Monthly Archives: July 2018

Do You Know the Predicatble Patterns in Your Housing Market ?

We’re starting to see rising supply & flat/declining prices.

Our good friend John Rubino over at DollarCollapse.com just released an analysis titled US Housing Bubble Enters Stage Two: Suddenly Motivated Sellers.

He reminds us that housing bubbles follow a predictable progression:

Stage One: Mania – Prices rise at an accelerating rate as factors like excess central bank liquidity/loose credit/hot foreign money drive a virtuous bidding cycle well above sustainably affordable levels.

Stage Two: Peak – Increasingly jittery owners attempt to sell out before the party ends. Supply jumps as prices stagnate.

Stage Three: Bust – As inventory builds, sellers start having to lower prices. This begins a vicious cycle: buyers go on strike not wanting to catch a falling knife, causing sellers to drop prices further.

Rubino cites recent statistics that may indicate the US national housing market is finally entering Stage Two after a rip-roaring decade of recovery since the bursting of the 2007 housing bubble:

the supply of homes for sale during the “all important” spring market rose at 3x last year’s rate,

30 of America’s 100 largest cities now have more inventory than they did a year ago, and

mortgage applications for new homes dropped 9% YoY.

Taken together, these suggest that residential housing supply is increasing as sales slow, exactly what you’d expect to see in the transition from Stage One to Stage Two.

If that’s indeed what’s happening, Rubino warns the following comes next:

Stage Two’s deluge of supply sets the table for US housing bubble Stage Three by soaking up the remaining demand and changing the tenor of the market. Deals get done at the asking price instead of way above, then at a little below, then a lot below. Instead of being snapped up the day they’re listed, houses begin to languish on the market for weeks, then months. Would-be sellers, who have already mentally cashed their monster peak-bubble-price checks, start to panic. They cut their asking prices preemptively, trying to get ahead of the decline, which causes “comps” to plunge, forcing subsequent sellers to cut even further.

Sales volumes contract, mortgage bankers and realtors get laid off. Then the last year’s (in retrospect) really crappy mortgages start defaulting, the mortgage-backed bonds that contain their paper plunge in price, et voila, we’re back in 2008.

Source: https://seekingalpha.com/article/4187673-trouble-ahead-housing-market

Are Prices Actually Crashing in California ?

Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8 percent year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties.

Sales fell 1.1 percent compared with May, but the average change from May to June, going back to 1988, is a 6 percent gain.

The weakness was especially apparent in sales of newly built homes, which were 47 percent below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell.

“A portion of last month’s year-over-year sales decline reflects one less business day for deals to be recorded compared with June 2017,” noted Andrew LePage, a CoreLogic analyst. “But affordability and inventory constraints are likely the main culprits in last month’s sales slowdown, which applied to all six of the region’s counties and across most of the major price categories.”

Fewer affordable homes

The median price paid for all Southern California homes sold in June was a record $536,250, according to CoreLogic, a 7.3 percent increase compared with June 2017. While part of that is due to a mix shift, since there are fewer lower-priced homes for sale, it is becoming increasingly clear that fewer buyers are able to play in the higher price ranges.

“Sales below $500,000 dropped 21 percent on a year-over-year basis, while deals of $500,000 or more fell about 3 percent, marking the first annual decline for that price category in nearly two years,” said LePage. “Home sales of $1 million or more last month rose just a tad – less than 1 percent – from a year earlier following annual gains of between 5 percent and 21 percent over the prior year.”

LePage points to the rise in mortgage rates over the past six months, increasing significantly a borrower’s monthly payment. Rates haven’t moved much in the past month, but are suddenly going higher again this week, pointing to even further weakness in affordability.

In the past, California, one of the largest housing markets in the nation, has been a predictor for the rest of the country. Home prices have been rising everywhere, amid a critical housing shortage. Prices usually lag sales by several months, and sales are beginning to crumble, even as more inventory comes on the market. The supply of homes for sale increased annually in June for the first time in three years, according to the National Association of Realtors, but sales fell for the third straight month.

Source: https://www.cnbc.com/2018/07/24/southern-california-home-sales-crash-a-warning-sign-to-the-nation.html

Mortgage Survival – Do You Have the Latest Technology to Survive

It’s almost impossible to start any trend article on mortgage lending without recognizing a recent statistic that has far-reaching implications for the mortgage industry. $8,957. That’s the cost to originate a loan in the first quarter of 2018, according to a study by the MBA. That figure rose almost $500 from the fourth quarter of 2017.

What else happened in Q1? Mortgage bankers lost money for the first time since Q1 of 2014.

Now consider the top trends this year that have to do with advanced technologies that financial services firms need to stay competitive with digital-first challengers in the market. So, what is the first and most important trend for mortgage lenders? According to The Financial Brand, financial institutions worldwide are making “massive investments in digital transformation” to try to make up for outdated legacy banking infrastructure that can’t keep up with the expectations of digitally savvy customers.

While You Were Pivoting

Digital-only entities are taking the market by storm and scooping up the customers and the profits even as the global banking attempts to pivot to becoming more tech-savvy. The fact that mortgage origination costs keep hitting new peaks is a sign that the mortgage industry as a whole is even further behind its other financial services counterparts.

