All About Mortgage Brokers

photo by Day Donaldson

Bankrate.com quoted me in Mortgage Broker — Everything You Need To Know. It opens,

When you need a mortgage to buy or refinance a home, there are 3 main ways to go about applying — through a traditional brick-and-mortar bank, an online lender or a mortgage broker (either in-person or online).

Many people first think about shopping for a mortgage where they already have their checking and savings accounts, which is often a major bank or a local credit union. And applying online with a traditional bank or online-only lender has become more common.

But while borrowers are probably the least familiar with using a mortgage broker, it comes with many benefits.

Here’s everything you need to know about using a mortgage broker. 

Working with a mortgage broker

A mortgage broker connects a borrower with a lender. While that makes them middlemen, there are several reasons why you should consider working with a broker instead of going straight to a lender.

For starters, brokers can shop dozens of lenders to get you the best pricing, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and mortgage advisor with C2 Financial Corp. in San Jose, California.

Fleming says the price he charges for certain lenders or banks is very often better than the price a consumer could get by going directly to the same lender.

“When the lender outsources the loan origination and sales function to a broker, they offer to pay us what they would otherwise pay to cover their internal operations for the same function,” Fleming says.

“If we are willing to work for less than that—and that is usually the case—then the consumer’s price through a broker ends up being less than if they went directly to the lender,” he explains.

Further, “A broker is legally required to disclose his compensation in writing — a banker is not,”says Joe Parsons, senior loan officer with PFS Funding in Dublin, California, and author of the “Mortgage Insider blog.”

Variety is another benefit of brokers. It can help you find the right lender.

“Some may specialize in particular property types that others avoid. Some may have more flexibility with credit scores or down payment amounts than others,” says David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York and the editor of REFinBlog.com.

In addition, brokers offer one-stop shopping, saving borrowers time and headaches.

“If you are turned down by a bank, you’re done — you have to walk away and begin again,” Fleming says. But “If you are turned down by one lender through a broker, the broker can take your file to another lender,” he adds. The borrower doesn’t need to do any extra work.

A broker’s expertise and relationships can also simplify the process of getting a loan.

Brokers have access to private lenders who can meet with you and assess whether or not you have the collateral, says Mike Arman, a retired longtime mortgage broker in Oak Hill, Florida.

Private lenders, which include nonbank mortgage companies and individuals, can make loans to borrowers in unconventional situations that banks can’t or won’t because of Dodd-Frank regulations or internal policy.

You may get a better price on a loan from a broker as well.

Under the Consumer Financial Protection Bureau’s Loan Originator Compensation rule, brokers (but not bank lenders) must charge the same percentage on every deal, so they can’t raise their margin “just because” like a bank can, Fleming explains.

“The intent was to prevent originators from steering borrowers to high-cost loans in order to increase their commission,” Fleming notes.

You should also know that working with a broker won’t make your loan more expensive.

“The lender pays us, just like a cruise line pays a travel agent,” Fleming says.

Working with a traditional bank lender

Banks issue less than half of mortgages these days, according to the industry publication Inside Mortgage Finance. But working with a broker isn’t necessarily a slam dunk.

“A broker may claim that he offers more choices than a banker because he works with many lenders,” Parsons says. “In reality, most lenders offer pricing on their loans that is very similar.” Although, he notes, a broker may have available some niche lenders for unusual circumstances.

Reiss says that even if you’re working with a mortgage broker, it can be worthwhile to check out lenders on your own since no broker can work with every lender — there are simply too many. He suggests starting with lenders you already have a relationship with, but also looking at ads and reaching out directly to big banks, small banks and credit unions in your community.

It’s important to know your range of options, he notes.

For the same reason, you might want to shop around with a few different brokers.

Surveying Mortgage Originations, Going Forward

survey-1594962_1280

REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category.  Please vote here if you like what you read.

As I had earlier noted, the Federal Housing Finance Agency has issued a request for comments on the National Survey of Mortgage Originations (NSMO).  The NSMO is “a recurring quarterly survey of individuals who have recently obtained a loan secured by a first mortgage on single-family residential property.” (81 F.R. 62889) I submitted my comment, written in the context of the newly-elected Trump Administration. It reads, in part,

I write to support this proposed collection, but also to raise some concerns about its efficacy.

