Apr. 13, 2013: The cost of saving the FHA; the cost of the CFPB and compliance; "understanding men" humor
Earlier this week, at a conference put on by the OMBA, in Oklahoma, I was asked what I thought about the FHA. Lots of folks want to know, for a variety of reasons. Right or wrong, some view it as the original subprime program; others view it as the new subprime program. Others believe it is the best hope that new home buyers have, and without new homebuyers existing homebuyers have hurdles moving up. Some believe it is on the proverbial ropes; some believe it should be saved at all costs. And maybe everyone is right. But one thing we know now: the Obama administration’s budget proposal for fiscal year (FY) 2014 revealed that the Federal Housing Administration (FHA) may require a bailout of up to $943 million to reinforce its capital reserves. In a conference call with reporters, HUD Secretary Shaun Donovan explained the agency has taken steps to ensure safer new business and to increase recoveries on the older, riskier loans that brought its Mutual Mortgage Insurance (MMI) Fund to a negative balance.
Mortgage News Daily reported, “Donovan declined to speculate about the likelihood FHA would need to draw on Treasury funds to correct the deficit in its Mortgage Insurance Fund but said that much progress had been made in plugging the hole. The Independent Audit conducted last fall found a $16 billion deficit but if comparisons were made apples to apples it was actually more like $19 billion. Changes FHA has made since then has reduced this to $943 million. These changes have included concentrated efforts to increase recoveries from the 2007 and earlier loans through ramped up modifications and increased loan sales, suspending the bulk draw payment option of the reverse mortgage program, and substantially increasing premiums for both FHA and GNMA loans. No decision will be made on the need for a Treasury draw until October 1, Donovan said.”
The government spends a lot of money, and billions and trillions are thrown around often. The CFPB’s budget and spending are a matter of public record, and here is one note I received on some of the details. “I ran across something today that bother me a surprised/bothered me. The CFPB spent approximately $134 million on employee compensation and benefits for its 970 employees on board as of 9/30/2012. I am no rocket engineer but this amounts to an average cost of $138,144 per employee. Even taking 25% off for benefits leaves the average salary of $103,608. This is only salaries alone as they have a lot of other costs and this doesn’t scratch the surface of what the rest of us are spending on compliance.”
The CFPB has issued its third semi-annual report (http://files.consumerfinance.gov/f/201303_CFPB_SemiAnnualReport_March2013.pdf) and, aside from the growing budget and jobs created ($598m budget, and 1,073 employees), its relevance has been undermined by almost daily press releases by the agency--too much transparency? However, the report has a few notable highlights including: the CFPBs expected ruling on pre-paid credit cards, a fair lending-focused component is under development for the automated system (named Compliance Analysis Solution) used by the CFPB’s examiners to conduct risk-based and targeted compliance assessments of loan portfolios, and a 2013 list of rules and orders the CFPB plans to propose and adopt and significant initiatives it plans to conduct do not include any items related to overdrafts, payday loans or other short-term credit products, or arbitration.
In CFPB news, the newly created protection bureau may already have its budget reduced. The agency receives its funding from the Federal Reserve, however, it is currently still on the list of agencies who will be effected by the sequester. According to reports, the CFPB’s funding will be reduced by $23 million. The report indicates that, “as a non-exempt non-defense mandatory program, the sequestration requires a 5.1 percent reduction of the CFPB’s $448 million “budget account.” In an ironic twist, according to the CFPBs fiscal year 2013 budget justification, the agency claims entitlement to approx. $598 million in funding from the Federal Reserve (for 2013), but estimates expenses and obligations of approximately $448 million: http://files.consumerfinance.gov/f/2012/02/budget-justification.pdf.
Has your “cost of compliance” gone up? Sure it has. “Rob, between legal, the cost of lost productivity, underwriters manually checking and re-checking files that are 3-4 inches thick for compliance issues and addressing and reworking investor exceptions, my management team spending time on compliance assurance and reporting rather than helping grow our business, grappling with different systems requiring different data, etc., etc., and the potential cost of penalties if it is not perfect, and resources spent on the auditors while they’re camped in our office, I am really wondering if it is worth originating a loan. This is time that is not going into growing the business.”
Ironically, Ellie Mae notes that some of the new rules designed to assure compliance may have the unintended effect of undermining it. For example, the Consumer Financial Protection Bureau’s (CFPB) new rules on loan originator (LO) compensation removes originators’ incentive to make sure timely disclosures are made and that all the paperwork is handled to a tee. “Now that their compensation is predetermined by law, we are hearing that LOs have less incentive to recheck their work, since they know they will be paid—regardless of what happens to the loan down the line,” says Parvesh Sahi, VP of compliance solutions at Ellie Mae.
Another problem area is the issue of data reporting, especially when different agencies can’t agree on definitions. When different systems require different data, lenders may have to resort to “mapping,” a process by which an individual goes through each required field on each different system and tries to define which data is required. Then there are the costs of data testing and scrubbing as regulators and investors demand thorough reviews of 100 percent of production. “On the plus side, having comprehensive, accurate data that documents key lending decisions can reduce the hidden cost of compliance,” explains John Haring, compliance enablement manager at Ellie Mae. “On the most fundamental level, it can reduce fines, penalties and the need to remediate problems. It can also shorten the length of the exams, which means fewer days and less out-of-pocket costs for the examiners. “As a result, both the hard costs of penalties and the soft costs of the examinations can be tracked back to data integrity,” he adds. To combat hidden costs, Ellie Mae recommends automated compliance systems, which can help companies address costs and risks—though they’re no substitute for trained compliance experts. “In today’s zero-tolerance environment, compliance has moved from the back-office to become an essential mission-critical function. Given what is at stake, lenders, investors and regulators are all evaluating automated solutions to take cost, human error and risk out of the mortgage business,” the paper concludes. Here it is for your Saturday reading pleasure: http://www.elliemae.com/about-us/news-reports/ellie-mae-reports/.