That’s why an aggressive and thoughtful focus on digital transformation for mortgage lenders is more important now than ever before. Digital lenders like Quicken and a growing field of disruptive startups are already focused on fast processes and online experiences. A recent whitepaper from financial analyst firm Celent concluded that a fully end-to-end digital mortgage is possible within the next five years. So making sure that lending institutions get started on the right foot with the right plan is critical.

A Proven Plan

What does it take to get there? It is a relief to know there are proven ways to start and maintain a digital transformation journey.

Celent suggests that taking a phased approach to technology implementation can provide fast initial benefits, lower project risk and spread out costs. First on the firm’s technology to-do list is digital document capture. But just any digital document capture solution isn’t likely to provide the benefits truly needed to move the needle on lowering costs and showing quick return on investment.

Lenders who want to make the most impactful first step in their transformation should look for a solution that combines OCR and intelligent capture technology and offers the following capabilities:

Automatically sorts (classifies) all incoming documents, regardless of type and format

Captures specific data without defining templates, zones, anchors or specific keywords

Reconciles captured data against your LOS to ensure consistency, accuracy, and completeness

Easily and quickly integrates with your LOS or other line of business systems, or may be leveraged as a standalone solution

These capabilities eliminate paper-based processes, reduce human touch-points, and eliminate the need to manually classify documents and hand-key data from even the most complex, diverse document types. With over 500 pages in the typical mortgage file, it’s easy to see how lenders have accomplished major cost reductions in areas like paper, file storage and printing costs.

Information accuracy and transparency are also improved, reducing the risk of critical loan defects and compliance issues. And reduced cycle times allow lenders to process more loans and make better profits, while increasing the satisfaction of the borrower, who invariably wants to close her loan as quickly as possible.

Clearing the Obstacles

Document capture is just the first key technology identified by Celent, so lenders shouldn’t stop there if they want to push for end-to-end mortgage lending. According to a 2017 survey, the top five barriers to digital transformation for financial institutions are teams that lack the right skillset, integration problems between new and existing technology and data, a lack flexibility and speed in processes, outdated technology and a lack of collaboration between IT and business units.

With the right plan and the right solution, these obstacles are easier to remove than you might think.

Source: http://themreport.com/daily-dose/07-25-2018/mortgage-lenders-need-tech

Interesting Overview of the Current Housing Market

Summary

Median incomes have lagged home price increases in hot West Coast markets, raising fears of a housing bubble.

Rents have been falling while prices continue to rise, driven by irresponsible lenders in the jumbo market.

Summer is traditionally the best time to sell a home, but recent headlines show sales activity is starting to slow in markets across the country.

Over the last seven years, home prices in California, Nevada, Oregon, and Washington have surged. Unfortunately, these price surges are the result of speculative activity and not based on consumers’ ability to afford homes over the long run. You can read my first round of analysis from earlier this month here on the United States and Canadian real estate markets.

Rents Are Falling, But Prices Are Surging

Sam Dogen at the Financial Samurai recently showed that rent prices have held steady and even fallen in hot markets such as San Francisco and Seattle over the last year or two. Prices have risen further, while rents have not. This isn’t a good sign.

The question I would pose to readers is this: If the housing market is so unstoppable, why are rents not going up anymore? Maybe, more of the surge in housing prices is due to speculation and less due to consumers’ ability to afford the homes. Falling rents should be a flashing red signal for informed buyers. In spite of this, the housing market has continued to charge higher because of loose standards in the jumbo market. I believe the culprit is a new crop of lenders who are outside of Fannie Mae and Freddie Mac regulations on FICO scores and DTI. For example, San Francisco lender Social Finance (SoFi) is offering up to 3 million dollar loans with 10 percent down and “flexible DTI.”

Firms like SoFi are the engine driving the madness in the California housing market. SoFi was founded in 2011, right at the start of the new housing boom, and by 2014, they started making jumbo mortgage loans for only 10 percent down. Here’s what Michael Tannenbaum, former Vice President of SoFi, had to say about their loans in 2016, “Sixty-five percent of the business we do is first-time home buyers; it’s a big deal we’re opening up to the jumbo first-time market.” A year later, he was gone. Other gems from the San Francisco Chronicle article – SoFi’s average loan at the time was $800,000 and two-thirds were in California. I shudder to think what their average loan size and DTI is now. Also, in addition to not being big fans of debt to income ratios, SoFi isn’t big on using other traditional measures like FICO scores to evaluate borrowers. In 2016, they declared their company a “FICO Free Zone” in a press release. Said a former business development associate, “The volume of applications coming in was crazy.” Other sources reported on the wild sex culture at the firm. As for their underwriting practices? As long as housing prices went up, they were more or less irrelevant. But, if prices go down, SoFi and their backers stand to lose a lot of money.

The housing market is typically strongest in the summer. So why are all these negative headlines piling up?