The NSMO is very important to the health of the mortgage market.  We need only look at the Subprime Boom of the late 1990s and early 2000s to see why this is true:  subprime mortgages went from “making up a tiny portion of new mortgage originations in the early 1990s” to  “40 percent of newly originated securitized mortgages in 2006.” David Reiss, Regulation of Subprime and Predatory Lending, International Encyclopedia of Housing and Home (2010). During the Boom, subprime lenders like Countrywide changed mortgage characteristics so quickly that information about new originations became outdated within months.See generally Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report 105 (2011) (“Countrywide was not unique: Ameriquest, New Century, Washington Mutual, and others all pursued loans as aggressively. They competed by originating types of mortgages created years before as niche products, but now transformed into riskier, mass-market versions”) Policymakers and academics did not have good access to the newest data and thus were operating, to a large extent, in the dark.  The information in the NSMO will therefore not only help regulators, but will also assist outside researchers to “more effectively monitor emerging trends in the mortgage origination process . . ..” (81 F.R. 62890)

*     *    *

there is no question that this “collection of information is necessary for the proper performance of FHFA functions . . ..” (81 F.R. 62890) Given the likely changes to the federal role in the mortgage markets over the next four years, the NSMO can provide critical insight into whether homeowners feel that that market serves their needs.

National Survey of Mortgage Originations

survey

The Federal Housing Finance Agency has issued a request for comments on the National Survey of Mortgage Originations. The NSMO is

a recurring quarterly survey of individuals who have recently obtained a loan secured by a first mortgage on single-family residential property. The survey questionnaire is sent to a representative sample of approximately 6,000 recent mortgage borrowers each calendar quarter and typically consists of between 90 and 95 multiple choice and short answer questions designed to obtain information about borrowers’ experiences in choosing and in taking out a mortgage.

*     *     *

The NSMO is one component of a larger project, known as the “National Mortgage Database” (NMDB) Project, which is a multi-year joint effort of FHFA and the Consumer Financial Protection Bureau (CFPB) (although the NSMO is sponsored only by FHFA). The NMDB Project was created, in part, to satisfy the Congressionally-mandated requirements of section 1324(c) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 (Safety and Soundness Act). Section 1324(c) requires that FHFA conduct a monthly survey to collect data on the characteristics of individual prime and subprime mortgages, and on the borrowers and properties associated with those mortgages, in order to enable it to prepare a detailed annual report on the mortgage market activities of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for review by the appropriate Congressional oversight committees. Section 1324(c) also authorizes and requires FHFA to compile a database of timely and otherwise unavailable residential mortgage market information to be made available to the public. (81 F.R. 62889)

Obviously, this is another post on a technical subject that is not for the faint of heart, but it is very important for the health of the mortgage market. During the Subprime Boom of the early 2000s, mortgage characteristics changed so quickly that information became outdated within months.  Policymakers and academics did not have good access to newest data and thus were operating, to a large extent, in the dark.

The information in the NSMO will not only help regulators, but will also outside researchers to “more effectively monitor emerging trends in the mortgage origination process . . ..” (81 F.R. 62890) The FHFA requests comments on whether “the collection of information is necessary for the proper performance of FHFA functions, including whether the information has practical utility.” (Id.) The FHFA is also looking for comments on ways “to enhance the quality, utility, and clarity of the information collected.” (Id.) Those with an interest in securing a safe future for our mortgage markets should take a look at the survey instrument (attached to the Comment Request) and respond to the FHFA’s request. Comments are due on or before November 14, 2016.

Subprime v. Non-Prime

photo by TaxRebate.org.uk

The Kroll Bond Rating Agency has issued an RMBS Research report, Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime. It opens,

Following the private label RMBS market’s peak in 2007 and the ensuing credit crisis, non-agency securitizations of newly originated collateral have focused almost exclusively on prime jumbo loans. This is not surprising given the poor performance of loosely underwritten residential mortgage loans that characterized certain vintages leading up to the crisis. While legacy prime, in absolute terms, performed better than Alt-A and subprime collateral, it was apparent that origination practices had a significant impact on subsequent loan performance across product types.

Many consumers were caught in the ensuing waves of defaults, which marred their borrowing records in a manner that has either barred them from accessing housing credit, or at best made it extremely challenging to obtain a home loan. Others that managed to meet their obligations have been unable to qualify for new loans in the post-crisis era due to tighter credit standards that have been influenced by regulation.

The private label securitization market has not met the needs of these consumers for a number of reasons, including, but not limited to, reputational concerns in the aftermath of the crisis, regulatory costs, investor appetite, and the time needed for borrowers to repair their credit. The tide appears to be turning quickly, however, and Kroll Bond Rating Agency (KBRA) has observed the re-emergence of more than a dozen non-prime mortgage origination programs that intend to use securitization as a funding source. Of these, KBRA is aware of at least four securitization sponsors that have accessed the PLS market across nine issuances, two of which include rated offerings.

