FHA Flipping Policy

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.

Access to credit

Removing barriers to getting a mortgage

HUD has been talking to their counterparts in the government about the reduction in FHA loans.

Jamie Dimon from JP Morgan stated in  a conference call that perhaps its’ time to re-think doing FHA loans.

Mortgage Bankers are looking at alternatives to Fannie Mae and Freddie Mac loans.

Why is all this going on?

Lenders are tired of being sued for lending.  That one-sentence probably best sums it up.  The days of subprime mortgages and bad lenders were cleansed when the market crashed and rinsed and washed a second time with some valuable Frank-Dodd reforms.

However, the US government continues to sue lenders and announce large settlements, regulators continue to overzealously enforce provisions that even they do not fully understand and banks and bankers seek to settle because the cost of litigating is high, but to litigate your regulator is toxic.

What choices do lenders have?  Lend without using Fannie, Freddie or FHA.  Tighten lending standards above and beyond what CFPB requires and deny credit to anyone who would have gotten a loan as recently as 2011.  And, lenders now over underwrite and over request documentation while over disclosing and demanding proof from the borrower that they received the disclosures to ensure they are in compliance.

So, HUD and Fannie have taken a step back.  HUD is in the process of re-writing their FHA lending requirements and Fannie and Freddie are looking at providing a more concise lending matrix that is very clear about how lenders can protect themselves from claims over bad loans.

The claims over bad loans are a big issue to lenders.  Fannie, Freddie and HUD all look to kick a loan back to the lender for the smallest of things when that loan is, typically, found to be 30 or 60 days late.   The late payment status of a particular loan triggers a complete review of the loan.  Any “t” not crossed or “I” not dotted triggers buy back demands.  This then triggers lenders to demand buy backs from other lenders and the game of “Hot Potato” with Mr. and Mrs. Smith’s mortgage begins.  As the game heightens and the loan gets sent from lender to lender back down the chain, the borrowers find themselves getting notices that their loan payment is not due to lender X, it’s due to lender Y now and maybe in 3-months it may be due to lender Z.   This hurts everyone and typically is caused by Mr. Smith forgetting to make the mortgage payment and everyone from Fannie to the small mortgage banker that originally originated the loan getting involved in who has what exposure.

Now, Fannie, Freddie and HUD realize that the mortgage market has gone too far in tightening credit.  They don’t cite the reasons, but the reasons are clearly outlined above – they and the government went too far and became too punitive following the market crash of 2008 and 2009.

To ease the situation Fannie, Freddie and HUD know they have two issues to attack.  One is the reduction in credit to individuals that is pushing potential homeowners into the rental market and slowing the home buying market.  The second is being clear to lenders that if they lend in good faith and follow the rules, they will not be held accountable if a loan becomes non-performing.

Recently, Fannie and Freddie announced that they were working to clarify what constitutes a buy back.  In 2013 they stated that no buy back would be demanded if the borrower did not miss any payments for three years.  In May they announced that the borrowers could miss two nonconsecutive payments within three-years without triggering a buy back demand.

The agencies are now working on other issues including small mistakes (minor clerical errors or missing paperwork that does not alter the soundness of the underwriting decision made while processing and approving the loan).   That’s a big concern for lenders because many banks and agencies will look for a missing pay stub or a missing disclosure to trigger a buy back on a loan that they just want to find a reason to demand it be purchased because they simply do not want that loan.

Also, fraud is coming into view in the horizon.  They are finally looking at what constitutes fraud and the definition of that.   This is an important point because lenders have met and exceeded due diligence in making a mortgage to a borrower only later to find out that the borrower was slick in providing false and misleading information to the lender to induce the lender to provide a mortgage.  This has led many lenders to close, others to be wrongfully accused of fraud and yet still others to lose a lot of money on fraudulent loans.  And, this problem, comes from consumers and individuals outside the mortgage industry.  The general public has been sold the story by the US Government that the bad guys are the mortgage professionals and they do not know the story of the bad person who may be living next door to them that pulled off a sophisticated mortgage fraud scheme to acquire their home (which, is the equivalent of stealing hundreds of thousands of dollars from a bank but since it was not done with a stick up they are not, in many cases, being prosecuted.  Instead, the lenders is being scrutinized by investigators from three, four and five federal agencies looking for anything to indict a company or staff of a felony; when in fact they were a victim.  Most people don’t view lenders as victims following the outrage of the crisis and the shrill voice of uniformed politicians throwing red meat to the angry voter)

So, how does the government provide lenders with the protections that they need so that they can make solid, good loan decisions based on information provided to them and received by them using third party tools to verify said information without fear of being second-guessed later on?  

How does the government reduce angst by lenders so that they loosen up credit?