Savvy real estate investors and home buyers know the best time to sell residential property is from late spring through summer, and the best time to buy is during the period from Thanksgiving through the end of January – the dead of winter. There is some interesting psychology to this. The average days on market for properties are much higher in the winter than during the summer, so you have more motivated sellers and fewer buyers. Also, sellers, including banks, are more likely to accept offers further below asking price during this period. It might be that buyers don’t see the potential of properties in snow-covered cities like Chicago and Minneapolis. But you also see the same effect occur in places with milder winters, like Dallas-Fort Worth and San Francisco. Conversely, the best time to sell a property is during the summer. Most buyers with school-age children won’t even consider moving them during the school year, and homes and yards look their best during the summer.

Portland is seeing properties start to pile up at higher price points. Seattle is reporting a “slight slowdown.” Listings are piling up in Orange County, California, and foreclosures are up. The Wall Street Journal put out an article two days ago titled, “Housing Market Stumbles at Beginning of Summer.” Pending home sales just hit a 4-month low, and the National Association of Realtors justifies it by blaming it on “low inventory,” rather than a lack of buyers willing and able to pay asking prices.

You can deny that the media is accurately reporting on this, but you can’t deny that the headlines are changing. In the last couple of years, instead we would be seeing headlines like “6 Ways to Win a Bidding War,” or “Good Luck Buying a Home in This Hot Housing Market.” All these new and negative articles are from markets that I predicted would see the most trouble and have the greatest discrepancies between prices and incomes. Here’s the map I showed in the first article again. Note that all these article headlines that are specific to a metro area are coming from relatively unaffordable markets. My theory is that the West Coast markets that have appreciated so much have done so not because they are great places to live, but because there are jumbo lenders with lax standards and buyers for the loans in the mortgage-backed securities market. The markets with a higher percentage under Fannie and Freddie’s conforming loan limits have risen more in line with median incomes, influenced by stricter underwriting guidelines that ensure that home buyers can actually afford the homes they are buying.

U.S. Home Prices, 2012-2017. Core Logic

The general mood is that the market is softening right now, especially at the high end. As interest rates continue to rise beyond buyers’ ability to qualify for mortgages, listings will pile up further and prices will fall. Also, the effects of last year’s tax bill will start to be noticed among consumers, many of whom have yet to figure out that they won’t be able to deduct the majority of their state and local income/property taxes. SALT is now limited to $10,000. Consumers have noticed their paychecks are bigger, but if I know the American consumer like I think I do, that money is being spent and not socked away to pay their higher after-tax deduction property bill.

I’m not predicting the end of the world. For property prices to go down an inflation-adjusted 15-20 percent from peak to trough is a perfectly normal market cycle. It does sting, though, if you put 10 percent down on a two million-dollar home and have to turn around pay money at closing when selling 3 years later.

The first domino that would cause housing prices to fall 15-20 percent in real terms is for mortgage rates to normalize. However, Donald Trump has expressed concern that the Federal Reserve is hiking rates too quickly and is putting pressure on the Fed to top short-term rates out at 2.5 percent. Trump obviously understands how rate hikes affect the real estate market. He has a good point. If the Fed only hikes rates by 50 basis points from here and mortgage rates follow suit, then housing prices will stay higher than they would be if the Fed hiked aggressively. Instead, if they hike 150-200 basis points, then I estimate that housing prices will fall more than 15-20 percent. With over 75 percent of California buyers financing their purchases and DTI ratios already stretched, mortgage rates are of paramount importance to buyers. The risk with the first approach is that inflation runs higher and negatively effects the economy. But, keeping interest rates low and letting inflation run a little higher will serve to give home buyers more equity in their homes and hide the drop in home prices relative to incomes. If the Federal Reserve takes this course, the decline in home prices will not be as severe. However, all bets are off if the Fed decides to aggressively hike rates. Homebuilders, mortgage companies, and small to mid-size banks with concentrated West Coast exposure are still best avoided, as the market does not seem to be adequately accounting for the risks of rising rates, or just how bad their business practices have been.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: https://seekingalpha.com/article/4189254-irresponsible-mortgage-lenders-created-second-housing-bubble

Best Practices for Vendor Management and Your Mortgage Company

Due diligence is one of the most fundamental but also one of the most important practices in third party risk management. The very basic reality is there will be times when you learn something in doing your due diligence that may change the entire way in which you think about a company, perhaps even causing you to change your mind about engaging in the relationship.

Due Diligence Is Vital to a Successful Third-Party Risk Management Program

Collecting and reviewing due diligence can seem like a very daunting task but it’s one that reaps many benefits, including:

It protects your mortgage company from unnecessary and unwanted exposure to risk. This is important to both your institution and your customers.

Examiners will be satisfied as it’s a regulatory expectation. Regulatory guidance such as OCC Bulletin 2013-29, FDIC FIL 44-2008, and CFPB Bulletin 2012-03 place a strong emphasis on risk-based due diligence and the overall lifecycle of the third-party relationship. It’s highly encouraged to review these regulations when implementing a due diligence process at your institution.

Due diligence procedures also ensure you have set a standard for the minimum requirements to onboard a vendor, which helps set the tone across the institution regarding due diligence expectations. Your institution’s lines of defense will be able to work together more efficiently when they’re all on the same page.

