Fixing Core Failings of the Mortgage Industry: Data Quality, Transparency, Auditability

The mortgage industry has always been cursed by its inability to prioritize initiatives that promote and ensure the efficacy of processes versus the efficiency of processes. Things were so bad that during the thick of the origination and housing boom, a 2007 Mortech study uncovered that two-thirds of lenders had no (zero) system for managing financial or operational risks. It’s always been far easier to justify investments and quantify returns on investments in the areas of loan sales and production than on quality assurance.

We all recognize that a lack of data quality, transparency, and auditability are core failings of the mortgage industry. Efforts to validate the integrity of loan data and quality of loan documents have been underway since the discovery of meta data and XML data (machine and human readable data) and eventually SMART documents over ten years ago.

President Clinton gave mortgage companies ammunition to fight fraud and improve processes with the enacting of E-SIGN legislation in July of 2000. The federal law gave “...electronic signatures, contracts and records the same validity as their handwritten and hard copy counterparts...”

E- Signatures became the linchpin to a fully automated, auditable, and rules based process – the eProcess. Loan software companies and document preparation companies quickly followed suite to be a part of the paradigm shift. Inaccurate and incomplete loan documents could not be signed until they were fixed. Loans would not – could not -progress unless everything was accurate. Anyone electing to “E-SIGN” documents went through rigorous and multi-pronged identification processes – even biometrics - that had virtually eliminated identity fraud cases. A digital seal was applied to the document and the embedded loan data was protected by a “hashmark” that ensured data could not changed once the document was notarized. The very things that could have prevented the mortgage and foreclosure debacle at its core are available, but for how long?

Last week, President Obama vetoed a bill that was designed to facilitate electronic mortgages and e-commerce, in large part over fears that the legislation would make it easier for servicers to get foreclosures approved by the courts. The bill (H.R. 3808) is called the Interstate Recognition of Notarizations Act and required state and federal courts to recognize paper or electronic documents with seals from out-of-state notaries.

White House press secretary Robert Gibbs said - “The President will not sign H.R. 3808...our concern is the unintended consequences on consumer protections, particularly in light of the home foreclosure issue and developments with mortgage processors. So the President is exercising a pocket veto, sending that legislation back to Congress to iron out some of those unintended consequences."

“Tapping the brakes” on 3808 is regrettable but understandable as the industry deals with yet another unprecedented issue. However, we need to be alert to the risks associated with condemning service providers and technology providers for what are really problems of procedures and policy. We as an industry need to be looking forward to the things that validate, mitigate, and share risks. Data driven rules and workflow go a long way toward solving to issues related to poor loan quality. E-Signatures and eNotarizations are the very sorts of things that ensure efficient processes can be performed at scale without deterioration of quality or efficacy.

by Tim Rood

a Mortgage News Daily article

Purchase Demand Rallies Ahead of FHA Updates. Seller Concession Reduction Still in Limbo

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending October 1, 2010.

The MBA's loan application survey covers over 50% of all U.S. residential mortgage loan applications taken by retail mortgage bankers, commercial banks, and thrifts. The data gives economists a snapshot view of consumer demand for mortgage loans.

In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment. If consumers are able to reduce their monthly mortgage payment and increase disposable income through refinancing, it can be a positive for the economy as a whole (creates more consumer spending or allows debtors to pay down personal liabilities like credit cards). A falling trend of purchase applications indicates a decline in home buying demand, a negative for the housing industry and the economy as a whole.

Excerpts from the Release...

The Market Composite Index, a measure of mortgage loan application volume, decreased 0.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 0.3 percent compared with the previous week. The four week moving average for the seasonally adjusted Market Index is down 3.0 percent.

The Refinance Index decreased 2.5 percent from the previous week. The four week moving average is down 4.2 percent for the Refinance Index. The refinance share of mortgage activity decreased to 78.9 percent of total applications from 80.7 percent the previous week.

The seasonally adjusted Purchase Index increased 9.3 percent from one week earlier and is the highest Purchase Index observed in the survey since the week ending May 7, 2010. The unadjusted Purchase Index increased 9.1 percent compared with the previous week and was 34.7 percent lower than the same week one year ago. The four week moving average is up 2.0 percent for the seasonally adjusted Purchase Index.


The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.25 percent from 4.38 percent, with points decreasing to 1.00 from 1.01 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The 30-year contract rate is the lowest recorded in the survey, with the previous low being the rate observed last week. The effective rate also decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.73 percent from 3.77 percent, with points increasing to 1.14 from 1.13 (including the origination fee) for 80 percent LTV loans. The 15-year contract rate is the lowest recorded in the survey, while the previous low was observed last week. The effective rate also decreased from last week.