And, how does the government address the fraud question and determine who is culpable (and this is a sticky one because, in the defense of the government, anyone could have committed the crime since there’s gain to be had for everyone in the process from the lender to the loan officer to the borrower to the attorney to the realtor and so on).

Well, that process has begun.

Fannie & Freddie are coming out with new “road rules” that address buy backs and addresses expanding credit to borrowers with lower down payments.  And, they’ve begun to attack the buy back issue along with the fraud issue.

HUD also has begun that process

So, it may be a new day in the mortgage industry where saner heads prevail and the adults take control of the room from the crazy kids who ran rampant.

Perhaps returning to vanilla products that were available before Clinton pushed for expanded home ownership is a sound decision.  Perhaps throwing in a few more products like one or two expanded ratio products geared specifically to LMI borrowers as defined by HUD medium incomes, issued by Fannie/Freddie is wise. Sticking to basic DTI’s and sticking to basic credit requirements is key. 

In 1995 the mortgage market began to see the lugs that held the wheels to their cars loosen when first the government announced that certain minorities lacked access to traditional credit and an underwriter could use alterative credit sources – and such began the process of tiered credit (Tier I, Tier II and Tier III credit) that could be used instead of traditional credit reports.  

That lead to tossing the basics out of underwriting and off loaded tax returns, eliminated proving income, went off only credit if the borrower put “enough down” and lent to borrowers at higher and higher DTI’s to get the coveted CRA’s from the government.

That was insanity.  And, that led to the subprime market.  And, that is a story the government does not want told  - its’ to arcane a story to tell and the public would prefer to dumb down what happened and blame the lenders.  This works for the likes of Barney Frank who pushed for the very rules he railed against in hearings in 2008 and 2009.

Maybe now we realize that too far left and too far right is simply too far.  Perhaps we now get that lending soundly means lending rules should be clear, concise and across the board.  The basic underwriting tools used from the 1990s were sound,: they should be used universally. 

Borrowers who don’t meet the criteria of vanilla conforming or vanilla govy loans or even vanilla expanded credit loans (lower LTV) should be viewed as tomorrow’s borrower.  Not today’s reject or the need for some politician to interject about unfair and discriminatory lending demanding new lending laws.

Lenders and agencies need clear rules of the road that dictate when a loan does not conform to agencies guidelines or regulations that then does trigger a buy back.

And, regulators and the government need to let people know that they will prosecute Joe Blow for lying on his mortgage application and getting a mortgage in addition to prosecuting rings of thieves who do so and rings of those in the industry who do so.   Breaking lending laws is not just the provence of those inside the lending industry.

Access to Credit

Removing barriers to getting a mortgage

HUD has been talking to their counterparts in the government about the reduction in FHA loans.

Jamie Dimon from JP Morgan stated in  a conference call that perhaps its’ time to re-think doing FHA loans.

Mortgage Bankers are looking at alternatives to Fannie Mae and Freddie Mac loans.

Why is all this going on?

Lenders are tired of being sued for lending.  That one-sentence probably best sums it up.  The days of subprime mortgages and bad lenders were cleansed when the market crashed and rinsed and washed a second time with some valuable Frank-Dodd reforms.

However, the US government continues to sue lenders and announce large settlements, regulators continue to overzealously enforce provisions that even they do not fully understand and banks and bankers seek to settle because the cost of litigating is high, but to litigate your regulator is toxic.

What choices do lenders have?  Lend without using Fannie, Freddie or FHA.  Tighten lending standards above and beyond what CFPB requires and deny credit to anyone who would have gotten a loan as recently as 2011.  And, lenders now over underwrite and over request documentation while over disclosing and demanding proof from the borrower that they received the disclosures to ensure they are in compliance.

So, HUD and Fannie have taken a step back.  HUD is in the process of re-writing their FHA lending requirements and Fannie and Freddie are looking at providing a more concise lending matrix that is very clear about how lenders can protect themselves from claims over bad loans.

The claims over bad loans are a big issue to lenders.  Fannie, Freddie and HUD all look to kick a loan back to the lender for the smallest of things when that loan is, typically, found to be 30 or 60 days late.   The late payment status of a particular loan triggers a complete review of the loan.  Any “t” not crossed or “I” not dotted triggers buy back demands.  This then triggers lenders to demand buy backs from other lenders and the game of “Hot Potato” with Mr. and Mrs. Smith’s mortgage begins.  As the game heightens and the loan gets sent from lender to lender back down the chain, the borrowers find themselves getting notices that their loan payment is not due to lender X, it’s due to lender Y now and maybe in 3-months it may be due to lender Z.   This hurts everyone and typically is caused by Mr. Smith forgetting to make the mortgage payment and everyone from Fannie to the small mortgage banker that originally originated the loan getting involved in who has what exposure.