Due diligence helps to inform all of your other third-party risk activities, particularly honing in on risks that must be addressed in the contract or through ongoing monitoring.

The 8 Vendor Due Diligence Best Practices for Your Mortgage Company

Here are 8 vendor due diligence best practices:

Gather the vendor list and perform standard due diligence on all vendors. Request a list from the Accounts Payable Department that you can compare to the vendor list you currently have on file to make sure you’re not overlooking any vendors. Once you have your vendor list ready to go, ensure the appropriate standard due diligence is accessible on each vendor (e.g. Tax ID, Business License, OFAC Check, Certificate of Good Standing). The standard due diligence requirements are dependent on your mortgage company’s policy; however, it’s always a best practice to have some documentation requirements, even on vendors that may pose very little risk to the institution.

Make sure the due diligence performed is tailored to the type of vendor and level of risk associated. In addition to the standard due diligence requests, you’ll want to include additional due diligence requirements based on the type of vendor it is and the vendor’s level of risk to the institution. Be sure to understand each vendor’s regulatory risk and business impact risk. The regulatory impact determines if the vendor is low, medium, or high risk. You should have a list of documentation requirements that is based on each risk level. The business impact will determine if the vendor is critical or non-critical to the institution. There may be additional documentation that needs to be maintained on each vendor dependent on the business impact as well, such as a detailed business continuity plan and results of any corresponding testing.

Due diligence should be completed during vendor selection prior to the contract being executed. It’s imperative to collect due diligence on a vendor before you contractually commit to their products or services. In fact, OCC Bulletin 2013-29, which is the gold standard in third party risk, includes due diligence and third-party selection as one of the lifecycle phases. Pre-contract due diligence in the vendor vetting process will prevent unwanted pitfalls and risk in selecting the wrong vendor, as well as allow you the opportunity to contractually commit them to provide any items they cannot release prior to an agreement being signed.

Due diligence should also be completed on an ongoing basis. Review and make updates periodically. Due diligence is not a one and done deal, and it is not a check-the-box item. Each due diligence document obtained should be reviewed by a qualified individual who can provide an accurate analysis. Depending on your program’s requirements, requests for updated due diligence updates should be made periodically in order to verify the vendor is still meeting expectations.

Always keep in mind the frequency of due diligence. Set reminders to reach out to the vendor for certain types of reports and make sure you’re making timely requests. For example, if the vendor is a public company, set an alert to check their website and gather financials as soon as they are released. Time due diligence to correspond with the most important time-sensitive materials, whether it’s financials or SOC report, etc.

Document all attempts to collect documentation from the vendors. It’s understood that you’re not always going to be able to collect all of the documentation being requested. In this case, it’s vital to document your method of reaching out and the date of each attempt. This is especially important so that you can show senior management, the board, and examiners. They’ll want to see you have a record of this and will appreciate the thoroughness.

Write out the steps in your vendor management program documentation. Make sure you’ve outlined the institution’s vendor due diligence requirements in your program. As changes are made or new guidance is released, be sure to update the documentation to reflect this. It’s important to keep the expectations consistent and current.

Include due diligence as part of your internal audit review of third-party risk management. It’s always prudent to identify problems or potential issues and address them proactively.

When you take the time and effort to properly perform due diligence on your vendors, it will positively impact your mortgage company. Initially, you’re guaranteeing that you’re selecting the vendor that best fits your institution’s needs. By continuing to perform the appropriate due diligence, you’re confirming that they are still the best fit. Finally, you’re gaining the utmost respect and trust from your customers as they can rely on your institution to provide great services and products because your third parties are doing so for you, which in turn is boosting your overall reputation.

Source: http://www.mortgagecompliancemagazine.com/due-diligence/eight-vendor-due-diligence-best-practices-for-your-mortgage-company/

Protect Yourself – Mortgage Fraud is on the Rise

The risk of fraud in mortgage application increased at the end of the second quarter, according to the latest quarterly Mortgage Fraud Risk Index released by CoreLogic on Thursday. CoreLogic said that the index rose to 149 for the second quarter, trending up 12 percent from the same period last year and rising 3 percent from the previous quarter.

The report said that Q2 2018 was the seventh consecutive quarterly increase in mortgage fraud risk. The Mortgage Fraud Risk Index is calculated from the aggregation of individual loan application fraud risk scores during the previous quarter.

Compared to 62 percent in Q1, purchase applications accounted for 72 percent of all transactions in Q2, the report indicated, as purchase volumes rose during the spring season. However, it found that refinances were at the lowest level since the index started reporting these trends in 2010, CoreLogic said.

“There is an increase in borrowers applying for loans on multiple properties,” the report said. “While the tight housing inventory and competitive market likely play a role, data also shows investors purchasing multiple properties concurrently and at times dividing loan applications across lenders.”

The index also found an increase in identity discrepancies. It also noted red flags on income reasonability during the quarter.

Regionally, Florida led the states with the most number of metros with the highest fraud risk. In fact, the Lakeland-Winter Haven metro area had the most significant increase in the fraud risk index at 20 percent. According to the report, the increase was due to high-risk flags in this region that included investors rapidly acquiring multiple rental properties, and the potential use of owner-occupant financing to obtain these properties.