Thus far, KBRA has observed that today’s non-prime programs are not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with “liar loans”. While the asset class is meant to serve those with less pristine credit, and can even have characteristics reminiscent of legacy Alt-A, it is expansive, and underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity (GSE) origination guidelines. In evaluating these new non-prime programs, KBRA believes market participants should consider the following factors:

■ Loans originated under sound compliance with Ability-To-Repay (ATR) rules should outperform 2005-2007 vintage loans with similar credit parameters, including LTV and borrower FICO scores. The ATR rules have resulted in strengthened underwriting, which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.

■ Loans that fail to adhere to GSE guidelines regarding the seasoning of credit dispositions (e.g. bankruptcy, foreclosure, etc.) on a borrower’s credit history should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity. This relationship likely depends on, among other things, equity position, current FICO score, and the likelihood that any life events relating to the prior credit issue remain unresolved.

■ Alternative documentation programs need to viewed with skepticism as they relate to the ATR rules, particularly those that serve borrowers with sub-prime credit histories. Although many programs will meet technical requirements for income verification, it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.

■ Investor programs underwritten with reliance on expected rental income and limited documentation may pose more risk relative to fully documented investor loans where the borrower’s income and debt profile are considered, all else equal. (1, footnotes omitted)

I think KBRS is documenting a positive trend: looser credit for those with less-than-prime credit is overdue. I also think that KBRS’ concerns about the development of the non-prime market should be heeded — ensuring that borrowers have the ability to repay their mortgages should be job No. 1 for originators (although it seems ridiculous that one would have to say that). We want a mortgage market that serves everyone who is capable of making their mortgage payments for the long term. These developments in the non-prime market are most welcome and a bit overdue.

Who are Fannie and Freddie?

photo by Mark Warner

Realtor.com quoted me in What Is Fannie Mae? And Freddie Mac, for That Matter? It opens,

Whether you are shopping for a mortgage or just occasionally read financial news stories, you’ve probably heard of Fannie Mae. But what is Fannie Mae, anyway? And for that matter, what about her buddy Freddie Mac? While they may sound like a Nashville singer and standup comic, respectively, they aren’t actual people. Rather, they’re oddly cute nicknames for major forces in the mortgage market.

Fannie Mae stands for the Federal National Mortgage Association, or FNMA (FNMA becomes Fannie Mae, get it?). Fannie’s brother organization is Freddie Mac, aka the Federal Home Loan Mortgage Corporation, or FHLMC. In a nutshell, these two government-sponsored enterprises—hybrids of government agencies and private corporations—help thousands of Americans get loans for homes, so it pays to familiarize yourself with what they do in more detail.

How Fannie and Freddie help homeowners

Fannie Mae was born in 1938, during the height of the Great Depression, when about 25% of Americans were defaulting on their mortgages. As part of the New Deal, the federal government created Fannie (followed by Freddie in 1970) to stimulate the housing market by making mortgages more accessible to lower-income borrowers who might not qualify otherwise. So how do they do that, exactly?

For starters, Fannie and Freddie don’t actually make loans—which is why you may have only heard about them in vague terms, since you wouldn’t approach them directly for a mortgage. Instead, these organizations purchase other lenders’ loans on the secondary market, package them (into mortgage-backed securities), and sell them to investors such as hedge funds.

By buying up banks’ loans, Fannie and Freddie essentially flood those companies with cash, which they can then turn around and lend to more home buyers. This, in turn, helps more buyers get homes who might not qualify otherwise.

“They are the behemoths of the housing finance sector, owning or guaranteeing nearly half of all the residential mortgages in the United States,” says David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Mortgage Market Overview

telescope-122960_1920

The Urban Institute’s Housing Finance Policy Center issued its May 2016 Housing Finance at a Glance Chartbook. This monthly report is invaluable for those of us who follow the mortgage market closely. The mortgage market changes so quickly and so much that what one thinks is the case is often no longer the case a few months later. This month’s report has new features, including Housing Credit Availability Index and first-time homebuyer share charts. Here are some of the key findings of the May report:

  • The Federal Reserve’s Flow of Funds report has consistently indicated an increasing total value of the housing market driven by growing household equity in each quarter of the past 2 years, and the trend continued according to the latest data, covering Q4 2015. Total debt and mortgages increased slightly to $9.99 trillion, while household equity increased to $13.19 trillion, bringing the total value of the housing market to $23.18 trillion. Agency MBS make up 58.2 percent of the total mortgage market, private-label securities make up 6.1 percent, and unsecuritized first liens at the GSEs, commercial banks, savings institutions, and credit unions make up 29.4 percent. Second liens comprise the remaining 6.4 percent of the total. (6)

It is worth wrapping your head around the size of this market. Total American wealth is about $88 trillion, so household equity of $13 trillion is about 15 percent of the total. With debt and mortgages at $10 trillion, the aggregate debt-to-equity ratio is nearly 45%.

