Proposed Mortgage Disclosure Forms Increase Burden, Banks Say

By Joe Adler

NOV 20, 2012 4:17pm ET

WASHINGTON – While banks applaud the Consumer Financial Protection Bureau’s goal of simplifying the tangled mass of required mortgage disclosures, the industry has found that simpler is not always better in the agency’s proposal for streamlined forms.

In more than 2,000 letters responding to the CFPB’s plan, bankers said several requirements – including a rigorous timeline for presenting borrowers with the new forms, limited deviation of estimated charges between initial and final disclosures, and an “all-in” annual percentage rate – will add constraints and confusion.

“We are concerned that some aspects of the proposal will add to ‘information overload,’ detract from the quality of disclosures, and impose unwarranted and unnecessary burdens on creditors,” Sy Naqvi, chief executive of PNC Mortgage, wrote in a letter dated Nov. 6, which was the comment deadline.

Many of the proposed reforms had been floated by the Federal Reserve Board before the CFPB – created under the Dodd-Frank Act – assumed rulemaking for disclosures and launched the project of melding Truth in Lending Act and Real Estate Settlement Procedures Act forms.

Bankers have consistently embraced the objective behind the plan, but remain concerned about its implementation.

Financial institutions and other stakeholders – including Realtors, title companies and consumer advocates – most consistently focused on the proposed inclusion of more information in estimates for finance charges and the APR.

But institutions also objected to submitting a “closing disclosure” three days before closing, as well as reducing permitted “tolerances” – or the types of charges that can be higher on the “closing disclosure” than they were in the earlier “loan estimate” form.

“Overly strict timeframes, lack of tolerances on fees and charges, and the inability to accommodate last minutes changes to avoid re-disclosure create a market environment where consumers will see higher charges for certain services, inflexible and extended timelines to complete the mortgage origination process, and possible restriction of mortgage credit for certain consumers,” wrote Ron Haynie, executive vice president for mortgage services with the Independent Community Bankers of America.

Commenters said consolidating the TILA and Respa forms should not get bogged down with the imposition of too many more requirements that were not established in regulation before the bureau undertook the project to integrate the two regimes.

“The bureau should continue to focus its energy on the enormous job of integrating the forms, which MBA fully supports, without making undue changes to the rules,” David Stevens, president and chief executive officer of the Mortgage Bankers Association, said in a Nov. 6 letter. “MBA recognizes that Respa and TILA disclosure requirements differ, necessitating some changes to the rules. Nevertheless, other proposed changes to the definition of application tolerances, timing and the introduction of a new APR, to name a few, extend far beyond what is needed and threaten to divert energy and support from this important effort.”

To be sure, several commenters appeared to see promise in the bureau’s attempts to simplify the forms (The CFPB’s proposal included model examples of what the loan estimate and closing disclosure forms would look like).

Bill Himpler, executive vice president of the American Financial Services Association, noted “problems with the proposed closing disclosure” as they would pertain to certain types of loans. Yet, he said, “The proposed disclosures are much clearer and more understandable for consumers for many transactions, particularly the standard home purchase money mortgage.”

But bankers and others urged the bureau to rethink the all-encompassing finance charges and other proposed features. Specifically, commenters said in including more fees in rate calculations, the new requirements could result in loans appearing to be higher-cost.

In turn, they said, such loans could hit triggers disqualifying them for regulatory status under other regulations, such as the CFPB’s pending rule on verifying a borrower’s “ability to repay”, and therefore restrict credit in some cases.

“The ‘all-in’ finance charge would result in higher ‘points and fees’ figures, which are calculated using the finance charge as a starting point,” wrote Michael S. Malloy, mortgage policy and counterparty relations executive at Bank of America. “Consequently, this would reduce the number of loans that would otherwise be ‘qualified mortgages’ under Dodd-Frank’s ability-to-repay requirements, given that qualified mortgages, as proposed, will not have points and fees in excess of three percent of the ‘total loan amount.’”

Even some consumer advocacy groups cited similar concerns about the more inclusive rate calculation.

A Nov. 6 letter submitted by the Center for Responsible Lending said, “The bureau should not pursue a change in the finance charge definition at this time.”

“While the bureau correctly identifies the consumer benefits that could come from an all-in finance charge definition in terms of greater transparency and improved shopping ability, the inter-related nature of current mortgage laws makes change at this time a complicated undertaking,” the group wrote.

