Mortgage Law Blog, LLC

Late yesterday, Senate Republicans blocked a test vote on the Foreclosure Prevention Act of 2008 (S. 2636). 

The bill would have allowed judges to change the terms of mortgage loans for borrowers in bankruptcy.  This power threatens to increase costs of mortgage for all borrowers as it undermines lenders’ confidence that loans will be repaid as agreed. 

Democrats fell more than 12 votes short of the needed 60 to get the provision to the floor for a vote.  The Wall Street Journal (paid subscription required) quoted Senator Richard Durbin (D-IL) as saying that the lenders who “created this crisis in America . . . don’t want those people to stay in their homes even if they can make their mortgage payments.” 

This statement seems misguided.  It is widely known that lenders and investors suffer serious damage when borrowers stop paying their mortgages, and bankruptcy filings prolong that process.  In addition, filing bankruptcy harms the borrowers credit for years to come, making any future purchases of homes, automobiles and other items more expensive.

David Kittle, Chairman of the Mortgage Bankers Association, pointed out that the way to keep borrowers in their homes is to pass an FHA Reform bill that will enable borrowers to refinance. 

The President has threatened to veto the measure if it comes across his desk.

Tags: Bankruptcy, Industry Involvement, Legislation, Lobbying, Mortgage Banking - General by the Editor
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RESPA News (subscription required) today reported that a summary for the new proposed rules under the Real Estate Settlement Procedures Act of 1974 is currently circulating on the Hill, and has been disseminated to the public.

The teaser for the article states:

A summary of the changes the new RESPA rule will make has been released on Capitol Hill and obtained by RESPAnews.com. The summary explains what is in the current RESPA rule and compares it to what is being proposed in the new RESPA reform rule. From Section 8 revisions, to a new definition for “required use,” to details of the new GFE and HUD-1 forms and other statutory changes, the scoop on RESPA reform is all right here.

The fuller article includes a link to the summary.  The Department of Housing and Urban Development website does not yet contain any press release for the proposal.  Many in the industry anticipate that HUD will issue a notice of proposed rulemaking on the issue soon. 

The public will then have a chance to comment on HUD’s proposal. 

Tags: Consumer Protection, HUD & FHA, Mortgage Banking - General, RESPA, Regulations by the Editor
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The Washington Post ran a tantalizing article today that all lenders should read. 

It describes a class action lawsuit by a couple allegedly duped by a lender’s advertisement for a loan. 

The article quotes Louis Pizante, Chief Executive Officer of Mavent, Inc., as indicating the case is one of the most important in the mortgage industry at the moment.  In Mr. Pizante’s words, the ”ramifications and impact [of the case] have completely changed given the current environment.”

It also points out that “[d]ozens of class-action homeowner lawsuits have been filed in California and elsewhere against the nation’s largest banks.”

As lenders know, a hypertechnical rule with severe ramifications is a difficult issue to confront.  The Post article notes:

The law states that even a minuscule violation by a lender can lead to a mortgage cancellation, or rescission. For example, if the annual percentage rate calculation is off by one-eighth of a percent between preliminary and final loan documents or if a monthly payment schedule does not conform precisely to federal guidelines, some borrowers could get a refund for all they have paid to live in their homes for years. They would have to pay back the entire amount of the loan, but they could then seek a new mortgage on better terms.

It also points out that, while the ability to receive class action treatment in such cases has been difficult historically, much rides on the Seventh Circuit’s decision expected to be issued soon.

As the Post article notes, there is a possibility of enormous liabilities for lenders and investors alike.  This ”unnerving scenario is a source of optimism for [class action plaintiffs'] lawyers.”

Having read the article, lenders should do two things.  First, they should take all reasonable steps to make sure they eliminate systemic problems that could run them into this minefield.  Second, they should get active in industry efforts to combat these types of problematic laws. 

Other Americans, too, would do well to consider the breathtaking cost of these types of lawsuits against lenders.  It is also important to think where the money comes from.  Lenders are in the business of loaning money to people and earning fees for this service. 