Other Florida regions on the list included Miami-Fort Lauderdale-West Palm Beach; Tampa-St. Petersburg-Clearwater; Deltona-Daytona Beach-Ormond Beach; and Orlando-Kissimmee-Sanford.

Oklahoma City, Oklahoma saw a quarter-over-quarter drop in mortgage fraud risk by 24 percent. Memphis, Tennessee also saw a decline of 10 percent.

Source: http://themreport.com/daily-dose/07-19-2018/mortgage-application-fraud-risk-increases-in-q2

Interesting Overview of the Current Housing Market

Summary

Median incomes have lagged home price increases in hot West Coast markets, raising fears of a housing bubble.

Rents have been falling while prices continue to rise, driven by irresponsible lenders in the jumbo market.

Summer is traditionally the best time to sell a home, but recent headlines show sales activity is starting to slow in markets across the country.

Over the last seven years, home prices in California, Nevada, Oregon, and Washington have surged. Unfortunately, these price surges are the result of speculative activity and not based on consumers’ ability to afford homes over the long run. You can read my first round of analysis from earlier this month here on the United States and Canadian real estate markets.

Rents Are Falling, But Prices Are Surging

Sam Dogen at the Financial Samurai recently showed that rent prices have held steady and even fallen in hot markets such as San Francisco and Seattle over the last year or two. Prices have risen further, while rents have not. This isn’t a good sign.

The question I would pose to readers is this: If the housing market is so unstoppable, why are rents not going up anymore? Maybe, more of the surge in housing prices is due to speculation and less due to consumers’ ability to afford the homes. Falling rents should be a flashing red signal for informed buyers. In spite of this, the housing market has continued to charge higher because of loose standards in the jumbo market. I believe the culprit is a new crop of lenders who are outside of Fannie Mae and Freddie Mac regulations on FICO scores and DTI. For example, San Francisco lender Social Finance (SoFi) is offering up to 3 million dollar loans with 10 percent down and “flexible DTI.”

Firms like SoFi are the engine driving the madness in the California housing market. SoFi was founded in 2011, right at the start of the new housing boom, and by 2014, they started making jumbo mortgage loans for only 10 percent down. Here’s what Michael Tannenbaum, former Vice President of SoFi, had to say about their loans in 2016, “Sixty-five percent of the business we do is first-time home buyers; it’s a big deal we’re opening up to the jumbo first-time market.” A year later, he was gone. Other gems from the San Francisco Chronicle article – SoFi’s average loan at the time was $800,000 and two-thirds were in California. I shudder to think what their average loan size and DTI is now. Also, in addition to not being big fans of debt to income ratios, SoFi isn’t big on using other traditional measures like FICO scores to evaluate borrowers. In 2016, they declared their company a “FICO Free Zone” in a press release. Said a former business development associate, “The volume of applications coming in was crazy.” Other sources reported on the wild sex culture at the firm. As for their underwriting practices? As long as housing prices went up, they were more or less irrelevant. But, if prices go down, SoFi and their backers stand to lose a lot of money.

The housing market is typically strongest in the summer. So why are all these negative headlines piling up?

Savvy real estate investors and home buyers know the best time to sell residential property is from late spring through summer, and the best time to buy is during the period from Thanksgiving through the end of January – the dead of winter. There is some interesting psychology to this. The average days on market for properties are much higher in the winter than during the summer, so you have more motivated sellers and fewer buyers. Also, sellers, including banks, are more likely to accept offers further below asking price during this period. It might be that buyers don’t see the potential of properties in snow-covered cities like Chicago and Minneapolis. But you also see the same effect occur in places with milder winters, like Dallas-Fort Worth and San Francisco. Conversely, the best time to sell a property is during the summer. Most buyers with school-age children won’t even consider moving them during the school year, and homes and yards look their best during the summer.

Portland is seeing properties start to pile up at higher price points. Seattle is reporting a “slight slowdown.” Listings are piling up in Orange County, California, and foreclosures are up. The Wall Street Journal put out an article two days ago titled, “Housing Market Stumbles at Beginning of Summer.” Pending home sales just hit a 4-month low, and the National Association of Realtors justifies it by blaming it on “low inventory,” rather than a lack of buyers willing and able to pay asking prices.

You can deny that the media is accurately reporting on this, but you can’t deny that the headlines are changing. In the last couple of years, instead we would be seeing headlines like “6 Ways to Win a Bidding War,” or “Good Luck Buying a Home in This Hot Housing Market.” All these new and negative articles are from markets that I predicted would see the most trouble and have the greatest discrepancies between prices and incomes. Here’s the map I showed in the first article again. Note that all these article headlines that are specific to a metro area are coming from relatively unaffordable markets. My theory is that the West Coast markets that have appreciated so much have done so not because they are great places to live, but because there are jumbo lenders with lax standards and buyers for the loans in the mortgage-backed securities market. The markets with a higher percentage under Fannie and Freddie’s conforming loan limits have risen more in line with median incomes, influenced by stricter underwriting guidelines that ensure that home buyers can actually afford the homes they are buying.

