THE BASIS POINT

Outsourcing FHA, The Trouble With MERS, A Word on New Home Sales

As my grandfather used to say, “If you find yourself in a hole, the first thing to do is stop digging.”* Apparently the folks at Sunwest Bank, out of Tustin, CA, felt the same way. Clients received a letter saying, “I regret to inform you that as of October 2, 2009, Sunwest Bank will be suspending its mortgage banking operations. My staff and I will be available through October 2, 2009 to assist you or answer any questions you may have.” (* Unlike my uncle the convicted felon, who always said, “If you find yourself in a hole, keep digging – you probably aren’t under the wall and out the fence yet.”)

Reuters reported that state housing agencies around the U.S. that provide mortgages to low-income borrowers would get as much as $35 billion in federal aid under a new U.S. Treasury Department program. Through it the government would provide up to $15 billion in new funding for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year. Critics point to evidence that one of the primary reasons that we are in the credit crisis is by extending home loans to borrowers who may not qualify. Proponents argue that adequate controls are in place.

Last night at sun down the Jewish observance of Yom Kippur came to a close. (Although as one person wrote to me about the observance, “I’m supposed to be repentant for all my transgressions. I couldn’t think of any sins in ’08 & ‘09, so I’m probably exempt. If God gave us free will, why should he be surprised we cheat sometimes? It’s his fault.”) In Israel property owners are subject to several types of tax, including a sales tax, a purchase tax, a capital gains tax, various municipal taxes, income tax on any rent collected, and a “betterment” tax. This is a tax paid when the authorities allow a change of zoning for a neighborhood which causes the value of the property to rise, and is 50% of the added value to the property due to the change in the zoning!

Global Mortgage Relief Extended
While we’re trotting around the globe, the Canadian government announced it would extend a mortgage purchase program through March 2010 in a bid to make it easier for banks to lend more. (Canada has about 33 million residents, not including meese or beavers.) And Russia’s central bank lowered its key interest rates by half a percentage point to help stimulate lending Bank Rossil cut their refinancing rate to 10 percent from 10.5 percent and lowered the repurchase rate charged on central bank loans to 9 percent from 9.5 percent, effective tomorrow.

Can Lenders Outsource FHA Functions?
Originators should also note that the FHA permits approved lenders to outsource certain mortgage functions, provided they do not “materially affect underwriting decisions or increase risk to FHA.” The origination and underwriting functions may never be outsourced. Any function performed by someone other than an employee of the FHA-approved lender is outsourced. FHA permits outsourcing of actions such as clerical duties, including but not limited to copying, filing, placing documents in stacking order, etc., loan processing, including but not limited to typing loan documents, mailing and collecting verifications, ordering credit reports and/or preparing loans for endorsement and/or shipment to investors, loan servicing, including but not limited to processing foreclosure actions, loss mitigation, and/or tax servicing, legal functions, and quality control reviews. But be careful, as the contract must be with a commercial provider and the lender is responsible for adherence to all Real Estate Settlement Procedures Act (RESPA) laws.

Wells Fargo Good Faith Estimates
The wholesale group of Wells Fargo, who recently pulled out of doing business in Canada, reminded their clients that effective 1/1/10 HUD will require that lenders and mortgage brokers provide borrowers with a new RESPA Reform GFE and HUD-1 Settlement Statement. But their clients should know that Wells Fargo Wholesale Lending and Wells Fargo Home Equity channels “are unable to accept the new GFE and HUD-1 forms until further notice.” The GFE can no longer be issued for pre-approvals as a property address is now required for the application to be complete, and will require the borrower’s name, borrower’s monthly income, borrower’s social security number, property address, estimate of the property’s value, and loan amount being sought. Wells goes on to discuss their HUD-1 policies, fee changes, tolerance limitations, and the requirements for matching the charges.

FHA Tighter Guidelines
Potomac Partners sent out an informative message about the current “potential” plight the FHA has, along with some predictions that make sense. First, with $30 billion in current cash reserves to pay claims, the FHA could pay claims for 50 months without considering any premium income from existing or new originations given their current rate. As for the future, Potomac Partners expects that the FHA will not only tighten their underwriting standards, especially in poorly performing products, but also develop their own automated underwriting system. Watch for increased post-endorsement reviews, greater counter-party responsibilities and indemnifications, and increased vigilance on wholesalers. Seller-servicers will be held accountable for the production of the originator, and “the FHA proposal, in effect, would be substituting the Direct Endorsement lender for the GSE seller-servicer. We would expect the DE lender would have to underwrite and close the loan in its name.”

MERS Trouble
Most folks in the business know what MERS is: Mortgage Electronic Registration System. The system is 12 years old, and is designed to improve efficiency in lenders by, among other things, eliminating the need to record changes in property ownership (assignments) in local land records by doing it electronically. It has been very successful, saving the industry an estimated $1 billion per year and having approximately 60 million loans registered in the name of MERS. But in the event of a foreclosure, are they a creditor who is able to file an action? In other words, can an electronic registry with no ownership claims have the right to evict borrowers? In the latest case, a ruling that the Kansas Supreme Court may have some implications for loans involving MERS.

The case involves a borrower with a 1st and a 2nd where the owner of the 1st foreclosed. The 2nd was done with Millennia Mortgage, registered in MERS’s name, and then transferred to Sovereign Bank – but the county records show no such assignment. Upon foreclosure the 1st was paid off and the borrower received the small remainder. Sovereign received nothing, but arguing that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings. Kansas ruled that Sovereign’s failure to register its interest with the county barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property. What about the millions of loans that are recorded in MERS’s name? MERS believes that “…the Kansas Supreme Court used an erroneous standard of review…” and will be continuing the judicial process. Stay tuned!

New Home Sales
If I owned a purple Ford Pinto, would you buy it? I guess only if you really needed a car, perhaps, but at a very low price. The basic rules of supply and demand would apply, as they do with the housing market. The current market for cheaper homes in many areas is doing very well, so watch for continued declines in median prices – since cheaper homes are the ones selling and shifting the numbers. First-time home buying tax breaks, originally meant to potentially increase high-end purchases, have not worked well in that market, and buyers are finding nice, large homes in good neighborhoods for reasonable prices. And they expire at the end of November. Last week’s sales data bore that out. Single family home prices financed through the agencies in July were +.3%. New Home Sales were +.7%, but the median price of a new house was -9.5% as homes selling for less than $150k increased their market share.

Rate/Economic News Update
On to interest rates, where things are currently a little quieter. We have already had the S&P Case-Shiller Index, expected to have fallen about 14% in July from a year earlier, the least in 17 months. And at 7AM PST, 10AM EST we’ll have Consumer Confidence. But getting back to the Index, it was “only” down 13.3% in July from a year earlier. Optimists point to this as a sign that the housing slump is winding down. Pessimists note that we’re still down! Regardless, rates have crept up slightly after the number: the yield on the Treasury’s 10-yr stands at 3.32% and mortgage prices are worse by about .125 versus Monday afternoon.

Daily Humor
(Warning: PG)
An Irish woman of advanced age visited her physician to ask his advice in reviving her husband’s libido.
“What about trying Viagra?” asked the doctor.
“Not a chance”, she said. “He won’t even take an aspirin.”
“Not a problem,” replied the doctor. “Give him an ‘Irish Viagra’. It’s when you drop the Viagra tablet into his coffee. He won’t even taste it. Give it a try and call me in a week to let me know how things went.”
It wasn’t a week later when she called the doctor, who directly inquired as to her progress. The poor dear exclaimed, “Oh, faith, bejaysus and begorrah! T’was horrid! Just terrible, doctor!”
“Really? What happened?” asked the doctor.
“Well, I did as you advised and slipped it in his coffee and the effect was almost immediate. He jumped straight up, with a twinkle in his eye and with his pants a-bulging fiercely! With one swoop of his arm, he sent me cups and tablecloth flying, ripped me clothes to tatters and took me then and there passionately on the tabletop! It was a nightmare, I tell you, an absolute nightmare!”
“Why so terrible?” asked the doctor. “Do you mean the “passion” your husband provided wasn’t good?”
“Feckin jaysus, ’twas the best I’ve had in 25 years! But sure as I’m sittin’ here, I’ll never be able to show me face in Starbucks again!”