Now, Fannie, Freddie and HUD realize that the mortgage market has gone too far in tightening credit.  They don’t cite the reasons, but the reasons are clearly outlined above – they and the government went too far and became too punitive following the market crash of 2008 and 2009.

To ease the situation Fannie, Freddie and HUD know they have two issues to attack.  One is the reduction in credit to individuals that is pushing potential homeowners into the rental market and slowing the home buying market.  The second is being clear to lenders that if they lend in good faith and follow the rules, they will not be held accountable if a loan becomes non-performing.

Recently, Fannie and Freddie announced that they were working to clarify what constitutes a buy back.  In 2013 they stated that no buy back would be demanded if the borrower did not miss any payments for three years.  In May they announced that the borrowers could miss two nonconsecutive payments within three-years without triggering a buy back demand.

The agencies are now working on other issues including small mistakes (minor clerical errors or missing paperwork that does not alter the soundness of the underwriting decision made while processing and approving the loan).   That’s a big concern for lenders because many banks and agencies will look for a missing pay stub or a missing disclosure to trigger a buy back on a loan that they just want to find a reason to demand it be purchased because they simply do not want that loan.

Also, fraud is coming into view in the horizon.  They are finally looking at what constitutes fraud and the definition of that.   This is an important point because lenders have met and exceeded due diligence in making a mortgage to a borrower only later to find out that the borrower was slick in providing false and misleading information to the lender to induce the lender to provide a mortgage.  This has led many lenders to close, others to be wrongfully accused of fraud and yet still others to lose a lot of money on fraudulent loans.  And, this problem, comes from consumers and individuals outside the mortgage industry.  The general public has been sold the story by the US Government that the bad guys are the mortgage professionals and they do not know the story of the bad person who may be living next door to them that pulled off a sophisticated mortgage fraud scheme to acquire their home (which, is the equivalent of stealing hundreds of thousands of dollars from a bank but since it was not done with a stick up they are not, in many cases, being prosecuted.  Instead, the lenders is being scrutinized by investigators from three, four and five federal agencies looking for anything to indict a company or staff of a felony; when in fact they were a victim.  Most people don’t view lenders as victims following the outrage of the crisis and the shrill voice of uniformed politicians throwing red meat to the angry voter)

So, how does the government provide lenders with the protections that they need so that they can make solid, good loan decisions based on information provided to them and received by them using third party tools to verify said information without fear of being second-guessed later on?  

How does the government reduce angst by lenders so that they loosen up credit?

And, how does the government address the fraud question and determine who is culpable (and this is a sticky one because, in the defense of the government, anyone could have committed the crime since there’s gain to be had for everyone in the process from the lender to the loan officer to the borrower to the attorney to the realtor and so on).

Well, that process has begun.

Fannie & Freddie are coming out with new “road rules” that address buy backs and addresses expanding credit to borrowers with lower down payments.  And, they’ve begun to attack the buy back issue along with the fraud issue.

HUD also has begun that process

So, it may be a new day in the mortgage industry where saner heads prevail and the adults take control of the room from the crazy kids who ran rampant.

Perhaps returning to vanilla products that were available before Clinton pushed for expanded home ownership is a sound decision.  Perhaps throwing in a few more products like one or two expanded ratio products geared specifically to LMI borrowers as defined by HUD medium incomes, issued by Fannie/Freddie is wise. Sticking to basic DTI’s and sticking to basic credit requirements is key. 

In 1995 the mortgage market began to see the lugs that held the wheels to their cars loosen when first the government announced that certain minorities lacked access to traditional credit and an underwriter could use alterative credit sources – and such began the process of tiered credit (Tier I, Tier II and Tier III credit) that could be used instead of traditional credit reports.  

That lead to tossing the basics out of underwriting and off loaded tax returns, eliminated proving income, went off only credit if the borrower put “enough down” and lent to borrowers at higher and higher DTI’s to get the coveted CRA’s from the government.

That was insanity.  And, that led to the subprime market.  And, that is a story the government does not want told  - its’ to arcane a story to tell and the public would prefer to dumb down what happened and blame the lenders.  This works for the likes of Barney Frank who pushed for the very rules he railed against in hearings in 2008 and 2009.

Maybe now we realize that too far left and too far right is simply too far.  Perhaps we now get that lending soundly means lending rules should be clear, concise and across the board.  The basic underwriting tools used from the 1990s were sound,: they should be used universally. 

Borrowers who don’t meet the criteria of vanilla conforming or vanilla govy loans or even vanilla expanded credit loans (lower LTV) should be viewed as tomorrow’s borrower.  Not today’s reject or the need for some politician to interject about unfair and discriminatory lending demanding new lending laws.

Lenders and agencies need clear rules of the road that dictate when a loan does not conform to agencies guidelines or regulations that then does trigger a buy back.

And, regulators and the government need to let people know that they will prosecute Joe Blow for lying on his mortgage application and getting a mortgage in addition to prosecuting rings of thieves who do so and rings of those in the industry who do so.   Breaking lending laws is not just the provence of those inside the lending industry.

Ebola, Stocks and the Economy

As stocks continue the trend from last week - the gains seen in the stock market are being eroded.  What is driving this is the concern that Japan and Europe are slowing down.  And, on top of this, as oil prices drop stocks go with them.  Lastly, consumer spending came in below expectations.  All of this drives traders to drive stocks downward.

On the bright side, this should help long term interest rates (mortgage rates) to either go down or hold steady based on previous trends.  Some lenders clearly are holding rates steady and booking profits on the increased gains.  However, others may lower rates to pick up desperately needed volume in new mortgage loans.

Meanwhile we should be keeping an eye on the Ebola crisis, that clearly has clearly entered the United States.  US cases include the two initial Atlanta cases that then grew to a 3rd person who entered without symptoms and died in Dallas.  Then we heard of another case of a journalist in the Midwest who has Ebola.  Now, two health care workers in Dallas have been infected.  If we strip this down we have to realize that there most likely will be more cases - which means Ebola has arrived in the United States and is no longer a West African problem.

So, we are closing out the 3rd quarter with many pressures.  For those of us in the mortgage industry - sales will probably remain weak despite lower rates.  Those who had higher rates have mostly re-financed and the remaining can't with the tougher lender standards.  That leaves lenders looking at the purchase market that has been stagnant as that is tied to consumer confidence levels.

With Europe and Japan having economic issues, rising US dollar - we are facing a possible slow down in the US economy which will most likely bring lower rates but fewer new home and existing home prices.

Editorial: What are we to think of CPFB action against M&T?

M&T Bank signed a consent order and settled with the CPFB, in essence stipulating that they are to refund bank account fees to consumers who had opened accounts advertised as "free accounts".

What got M&T Bank in hot water was not that they did not offer this product.

In essence M&T Bank was spanked for two reasons: 1)  M&T bank failed to tell the consumer that this particular free account required a threshold of transactional history to qualify as a free account. 2) M&T Bank automatically transferred customers accounts to fee accounts if their account did not qualify transactionally for the free one that the consumer initially opened.   3.  And, M&T did not notify their customer that they were going to be moved to the new account automatically.

Regulators have, for a long time, overseen banks advertising.   False or misleading advertising to lure customers has always been a hot button issue.  State and Federal regulations have even gone so far as to stipulate that the font size be of a certain number.

New York, where M&T is headquartered (Buffalo) has since the 1990's (and maybe before) stated clearly that deceptive ads were a very large concern.  This is why NYS was one of the first to push that anyone who advertised "no fees" on, say a mortgage transaction, make sure that they list the APR that shows clearly the fees are being rolled into the loan amount forcing the APR higher when compared to a fee based mortgage transaction, for example.

So, while M&T states this is a new regulation and one that they are compliant today, they are probably on face value stating the truth.

But, at the end of the day, advertising free and then moving clients to fee-based products and not telling them never was viewed by regulators as proper.

That is why advertising for financial products must be transparent and truthful so that consumers are not being nickeled and dime'd that, when taken in the aggregate, brings a large swath of cash to an institution.

So, M&T stating that the CPFB was not in existence and the rules are changing is correct.  And, M&T's statement in essence that they are in compliance probably correct.

But truthful advertising has always been a mainstay of regulators.

And, M&T's actions at the base level were certainly not ethical.

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

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.

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

M&T Bank ordered to return 2.9 Million dollars to consumers for deceptive Ads; according to Consumer Financial Protection Bureau (CPFB)

M&T Bank ordered to return 2.9 Million dollars to consumers for deceptive Ads; according to Consumer Financial Protection Bureau (CPFB)

The CPFB announced it had signed a Consent Order with M&T Bank, based out of Buffalo, New York; for 2.9 million dollars to be returned to consumers.  The CPFB stated that M&T Bank lured people to open "free" accounts; that were not free.

In essence, the CPFB said that M&T Bank lured people to open accounts without telling the consumers that if they did not use the account to a certain degree (by depositing and withdrawing a certain amount per month) the accounts would be converted to regular accounts.  There was no notice given to the consumers.

Under the regular accounts, the consumers had to maintain a certain balance or were faced with monthly fines.

The CPFB directed M&T Bank to refund 2.9 million dollars to consumers and the CPFB fined M&T Bank $200,000 dollars.

M&T Bank signed the consent order, agreed to the payments and issued a statement stating they complied with the CPFB and that they had adopted to regulatory changes about two-years ago.