If being in the business costs more because of class action lawyers and a small pool of consumers gaming the system, that means everybody else pays more for their loans. 

That should make people downright mad.

Tags: Class Actions, Consumer Protection, Litigation, Mortgage Banking - General, Regulations, Unfair or Deceptive Acts by the Editor
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The Office of the Comptroller of the Currency yesterday issued guidance (OCC Bulletin 2008-4) regarding Flood Hazard Determination Practices.  (As discussed below, this guidance is useful to non-OCC regulated entities also.)

The OCC notes two concerns regarding flood hazard determinations that expose regulated entities to compliance and operational risks.  The Bulletin states in pertinent part:

The OCC discovered that some companies that provide flood determinations to national banks are not using the Community Status Book (CSB) when obtaining community status information for their flood determinations.  Instead, these entities rely solely on the information available through Flood Map Status Information Service (FMSIS), the Federal Emergency Management Agency’s (FEMA) electronic flood data that is provided to subscribers on a monthly basis.  This also may be a problem for national banks that are performing determinations for their own portfolio.  FEMA has indicated that the CSB is the final authority for community status information and that the community status information in FMSIS may not always be current.  If an entity making a flood determination fails to rely on the CSB when obtaining community status information for flood determinations, the entity could make incorrect flood determinations, which in turn, could expose national banks and their customers to a risk of financial loss.  Therefore, the OCC strongly encourages national banks to review their third-party vendor relationships and their own practices and procedures to ensure that appropriate information is used when performing flood determinations.

The OCC also discovered that some flood determination companies do not note on the Standard Flood Hazard Determination Form that they have revised or updated its determination.  This also may be a problem for a national bank that is performing determinations for its own portfolio.  If the entity revising or updating the form does not record the revised or updated date, the bank may not be able to determine or track compliance with the regulation.  The OCC recommends that flood determination companies and national banks indicate any dates of revision in the “comments” section of the Standard Flood Hazard Determination Form, when a determination has been revised or updated. 

The Bulletin notes that this information also is being reported to the National Flood Determination Association (NFDA) and Federal Emergency Management Association (FEMA) for incorporation into guidance issued by those entities.

While the OCC regulation is generally limited to banks and their subsidiaries, the flaw in relying on outdated information certainly poses similar operational risks to mortgage companies more generally.  Mortgage Law Blog encourages mortgage-related companies to take a look at the Bulletin. 

Tags: FDIC, Federal Bank Regulators, Mortgage Banking - General, OCC, Regulations by the Editor
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On February 13 and 14, Senate Majority Leader Harry Reid (D-NV) read into the record proposed legislation that would give bankruptcy judges the ability to force changes to the terms of mortgage agreements in bankruptcy proceedings.  Senator Reid then placed the bill on the Senate calendar. 

This bill, the Foreclosure Prevention Act of 2008 (S. 2636) includes a variety of provisions, some of which the Mortgage Bankers Association supports.  However, the bill also contains the bankruptcy cramdown provisions widely opposed.  These provisions necessarily are bad for lenders and nearly all consumers.  The provisions also encourage financially negligent behavior and bankruptcy filings, at the cost of financially responsible individuals. 

The MBA has indicated that cramdowns would further destabilize the economy and harm consumers at a time when the credit markets are experiencing serious challenges.   

Boiled down, if a borrower could even get a loan, the loan would have higher interest rates or fees and require larger down payments. 

A prior posting on Mortgage Law Blog has explained that the resulting costs of similar provisions would likely amount to an average of $160/mo. increase in mortgage payments nationwide. 

Additional postings about similar legislation in another pending bill can be found here.

This portion of the legislation should be opposed as bad for business, bad for consumers and bad for the American economy.  It should be strongly opposed.