U.S. Home Prices, 2012-2017. Core Logic

The general mood is that the market is softening right now, especially at the high end. As interest rates continue to rise beyond buyers’ ability to qualify for mortgages, listings will pile up further and prices will fall. Also, the effects of last year’s tax bill will start to be noticed among consumers, many of whom have yet to figure out that they won’t be able to deduct the majority of their state and local income/property taxes. SALT is now limited to $10,000. Consumers have noticed their paychecks are bigger, but if I know the American consumer like I think I do, that money is being spent and not socked away to pay their higher after-tax deduction property bill.

I’m not predicting the end of the world. For property prices to go down an inflation-adjusted 15-20 percent from peak to trough is a perfectly normal market cycle. It does sting, though, if you put 10 percent down on a two million-dollar home and have to turn around pay money at closing when selling 3 years later.

The first domino that would cause housing prices to fall 15-20 percent in real terms is for mortgage rates to normalize. However, Donald Trump has expressed concern that the Federal Reserve is hiking rates too quickly and is putting pressure on the Fed to top short-term rates out at 2.5 percent. Trump obviously understands how rate hikes affect the real estate market. He has a good point. If the Fed only hikes rates by 50 basis points from here and mortgage rates follow suit, then housing prices will stay higher than they would be if the Fed hiked aggressively. Instead, if they hike 150-200 basis points, then I estimate that housing prices will fall more than 15-20 percent. With over 75 percent of California buyers financing their purchases and DTI ratios already stretched, mortgage rates are of paramount importance to buyers. The risk with the first approach is that inflation runs higher and negatively effects the economy. But, keeping interest rates low and letting inflation run a little higher will serve to give home buyers more equity in their homes and hide the drop in home prices relative to incomes. If the Federal Reserve takes this course, the decline in home prices will not be as severe. However, all bets are off if the Fed decides to aggressively hike rates. Homebuilders, mortgage companies, and small to mid-size banks with concentrated West Coast exposure are still best avoided, as the market does not seem to be adequately accounting for the risks of rising rates, or just how bad their business practices have been.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.\

Source: https://seekingalpha.com/article/4189254-irresponsible-mortgage-lenders-created-second-housing-bubble

How Much Do You Know About OFAC Compliance For Mortgage Companies ?

While OFAC may not be included in the top 10 issues facing your company, how familiar are you with the requirements? Are you confident that your company’s OFAC program is robust or, at least, meeting minimum requirements?

OFAC, an office of the U.S. Treasury, administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals, and it acts under Presidential wartime and national emergency powers to impose controls on transactions and to freeze assets under U.S. jurisdiction.

All U.S. persons, must comply with OFAC’s regulations. Financial regulators evaluate OFAC compliance programs to ensure compliance with the sanctions. In the creation and implementation of an OFAC compliance program, a risk-based approach is what is expected. The basic requirements are to block accounts and other property of specified countries, entities, and individuals and prohibit or reject unlicensed trade and financial transactions with specified countries, entities, and individuals.

Of special note, in2009, OFAC issued a final rule entitled “Economic Sanctions Enforcement Guidelines” to provide guidance by explaining the procedures that OFAC follows in determining the appropriate enforcement response to apparent violations of its regulations. As noted in the FFIEC BSA/AML Examination Manual (2014), “some enforcement responses may result in the issuance of a civil penalty that, depending on the sanctions program affected, may be as much as $250,000 per violation or twice the amount of a transaction, whichever is greater. The Guidelines outline the various factors that OFAC takes into account when making enforcement determinations, including the adequacy of a compliance program in place within an institution to ensure compliance with OFAC regulations.”

As we commonly see in compliance news, OFAC issues penalties for noncompliance and the outcomes are financially and reputationally damaging. Remember that violations can result in criminal penalties for willful violations and fines may range up to $20 million and imprisonment of up to 30 years. Take special note of the following:

Civil penalties for violations of the Trading With the Enemy Act can range up to $65,000 per violation;

Civil penalties for violations of the International Emergency Economic Powers Act can range up to $250,000 or twice the amount of the underlying transaction for each violation; and

Civil penalties for violations of the Foreign Narcotics Kingpin Designation Act can range up to $1,075,000 for each violation.

So, knowing all of this, there are pitfalls to avoid. Being familiar with OFAC requirements is good; however, a comprehensive understanding of how OFAC intersects with your company’s operations is something else. And, this ‘something else’ is where we should be or heading towards. Take a look at the list below and see if your company’s OFAC compliance program needs any fine tuning.

Responsibility: Has your company defined and documented roles and responsibilities to specific staff members? Have appropriate noncompliance consequences been documented and communicated to appropriate staff members?

Policies and procedures: Yes, you’re hearing this once again. Does your company have an established OFAC policy as well as procedures and processes to adequately meet OFAC compliance program requirements?

Monitoring: This process needs to occur internal and external to your company. Internally, how often is your company measuring its risk appetite with OFAC? How often is the OFAC risk assessment reviewed, updated, and presented to the Board? From an external perspective, how often does your company evaluate the effectiveness of any vendors that assist with OFAC compliance?