  • As of March 2016, debt in the private-label securitization market totaled $613 billion and was split among prime (19.5 percent), Alt-A (42.2 percent), and subprime (38.3 percent) loans. (7)

This private-label securitization total is a pale shadow of the height of the market in 2007, back to the levels seen in 1999-2000. It is unclear when and how this market will recover — and the extent to which it should recover, given its past excesses

  • First lien originations in 2015 totaled approximately $1,735 billion. The share of portfolio originations was 30 percent, while the GSE share dropped to 46 percent from 47 in 2014, reflecting a small loss of market share to FHA due to the FHA premium cut. FHA/VA originations account for another 23 percent, and the private label originations account for 0.7 percent. (8)

The federal government, through Fannie Mae, Freddie Mac and Ginnie Mae, is insuring 69 percent of originations. Hard for me to think this is good for the mortgage market in the long term. There is no reason that the private sector could not take on a bigger share of the market in a responsible way.

  • Adjustable-rate mortgages (ARMs) accounted for as much as 27 percent of all new originations during the peak of the recent housing bubble in 2004 (top chart). They fell to a historic low of 1 percent in 2009, and then slowly grew to a high of 7.2 percent in May 2014. (9)

It is pretty extraordinary to see the extent to which ARMs change in popularity over time, although it makes a lot of sense. When interest rates are high and prices are high, more people prefer ARMs and when they are low they prefer FRMs.

  • Access to credit has become extremely tight, especially for borrowers with low FICO scores. The mean and median FICO scores on new originations have both drifted up about 40 and 42 points over the last decade. The 10th percentile of FICO scores, which represents the lower bound of creditworthiness needed to qualify for a mortgage, stood at 666 as of February 2016. Prior to the housing crisis, this threshold held steady in the low 600s. LTV levels at origination remain relatively high, averaging 85, which reflects the large number of FHA purchase originations. (14)

It is hard to pinpoint the right level of credit availability, particularly with reports of 1% down payment mortgage programs making the news recently. But it does seem like credit can be loosened some more without veering into bubble territory.

Hard to keep up with all of the changes in the mortgage market, but this chartbook sure does help.

FIRREA Blanks

photo by Mike Cumpston

The Court of Appeals for the Second Circuit reversed the District Court’s judgment (SDNY, Rakoff, J.) against Bank of America defendants for actions arising from Countrywide’s infamous “Hustle” mortgage origination program. The case has a lot of interesting aspects to it, not the least of which is that it does away with more than one billion dollar in civil penalties levied against the defendants.

The opinion itself answers the narrow question, when “can a breach of contract also support a claim for fraud?” (2) The Court concluded that “the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises.” (3)

I think the most important aspect of the opinion is how it limits the reach of the Financial Institutions Reform, Recover, and Enforcement Act of 1989 (FIRREA). Courts have have been reading FIRREA very broadly to give the federal government immense power to go after financial institutions accused of wrongdoing.

FIRREA provides for civil penalties for violations of federal mail or wire fraud statutes, but the Court found that there was no fraud at all. It made its point with a hypothetical:

Imagine that two parties—A and B—execute a contract, in which A agrees to provide widgets periodically to B during the five-year term of the agreement. A represents that each delivery of widgets, “as of” the date of delivery, complies with a set of standards identified as “widget specifications” in the contract. At the time of contracting, A intends to fulfill the bargain and provide conforming widgets. Later, after several successful and conforming deliveries to B, A’s production process experiences difficulties, and the quality of A’s widgets falls below the specified standards. Despite knowing the widgets are subpar, A decides to ship these nonconforming widgets to B without saying anything about their quality. When these widgets begin to break down, B complains, alleging that A has not only breached its agreement but also has committed a fraud. B’s fraud theory is that A knowingly and intentionally provided substandard widgets in violation of the contractual promise—a promise A made at the time of contract execution about the quality of widgets at the time of future delivery. Is A’s willful but silent noncompliance a fraud—a knowingly false statement, made with intent to defraud—or is it simply an intentional breach of contract? (10)

This case emphasizes that “a representation is fraudulent only if made with the contemporaneous intent to defraud . . .” (14) While this is not really new law, it is a clear statement as to the limits of FIRREA. This will act as a limit on how the government can deploy this powerful tool as new cases crop up. Unless, of course, the Supreme Court were to reverse it on appeal.