The Federal Reserve Board has amended Regulation Z, which implements the Truth in Lending Act and Home Ownership Equity Protection Act, with new policies for how loan originators may be compensated.
Effective April 1, 2011, all loan originators will no longer be able to receive compensation based on the interest rate or other loan terms, but instead be compensated based on a percentage of the loan amount.
The final rules protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.
The final rules, which apply to closed-end loans secured by a borrower’s home, will:
·Prohibit payments to the loan originator that are based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted;
·Prohibit a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person;
·Prohibit a mortgage broker or loan officer from “steering” a consumer to a lender offering less favorable terms in order to increase the broker’s or loan officer’s compensation; and
·Provide a safe harbor to facilitate compliance with the anti-steering rule.
This policy eliminates yield spread premium as of April 2011, and will be a very significant change to the lending business. There will be a drastic reduction in mortgage broker profitability unless they increase their loan origination fees to cover the change.

Buy and bail – where a homeowner buys a new house before his credit is trashed by walking away from the old one – is on the rise, according to a recent Bloomberg report.

According to the article, those most likely to “buy and bail” have a large income and low debt, enabling them to qualify for a mortgage – now at historic lows – on another home. Once they purchase that home, they then walk away from the old home that likely carries a much larger mortgage payment at a much higher interest rate on a property that is worth considerably less than they paid for it.

A Morgan Stanley report noted that those most likely to walk away are debtors with the best credit scores and jumbo loans that exceed the Fannie and Freddie cap limits for mortgages. They have typically lost more than $100,000 in property value.

Both GSEs put protections in place two years ago to thwart buy and bailers, but a Freddie Mac spokesman quoted in the Bloomberg piece said, “it still seems to be going on.”

Of course, if buy and bailers use false information to qualify for a loan on that next house, that’s called fraud. And the FBI is working with local housing agencies to conduct investigations.

At a conference held last week to discuss the overhaul of housing finance, Treasury Secretary Timothy Geithner said that the Obama administration was not looking to perform “radical surgery” on the system, but was focused instead on creating a “new and improved” version of the current system where the government would subsidize mortgage loans made by private lenders.

The administration convened the conference with dozens of leading experts on housing finance, who were largely of two minds: some want to do away with the current system altogether, with the government taking a more limited role by offering insurance for catastrophic losses only. Others argue that mortgage lending will not recover unless the government plays a more active role, providing the guarantees necessary to attract investors.

Left largely unsaid was the fate of Fannie and Freddie, which now guarantee 90 percent of all new mortgages. While most agree that they are unlikely to survive in their current form, there are so far no suggestions on what to do to get rid of them and their vast portfolios of troubled loans.

For the New York Times coverage of the conference, go here.

The Center for Responsible Lending, a nonprofit research center and borrower advocacy group, reports that Latinos account for almost half of the foreclosures in California.

The CRL says that Latino borrowers make up 48.2 percent of the over 700,000 California homes currently in the foreclosure process, based on their analysis of data from ForeclosureRadar and Catalist. According to the U.S. Census Bureau, Latinos make up 37 percent of California’s total population.

White/Non-Hispanic homeowners accounted for 34.6 percent of foreclosures in California, and African-Americans were 7.6 percent. Asians accounted for only 6.4 percent of California foreclosures.

According to a REO Insider article, lenders and servicers have taken notice of this trend, and some are targeting minority-owned brokerages for their REO listings. In addition, a Fannie Mae executive said that hiring real estate agents and brokerages that serve minority communities is one of its key strategies.

The Obama administration is holding a conference today to discuss ways to overhaul Fannie Mae and Freddie Mac, saying that doing so will be important to fixing the country’s broken housing finance system.

The conference will focus on a review of Fannie Mae, Freddie Mac, the FHA, Ginnie Mae, the Federal Home Loan Banks and the “significant private sector role” in mortgage origination, funding and servicing.

To date, the U.S. Treasury has spent more than $145 billion to keep Fannie and Freddie solvent, after seizing the lending giants in September of 2008, as they teetered on the brink of collapse.

Treasury Secretary Timothy Geithner said that the Obama administration wants a “comprehensive reform proposal that protects taxpayers, institutes tough oversight, restores the long-term health of our housing market, and strengthens our nation’s economic recovery.”

According to the Treasury, Fannie, Freddie and other government entities currently guarantee more than 90 percent of new mortgages.

