The Nation’s Housing: Are kickbacks making a comeback?

By KENNETH R. HARNEY May 31, 2013

A settlement between the federal Consumer Financial Protection Bureau and a Texas homebuilder is drawing renewed attention to a controversial issue that was prominent during the years preceding the housing bubble: kickbacks in home real estate transactions. Put another way, do you know where your money is really going when you pay thousands of dollars in loan fees and closing charges? Is your realty broker or builder getting an extra piece of the action through side deals with lenders or title agencies – all at your expense through higher charges?

The CFPB’s allegations in its case against Dallas-based Paul Taylor Homes Ltd. illustrate how these arrangements can work: According to the settlement, the builder created partnerships with two lenders – one a bank, the other a mortgage company. In reality, however, according to the CFPB, “both entities were shams” designed to funnel kickbacks to Taylor for referrals of home purchasers needing mortgages.

Though the partnership entities had names – Stratford Mortgage Services and PTH Mortgage Co. – and appeared to be the funding sources for the loans, they in fact were shells with no separate employees, office space or real substance, the CFPB alleged. They did not advertise their mortgage businesses to the general public, instead servicing only Taylor purchasers.

Paul Taylor Homes denied any wrongdoing as part of the settlement. Asked for comment for this column, a lawyer for Taylor Homes, Van Shaw, said Taylor “has chosen to settle this matter to avoid the expense of potentially extended litigation with the government. The company now considers the matter closed.” As part of the settlement, Taylor must pay the federal government $118,194, the amount of money the builder received from the alleged kickback scheme starting in 2010.

This was the second such case the CFPB has settled in the past two months. In April, the agency fined four large mortgage insurance companies – Mortgage Guaranty Insurance Corp., Radian Guaranty Inc., Genworth Mortgage Insurance Corp. and United Guaranty Corp. – a total of $15.4 million for alleged illegal kickbacks to lenders. The under-the-table payments, said CFPB Director Richard Cordray, “inflat[ed] the financial burden of home-ownership for consumers” by raising their mortgage premium charges. The firms admitted no wrongdoing as part of their settlements.

Federal authorities have been investigating and taking action against real estate kickback schemes since the mid-1970s. Federal law prohibits the giving or accepting of fees, kickbacks or “things of value” in exchange for referrals of customers who are applying for or obtaining a home mortgage. Cases have ranged from the prosaic – lenders or title agencies providing realty agents cash, free trips to resorts, tickets to sporting events – to subtler schemes. For example, a realty firm or builder might put up 10 percent of the capital to start a partnership with a lender or title agency but get kickbacks totaling 70 percent of the profits, based on the volume of referrals.

Though federal law permits “affiliated business arrangements” among real estate and settlement service providers, those arrangements must have economic substance – they are adequately capitalized, no partner receives compensation based on referral volume, they have separate office space and employees, among other requirements.

Many large real estate brokerages and homebuilders have such affiliate tie-ins and are required to disclose their existence to clients and advise them that they have other choices for services. Industry proponents of these arrangements argue that they provide faster, more reliable service in transactions at a fairer cost than can be achieved by consumers going out and shopping on their own.

But critics such as Doug Miller, executive director of Consumer Advocates in American Real Estate (CAARE), dispute this. He argues that tie-ins often squeeze out service providers who choose not to affiliate with a big realty firm or builder, reduce competition and raise costs to consumers.

“I’d like to know the last time removing competition causes prices to go down,” Miller said in an interview.

His advice to homebuyers: Always shop for title insurance and settlement service alternatives to the in-house deals you’re offered. Ask your realty agent to help you shop beyond the affiliation network. Agents have a duty to help you get the best deals and best service, and they often know where they are. If you find better prices from unaffiliated vendors, don’t let anybody pressure you to go with the in-house, preferred provider. It’s your legal right to choose.