Connection to other BSA requirements or elements: Important crossovers exist, such as:

CIP: How effective and comprehensive are OFAC processes within the CIP process at your company?

Beneficial Ownership Rule: Have procedures and processes been updated to include the identification of beneficial owners of your company’s business entity clients in the OFAC process?

Independent reviews/audits: Whether an internal or external review is performed, how thorough is the audit in determining your company’s compliance with OFAC requirements?

Avoiding the pitfalls is crucial. Taking the right steps will help:

Proper oversight by the Board and senior management. Tone from the top and adequate employee training are must haves.

Strong BSA compliance policy and effective internal controls aid in compliance with OFAC requirements.

Since much of BSA is a risk-based approach, review and update at least annually the BSA and OFAC risk assessments and adjust the compliance programs accordingly.

Keep current with changes to the SDN list and sanctions communicated by OFAC. Do not rely on vendors at face value. Due diligence is a must.

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Around the Industry:

Effective Now

The Fed, FDIC, and OCC jointly issued a statement detailing rules and associated reporting requirements that are immediately affected by the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The Fed also issued a statement describing how the Board will not take action to enforce certain regulations and reporting requirements for firms with less than $100 billion in total consolidated assets.

Source: http://www.mortgagecompliancemagazine.com/weekly-newsline/dont-let-the-snares-of-ofac-catch-you-off-guard/

Still Confused about the New HMDA Law ? Here’s the Latest Help

By Leslie A. Sowers & J. Eric Duncan

January 1, 2018, marked the official start of a new and complex regulatory era for financial institutions subject to the Home Mortgage Disclosure Act (HMDA) and Regulation C. On that day, the majority of the amendments to Regulation C under the Bureau of Consumer Financial Protection’s October 2015 and September 2017 final rules took effect. Those amendments, collectively referred to herein as the “New HMDA Rule,” were sweeping. They dramatically altered the coverage of institutions subject to HMDA, the loan transactions and applications that must be reported, and the data points that must be collected, recorded, and reported to the appropriate federal regulator.

In the six months that have passed since these changes went into effect, mortgage lenders and other covered institutions have faced a number of common implementation issues, from open questions and ambiguities not addressed by the New HMDA Rule to challenges caused by the volume and complexity of the new requirements. We discuss some representative examples of these issues below.

Moving Targets

One of the biggest implementation challenges presented by the New HMDA Rule results from the manner in which the Bureau is issuing instruction and guidance. Unlike the Bureau’s other rules, the statute, implementing regulation, and official staff commentary do not provide all of the information HMDA reporters need in order to comply. Among various other documents and tools issued by the Bureau, HMDA reporters must also consult the Filing Instructions Guide (FIG), a 151-page document that provides the file, data, and edit specifications required for reporting HMDA data, including the possible values and other information that may be reported for each data point. Before the New HMDA Rule, Appendix A to Regulation C and the related commentary contained much of this information, including the various “codes” that related to each data point.

Why is this shift in approach noteworthy? Removing this information from Regulation C allows the Bureau to issue and change this information without going through the time-consuming notice and comment rulemaking process. While this approach allows the Bureau to make adjustments timelier, which is beneficial, these adjustments are made without requesting public comments and without helpful explanation as to the purpose of the changes. In fact, the Bureau has revised the 2018 FIG seven times since it was first issued in January 2016, the most recent of which occurred in February. Is your HMDA team keeping up with each of these revisions and how it may impact your HMDA collection and reporting process?

For example, under the New HMDA Rule, institutions must report the name of the automated underwriting system (AUS) used to evaluate the application and the result generated by the system, if applicable. In cases where a company uses more than one AUS to evaluate an application or the system or systems generate two or more results, the New HMDA Rule lays out a complex waterfall approach for deciding which results to report. Additional questions arise in the context of particular AUS types, such as the USDA’s Guaranteed Underwriting System (GUS). GUS results can be a challenge to report because GUS generates two separate results for each file, and those results may correspond to more than one code available (e.g., Accept/Unable to Determine), but an institution may report only one AUS result per AUS reported.

The Bureau changed the codes available for reporting AUS results in the most recent revision to allow lenders reporting GUS results to use “Code 16 – Other.” The FIG instruction to “Code 16 – Other” states that more than one AUS result may be entered in the free-form text field, as applicable. The Bureau’s only explanation of this change was: “Updated allowable codes for AUS results produced by the Guaranteed Underwriting System (GUS).” This comment fails to explain what prompted this change and what it means for reporters; this is particularly troubling since the Bureau previously gave informal advice to report only one of the GUS results before it issued the February FIG revisions.

Will the Bureau continue to modify the FIG this year? All reporters must record the data collected for HMDA on a loan/application register within 30 calendar days after the end of each calendar quarter in which final action is taken. Therefore, if more changes are made to the FIG, each reporter will be required to update its recorded entries and revise its procedures (and/or systems) going forward for each change.

Regardless, you should be expecting additional changes that may impact your recorded entries and your process. We are still awaiting the Bureau’s release of additional reporting tools, including the geocoding tool, which provides institutions that use it correctly with a safe harbor when reporting the census tract. In addition, the Bureau announced in December 2017 that it intends to open a rulemaking to reconsider various aspects of the New HMDA Rule such as the institutional and transactional coverage tests and discretionary data points, and the latest regulatory agenda indicates that this process is not scheduled to begin until 2019.

