacted by a legal firm, immediately seek legal advice.  As always, stay on top of your credit report and understand that it may take numerous requests and disputes before the credit bureaus finally report the accounts correctly.  Understand that lenders may require that you pay off collections if you wish to purchase a home or refinance, and that you should always obtain a written settlement agreement releasing you of further liability whenever you pay a collection- especially on a reduced settlement.  

As to industry professionals, the best practice is to put the borrower first, and understand that arbitrarily requiring payment of disputed and time-barred debts is abusive and actually subjects the borrower (and lender) to greater risk.  If the debts must be paid despite a documented dispute, consider payment through a qualified debt management and settlement company who can assist the borrowers in receiving settlement letters and releases, and ensure that the accounts are reported properly after settlement.  Understand that the borrower is the customer and not the collection agency.  As such it is the borrower’s well-being which should be the most important.

Please note that I am not an attorney and am not providing legal advice, but moreover, a wake up call for the industry. 

Important Resources: (click on subject for link)

The Fair Credit Reporting Act

The Fair Debt Collection Practices Act

FTC Time-Barred Debts

FTC Fines Collector for abuses of FDCPA

FTC Opinion Letter on FDCA - Reporting Time Limits Collectons/Charge-offs

Filing a complaint with Fair Trade Commission

Fair Trade Commission 2008 Report on the FDCPA

Statute of Limitations by State

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The FHA Non-Approved Broker Debate Part II: End of the HECM Advisor Program

Just when you thought FHA settled the non approved broker debate in regard to reverse mortgages (HECMs) with Mortgagee Letter 2008-14, a new controversy emerges as a result of H.R. 3221.

The proverbial fly in the HECM advisor ointment is the FHA Modernization Act, specifically, Section 2122 of H.R. 3221 which amends Section 255 of the National Housing Act to require that all parties involved in the origination of a reverse mortgage (HECM) be approved by the Secretary of the Department of Housing and Urban Development.

Here is the text of added to 12 U.S.C. 1715z-20 as section (n): (Notice section (2))

‘‘(n) REQUIREMENTS ON MORTGAGE ORIGINATORS.—
‘(1) IN GENERAL.—The mortgagee and any other party that
participates in the origination of a mortgage to be insured
under this section shall—
‘‘(A) not participate in, be associated with, or employ
any party that participates in or is associated with any
other financial or insurance activity; or
‘‘(B) demonstrate to the Secretary that the mortgagee
or other party maintains, or will maintain, firewalls and
other safeguards designed to ensure that—
‘‘(i) individuals participating in the origination of
the mortgage shall have no involvement with, or incentive
to provide the mortgagor with, any other financial
or insurance product; and
‘‘(ii) the mortgagor shall not be required, directly
or indirectly, as a condition of obtaining a mortgage
under this section, to purchase any other financial
or insurance product.
‘‘(2) APPROVAL OF OTHER PARTIES.—All parties that participate
in the origination of a mortgage to be insured under
this section shall be approved by the Secretary

This new section conflicts with guidance provided by Assistant HUD Secretary and FHA Commissioner, Brian Montgomery in Mortgagee Letter 2008-14 which states:

FHA’s HECM regulations permit a non-approved entity or third party to provide educational-type origination services (generally known in the reverse mortgage lending industry as “Advisor” services) under limited circumstances. Under 24 CFR 206.31(a)(1), a non-approved entity or third party must be “engaged independently by the homeowner,” and there must be “no financial interest between the mortgage broker and the mortgagee.” In addition, the fee paid to the non-approved entity or third party must be “included as part of the origination fee” paid to the mortgagee or loan correspondent.

Read complete Mortgagee Letter here.

While 24 CFR 206.31 (a)(1) provides for the inclusion of the mortgage brokers fee in the origination fee collected from the borrower provided that the mortgage broker is independently engaged by the borrower and does not have a financial interest in the mortgagee, it does not provide an exclusion for borrower representation that is present for forward mortgages under 24 CFR 203.27 (e). As a result, the borrower’s right to exclusive representation is not protected for the reverse mortgage program leaving the door wide open for termination of the “Advisor” program.

Already responding to H.R. 3221, FHA Commissioner Montgomery stated during a conference call on 7/31/08 that the advisor program would be eliminated and a Mortgagee Letter would be issued within 30 days.