Republicans Sharply Criticize CFPB Over ‘Qualified Mortgage’ Rule

by Rachel Witkowski MAY 21, 2013 5:32pm ET

WASHINGTON – Lawmakers blasted senior officials at the Consumer Financial Protection Bureau on Tuesday, arguing they were too rigid with recently finalized mortgage rules that could choke off access to credit.

At a hearing of a House financial institutions subcommittee, several lawmakers focused on the agency’s “qualified mortgage” rule, arguing it was too strict and needed to be reworked.

“While the intent is to protect consumers from fraudulent mortgages, the practical implications of this rule could result in a constriction of mortgage credit for consumers,” said Rep. Shelley Moore Capito, R-W.Va., the chairman of the subcommittee. “I fear that this approach of ‘Washington knows best’ will harm the very people that the rule seeks to help: borrowers who are on the fringe of lacking access to mainstream financial services.”

At issue was a final rule issued in January that defined an ultra-safe class of loans which are exempt from a requirement that lenders ensure borrowers have the ability-to-replay a loan before extending credit. Qualified mortgages must fit certain underwriting criteria, including a cap on a borrower’s debt-to-income ratio.

But lawmakers said the “one-size-fits-all” approach in the rule could hurt community banks that underwrite more specialized loans for certain higher risk, low-income borrowers.

“Lenders of Pennsylvania are very concerned, and understandably so because they serve the community by making loans and their ability to provide that service depends on their ability to assess credit worthiness,” said Rep. Michael Fitzpatrick, R-Pa. “And there’s concern that by constructing a box in which they operate that it’s inappropriate that qualified borrowers won’t have access to credit.”

Rep. Lynn Westmoreland, R-Ga., went further by calling for lawmakers to “swiftly” repeal the mortgage rules before local banks stop lending and another housing bubble ensues.

“This country needs sensible housing regulation that allows the market to set the price and the qualifications for eligible borrowers,” he said. “Policies like the qualified mortgage are the most dangerous to economic freedom in this country.”

But CFPB officials repeatedly argued that they already addressed many industry concerns by broadening the initial definition of QM and carving out exceptions for smaller lenders.

“We worked to structure the rule in a way that allows room for multiple underwriting practices and models used by different types of creditor today,” said Kelly Cochran, the CFPB’s assistant director for regulations. “We also considered as the mortgage market strengthens, the rule should provide appropriate safeguards without becoming straitjackets.”

CFPB officials noted exceptions for small lenders that serve rural and underserved communities.

Peter Carroll, the CFPB’s assistant director for mortgage markets, said the agency has expanded the definition of rural lenders from the original version of the rule suggested by the Federal Reserve Board.

But that only led to greater concerns for lawmakers who argued the exemptions were still not broad enough for most small banks.

Rep. Sean Duffy, R-Wisc., pulled out a map of what he considered rural Wisconsin and noted discrepancies in how the CFPB’s definition affected different areas of the state. He argued that some counties that were similar were treated differently.

There is no difference [among counties]. It’s farms as far as the eye can see for 30 miles on either side of county lines,” Duffy said. “And it creates some real problems and disadvantages in my community the way the rules are written.”

Lawmakers also doubted the CFPB’s contention that a private market would open up for riskier loans outside of QM.

“Despite the CFPB’s claims that lenders will issue non-QM mortgages, my conversations with lenders lead me to believe that few, if any, will be willing to issue these types of mortgages,” Capito said.

But Carroll said that given time, lenders will adjust to the new rules.

“Based on our analysis, we do think it is possible to quantify the risks associated with nonqualified mortgage lending.”

CFPB officials also said that they have given lenders more flexibility because any loan purchased by the government-sponsored enterprises is considered a QM loan for the next seven years. But Rep. Gary Miller, R-Calif., questioned why the CFPB would give this window if they thought QM was a “good rule” in the first place and fit most current loans.

“Every lender I’m talking to said ‘we’re not going to do anything. We’re not going to make any loans outside of the QM rules.’ That is a recipe for immediate disaster this coming January,” Miller said. “And I would strongly encourage you to not force us to legislatively change the rule to be more flexible.”