Rate-Set Date for Calculating Rate Spread

For loans and approved but not accepted applications that are subject to Regulation Z (other than an assumption, a purchased loan, or a reverse mortgage), institutions must report the Rate Spread, which is the difference between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set. A number of questions arise when trying to determine the appropriate rate-set date to use for purposes of this calculation.

For example, which rate-set date should an institution use for an approved not accepted application that had a floating interest rate? In such cases, the interest rate was arguably never “set.” While some institutions have concluded the most defensible approach is to use the date on which the applicant was provided the early disclosures required under Regulation Z, the New HMDA Rule does not directly address the question. Complications can also arise in identifying the rate-set date for “repriced” transactions and transactions in which a borrower changes from one loan program to another program that is subject to different pricing terms. The requirements for these situations are complex and potentially ambiguous and can trip up companies that have not sufficiently thought through their approach to such scenarios.

What Data to Report

What data an institution must report often depends on the action taken on the file and whether the institution relied on the information as part of the credit decision made. In particular, the reporting requirements associated with counteroffers demonstrate the complexity involved in implementing this aspect of the New HMDA Rule.

Suppose an institution makes a counteroffer to lend on terms different from the applicant’s initial request. If the applicant declines to proceed with that counteroffer or fails to respond, the institution reports the action taken as a denial based on the original terms requested by the applicant. On the other hand, if the applicant agrees to proceed with consideration of the counteroffer, the institution reports the action taken as the disposition of the application based on the terms of the counteroffer. In such cases, how the file is reported may also depend on whether the institution’s conditional approval is subject to only customary commitment or closing conditions or also includes any underwriting or creditworthiness conditions. Companies must have procedures and systems that address all of the potential scenarios to ensure accurate reporting and update them as needed when unique scenarios arise.

Collection of Expanded GMI Data

The New HMDA Rule significantly expanded and complicated the requirements for collecting Government Monitoring Information (GMI) data regarding an applicant’s race, ethnicity, and sex. As a result, institutions have faced certain issues in updating their collection procedures and forms to ensure they offer applicants appropriate options, such as the ability to select one or more race or ethnicity subcategories even if the applicant has not selected a race or ethnicity aggregate category. These requirements can pose challenges depending on how a company’s existing systems or processes were designed, especially in the context of online applications, where forms may be coded to automatically trigger the selection of a main category when a subcategory is selected.

Does the New HMDA Rule require online application forms to allow an applicant to skip these questions entirely? Is it permissible to structure the electronic interface to require the applicant to make at least one selection in order to move on to the next page, even if only by checking a box to specifically indicate they do not wish to provide the information? The New HMDA Rule fails to directly address these questions, and institutions must make decisions on the best way to proceed based on their own operations and the regulatory language and then apply a consistent, reasonable approach.

MLO NMLSR Identifier

The New HMDA Rule added a requirement to report an individual mortgage loan originator’s (MLO) National Mortgage Licensing System & Registry identifier (NMLSR ID) for a loan or application. Questions often arise in this context when multiple MLOs are involved in a single transaction because, for example, an MLO leaves the company or multiple MLOs work on an application together as part of a team. In those cases, which individual’s NMLSR ID must be reported? The New HMDA Rule requires the company to report the NMLSR ID of the MLO with primary responsibility for the transaction as of the date of action taken. The regulation does not provide additional guidance with respect to what constitutes primary responsibility, but instead provides a company some discretion to develop reasonable policies to make that determination.

In order to address these situations, an institution should establish and follow a reasonable, written policy for determining which individual MLO has primary responsibility for the reported transaction as of the date of action taken. When creating that policy, companies should also consider the requirements under various other federal and state laws that have requirements for identifying the MLO(s) for a transaction, such as Regulation Z’s requirement to disclose the primary loan originator’s name and NMLSR ID (if any) on certain loan documents, as those other requirements may influence this determination.

Final Thoughts

As the common issues described above illustrate, there is still much to consider and work through in implementing the New HMDA Rule during its first year. You should be putting in the extra time and dedicating extra resources to audit your information and to identify questions and pain points. Institutions should have already recorded their first quarter data for 2018 under the new requirements. Use this opportunity to carefully test and review that data and the relevant internal processes for the issues above as well as any other potential gaps or questions unique to your own operations.

In situations where there are open questions and multiple reasonable interpretations, the key is consistency. Develop a well-reasoned, consistent approach based on the language in Regulation C, the commentary, and the FIG. Review the other guidance available on the Bureau’s website, submit questions to the Bureau, and consult with counsel. Document your analysis process to demonstrate your good faith efforts to comply. Any identified issues should be addressed as soon as possible so you can have a consistent approach moving forward and only have a few months of past entries to correct. If you wait until 2019 to review, you will have to correct an entire year’s worth of entries retroactively should you find any issues.

Source: http://www.mortgagecompliancemagazine.com/compliance/first-six-months-of-the-new-hmda-rule-common-issues-and-challenges/

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