Tags: Bankruptcy, Consumer Protection, Distressed Assets, Foreclosure, Industry Involvement, Legislation, Mortgage Banking - General by the Editor
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Mortgage Law Blog issues this reminder that the deadline is Monday, February 25, 2008 for comments to the Federal Trade Commission regarding the impact and effectiveness of state and private credit report freeze laws and initiatives.

The FTC’s press release requesting comments states in part:

Thirty-nine states and the District of Columbia have enacted laws providing consumers the right to place credit freezes, and each of the three nationwide consumer reporting agencies (“CRAs”) is offering a commercially-developed credit freeze option. In general, once a consumer initiates a credit freeze with a CRA, the freeze prevents that CRA from releasing a consumer report (i.e., a credit report) about that consumer unless the consumer temporarily lifts or permanently removes the freeze. A credit freeze may help prevent identity thieves from opening new accounts in consumers’ names, because businesses typically will not extend new credit (or provide certain other benefits) without first viewing the consumer’s credit report.

In April 2007, the President’s Identity Theft Task Force (“Task Force”) issued a strategic plan to make the federal governments effort’s more effective and efficient in the areas of identity theft awareness, prevention, detection, and prosecution, www.idtheft.gov/reports/StrategicPlan.pdf. As part of its strategic plan, the Task Force recommended that the FTC, with support from the Task Force member agencies, assess the impact and effectiveness of credit freeze laws and report on the results, in order to assist policymakers in considering the appropriateness of a federal credit freeze law.

Commission staff invites interested parties to submit written comments on the impact and effectiveness of state credit freeze laws, as well as the credit freeze options offered by the nationwide consumer reporting agencies. Comments must be received on or before February 25, 2008.

The FTC’s detailed information for comments can be found here.

Tags: Consumer Reports/Credit Reports, Credit Report Freezes, Industry Involvement, Mortgage Banking - General, Regulations, State Regulation by the Editor
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The Washington Post (registration required) carries an article today regarding a creative plan the Office of Thrift Supervision preliminarily surfaced yesterday.

The plan would help borrowers “upside-down” on their mortgage.  In other words, borrowers who owed more than their homes were currently worth.

Under the proposed plan, the borrower would refinance the existing mortgage by obtaining a government-insured (presumably FHA) loan for an amount equal to the current value of the home.  The new loan would pay off most, but not all of the existing loan.  Any amount still owed to the existing lender would not be paid off at that time.  Instead, the existing lender would receive a so-called “negative-equity certificate.” 

If the home were later sold at a higher price, the lender would redeem the certificate at the closing of that later sale.  If the home were not sold at a higher price later, the lender would take a loss.  It is not clear what the proposal would contemplate in a later refinance of the new FHA loan. 

The plan also anticipates a secondary market in which the negative-equity certificates would be bought and sold.

The plan is far from perfect, there are many potential devils in the details, and it is far from clear whether other regulators, the White House or industry will accept such a proposal.  But this is exactly the kind of creative thinking Mortgage Law Blog encourages.  Hats off to the OTS.

A copy of the full article can be found here.

Tags: Foreclosure, HUD & FHA, Loss Mitigation, Mortgage Banking - General by the Editor
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The Department of Housing and Urban Development has issued its Annual Performance Plan for Fiscal Year 2009. 

The Plan’s highlights include:

• promoting homeownership, especially in minority and low-income communities and first-time homebuyers, through a revitalized FHA;
• promoting preservation of homeownership through housing counseling assistance and policies addressing subprime mortgages;
• strengthening communities through housing rehabilitation and improved coordination of federal resources for neighborhood revitalization;
• ensuring housing assistance to those most in need, including quality housing for approximately 4.8 million rent-assisted and public housing families, and assistance to the homeless;
• strengthening the ability of fair housing groups to enforce the laws prohibiting discrimination in housing;
• helping lead the federal government in tapping the potential of faith-based communities; and
• continuing to improve HUD’s management, internal controls and information technology systems.