Nonetheless, since HUD has already issued their approval of non-approved brokers with Mortgagee Letter 2008-14 which is signed by the Assistant Secretary of Housing and Urban Development, trade associations such as the NRMLA (National Reverse Mortgage Lenders Association) are likely to fight tooth and nail to save the program.  I have received word from a credible source that this has become an issue between NRMLA and HUD attorneys, however, the NRLMA has not directly confirmed dispute. None the less, NRMLA members can confirm the FHA conference call at NRMLA’s Website.    

Regardless of the outcome, FHA continues to side step the issue of mortgage broker fiduciary duty and the broker’s role as borrower agents. As a result of HUD’s failure to recognize mortgage brokers as agents combined with a lack of disclosure requirements, borrowers often unwittingly find themselves in a situation where the HUD approved broker is not legally required to act in the borrower’s interest.

Another consequence of FHA’s failure to address the mortgage broker as a fiduciary is an overall inadequacy of the standards for compensable services as defined in HUD’s RESPA Statement of Policy 1999-1 which incorporates the infamous IBAA letter. Unfortunately, both the IBAA and RESPA fail to define mortgage brokers as the agent of the borrower, and instead recognize the broker as only an intermediary or agent of the lender. In fact, while RESPA contains language which specifically exempts payments to the lender’s agent or contractor for origination services, RESPA is mute as to borrower agents. Furthermore, while FHA guidelines and related Statutes are clear that HUD approved brokers are the agent of the HUD approved lender, there is absolutely no recognition of of borrower agents. This, of course, creates an unsavory situation whereby HUD approved brokers are the agent of the lender and owe the lender (and the FHA program) a fiduciary duty, but there is no standard of care to the borrower. Since most states are not agency states, this leaves many borrowers clearly unprotected.

Due to deficiencies in FHA’s disclosure standards and continued lack of fiduciary duty in the mortgage industry,the Department of Housing and Urban Development should be compelled to produce streamlined registration and approval standards for borrower agents that are less strict than the requirements for lenders agents.  Please note that I am not suggesting that HUD lower or in any way compromise the approval standards of lender’s agent who process and originate loans for HUD approved entities, but moreover, that HUD establish a reasonable channel for borrower agents and advisors.  Furthermore, guidelines for borrower agents and advisors should include provisions that require compensation to be treated equally with lender agent compensation including offset of borrower’s out of pocket costs via seller credits, YSP credits, and loan proceeds.  

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Take a Ride on the Magic Omnibus: Impact of H.R. 3221 on the FHA Program

On July 30, 2008, President Bush signed H.R. 3221, otherwise known as the Housing and Recovery Act, making it Public Law # 110-289. This complex piece of Omnibus legislative art has many provisions. Some are good, some are bad, and some are downright ugly. Which is which, of course, depends entirely on your perspective and agenda.

Regardless of your opinion, there are certain key provisions that are important to know regarding FHA loans. Let’s take a look at some of the key provisions of the FHA Modernization Act and Manufactured Housing Loan Modernization that were included in H.R. 3221:

• Increased loan limits: $271,050 to a maximum of $625,500 in high cost areas. New limits take effect upon expiration of the Economic Stimulus Act of 2008. Limits apply to 1 unit, single family.

• Increase in the maximum loan to value to 100%. All those pesky loan to value limits based on the amount of sales prices, area, and new construction are eliminated with one simple limit of 100%.

• Increase in the maximum cash investment requirement from 3% to 3.5%. This obvious sign of legislative neurosis is partially offset by the fact that borrowers can still borrow 100% of their cash investment from a family member provided the loan is secured by a lien on the property that is subordinate to the new loan.

• Elimination of seller funded down payment assistance. Yes, that’s right, waive goodbye to seller funded down payments which will no longer be allowed for mortgages underwritten after October 1, 2008. Needless to say, the games have already begun with Representatives Al Green, Gary Miller, Maxine Waters, and Mr. Shays already introducing H.R. 6694 to reauthorize seller funded down payment assistance before the ink from the President’s signature is barely dry. Here is copy of H.R. 6994 that was forwarded to me by Ameridream on 8/1/08.

