Monthly Archives: March 2019

What Are PACE Loans ? … Why You Need to Know

CFPB indicates PACE regulations are on the horizon

The Consumer Financial Protection Bureau (CFPB) has issued an advance note of proposed rulemaking on Property Assessed Clean Energy (PACE) loans, signaling its intention to increase oversight on the divisive financing program.

PACE financing allows homeowners to pay for energy-efficient retrofitting through their property-tax assessments. In some states, these loans can take lien priority over the property’s primary mortgage — a rule that has drawn the ire of the mortgage industry. Another target of the mortgage industry’s criticism is that the PACE program faces fewer regulations than other types of financial services.

For a few years, mortgage and real estate industry groups have been urging the CFPB for tighter oversight of PACE loans. Nine trade organizations, including the American Bankers Association (ABA), the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) co-signed a letter to the CFPB this past October, asking for PACE-loan subordination to established lien priority standards, as well as incorporating the PACE program into the Truth in Lending Act’s “overall mortgage protections.”

It seems the CFPB has taken notice.

Specifically, the CFPB’s notice calls for mandating ability-to-repay requirements, which are currently in place for residential mortgages through the Truth in Lending Act. That mandate was put in place last year by the Economic Growth, Regulatory Relief and Consumer Protection Act, which eased regulations imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Kathleen Kraninger, director of the CFPB, called the issuance “the next step in the Bureau’s efforts to implement the Economic Growth, Regulatory Relief and Consumer Protection Act as expeditiously as possible.”

New rules could hamper the rising popularity of PACE loans, which has mounted as buyers have become more interested in green-building and energy-efficiency strategies. The U.S. Department of Housing and Urban Development announced in 2016 that the Federal Housing Administration would guarantee mortgages accompanied by PACE liens, which helped the PACE program grow during the tail end of the Obama administration. That move, however, was met by widespread disapproval from the mortgage industry and the Trump administration reversed the policy in December 2017.

Source:https://www.scotsmanguide.com/News/2019/03/CFPB-indicates-PACE-regulations-are-on-the-horizon/

How to Make Your Mortgage Business Recession Proof

The mortgage industry has taken a beating in the past year.
Some lenders are expected to loosen their credit standard to improve profits.
But JPMorgan Chase is ceding market share — intentionally.
Anticipating recession, the bank has been reinforcing its mortgage business to make it recession-proof — even if it means sacrificing market share and profits in the near term.
“It is a tough time to be in the mortgage business,” Gordon Smith, the CEO of Consumer and Community Banking at JPMorgan Chase, said Tuesday at the bank’s investor day.

Indeed, the mortgage industry has taken a beating in the past year amid intensifying competition, rising costs, and dwindling home sales.

At JPMorgan Chase, one of the largest US residential mortgage lenders, originations fell 29% to $79 billion in 2018.

That in part caused mortgage production revenue to drop sharply to $370 million — less than half of the $640 million tally in 2017 and a third of the $850 million it earned in 2016. Overall mortgage fees declined 22% to $1.25 billion in 2018 from $1.61 billion in the previous year.

Because JPMorgan is the largest US bank, its every pivot and parry is closely watched by competitors and the business community writ large.

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But anyone expecting executives discussing these figures at the investor day to don a gloom-and-doom demeanor or unveil a battle plan to reclaim market share and profits were dearly disappointed.

To the contrary, JPMorgan signaled it was perfectly content to cede market share to competitors and in fact had done so on purpose.

“Where we’ve lost share, it’s been intentional,” the bank’s chief financial officer, Marianne Lake, said.

To what end? Count up the roughly dozen times senior execs said “recession” or “downturn” during their presentations and you get a clue as to what’s driving their strategy.

The bank is taking great pains to make its mortgage business recession-proof — even if it means sacrificing market share and profits in the near term.

“We’re not waiting for a recession and then to act on the recession,” Smith said. “We monitor credit performance hourly, daily, weekly, monthly.”

As Smith explained, JPMorgan has been preoccupied with “de-risking” its mortgage business. It has rebalanced its portfolio, focusing on prime loans to borrowers with top-notch credit scores.

So, while originations and revenue have fallen, so have delinquencies on the mortgages they hold or service. Their delinquency rate on servicing declined 28% in 2018, and the bank recovered more delinquent loans than it charged off — something that didn’t happen in the preceding four years.

JPMorgan 2019 investor day screen shot
JPMorgan Chase
This isn’t necessarily the tack every mortgage lender is taking. Moody’s wrote in a report this month that in the face of the industry’s economic headwinds, residential mortgage originators are expected to “loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances.”

Amid the loosening, Moody’s expects loan delinquencies, which have been hovering near postcrisis lows, to increase modestly over the coming year.