The average contract interest rate for one-year ARMs increased to 7.11 percent from 7.04 percent, with points increasing to 0.24 from 0.22 (including the origination fee) for 80 percent LTV loans.
The adjustable-rate mortgage (ARM) share of activity increased to 6.1 percent from 6.0 percent of total applications from the previous week.

THE MBA SAYS:

“The increase in purchase activity was led by a 17.2 percent increase in FHA applications, while conventional purchase applications also increased by 3.6 percent,” said Jay Brinkmann, MBA’s Chief Economist. “This is the second straight weekly increase in purchase applications and the highest Purchase Index level since the expiration of the homebuyer tax credit program. One possible driver of last week’s big increase in FHA applications was a desire by borrowers to get applications in before new FHA requirements took effect October 4th, which included somewhat higher credit score and down payment requirements.”

Jay hits the nail on the head. While new upfront MIP requirements lower the cost for borrowers at the closing table, the plain and simple truth is the increase in the annual premium (paid monthly) pushes monthly costs higher for homeowners. Hence the uptick in purchase demand, led by FHA loans, before the October 4 case number deadline .

From Mortgagee Letter 10-28

HUD has decided to raise the annual premium and correspondingly lower the upfront premium, except for Home Equity Conversion Mortgages (HECM), so that FHA is in a better position to address the increased demands of the marketplace and return the Mutual Mortgage Insurance (MMI) fund to congressionally mandated levels without disruption to the housing market.

Based on the new authority, effective for FHA loans for which the case number is assigned on or after October 4, 2010, FHA will lower its upfront mortgage insurance premium (except for HECMs) simultaneously with an increase to the annual premium which is collected on a monthly basis. This policy change will decrease upfront premiums for purchase money and refinance transactions, including FHA-to-FHA credit-qualifying and non-credit qualifying streamlined refinance transactions.

What items do home appraisers seek to find that would give higher home values?

The The quick and easy answer would be comps (comparable homes for sale in your area) and location. We all know the first rule of real estate is location, location, location. A home across the street that might be exactly the same as yours could be valued at more because it might fall in a better school district or may not have railroad tracks behind it.

An appraisal is subjective but all appraisers should follow similar guidelines. That is to say 2 different appraisers could come to your house the same day and give you two different values. They try to find homes similar in size, location, and appeal to yours. But as we know all homes are not the same. Even in a development built by the same builder, homes vary in size, location, features, views, lots etc. The appraiser will adjust the homes based on the items. Usually they have fixed costs for things, like a home with an extra half bath would add $5000 or a fireplace would add $2500 to the value. There are also more subjective items like condition, build quality, view etc. This can vary greatly and is based on the appraiser and again comps in the area.

What is APR?

Rarely is there such a simple question in the mortgage industry with such a complicated answer. The true definition of this one even puzzles some seasoned veterans. For those of you not interested in long and complicated, here is a very serviceable and very brief definition: APR is the true cost of money over time.

In other words, your mortgage has a NOTE rate, or the interest rate on your loan, but it also has closing costs, prepaid interest, and other finance charges. The APR is the cost of your normal interest and those finance charges over time expressed as an interest rate relative to the rate you are paying on your mortgage.

· Now for the long and boring stuff:

APR stands for Annual Percent Rate and was made a requirement of mortgage disclosures by the Federal Truth in Lending Act. It is intended to level the playing field among mortgage quotes. For instance, one loan might advertise a 4.5% NOTE rate, while another advertises 6.5% rate. But both of those loan's APRs could be exactly the same, meaning that although the 4.5% loan appears to be the better deal, if you take closing costs and finance charges into consideration, the cost is actually the same as the 6.5% loan. In fact, if you were to sell or refinance the house sooner rather than later, you'd probably pay less interest overall on the 6.5% loan!

Perhaps the most idiotic thing about APR is that the finance charges that contribute to the APR calculation must be manually checked and included by the person originating the loan. Because of this, two identical mortgage quotes could have completely different APRs because one of the loan originators didn't do their job correctly. Even worse for consumers is that the lower APR quote in this example would be the one generated by the inferior originator. My blanket advice is to know the NOTE rate of the loan you are applying for, and know the exact closing costs. Do not trust anyone's calculation of APR.