Some bankers suggested that institutions that do not view themselves as high-cost lenders would be pushing the envelope with the new requirement.

“Macon Bank does not presently originate high cost loans. However, the proposed changes to the definition of finance charge will cause APR’s to increase and more loans will exceed the high cost, higher priced and higher risk thresholds,” wrote Patti Morgan, lending compliance specialist at the $818 million-asset institution in Franklin, N.C. “This will have a negative effect on low to moderate income borrowers since lenders will be reluctant to make high cost or higher priced mortgage loans due to the stringent requirements.”

Banks also warned that a provision requiring lenders to give consumers a closing form three days early – which in most cases would obligate lenders to restart the three-day period if an estimate changed before the actual closing – overlooks the common last-minute changes that are hard to control.

“Bank of America requests that the CFPB expand the category of changes that allow for provision of an updated disclosure at the closing table, instead of requiring redisclosure and a new three-day waiting period, to include changes in costs that are outside the control of the lender,” Malloy wrote.

Under the proposal, certain elements of the disclosure would get an exception from the three-day requirement. These include changes stemming from negotiations between a buyer and seller following a final walk-through, and other minor changes that result in less than $100 in increased costs.

But lenders called for more flexibility.

“Regarding subsequent redisclosures, we believe the rule needs to provide more flexibility to ensure that an additional three business day waiting period is imposed only when it will truly benefit the customer,” Michael J. Heid, president of Wells Fargo Home Mortgage, wrote in a Nov. 5 letter.

Similarly, they said the reduction in tolerances allowed following release of the initial disclosure form would go too far. Under the rule, certain charges could not increase between when the lender first presents the loan estimate and the closing. Those include what the lender charges for its own services, charges for services provided by a lender’s affiliate and charges accrued when the lender forbids a borrower to shop around for a better price. Also, charges for other services could not jump by 10% or more.

Yet commenters said they saw little reason for a reduction in the tolerances.

“There is no indication that current tolerances are inadequate, and CFPB should not make such changes unless it has data that a tightening of tolerances is necessary to prevent ongoing abuses at closing, and that unintended consequences will not result,” Robert Davis, the American Bankers Association’s executive vice president of mortgage markets, financial management and public policy, wrote in a Nov. 6 letter.

FHA Seeks to Avoid Bailout with Loan Sales, Higher Premiums

By Kate Berry

NOV 16, 2012 11:00am ET

The Federal Housing Administration said Friday that it will hike insurance premiums, accelerate short sales and aggressively sell off defaulted loans to plug a $16.3 billion shortfall in its capital reserves.

FHA Acting Commissioner Carol Galante outlined the series of steps after an independent audit found that the agency’s capital reserve ratio – which measures reserves held in excess to cover projected losses – fell into negative territory at, -1.44% at Sept. 30. By law, FHA must maintain at least a 2% capital reserve.

With the moves, the FHA is hoping to avoid tapping the U.S. Treasury for funding for the first time in its 78-year history.

The capital cushion has been depleted by high levels of defaults on FHA-backed loans. While FHA currently has reserves of $30.4 billion, the projected payout on claims – mostly on loans insured between 2007 and 2009 – will be $46,7 billion, according to the audit report released Friday.

In a statement, Galante said that the agency “will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

The agency’s fiscal woes are likely to spark a contentious battle in Washington over how to shore up its finances. While premium hikes will bring in more revenue, they will also increase mortgage costs for borrowers, which could anger some housing advocates.

The concern for bankers and mortgage lenders, meanwhile, is that FHA will increase its buyback requests as the agency scrambles for new sources of revenue. FHA was able to avert a financial crisis earlier this year only by negotiating a $1 billion settlement with Bank of America (BAC) to compensate the agency for past losses.

Some housing advocates say FHA has been slow to make changes that have already been adopted by Fannie Mae and Freddie Mac.

“FHA needs to get more serious about loss mitigation and make sure they are putting people in modifications or providing alternatives like streamlining the short sale process,” says Julia Gordon, director of housing finance and policy at the Center for American Progress.

Frank Keating, the president and CEO of the American Bankers Association, called the independent audit “troubling” and said FHA must find ways to avoid a taxpayer bailout.

“Achieving that goal must be done in a way that does not drive private lenders from participating in the FHA program by making the process overly bureaucratic and lacking in certainty,” Keating said in a statement.

This time last year, the independent audit projected that the FHA’s capital reserve ratio at Sept. 30 would be 0.24% – below the 2% requirement but well above the -1.44% ratio reported Friday. John Weicher, a senior fellow at the Hudson Institute and former FHA commissioner, said last year’s audit report was based on a rosy economic forecast from Moody’s that did not actually materialize.

“The economy performed worse than they expected a year ago so a lot depends on house price and interest rate changes in the next year, as well as losses on foreclosures,” says Weicher.

To bolster its capital reserves, Galante said FHA will raise annual insurance premiums by 10 basis points, which would come on top of an upfront 75 basis-point increase in April, to 1.75% of the loan amount. FHA expects to bring in $11 billion in additional capital in fiscal 2013 due to the higher insurance premiums, though that amount was not included in the independent audit’s estimate.

An increase in annual insurance premiums will make FHA loans slightly more expensive, adding about $13 a month to the average borrower’s payment. It is unclear whether higher premiums will have an adverse impact on FHA’s core constituency of low and moderate-income borrowers.

Among other changes, FHA will ramp up bulk loan sales to 10,000 per quarter in the next year through its Distressed Asset Stabilization Program.

The agency will expand the use of short sales and revise its loss mitigation program to provide more relief to struggling borrowers so they avoid costly foreclosures.

FHA also is reversing a policy that allowed borrowers to stop paying premiums after a certain point even though FHA’s insurance guarantee remained in effect for the 30-year life of the loan. That policy left many borrowers without insurance to cover losses, Galante said.

This year’s audit used a different methodology to predict how losses on defaulted loans and reverse mortgages would impact FHA’s mutual mortgage insurance fund. The changes were based on previous recommendations made by the Government Accountability Office and the Department of Housing and Urban Development’s Inspector General.

Last year’s report had higher forecasts for home price appreciation and FHA says the turnaround in the housing market occurred later than was projected last year. FHA’s revenue also took a hit from the continuing decline in interest rates because more borrowers paid off their loans by refinancing.

Though loans insured since 2010 are providing billions in new revenues, and serious delinquencies from 2005 to 2009 are declining, they are not enough to cover the $70 billion in losses on loans made during the height of the housing boom.

FHA’s capital reserve ratio has turned negative before, in both 1990 and 1991, but the FHA came up with the necessary funds and did not have to tap the Treasury.

Lame-duck Congress may tackle issues affecting buyers and sellers of homes

By Kenneth R. Harney,

11/16/2012

With the House and Senate back on Capitol Hill for the lame-duck session, preliminary negotiations aimed at keeping the country from careening off the “fiscal cliff” began in earnest this past week.

The macro issues – how to reduce federal spending and how to raise federal revenues – are getting the bulk of the attention. But buried away in the discussions are bread-and-butter questions that could affect millions of homeowners and buyers:

●Will the biggest housing-related tax benefits – for mortgage interest, property taxes and home-sale capital gains exclusions – be on the chopping block in the coming six weeks? Or will these popular, multibillion-dollar annual supports for homeownership be deferred for the big game – the “grand bargain” negotiations involving a wholesale transformation of the tax code in 2013?

●Could Congress fail to extend the Mortgage Forgiveness Debt Relief Act before its expiration Dec. 31, potentially exposing large numbers of owners who receive cancellation of unpaid principal balances on their loans to punitive income taxes on the amounts forgiven?

●Will smaller-scale deductions for mortgage insurance premiums, energy-conserving home improvements and tax credits for builders that construct energy-efficient new houses be renewed? Or could they become poker chips that “pay” for other concessions to real estate interests?

Though strategies and timing could change in the House or Senate, the betting among lobbyists and other analysts is that it’s unlikely that a still fractious Congress will be able to pull off a major rewrite of the tax code during the lame-duck session. As a result, the big-ticket housing preferences such as the mortgage interest deduction – a nearly $100-billion-a-year revenue drain for the Treasury – would not be an action item in the coming several weeks, although agreements in principle might be forged to limit them in some way, with details to be worked out in 2013.

But cutting back on housing preferences will be a bruising fight on Capitol Hill, where powerful groups such as the National Association of Realtors and the National Association of Home Builders view them in almost existential terms. Plus, any changes to the write-offs – even in a grand reform where every special interest gets dinged – would need to be phased in over an extended period of years, given the important role that housing plays in the economy.

Renewal of the mortgage debt forgiveness legislation may well be the most time-sensitive issue affecting homeowners during the lame-duck session. If it expires at the end of the year, owners who receive principal reductions through loan modifications, short sales or foreclosures by lenders next year could face painful tax bills: The IRS would treat their debt cancellations as ordinary taxable income.

Michelle J. Adams, an attorney in Rockville with a large practice assisting distressed borrowers, said that “for some homeowners, the amount forgiven is a couple of hundred thousand dollars.”

If Congress lets the provision lapse, she said, “many owners will walk away” after a foreclosure with the misconception that their tax liability had been erased. In fact, she said, they would be facing prohibitively high tax payments that might force them into bankruptcy in order to discharge the debt. Under the tax code, most forms of forgiven debt are treated as ordinary income – with the temporary exception of mortgage debt on principal residences – unless the borrower is insolvent.

Carrie Johnson, senior policy counsel for the nonprofit Center for Responsible Lending, says allowing an expiration “would be inconsistent” with other ongoing efforts, including Fannie Mae’s and Freddie Mac’s new short sale program, the $25 billion “robo-signing” settlement with major banks and private loan modification programs run by lenders, all of which encourage principal cancellations.

With several bills pending in the House and one in the Senate that would extend the program for another year or two, lobbyists say there is a slightly better than even chance Congress will extend the debt forgiveness provisions, unless the entire fiscal cliff negotiations implode.

Might some of the other housing issues – energy-conservation and mortgage insurance premium deductions especially – get sidetracked during the lame-duck session? Absolutely. Though the Senate Finance Committee approved a bipartisan bill to renew these and dozens of other tax code preferences in August, the measure never came to a vote in the full Senate and its fate is uncertain. Since neither of the housing extensions is weighty enough to pass on its own, they will need to be included in a much larger omnibus bill. If they don’t make it onto the bus in the final rush, they probably won’t survive the session.

Fed’s Duke Advocates Separate Mortgage Regulation for Small Banks

By Joe Adler

NOV 9, 2012 1:29pm ET

WASHINGTON – Federal Reserve Board Gov. Elizabeth Duke on Friday called for a two-tiered approach to regulating mortgage lending, saying the heightened regulatory burdens faced by community banks are putting a sizable portion of the origination market in jeopardy.

“Balancing the cost of regulation that is prescriptive with respect to underwriting, loan structure, and operating procedures against the lack of evidence that balance sheet lending by community banks created significant problems, I think an argument can be made that it is appropriate to establish a separate, simpler regulatory structure to cover such lending,” Duke said in prepared remarks for a Chicago speech to the Community Bankers Symposium, an event sponsored jointly by the three federal bank regulatory agencies.

Duke said imposing new restrictions on mortgage lenders, including in rules implementing the Dodd-Frank Act, is “an understandable approach” in light of the subprime mortgage crisis. But certain loan features targeted by policymakers – such as balloon interest payments – are traditional in mortgages originated by community banks. Those characteristics may have endangered subprime lenders in the lead-up to the mortgage meltdown, but community banks should not be penalized for others’ abuses, she said.

“Community banks have long been a source of loans that, for a variety of reasons, do not fit the parameters of conforming government-sponsored enterprise loans or eligibility for government-guaranteed programs. Community banks typically hold these loans on their own balance sheets,” Duke said. “They use higher interest rates to compensate for the lack of liquidity in these loans or to cover higher processing costs because community banks lack economies of scale, and they use balloon payments as a simple way to limit their interest-rate risk.

“To the extent that regulations require additional operational procedures for such loans that are prohibitively expensive, raise the liability associated with making them, or create capital requirements that are out of proportion to the riskiness of the loans, community banks could be closed out of these products altogether.”

She discussed data compiled by Fed staffers that, Duke said, “demonstrate that while the community bank share of the mortgage market is not large, it is significant.”

According to information collected under the Home Mortgage Disclosure Act, banks with between $500 million and $10 billion of assets are responsible for about 13% of home loan originations, while those under $500 million of assets account for about 5%. Credit unions, meanwhile, make up an additional 7%.

“Thus, taken together, community banks and credit unions accounted for one-quarter of the new origination market in 2011,” Duke said. “This is up from a combined market share of nearly 16% in 2004.” During that period, the share for nonbanks went down, and originations for large banks were about the same.

She said that the data points to “evidence that the additional capacity provided by smaller lenders is important, especially at the margin, and could contribute to lowering mortgage rates and loosening lending standards.”

Despite community banks’ importance in the housing market, Duke said, “crafting regulations to address the real problems that occurred in subprime lending without creating punitive burdens on community banks may prove to be quite difficult.”

She specifically pointed to the burden for smaller banks of complying with new capital requirements, as well as certain provisions in Dodd-Frank, including new escrow rules for higher-priced mortgages, compensation standards for loan officers and revised appraisal regulations.

“Within the escrow requirements, the Dodd-Frank Act did provide for an exemption for banks in rural or underserved areas, but I think broader exemptions for community banks should be considered,” Duke said.

She said inaction by regulators in recognizing the need for more nuance in rules affecting community banks could have serious consequences.

“If the effect of a regulation is to make a traditional banking service so complicated or expensive that significant numbers of community banks believe they can no longer offer that service, it should raise red flags and spur policymakers to reassess whether the potential benefits of the regulation outweigh the potential loss of community banks’ participation in that part of the market,” Duke said. “Unfortunately, my discussions with community bankers lead me to believe that we might be approaching that point with residential mortgage lending regulation.”

Help, and snares, for walking wounded

By KENNETH R. HARNEY

Nov 9, 2012

Though there are still some snares and drawbacks for participants, one of the federal government’s most important financial relief efforts for underwater homeowners started operation on Nov. 1.

It’s a new short-sale program that targets the walking wounded among borrowers emerging from the housing downturn – owners who owe far more on their mortgages than their current home value but have stuck it out for years, resisted the temptation to strategically default, and never fell seriously behind on their monthly payments.

Industry estimates put the number of underwater owners across the country at just under 11 million, or 22 percent of all homes with a mortgage. Of these, approximately 4.6 million have loans that are owned or securitized by Fannie Mae or Freddie Mac. Eighty percent of these Fannie-Freddie borrowers, in turn, are current on their mortgage payments and meet the baseline eligibility test for the new short-sale

effort.

Here’s how the program works and where the potential snares are. Traditionally short sales, where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price, are associated with extended periods of delinquency by the original owner. The new Fannie-Freddie program – designed by the companies’ overseer, the Federal Housing Finance Agency – breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

Say you are deeply underwater on your mortgage and recently lost your job or had your work hours reduced. Under the new program, you can contact your mortgage servicer and ask to participate in a Fannie-Freddie short sale for non-delinquent borrowers. You’ll need to find a qualified buyer for the house, typically with the help of a real estate broker or agent knowledgeable about short sales who will list the property and obtain an offer and communicate the details and documentation to the servicer. If the proposed short-sale package is acceptable, the deal would then proceed to closing weeks – or months – later.

Eligible hardships under the new program run the gamut: job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and a you-name-it category called “other,” meaning a serious financial issue that isn’t one of the above.

Borrowers who take part in the new program can expect to rid themselves of the money-devouring albatross their mortgage has become – without going through the nightmares of foreclosure or bankruptcy – and to get a chance to start anew, better equipped to deal with the financial hardship that caused them to sell their house in the first place.

What about the snares in the program? There are several that participants need to consider.

. Credit score impacts. Though officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry, at the moment it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores – 150 points or more. This is because under current credit industry practices, short sales are lumped in with foreclosures. According to Laura Arce, a senior policy analyst at the agency, the government is in discussions with the credit industry to institute “a special comment code” for servicers who report the new Fannie-Freddie short sales to the national credit bureaus that would treat participants more fairly on FICO scores.

. Promissory notes and other “contributions.” In the majority of states where lenders can pursue deficiencies, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the loan balance owed or sign a promissory note. This would be in exchange for an official “waiver” of the debt for credit reporting purposes, potentially producing a more favorable credit score for the sellers.

. Second lien hurdles. The program sets a $6,000 limit on what second lien holders – banks that have extended equity lines of credit or second mortgages on underwater properties – can collect out of the new short sales. Some banks, however, don’t consider this a sufficient amount, and may threaten to torpedo sales if they can’t somehow extract more.