• Increase in the maximum upfront mortgage insurance premium (UFMIP). UFMIP is increased from a maximum of 2.25% to 3% while upfront premiums for first time borrowers completing approved homebuyer counseling is increased from a maximum of 2.0% to 2.75%. Annual premiums remain unchanged.

• Raises the maximum claim amount for reverse mortgages (HECM) to $417,000 (or up to $625,500 high cost areas).

• Allows condominium projects involving manufactured homes (including manufactured condominiums projects on leased land) as well as reverse mortgages in cooperative housing developments.

• Allows for insurance of purchase transactions utilizing reverse mortgage financing.

• Provides for the approval of all parties participating in the origination of a reverse mortgage (HECM) to be approved by the Secretary of Housing and Urban Development. It will be interesting to see how this impacts non-FHA approved “advisors”.

• Provides for a 12 month moratorium on the implementation of risk-based mortgage insurance premiums that are based on borrower’s decision credit score. Moratorium period begins October 1, 2008.

These are just some of the changes. To help you work through the maze of changes, I’ve compiled a matrix summarizing the changes. Click here for pdf:

3221-fha-at-a-glance

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The FHA Delinquency Crisis: 1 in 6 Borrowers in Default

At a time when borrowers, lenders, regulators, and lawmakers are scurrying for cover from the subprime lending crisis, a new crisis appears to be emerging with FHA.  

Just take a look at FHA delinquency rates: 

As you can see, FHA’s delinquency rate has been rising steadily since 2000-2001, and is now approaching critical levels.  Consider that at 16.81% delinquency, more than 1 out of every 6 FHA single family borrowers are delinquent on their loan. 

Now take a look of the current performance of FHA’s 10 largest servicers:

Surprisingly, 4 out of the 10 largest servicers have default rates exceeding 20% of their active servicing portfolios.  This translates into 1 out of every 5 borrowers either being delinquent or in foreclosure. 

Bear in mind that the above servicers account for 78% of FHA’s current portfolio and 80.57% of current delinquencies.  However, these servicers are hardly the worst.  For example, Washington Mutual Bank NA’s delinquency rate is slightly over 40% with a total default rate of 49% including foreclosures.  That’s just shy of 1 out of every 2 borrowers at risk of losing their home.  While subprime defaults have been blamed on risky loan products and practices, these are government insured loans.  

Could FHA’s rising delinquency rate be due to FHA incorporating risky practices that have become standard in the mortgage industry? Since industry experts often cite 100% financing as being a major factor in the mortgage meltdown, let’s take a look at borrower down payment sources:

This chart breaks down the FHA purchase endorsements made in 2000 by down payment source.  As you can see, in 2000, down payments were primarily borrower funded (76%) while non-profit agencies only provided down payment assistance on 2% of purchase loans.  Of course, back in 2000, FHA’s delinquency rate was only 9.070%

Now, let’s fast forward to 2008 and revisit down payment source: 

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FHA AFFIRMS PARTICIPATION OF NON APPROVED BROKERS AS CONSULTANTS

Brian Montgomery officially acknowledged in Mortgagee Letter 08-17, dated June 20, 2008, that non FHA approved mortgage brokers can provide counseling type duties consistent with HUD’s guidance in the 1999-1 RESPA Statement of Policy (SOP) and 24 CFR 203.27 (e). Clickhere to view ML 08-17:

According to Mortgagee Letter 08-17, non approved brokers cannot perform certain origination functions that FHA requires to be performed by FHA approved entities. These duties include: taking the application; collecting financial information and documentation from the borrower; initiating/ordering credit, appraisal, verifications, inspections, and disclosures along with maintaining communication with all parties involved with the transaction. Brian Montgomery asserts that non-approved brokers may not duplicate these duties without violating RESPA, and reaffirms that FHA approved entities may not compensate non approved brokers for performing these functions. 

However, Brian Montgomery affirms 24 CFR 203.27 (e), and specifically states that it is acceptable for a borrower to engage a broker who is not FHA approved to assist them in obtaining a FHA mortgage. ML 08-17 cites that non FHA approved brokers may be compensated by the borrower to perform counseling, educational, and consulting type services:

Excerpt from ML 08-17:

Other services that are considered counseling in nature (e.g., educating prospective borrowers in the home buying and financing process, advising the borrower about different types of loan products available, and demonstrating how closing costs and monthly payment could vary under each product), may be performed by a non FHA-approved broker so long as the services provided constitute meaningful counseling, and not steering.

