Tuesday, June 17, 2008

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.

Monday, June 16, 2008

Mortgage Broker Fiduciary Duty

Being a California Department of Real Estate (DRE) licensed real estate and mortgage broker, I owe my borrowers and (and sometimes lenders) a fiduciary duty. In fact, all DRE licensed mortgage brokers are agents and always owe their borrowers a fiduciary duty. However, in most parts of the country most mortgage brokers are not held to a fiduciary standard nor are they required to disclose that fact to their borrowers.

In the industry, some mortgage brokers hold themselves out as agents, consultants, and advisors whose job it is to "shop" for a loan for the borrower. While many of these brokers are not held to a fiduciary duty under the laws of their state, often times, by holding themselves out as consultants and advisors, they create an implied agency which carries with it an imposed fiduciary duty. As a fiduciary, the mortgage broker is required to put the best interest of the borrower above their own and to disclose all material facts, including compensation. This clearly provides a greater benefit to borrowers by demanding the highest legal standard of care along with providing additional borrower recourse that goes beyond that provided by RESPA. Considering that HUD's 2001-1 Statement of Policy effectively curtailed borrower class action suits for RESPA violations, borrowers have been left impotent in regard to meaningful recourse for lending abuse.

While some mortgage brokers are fiduciaries, other are intermediaries. Intermediaries are best defined as 'selling' access to money, and are not required to place their borrower's best interest above their own.

In the battle over industry reform, both the MBA and NAMB have taken conflicting positions. The difference between the mindset at the MBA is the polar opposite to NAMBs in regard to the role of mortgage brokers, and specifically, fiduciary duty. While the MBA recognizes the varying roles of the mortgage broker, the MBA holds that only those mortgage brokers that hold themselves out as agents should be held to an agency standard. This differs from NAMB's position in that NAMB completely denies that such standard actually exists.

Click here for a link to the MBA's comments in response to HUD's proposed RESPA rule.

And click here for a link to NAMB's comment in response to HUD's proposed RESPA rule.

As you can see, if you are willing to read all 154 combined pages, both organizations view mortgage broker responsibility differently:

Excerpt from MBA letter:

Brokers Who Claim to be or Act as Borrowers’ Agents
Should Be Treated As Agents Under the Law of Principal and Agent

If a broker asserts or acts in a manner that indicates that he or she is shopping for the borrower, the broker should be subject to the duties of agency. This would clarify that a broker is acting on the borrower’s behalf and has an obligation to act in the borrower’s best interests.

MBA believes that this is best accomplished through a declaration (or disclaimer) of agency relationship by the broker. This clearly would inform a borrower as to whether he should rely on a broker to shop for him. Mere imposition of an undefined standard of fiduciary duty on all mortgage brokers, irrespective of the borrower’s wishes, would likely increase liability and costs to both mortgage bankers and borrowers.

Now, let's take a look at what NAMB has to say:

Today, a real estate financing professional or entity acts in a mortgage broker capacity when the professional or entity works with both borrowers and lenders, though representing neither, to obtain a mortgage loan. A mortgage broker adds value by providing goods with quantifiable value, such as a customer base and goodwill, as well as facilities and services. A broker works with consumers to help them through the complex mortgage origination process. Accordingly, a mortgage broker's services may include taking the application; performing a financial and credit evaluation; collecting and completing documents; working with realtors; ordering title searches, appraisals, and pay off letters; assisting in remedying faulty credit reports or title problems; and facilitating loan closings.

Of course NAMB fails to cite that on FHA and VA transactions, the mortgage broker is always the agent of the lender, therefore, agency representation does in fact exist for mortgage brokers whether or not the right to representation is extended to the borrower. However, HUD's failure to recognize agency representation equally for borrowers is the topic of another post.

Needless to say, this could get interesting- especially if the MBA decides to press the issue of mortgage broker fiduciary duty beyond the current RESPA issue.

While I am a mortgage broker, I am not a member of NAMB and do NOT want NAMB speaking or lobbying for me. My view is simply that mortgage broker reputation and public trust are more important than immunity for the actions of bad actors which only promote borrower exploitation and RESPA abuse.

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 as per 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 clicking here (Note: Document ID reference HUD_FRDOC_0001-1138).

Comments are due by August 15, 2008.