Much of this loosening will come from smaller companies that specialize in home lending, according to Warren Kornfeld, a senior vice president covering financial institutions at Moody’s. Global behemoths like JPMorgan have the flexibility, given their business diversity, to back off if they spot foreboding economic storm clouds.

“They have a greater ability to step back from a market if profitability and risk/reward opportunities are subpar,” Kornfeld said.

Grasping for profits by reaching down the credit spectrum is a double-edged sword. Looser lending standards mean a greater risk that some of those loans don’t get paid back and turn red on the income statement.

JPMorgan isn’t willing to let that happen.

“Given the expense, plus headline risk, banks really do not want to service delinquent loans, especially on loans that they own,” Kornfeld said. “The common thread in the market is that banks are focusing on their core customers with residential mortgage lending.”

Read more:
Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing
JPMorgan Chase shared a slide with investors that explains why mortgage lenders are getting smoked
Home sales continue to get whacked, falling to a 3-year low, and an increase in mortgage delinquencies is looming
Rust-belt cities that got killed in the recession are making comeback, and they’ve become the best places for millennials to buy a home
Source:https://www.businessinsider.com/jpmorgan-chase-is-making-its-mortgage-business-recession-proof-2019-2

The Latest Regulations on Your Appraisal and Evaluation Review Program

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was a law enacted in response to the savings and loan crisis of the 1980s. Interestingly, FIRREA accomplished significant changes in the areas of deposit insurance and federal regulation of the savings and loan industry at the time. Let’s hone our focus on the area of appraisals.

Reviewing the Old

No doubt, FIRREA has been around for quite some time. And, we have seen guidelines produced by federal regulators to ensure understanding and compliance of the requirements. Are you aware that FAQs were published in October 2018 to assist us as we deal with appraisals? While no new content was introduced with the FAQs, a review of the them may trigger for you a need to know more about this topic. Here are a few questions posed from the FAQs published by the FDIC, OCC, and FRB. To review the entire FAQ document, click here.

Question #6: What cost-effective actions can a smaller financial institution take to implement an appraisal and evaluation review program that meets the standards for independence in the agencies’ appraisal regulations?

Answer: A small financial institution with limited staff should implement practical safeguards for reviewing appraisals and evaluations when absolute lines of separation between the collateral valuation program and loan production process cannot be achieved. Small financial institutions could have loan officers, other employees, or directors review an appraisal or evaluation, but those individuals should be appropriately qualified, independent of the transaction, and should abstain from any vote or approval related to such loans.

To the extent that a financial institution is involved in real estate transactions that are complex, out of market, or otherwise exhibit elevated risk, management should assess the level of in-house expertise available to review appraisals or evaluations associated with these types of transactions. If the expertise is not available in-house, the financial institution may find it appropriate to evaluate alternatives, such as outsourcing of the review process, for ensuring that effective and independent reviews are performed.

For transactions subject to the IFR on Valuation Independence, institutions must comply with the provisions of that rule (See 12 CFR 1026.42(d)).

Question #8: Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially?

Answer: No. A financial institution may use an existing appraisal or evaluation to support the renewal of an existing loan at the financial institution when the market value conclusion within the appraisal or evaluation remains valid.

Validating the market value conclusion of the real property is a fact-specific determination, based on market conditions, property condition, and nature of the transaction. As described in the Valuation Guidelines, a financial institution should establish criteria for validating an existing appraisal or evaluation in its written valuation policies. The criteria should consider factors that could impact the market value conclusion in the existing appraisal or evaluation, such as: the volatility of the local market; changes in terms and availability of financing; natural disasters; supply of competing properties; improvements to the subject or competing properties; lack of maintenance on the subject or competing properties; changes in underlying economic and market assumptions, such as capitalization rates and lease terms; changes in zoning, building materials, or technology; environmental contamination; and the passage of time. Regarding this last factor, there is no provision in the agencies’ appraisal regulations specifying the useful life of an appraisal or evaluation.

The financial institution must also consider whether an appraisal or an evaluation is required for the transaction. The agencies’ appraisal regulations require an evaluation for transactions involving an existing extension of credit at the financial institution when either (1) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection after the transaction, even with the advancement of new money, or (2) there is no advancement of new money, other than funds necessary to cover reasonable closing costs. Alternatively, a financial institution could choose to obtain an appraisal, although only an evaluation is required. For example, an institution may choose to obtain an appraisal to achieve a higher level of risk management or to conform to internal policies.

In the context of renewal transactions, whether there has been a material change in market conditions may affect both whether an appraisal or evaluation is required and whether an existing appraisal or evaluation remains valid. A financial institution can assess whether there has been a “material change” in market conditions by considering the factors detailed above for validating an existing appraisal or evaluation. When there has been an obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection, the existing appraisal or evaluation is no longer valid. In such situations, if no new money is advanced, a financial institution must obtain a new evaluation, or may choose to satisfy the agencies’ appraisal regulations by obtaining a new appraisal.