The Mortgage Law Blog welcomes the continued emphasis on making the FHA program more user-friendly.  Lenders will recall that only a year FHA’s percentage of the marketplace had declined to only about two percent.  Naturally, there were many reasons for the shrunken market share.  A primary reason, however, was that the program was viewed as overly bureaucratic, with far too much red tape. 

In addition, HUD’s enforcement team and the Office of the Inspector General were viewed as overly aggressive and sometimes outright hostile to lenders.  With the risk of serious civil penalties, indemnification requests and other possible sanctions always hanging in the balance, many in the industry simply stopped using the program.  Some even predicted FHA’s ultimate demise. 

By chance, FHA has been given a second chance.  The unfortunate circumstances in other parts of the marketplace have opened the doors for a renewed and refreshed FHA.  At the same time, senior level staff within FHA have shown real determination to improve the efficiency and usability of the program.  Similarly, Congress has increased the loan limits to enable FHA to be used in higher cost areas.  In all, this excellent government sponsored program, which has been around since the New Deal era, basically invented the 30-year mortgage and created loss mitigation, and is the biggest game in town in the reverse mortgage arena, is rising from near death. 

Thankfully, HUD’s Plan indicates the agency seems determined to assist.

A copy of HUD’s Plan can be found here.

Tags: Consumer Protection, Financial Literacy, HUD & FHA, Loan Modifications/Workouts, Loss Mitigation, Mortgage Banking - General, Regulations, Reverse Mortgages by the Editor
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This is a reminder that the Distressed Real Estate Investing Summit is February 20-22, 2008 in New York City.

The announcement for the Summit states:

A number of forces are driving today’s activity in distressed real estate investing. The domino effect of a sharp drop in housing construction, land development loan defaults, condominium oversupply and the growing wave of single family home defaults, in addition to growing weakness in commercial properties, are creating a tsunami of opportunities for distressed investors in the real estate space.

The Distressed Real Estate Investing Summit will bring together active market players from throughout the industry, including property owners and investors, private equity funds, hedge funds, restructuring specialists, retail experts and market analysts to share their perspectives, to establish a constructive dialogue, to build understanding, and ultimately to develop the relationships needed to pursue profitable deals. You’ll hear up-to-the-minute discussions of opportunities in:

• Real estate loan portfolios and mortgage-backed securities
• Foreclosed real estate
• Sales of distressed assets
• Real estate holdings that come into play in the context of corporate turnarounds
• The equity and debt of housing-related retailers
• The equity, debt and assets of distressed home builders

Detailed information about the summit, including downloadable brochures, can be found if you click here.

Tags: Conferences & Events, Distressed Assets, Industry Involvement by the Editor
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The National Association of Mortgage Brokers has issued its Policy Agenda for 2008.  In light of current market conditions, the Agenda contains a substantial list of priority items.  Mortgage reform, consumer protection and FHA loans top the list of key issues.

NAMB President, George Hanzimanolis, pointed out that the Agenda items were “crafted to protect consumers, improve loan disclosures, and ensure that all mortgage originators meet the same high standards of education and professional ethics.”

The Association’s press release noted that the Agenda contains three new major policy positions:

NAMB calls for an independent, government sponsored study/investigation of consumer disclosures that may be contributing to or enabling deceptive sales and marketing practices in the mortgage industry. The study should focus on whether there are disparities in current or proposed consumer disclosure requirements that could confuse or increase costs to consumers

NAMB will promote efforts that ensure direct and/or indirect compensation received by any originator, regardless of distribution channel, is treated equally and in similar fashion to avoid competitive inequities and consumer confusion.

NAMB supports the establishment of a nationwide registry that mandates the inclusion of all loan originators to provide tracking control and strengthen the industry and consumer protection, and supports the establishment of professional standards for all mortgage originators that will mandate minimum pre-employment and continuing education, testing, and complete criminal background checks. 

A copy of the full press release and Agenda can be found here.

Tags: Association Activities, Industry Involvement, Lobbying by the Editor
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