Moving on to some lender, investor, and vendor news. As always, it is best to read the full bulletin, but these will give you a flavor for the trends out there.
California’s Pinnacle Capital has a number of product guideline updates, including the addition of DU and LP Interested Party Contribution guidance on HOA payments for all Conforming loans. The section on delinquent HOA dues in the Condo Questionnaire (Conventional products) has been updated to reflect this, and the condo matrix for all products now states that if a mortgagee acquires a unit via foreclosure or deed-in-lieu, he or she may not be responsible for either more than six months’ delinquent dues or the maximum amount permitted by state law. For Mammoth Jumbo loans, the definition of “age of appraisal” has been clarified to be based on the date the Note is signed and that the lower of any two appraised value must be used; Condo Project Regime has been added as an eligible property type and minimum loan amount guidance has been updated as well. As for government loans, projected income guidance and an updated definition of “family member” has been added for FHA products, while guidance on subordinate financing restrictions for high balance loans, maximum Jumbo loan amounts, and removing a spouse (IRRRL only) has been added for VA transactions. Guidelines on bankruptcy, foreclosure, deed-in-lieu, and short sale waiting periods has been revised for the Pinnacle Plus product, and the second home escrow waiver restriction on the Cascade Jumbo product has been removed.
Secure Settlements announced “Closing Guard and Quick Check Closing Agent Risk Management Subscription Programs for Lenders,” two new lender subscription fraud tool programs assisting in the evaluation, monitoring and reporting of closing agent risk. Closing Guard is a subscription fee based service that allows banks to adopt the SSI Closing Guard program as a new tool for quality control and loan quality assurance while shifting the cost of vetting, monitoring and reporting of risk away from agents. “The cost shift allows banks and mortgage lenders to avoid competitive disadvantages while meeting their regulatory obligation to address closing agent risk in the daily operation of their businesses. The agent paid model will not disappear. Agents who choose to become vetted and join the SSI National Closing Agent database as a marketable credential can choose to pay the applicable vetting fee ($299/$99) and gain the advantages of independent vetting, monitoring and reporting for twelve months, which gives them access to the SSI photo ID card, SSI Vetted Agent Seal, eligibility for discounted insurance, free fraud and best practice resources, and discounted continuing education programs.”
Kinecta now allows LTVs up to 80% on Super Conforming FRM transactions with credit scores as low as 680. This replaces the previous guidelines that allowed LTVs up to 75% only with credit scores of 700 or over.
Freedom Mortgage has issued an announcement on its turn times that guarantees 20 business days or less from submission to closing. Provided that clients clear all open GFE and Set Up items within three business days from the receipt of the Freedom request, all underwriting conditions apart from the appraisal are submitted within five days of notification, and the initial appraisal passes underwriting review, Freedom promises to close a maximum of 20 business days from receipt of a correctly executed GFE. This is available for all programs apart from Patriot and USDA.
"ITS A GUY THING"
Translated: "There is no rational thought pattern connected with it, and you have no chance at all of making it logical."
"CAN I HELP WITH DINNER?"
Translated: "Why isn't it already on the table?"
"UH HUH," "SURE, HONEY," OR "YES, DEAR"
Translated: Absolutely nothing. It's a conditioned response.
"IT WOULD TAKE TOO LONG TO EXPLAIN"
Translated: "I have no idea how it works."
"I WAS LISTENING TO YOU. IT'S JUST THAT I HAVE THINGS ON MY MIND."
Translated: "That girl standing on the corner is a real babe."
"TAKE A BREAK HONEY, YOU'RE WORKING TOO HARD."
Translated: "I can't hear the game over the vacuum cleaner."
"THAT'S INTERESTING, DEAR."
Translated: "Are you still talking?"
"YOU KNOW HOW BAD MY MEMORY IS."
Translated: "I remember the theme song to 'F Troop', the address of the first girl I ever kissed, and the vehicle identification numbers of every car I've ever owned, but I forgot our anniversary."
"I WAS JUST THINKING ABOUT YOU, AND GOT YOU THESE ROSES."
Translated: "The girl selling them on the corner was a real babe."
"OH, DON'T FUSS - I JUST CUT MYSELF, IT'S NO BIG DEAL."
Translated: "I have actually severed a limb, but will bleed to death before I admit that I'm hurt."
"I CAN'T FIND IT."
Translated: "It didn't fall into my outstretched hands, so I'm completely clueless."
"WHAT DID I DO THIS TIME?"
Translated: "What did you catch me at?"
"I HEARD YOU."
Translated: "I haven't the foggiest clue what you just said, and am hoping desperately that I can fake it well enough so that you don't spend the next three days yelling at me."
"YOU KNOW I COULD NEVER LOVE ANYONE ELSE."
Translated: "I am used to the way you yell at me, and realize it could be worse."
"YOU LOOK TERRIFIC."
Translated: "Oh, please don't try on one more outfit, I'm starving."
"I'M NOT LOST. I KNOW EXACTLY WHERE WE ARE."
Translated: "No one will ever see us alive again."
If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog is, “How Changes in FHA Loan Pricing Will Lead to Changes in Investor Demand." If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.
(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries or to subscribe, go to www.robchrisman.com. Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)