However, if new money is advanced, a financial institution must obtain a new appraisal unless another exemption from the appraisal requirement applies. Refer to the following examples, assuming no other exemption from the appraisal requirement applies.

Example 1. A financial institution originated a revolving line of credit for a specified term, and at the end of the term, renews the line for another specified term with no new money advanced. The financial institution’s credit analysis concluded that there had been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an evaluation, rather than an appraisal, because no new money was advanced, even though the financial institution concluded there is a threat to the adequacy of the collateral protection. Alternatively, the financial institution could choose to obtain a new appraisal, although only an evaluation would be required.

Example 2. A financial institution originated an ADC loan and, at maturity, renewed the loan and advanced new money that exceeded the original credit commitment. The financial institution’s credit analysis concluded that a material change in market conditions or the physical aspects of the property threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an appraisal to support the transaction, because the financial institution advanced new money and concluded there is a threat to the adequacy of the real estate collateral protection.

Example 3. Consider the same scenario in Example 2 above; however, the financial institution’s credit analysis concluded that there had not been a material change in market conditions or physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, a financial institution could choose to obtain a new appraisal, but a new appraisal would not be required.

Example 4. A financial institution originated a balloon mortgage secured by a single-family residential property. At the end of the term, the financial institution renews the balance of the mortgage for another term, with no new money advanced. The financial institution’s credit analysis concluded that there had not been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require the financial institution to obtain an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, the financial institution could choose to obtain a new appraisal, although a new appraisal would not be required.

Financial institutions should consider the risk posed by transactions that do not require new appraisals or evaluations and may consider obtaining a new appraisal or evaluation based on the financial institution’s risk assessment. In addition, financial institutions making HPMLs must ensure compliance with the HPML Appraisal Rule, 12 CFR 1026.35(c)(2)(vii).

Question #20: May an appraisal be routed from one financial institution to another financial institution via the borrower?

Answer: A financial institution should not accept an appraisal from the borrower. However, the borrower can inform the financial institution that there is an existing appraisal. Prior to accepting an appraisal from another financial institution, the institution should confirm that the appraiser is independent of the transaction, the appraiser was engaged directly by the other financial institution, and the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable.

Knowing the New

In April 2018, the federal agencies (FDIC, OCC, FRB) jointly published an amended rule titled Real Estate Appraisals, with the following issues of which to be aware:

Under current thresholds, all real estate-related financial transactions with a value of $250,000 or less, as well as qualifying business loans secured by real estate that are $1 million or less, do not require appraisals. Qualifying business loans are business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
For real estate-related financial transactions at or below the applicable thresholds, the interagency appraisal regulations require financial institutions to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices, but does not need to be performed by a licensed or certified appraiser or meet the other Title XI appraisal standards.
The Appraisal Rule creates a new definition of, and separate category for, commercial real estate transactions and raises the threshold for requiring an appraisal from $250,000 to $500,000 for those transactions, which will exempt an additional 15.7 percent of transactions from the appraisal requirements.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was signed by the president on May 24, 2018. Title I, Improving Consumer Access to Mortgage Credit, covers many topics one of which amends FIRREA. Section 103 of the EGRRCPA added Section 1127 to the FIRREA, which details when an appraisal is NOT required:

The real property or interest in real property is located in a rural area, as described in section 1026.35(b)(2)(iv)(A) of Regulation Z;
Not later than 3 days after the date on which the Closing Disclosure relating to the federally related transaction is given to the consumer, you have contacted not fewer than 3 State certified appraisers or State licensed appraisers, as applicable, on the mortgage originator’s approved appraiser list in the market area and have documented that no State certified appraiser or State licensed appraiser, as applicable, was available within 5 business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments;
The transaction value is less than $400,000; and
The mortgage originator is subject to oversight by a Federal financial institution regulatory agency.

Around the Industry:

Effective Now

Recently, the CFPB published the 2019 list of rural and underserved counties and a separate 2019 list that includes only rural counties. Also, note that the CFPB updated the rural and underserved areas website tool for 2019. The lists and the tool help creditors determine whether a property is located in a rural or underserved area for purposes of applying certain regulatory provisions related to mortgage loans.

MCM Q&A

Remember the Tom and Jerry cartoons from long ago? Well, check out one of the most read articles from 2018 regarding cybersecurity and see for yourself this cat and mouse game of secure authentication.

Source: http://www.mortgagecompliancemagazine.com/weekly-newsline/firrea-the-old-and-new-of-appraisals/

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