Brian Montgomery also clarified and affirmed the guidance provided in HUD’s 1999-1 RESPA Statement of Policy which requires brokers that perform only counseling type duties to provide alternatives from at least 3 other lenders for which the compensation must be the same for each. This is to ensure that meaningful counseling has been provided and not just “steering”. FHA’s failure to abide by HUD’s SOP was previously discussed on this blog and the ML Implode Forum, and I am glad to see that they are finally in compliance on forward loans. Nonetheless, FHA is still not in compliance on reverse mortgages. 

In regard to the amount of broker compensation, FHA side-stepped limit setting, and instead relied on their trusty old standby: 
ML 08-17 excerpt:

Under no circumstances may a borrower be charged a fee that is not commensurate with the amount normally charged for similar services. If the payment bears no reasonable relationship to the market value of the services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g). 

RESPA provided further guidance to industry regarding payments by lenders to mortgage brokers in Policy Statement 1999-1. While the policy statement specifically speaks of lender payments to mortgage brokers, those payments are indirectly paid by the consumer and the policy statement would apply equally to payments made directly by the consumer. 

While FHA has taken a big step by acknowledging that counseling, consulting, and advising are separate and distinct from taking an application and processing a loan, Brian Montgomery has failed to recognize agency and fiduciary duty as a vital role for mortgage brokers. Commissioner Montgomery also failed to recognize that certain duties, such as taking the application and communicating with various parties on behalf of the borrower is not a duplication of duties, but moreover, duties that overlap with the lender’s agent.

Example: for a mortgage broker to be able to properly advise and counsel a borrower, they must take an application and review the borrower’s financial and other documentation. This duty would for the borrower. Whereas, an approved FHA broker who takes the application to originate the loan would be taking the application forthe lender as part of facilitating the loan. Consider that RESPA does not prohibit duplicated or overlapping duties, but moreover, prohibits duplicate charges arising from said duplication. If neither the lender or borrower agent charges an application fee, it would not result in a duplicate charge for both to take their own application. 

Although HUD recognizes in the 1999-1 RESPA policy statement that some services are for the borrower and some are for the lender, HUD states that “All services, goods and facilities inure to the benefit of both the borrower and the lender in the sense that they make the loan transaction possible”.

Additionally, while Commissioner Montgomery cites that the 1999-1 RESPA Statement of Policy would apply equally to all payments whether made directly or indirectly by the borrower, he failed to address whether the borrower would be permitted to use loan proceeds, seller credits, or yield spread premiums (when credited directly to the borrower) to offset their mortgage broker costs. After all, if all fees are treated equally under RESPA, there should not be any prohibition for offset. 

Perhaps that will be another Mortgagee Letter. 

The reality remains that while some mortgage brokers are agents and fiduciaries and other mortgage brokers are intermediaries that only sell access to money, fiduciaries are largely ignored by the mortgage industry. As a result, HUD’s 1999-1 and 2001-1 Statements of Policy and ML 08-17 are deficient as to the mortgage broker’s role as a fiduciary.

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Reps Gone Wild: New Act Seeks to Eliminate FHA Approval Requirements

Temporary FHA Direct Endorsement Lender Participation Act of 2008

Just when you thought it was safe to go into the mortgage water again, California Representative Gary Miller [R] along with California Representatives Joe Baca [D] and Brad Sherman [D] introduce H.R. 6254 to the House which would allow non FHA approved mortgage brokers to originate FHA loans. Click here to view H.R. 6254.
What H.R. 6254 proposes is to amend Section 202 of the Economic Stimulus Act of 2008 to temporarily allow non FHA approved lenders and mortgage brokers to originate and close FHA loans in their own name upon filing an application for FHA participation approval. However, the lender or mortgage broker would not have to comply with FHA’s requirement of submitting a financial statement.

Still, mortgage brokers can already participate in the FHA program as borrower agents, consultants, and representatives on FHA forward and reverse mortgages with the restriction of not being allowed to originate, process, or close the loan in the non-approved brokers name. Instead, the loan must be originated by a FHA approved lender or broker. Furthermore, non approved brokers may not be compensated by anybody other than the borrower and cannot receive yield spread premiums. This is as much for the safety and best interest of the borrower as it is FHA. 