KnowYourOptions.com is the new Fannie Mae website launched last week to help distressed borrowers understand more about mortgage financing and prepare them for dealing with lenders in the foreclosure process.

Available in both English and Spanish, the new site aims to help struggling homeowners find alternatives to foreclosure. According to a Fannie Mae press release, key features of the site include:

• Interactive Options Finder to help homeowners identify options that might be right for their situation;
• Calculators to help borrowers understand how many of the options work, including refinance, repayment, forbearance, and modification;
• Videos featuring real homeowners discussing how they received help and housing counselors providing advice;
• A virtual assistant to walk homeowners through key areas of the site; and
• Next steps and helpful forms, including a financial checklist and contact log to help borrowers be prepared when contacting their mortgage company or housing counselor.

The site also provides details about Fannie Mae’s Deed-for Lease program, which gives borrowers the option to remain in their home by becoming renters.

Fannie Mae has relaxed the limit of 30 REO listings per broker from any one Fannie Mae source, according to a report from REO Insider.

In June, Fannie imposed a strict limit of 30 REO listings per broker at any one time, and imposed a 25-mile restriction as well. The new rules elicited an immediate response from NAR and Keller Williams Realty.

In a letter to the president of Fannie Mae, Mark Willis, Keller Williams CEO, said that the REO listings limitation “will impede the objectives of both Fannie Mae and the real estate professionals who have invested heavily in people and systems to efficiently move REO properties. Clearly, the REO arena is an extremely specialized field, requiring dedicated professionals who possess distinct expertise and sufficient financial and organizational resources.”

Apparently, Fannie agreed and said it would approve special exceptions to the limit. Fannie also made the clarification that a broker could have 30 REO listings directly from Fannie Mae and take on additional listings from outsourcers without the need for approval from Fannie.

Complaints from lenders about a new Fannie Mae policy that requires lenders to secure a borrower’s “refreshed” credit report just prior to a home purchase has resulted in the lending giant pulling the new rule from its website.

According to a Washington Post report, Fannie Mae introduced a new policy this summer that “encourages” lenders to retrieve a borrower’s updated credit report just before a loan closes to see if the borrower has taken on extra debt since applying for the loan.

Lenders say the new policy creates logistical nightmares and could trip up home purchases at a time when consumers and investors are showing more confidence in the U.S. housing market.

In response, Fannie Mae says it is reviewing the policy, which it has removed from its website, and will offer additional guidance by the end of July. Fannie said it was never its intent to tell lenders they were required to perform the additional credit check on all loans, just a suggestion on a “tool they could use”.

The Post story noted that until Fannie Mae clarifies its position on “refreshed reports”, lenders are nervous about the potential consequences, including delays that could prove costly to buyers, especially if they are purchasing foreclosures or participating in a short sale. Those types of purchase contracts can carry harsh penalties for late closings.

Deputy Treasury Secretary Neal Wolin told the Securities Industry and Financial Markets Association (SIFMA) conference in New York recently that Treasury will not propose housing finance reform measures until 2011, and will probably do so in conjunction with the agency’s enforcement of the new financial reform law just passed by the Senate and due to be signed by President Obama next week.

However, several conference attendees question whether Treasury can implement housing finance reform at the same time it is implementing the most sweeping changes to the country’s finance system since the 1930s.

Both sides of the political aisle endorse the need for reform, especially for crippled lending giants Fannie Mae and Freddie Mac, but no one has yet developed a workable plan that would not inflict more harm on the still-sagging housing market.

Congress continues to be leery of implementing big changes that could upset the economic recovery since Freddie, Fannie and the FHA provide the majority of funding for American homebuyers.

Deputy Treasury Secretary Neal Wolin’s keynote address to the SIFMA conference can be read here.

As the result of a post-purchase review of mortgage loan files that identified a number of appraisal issues, Fannie Mae has updated its Selling Guide with additional appraisal guidance.

The new policy requirements and clarifications concerning existing lender requirements – which take effect on all mortgage applications dated on or after Sept. 1, 2010 — have been added to a number of appraisal sections of the Selling Guide, including:

• Inclusion of interior photographs in the appraisal report
• Lender changes to the appraised value and guidance on addressing appraisal deficiencies
• Appraiser selection criteria
• Sources of comparable market data
• Selection of comparable sales
• Communication under the HVCC
• Seller concessions
• Treatment of personal property
• Market Conditions Addendum to the Appraisal Report (Form 1004MC)

A copy of the Fannie Mae Selling Guide updates on appraisal policies can be found here.