House Democrats, however, were more supportive of the CFPB’s efforts.

Other lawmakers have said “if the rules regarding QM were put in place, it could result in fewer loans . I must say, I hope so,” said Keith Ellison, D-Minn. “The fact is, is that there were a lot of loans that should not have been issued in the last several years.”

Short sales may be treated like foreclosures by credit-reporting agencies

By Kenneth R. Harney, Published: May 16 | Updated: Friday, May 17, 8:55 AM

Are large numbers of homeowners who have negotiated short sales with lenders at risk because of a startling omission in the American credit system? Do their credit reports and scores indicate that they were foreclosed upon, rather than having negotiated a mutually agreeable resolution with their lender?

The answers appear to be yes, and last week the Federal Trade Commission and the Consumer Financial Protection Bureau were asked to investigate why. The reality is this: The credit reporting system now in place does not have a separate code that distinguishes a short sale from a foreclosure. Yet there are crucial differences between the two:

●In a short sale, the bank approves the sale of the house to a new buyer at a mutually acceptable price. Any unpaid loan balance not covered by the sale proceeds may then be either partially or fully forgiven. The bank is an active participant throughout the process, negotiating for a higher price and higher repayment of principal from the original borrower.

●In a foreclosure, the bank is essentially left holding the bag. The owners walk away at some point or live in the property rent-free until they’re evicted. Frequently, there is damage to the house left by the departing owners; sometimes it is extensive. There is little or no cooperation between them and the bank.

Both transactions are serious, negative credit events for the borrower. After all, the mortgage wasn’t fully repaid. But the financial losses generated by a foreclosure typically are more severe for the lender than a short sale. Not only are there extended periods of nonpayment by the borrower, but there are also substantial property management expenses, renovation costs, local property taxes and insurance while the house is being readied for resale. In some parts of the country, the average time to complete a foreclosure has exceeded two years.

The nation’s major sources of mortgage financing – Fannie Mae, Freddie Mac and the Federal Housing Administration – all recognize the differences between short sales and foreclosures in their underwriting policies regarding new mortgages. Fannie Mae generally won’t approve a new mortgage application by borrowers with a foreclosure on their credit report for up to seven years, but it will consider lending to people who were involved in short sales – and who otherwise qualify in terms of recent credit behavior and available down payment – in as little as two years.

But if short sales routinely show up in credit reports coded as foreclosures, borrowers who might qualify for a new mortgage two or three years after a short sale find themselves shut out of the market.

George Albright, who completed a short sale on his home in New Port Richey, Fla., in 2010, has been trying for months to get through the hoops for a Fannie Mae conventional mortgage. According to his mortgage broker, Pam Marron, Albright has a solid 720 FICO credit score, down-payment cash of 20 percent and more than adequate monthly income and reserves for a new home. But he keeps getting rejected because his credit report indicates a foreclosure, not a short sale.

That’s not unusual, Marron said, since there is no specific code to identify short sales. In a highly automated and strict underwriting environment, lenders go by the codes, according to Marron, harming creditworthy applicants such as Albright.

“I did my time,” Albright said in an interview. “I’m ready to move on,” but because of the inadequacy of current credit reporting practices “I’m still paying more for rent than I’d be paying on a new mortgage.”

Following a Capitol Hill hearing May 7 on credit reporting issues, Sen. Bill Nelson (D-Fla.) sent requests to both the FTC and the CFPB to investigate what he called the “disturbing practice” of misidentifying short sales and to “penalize responsible parties in the mortgage- and credit-reporting industries, if they don’t fix this coding problem within 90 days.”

Nelson said real estate industry data indicate that there have been 2.2 million short sales nationwide during the past several years. Consumers who opted for a short-sale route rather than a more costly foreclosure are now being blocked from “re-entry into the housing market,” he said, thereby “stifling economic recovery for all homeowners.”

Officials of the main trade group for the credit reporting industry, the Consumer Data Industry Association, were not available for comment on Nelson’s short-sales complaint to the federal agencies.