FHA MIP Updates Go Live on Today; Flood Insurance Officially Extended

On the legislative front, President Obama signed into law S. 3814, a bill that will extend the National Flood Insurance Program(NFIP) for one year to September 30, 2011. And H.R. 3081 passed the House of Representatives, which among other items is the authorization to extend current loan limits for mortgages provided through Fannie Mae, Freddie Mac, and the Federal Housing Administration. Passage of the legislation will ensure that current loan limits for single-family residential mortgages will remain in place until September 30, 2011 at 125% of local median home sales prices, up to a maximum of $729,750 in high-cost areas. The floor for FHA is $271,050; the floor for Fannie Mae and Freddie Mac conforming loan limits is $417,000. The bill also appropriates $20 billion so that FHA can continue making loan commitments through the end of 2010.

Everyone in the FHA biz knows that Monday is a big day. FHA will lower its upfront mortgage insurance premium (except for HECM's) while simultaneously increasing the annual premium, which is collected on a monthly basis. This change will affect purchase money and refinance transactions, including FHA-to-FHA credit-qualifying and non-credit-qualifying streamlined refinance loans. (Hawaiian Homelands Section 247 loans are not affected by these changes, for anyone doing business in the state whose motto is "Ua Mau ke Ea o ka 'Āina i ka Pono.")

Private mortgage insurers have been licking their chops for Monday. They have grappled with credit losses on policies, claims of bad policy rescission, and an inability to compete with FHA's prices on new insurance. So with the increase on Monday could come the restoration of competitiveness of private insurance, potentially letting the companies win back market share and rebuild their reserves. And anyone watching that business has seen MI companies increasing riskier loans in somewhat subtle ways. Most believe that the MI companies, as a whole, are still fairly well capitalized. And of course lenders undoubtedly will benefit from the better prices, service and product diversity after Monday's FHA premium changes.

Most investors have credit and guideline overlays, over and above what the government agencies allow for programs.CitiMortgage, currently ranked #5 in volume among lenders right behind #4 GMAC, releases its overlays monthly. Citi's clients are aware of them, but include restrictions on initial & final 92900A and 92900-LT forms, VA Funding Fee information, source of funds documentation requirements, savings documentation, maximum VA loan amounts ($1 million prior to the VA Funding Fee), etc., etc. In other words, in this environment, borrowers had better have proof of anything or any transaction for practically every investor.

On to the fixed income markets. After some intra-day volatility, mortgage (MBS) prices ended Thursday unchanged from Wednesday's closing prices, with about $2.2 billion being sold. 10-yr notes worsened about .125 in price and moving to 2.52%. This was all after new U.S. claims for jobless aid fell last week, while manufacturing in the nation's Midwest region grew faster than expected in September, supporting the view that economic activity picked up a bit in the third quarter. There are, of course, large-scale trends occurring around the world, with commodities on the rise, the dollar sinking, several European countries still wallowing - so one might ask what a few percentage points in an ISM survey or the NY Fed's Empire Index means. It is a valid question.

Q: How long do you need to wait to get a new mortgage if you have a bankruptcy and a forclosure discharged on your credit?

Mortgage Question of the Day

A:The time frame for recovery after a bankruptcy and or foreclosure is four years as a general rule of thumb.

This time frame can vary based on the circumstances. For example, if your bankruptcy or foreclosure was due to medical reasons then it is possible that you could qualify in as little as 2 years from the time your bankruptcy is discharged or the foreclosure redeemed, which ever occurs last.

If there is no medical reason for the situation and it is due to financial neglect then it is 4 years after the end of the last event, either the home is repurchased or bankruptcy discharged.

One other important point to know is that bank underwriters also want to see 4 years of RE-established credit history so it is important to start working on as soon as possible to help you on the road to recovery.

Q: Once a bank has issued an acceleration notice on a mortgage, how long does it take before a person must leave the propery?

Real Estate Question of the Day

A: An acceleration notice just informs the mortgagor that the debt is due, immediately. It is not a foreclosure notice, and it is not an eviction notice. After acceleration, if the debt isn't brought current, the lender can file a foreclosure action; and in that case, the lender must follow the specific rules in the foreclosure law. These rules usually require notice of the foreclosure sale be published several times in a newspaper, notice to the property owner and other secured parties, and might even require notice to tenants.

At the foreclosure sale, if the lender bids in the mortgage balance, the lender becomes the owner. In some states, there is a redemption period, meaning the former owner can "buy back" the property from the lender by paying off the debt. Rdemption periods vary. However, if there is no redemption period and the mortgage lender owns the house, the former mortgagor has no right to remain in the house from the day of the foreclosure sale. If he stays in the house, the lender must use legal means to evict him. That means filing an eviction notice, which again requires notice to the occupant and legal process. Some jurisdictions are fast with evictions (Virginia) and some are slow (DC). So it depends on where you live. The basic rule is you have no right to occupy the property from the moment it is sold at the foreclosure sale.