Of course, NAMB applauds the FHA Direct Endorsement Lender Participation Act which allows their members to circumvent FHA guidelines in order to originate loans and receive undisclosed yield spread premium payments from lenders without meeting FHA’s approval criteria. You can view NAMB’s press release here. 

According to NAMB President, George Hanzimanolis:

“If signed into law, this is a victory for all consumers who need access to the FHA program to refinance into a more affordable loan”. “We thank Representatives Miller, Sherman and Baca for their leadership in addressing the importance of making FHA programs more available to homeowners.”

Well, that sounds all well and good until you realize that NAMB is consumer enemy #1 by opposing RESPA compliance, disclosure of yield spread premiums by mortgage brokers, and mortgage broker fiduciary duty. NAMB also opposes mortgage broker disclosure of relationship and duty. Is this really the organization you think should be the spokesperson for what is best for consumers? 

Reps Miller, Baca, and Sherman are openly and notoriously cowing to special interests to the detriment of the FHA program and the public that they serve. This is an obvious breach of civil duty and a complete outrage that they would seek to compromise the integrity and solvency of the FHA program by circumventing necessary minimum approval standards.

Of all the colossally bad ideas that have been tossed around of late, this is an award winning worst. FHA approval criteria is there for a reason, and allowing non approved entities who have not been adequately screened by FHA to originate, process, and close loans in their name is an invitation for trouble and abuse.

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Commissioner Montgomery Takes on Seller Funded Down Payment Assistance Again

FHA Commissioner, Brian Montgomery, has resumed his battle against FHA program abuse via seller funded down payment grants which threaten significant losses to the FHA program. According to Brian Montgomery, this proposal is also to ward off an estimated 1.4 billion credit subsidy that is projected that the program will need at the beginning of fiscal year 2009.

HUD’s proposed rule published in the June 16, 2008 Federal Registry titled Standards for Mortgagor’s Investment in Mortgaged Property: Additional Public Comment Period, is in response to the U.S. District Courts for the Eastern District of California and the District of Columbia injunctions in February 2008 and March 2008 which prevented FHA from implementing their final rule entitled “Standards for Mortgagor’s Investment in Mortgaged Property” published October 1, 2007 HUD in the Federal Registry On October 1, 2007 (72 FR 56002). Click here to view.

Like the 2007 proposed rule, today’s proposed rule seeks to eliminate down payment assistance from all parties with a financial interest in the property and retain the modification of the Code of Federal Regulations, Title 24, Part 203, Section 203.19 (C) 1-2 (April 2008 revision) which states:

(c) Restrictions on seller funding. Notwithstanding paragraphs (e) and (f) of this section, the funds required by paragraph (a) of this section shall not consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:
(1) The seller or any other person or
entity that financially benefits from
the transaction; or
(2) Any third party or entity that is
reimbursed, directly or indirectly, by
any of the parties described in paragraph
(c)(1) of this section

The IRS ruled in May 2006 that non-profit organizations that funnel down payment assistance to buyers through “self-serving, circular financing arrangements” is inconsistent with with operation of as a section 501(c)(3) charitable organization. As such, organizations that provide seller funded down payment assistance no longer qualify as tax exempt entities.

Click here to view the ruling, and here to view the IRS press release. 

FHA’s delinquency rates have risen from 9.07% in 2000 to 16.571% during the first quarter of 2008 while borrower funded down payments have decreased from 75.75% in 2000 to only 46.05% in 2008. So-called “non profit” funded down payments have risen from 1.74% in 2000 to 37.30% in 2008 while increasing their early payment default rate from 7.98% in 2000 to 16.43% in 2005. In fact, loans involving “non-profit” down payment assistance have both the highest delinquency and default rate of any other down payment source, including family gift. 

Unfortunately, seller funded down payment grants have a tendency to increase prices for everyone because of how they work. Typically, the seller agrees to increase the sales price to include the amount of the borrower’s down payment grant which is pledged to be “donated” to the non profit company at closing. Prior to closing, the non profit company wires the borrower’s down payment grant to escrow along with their fee demand. After closing, the amount of grant and the fee is deducted from the seller’s proceeds and forwarded to the non profit company. The down payment contribution is typically in addition to contributions for closing cost and other concessions that further skew prices for everyone. 

While FHA’s proposed rule will eliminate seller funded down payment grants, it will not impact legitimate non profit, community, and government programs.

The proposed rule is not final, and the public and other interested parties are invited to make comment via Regulations.gov by clickinghere (Note: Document ID reference HUD_FRDOC_0001-1138). 

Comments are due by August 15, 2008.

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Mortgage Broker Fiduciary Duty

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THE FHA NON-APPROVED BROKER DEBATE

FHA recently published Mortgagee Letter 08-14 regarding non approved broker participation in the HECM loan program (reverse mortgages). 

Click here to view Mortgagee Letter 08-14

This letter clarified FHA policy regarding the role of non approved brokers and payment of their compensation. According to ML 08-14, non approved brokers may participate in the FHA HECM program by performing limited educational-type origination services known as “advisor” services. Brian Montgomery states in ML 08-14:

FHA permits the non-approved entity or third party to provide advisory and educational services to the HECM borrower; and under RESPA, the non-approved entity or third party may receive bona fide compensation for those services.

As you can see, Brian Montgomery clearly states that under RESPA non-approved brokers may receive bona fide compensation for providing advisory and educational services on a FHA loan (HECM).

Brian Montgomery goes on to state in ML 08-14:

RESPA regulations permit a non-approved entity or third party to be compensated for educating prospective borrowers about the reverse mortgage lending process, advising the borrower about different types of loan products available, demonstrating how closing costs and payment options could vary under each product, and maintaining regular contact with the lender to keep the borrower apprised of the status of the loan application. Such services would be in addition to, and not as a substitution for, reverse mortgage counseling which is provided by a HUD-approved housing counseling agency.

So, duplication of duties is acceptable now under RESPA? Why is it then that FHA’s Policy Alert regarding payments to non approved brokers on FHA loans dated 10/30/07 states that duplication of duties is not allowable under RESPA? In fact the FHA Policy Alert specifically stated:

In transactions where the mortgage broker is not an FHA-approved broker, the loan origination services cannot be performed. Under these circumstances, RESPA would prohibit the payment to the non FHA-approved mortgage broker because those services, under FHA regulations, would have to be performed again by either an FHA-approved lender or loan correspondent. The payment to the unapproved broker for duplicated services amounts to an unearned fee in violation of section 8(b) of RESPA. Further, this payment also acts as a disguised referral fee for steering the borrower to the FHA-approved lender or loan correspondent which is in violation of section 8(a) of RESPA.

Click here to view FHA Policy Alert

Well, is it or is it not a violation of RESPA for a broker to duplicate duties? What is the difference between duplicating counseling services and duplicating taking an application? HECM Counseling is required and could result in duplicate charges whereas applications are typically done at no expense. It appears that FHA views RESPA as applying differently to forward vs. reverse mortgages, yet RESPA is the same for loan types regardless of differences in the Code of Federal Regulations. 

Going back to the FHA Policy Bulletin, FHA at least admits that mortgage brokers can assist borrowers in obtaining a FHA loan although they minimize the role to an assistant:

While a broker who is not FHA-approved may assist a prospective FHA borrower in obtaining an FHA loan, the non-approved broker cannot perform required FHA loan origination services. In these instances, the fee charged must be paid from the mortgagor’s own available assets, must be disclosed on the HUD-1 at closing and a copy of the contract included in the loan file submitted for insurance endorsement.

FHA’s policy is that the borrower’s agent fee is limited to payment by the borrower and cannot be offset with YSP credits, seller credits, or loan proceeds. Nonetheless, according to ML 08-14, non-approved brokers can be paid from the proceeds of the financed origination fee:

The compensation is paid by the borrower directly from the borrower’s own available assets or from HECM loan proceeds. If the payment comes from the HECM proceeds, the amount would be added to the loan balance and disbursed to the broker by the closing agent. In all cases, the amount paid must be included in (subtracted from) the loan origination fee which is capped at the greater of $2,000 or 2% of the maximum claim amount.

On a reverse mortgage the non approved broker can be compensated from the proceeds of the borrowers FINANCED origination fee that is charged by the FHA approved lender or broker. In other words, fee splitting is also permissible on FHA reverse mortgages. Wow, fee splitting and duplication of duties. That’s bold.

Now let’s take a look at compensable duties as per guidance issued in HUD’s 1999-1 Statement of Policy (SOP) and reaffirmed in their 2001-1 SOP. HUD’s 1999-1 SOP provides a list of compensable services in accordance with HUD’s letter to the Independent Bankers Association of America, dated February 14, 1995 (IBAA letter). In HUD’s letter to the IBAA, HUD stated that they would be satisfied that sufficient compensable origination services had been provided if the broker took the loan application and performed at least 5 duties from the IBAA list. Note: Both the 1999-1 Statement of Policy and ML 08-14 acknowledge that the IBAA list is not exhaustive.

HUD’s 1999-1 Statement of Policy HUD continues to further state that when services are of a counseling type nature, HUD would be satisfied that meaningful counseling, and not steering, occurred if the broker provided alternatives from at least 3 other lenders which the compensation was the same for each and not influenced by volume. 

Yet neither ML 08-14 or the FHA Policy Alert state anything about providing alternatives to the borrower let alone the requirement that the compensation be the same for all alternatives. 

Let’s explore what the Code of Federal Regulations has to say about both programs.

Closing costs for forward mortgages are covered in Title 24 of Code of Federal Regulations Part 203, Section 203.27. 

Click here to view 

24 CFR, Part 203, Section 203.27, (e) states:

Nothing in this section will be construed as prohibiting the mortgagor from dealing through a broker who does not represent the mortgagee, if he prefers to do so, and paying such compensation as is satisfactory to the mortgagor in order to obtain mortgage financing.

Note: FHA approved mortgage brokers are the agent of the lender (mortgagee) and represent the lender (mortgagee) on FHA loans. However, the CFR specifically provides that that borrowers not be prohibited from dealing through a broker who does not represent the lender (mortgagee) and paying compensation that is satisfactory to the borrower (mortgagor). In other words, borrower exclusive agents.

Now lets look at the 4155.1 Rev 5, Chapter 1, Section 3, regarding allowable closing costs on forward mortgages: 

I. Mortgage Broker Fees. If the borrower must pay a fee directly to a mortgage broker, that expense must be included in the total of the borrower’s cash settlement requirements and appear on the HUD-1 Settlement Statement. (This requirement applies to instances in which the borrower independently engages a mortgage broker to seek financing and pays the broker directly. The payment may not come from the lending institution.)

Borrowers are allowed to independently engage their own mortgage broker to deal through that does not represent the lender (mortgagee) and pay the broker’s compensation on forward loans. 

Now let’s look at reverse mortgages and Title 24 of the Code of Federal Regulations, Chapter II, Subchapter B, Part 206, Section 206.31 (A), (1): 

(a) Fees at closing. The mortgagee may collect, either in cash at the time of closing or through an initial payment under the mortgage, the following charges and fees incurred in connection with the origination of the mortgage loan:

(1) A charge to compensate the mortgagee for expenses incurred in originating and closing the mortgage loan, which may be fully financed with the mortgage. The Secretary may establish limitations on the amount of any such charge. HUD will publish any such limit in the Federal Register at least 30 days before the limitation takes effect. The mortgagor is not permitted to pay any additional origination fee of any kind to a mortgage broker or loan correspondent. A mortgage broker’s fee can be included as part of the origination fee only if the mortgage broker is engaged independently by the homeowner and if there is no financial interest between the mortgage broker and the mortgagee.

The Code of Federal Regulations also provides that borrowers may independently engage their own mortgagee broker on reverse mortgages and include their mortgage broker’s fee as part of the origination fee. 

So, there you have it, both forward and reverse mortgages allow borrowers to deal through non approved brokers that do not represent the lender (mortgagee) and pay compensation that is acceptable to the borrower. Furthermore, RESPA does not differentiate between reverse and forward mortgages, and compensable services are outlined in HUD’s 1999-1 Statement of Policy which references HUD’s 1995 IBAA letter. According to the IBAA letter, HUD would be satisfied that compensable services had been provided if the broker took the application and completed 5 duties off the IBAA list (which HUD states is not an exhaustive list). 

Additionally, for brokers that provide only counseling type services, that HUD would be satisfied that meaningful counseling had been provided, and not steering, if the broker provided alternatives from at least 3 other lenders and the compensation for all alternatives was the same and not based on volume of referrals. 

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