‘Pocket listings’ allow realty agents to make sales without sharing commissions

By Kenneth R. Harney, Published: May 9 | Updated: Friday, May 10, 8:45 AM

How hot is hot when it comes to housing markets across the country right now? Crazy hot: Some houses sell within days, sometimes within hours, of listing. Then there are the growing numbers that sell even before they formally hit the market – sold through a controversial technique known as pocket listings.

What’s a pocket listing? Essentially it’s a private, off-market listing, often of short duration. Instead of putting the house on the local multiple listing service, which exposes it to a vast number of shoppers and agents via real estate Web sites, agents restrict access to information about the house to their own buyer clients or colleagues in the same brokerage, hoping for a quick, full-price sale.

Pocket listings are surging, real estate experts say, because of historically low inventories of homes for sale in major metropolitan areas, along with strong buyer demand and low mortgage rates. This combination has made control of upcoming new listings a powerful, highly profitable asset for agents in the most competitive seller’s markets.

If agents can sell their off-market listing to a buyer-client they bring in on their own, they can collect both sides of the commission rather than split it with another agent. If they can sell it through colleagues in their own firm – even at a slight discount to regular commission rates – the full commission remains inside the brokerage.

Though no organization or research firm publishes statistics on the subject, top brokers in some highly competitive markets say pocket listings are becoming a significant factor.

Bill Podley, broker-owner of Podley Properties, a Pasadena, Calif.-based firm that specializes in middle- and high-end communities, says he has heard estimates that as many as a third of luxury and upper-cost homes selling in northeast Los Angeles County involve pocket listings. David Howell, executive vice president of McEnearney Associates, a large brokerage based in Alexandria, says he heard a recent estimate that such listings may now run as high as 20 percent nationally. Glenn Kelman, chief executive of Redfin, an online real estate firm, said, “We are seeing more pocket listings across the U.S. In Boston and Los Angeles, we also see listing agents refuse to allow any showings of the home until the weekend open house.”

Real estate executives such as Podley, Howell and Kelman are all critical of pocket listings. They argue that by restricting access to information about homes available for sale to relatively small numbers of potential buyers, agents are not fulfilling their core duties to their seller clients and not obtaining the highest possible prices.

Podley cites the example of a house he recently sold. Because it was put on the multiple listing service, it drew 300 visitors and 50 offers within five days, and it sold for more than 40 percent above the asking price.

“It is highly unlikely,” he said, “[that] the seller would have achieved that kind of price had the home been exposed to a limited number of buyers” through a pocket listing.

Some agents, however, argue that there is a good case for keeping things private: Sellers may not want hundreds of strangers tramping through their homes. Others just want to get the transaction done quickly at an agreeable price – not a bonanza – and don’t see the need for Internet exposure. Still others argue that large brokerages that are prominent in the upper brackets of their local markets have agents who know hundreds of potentially interested buyers.

Tom Heatherman, communications director for Michael Saunders, a Sarasota, Fla., brokerage with 600 agents, says his firm conducts weekly “caravans” for its agents to view homes not yet on the multiple listing service but scheduled for listing by the company later in the week.

In this spring’s atmosphere of “feverish” buyer demand, he said, the firm’s agents often are able to sell these houses “before they even make it to the market.” In fact, according to Heatherman, the company’s ability to market first to its own large pool of agents is a key reason why sellers choose them.

Bottom line: If you are thinking about selling, be aware that pocket listings restrict the audience for your property and possibly your maximum price. If that’s fine with you and you understand the potential conflicts of interest when brokerages represent both the seller and the buyer in a real estate transaction, then go for it. If that’s not fine with you, require your agent to get your house onto the local multiple listing service as fast as possible.”

Some zero-down successes

May 3, 2013 Kenneth R. Harney

WASHINGTON — Who says lenders need to charge you a cash down payment when you take out a mortgage in this era of hyper-strict underwriting?

Just about everybody: