Bank fund pay outs

 How bank funds are being spent:

 

http://www.wsj.com/articles/new-york-gov-andrew-cuomo-legislators-jockey-over-bank-settlement-proceeds-1418436720?mod=WSJ_hps_MIDDLE_Video_second 

 

Just clicking on the above link will take you to the fight over the bank settlement funds in New York State.  One city wants water pipes.  Another wants a bridge.  The state wants economic development.

 

But....wait.  Wasn't this from the big, bad, criminal banks?  Wasn't this over the mortgage crisis - they lent money recklessly to make bazillions from unsuspecting citizens?

 

If that premise is correct, and the government is fully repaid on the monies lent out, with interest, why are these proceeds not going to the victims?

 

Does this not remind you of the 1990's and the lawsuits against the cigarette manufacturers? 

 

Looser lending misrepresented by press

It's all over google, yahoo and other search engines.  Banks are loosening up lending and that will make getting a mortgage easier.  Pundits are stating the doors are now opening up for individuals who otherwise would be denied a loan.

But, after the housing crash and the accusations of mortgage misdeeds - demanding that lenders know who they are lending money to - how could this occur?

In actuality, it really is about the documentation.  Not the standards of underwriting such as credit scores, how long you're employed or how much you're trying to borrow.

Lenders have gotten into lawsuits with each other and with national agencies such as HUD, Fannie Mae and Freddie Mac demanding what is called a "put back".  A "put back", in mortgage parlance, is when a national agency like HUD or a lender who bought a loan from another lender "puts the loan back" to the original lender.

Say you went to a bank and got a mortgage.  Your loan probably was sold once or more times since you received the initial loan.  That's normal in the industry - it keeps the cash flowing for more borrowers to get more loans.

But, lets' say you miss one or two payments.  You had severe medical bills, you were out of the country, whatever the reason - it is not important.  What happens?  As far as you're concerned, you get late payments (which you do not want) on your credit reported on your mortgage payment history.

However, behind the scenes, the action unfolds.  Someone somewhere is tasked with going through your loan and looking at every single document that you provided and that you signed.   The intention is to determine one of four things:  1. You signed something incorrectly (a mistake by your original lender) with the wrong date or the wrong information on the disclosure.  2. You lied and are a fraud.  3.  The Underwriter made a mistake and improperly underwrote your loan to the proper guidelines.  Or 4.  There is some paper that has some error or something missing.

The employee who finds this gets a big slap on the back and the company then sends a demand letter to the bank that originally gave you the loan saying "We're sending the loan back to you ("put back") and you need to wire us the money for the loan ASAP or we are going to sue you"

For cases like egregious underwriting errors or fraud, this is common practice

But, this practice was abused by many major banks who kicked loans back and forth to one another and abused by agencies who did not want to insure loans to banks.  They looked for simple, tiny, errors that they could use as an excuse to trigger the "put back" or "buy back" clause

After much discussion in Washington, there was an agreement that limits this practice.  Because, typically, if an Agency like HUD, Fannie, Freddie or the VA refuse to insure a loan -you can bet that every bank between San Fran and Miami start kicking the loan back and putting it back - because none of them want an uninsured loan.

So, the agencies have come to an agreement to limit the demands to egregious issues and not to smaller items that do not materially change the fundamental quality of the original loans.

This does not translate to easing of credit.

This translates to less lawsuits from "put backs"

After all, if the government is going to legislate to a lender that they can only lend you what you can afford - (google "ability to repay") - do not thing for one second that they just loosened lending up like it was 2002 all over again

Should we loosen up lending?

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

Cost of Regulation

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

FHA Flipping 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.