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Breaking News: CFPB Research Discovers Confused Borrowers at Loan Closings!

Thursday, April 24, 2014 - Article by: bcahoone - Global Home Finance Inc - Message

It is "bring your kid to work" day. Some kids are fascinated with how much others make. They grow up to be underwriters. Others are fascinated with the ebb and flow of compensation, and the inherent inequality in government versus private market pay structures. They grow up to be reporters, or CEOs. Here's something that had both groups, and everyone in-between, buzzing yesterday: a story about how regulators make more than banking and mortgage folks: "Guess Who Makes More Than Bankers: Their Regulators." "The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. At the OCC, secretaries make on average $79,182 per annum. Motor vehicle operators (the agency's limo drivers) at the FDIC earn $82,130. Human resources management trainees at the CFPB make $110,759 a year." I need to brush off my resume!

Here's something that is kind of interesting, in a nerdy-mortgage way. Yesterday's MBA applications numbers showed that adjustable rate mortgages, as a percent of total dollars of loans was 18.6%. But as a percent of the total number of applications, ARMs were 8.5%. The MBA states that its numbers capture 75% of the retail originations out there, and putting aside the usual questions about how much of that 75% Wells, Citi, Chase, and BofA constitute, I suppose more higher balance loan applications are being received for ARMs than for lower balance loans. And as we know, plenty of those loans are going into the portfolios of those banks. After all, generally most lenders would rather do one loan for $800,000 than four loans for $200,000 since doing the one loan uses less overhead, and may price accordingly.

If I had a sense of humor, I would find this hysterical: let's create a problem by overregulating and creating an environment where lenders are terrified to make a mistake, and then "discover" the problem that said regulation created! The CFPB published a report which finds that many consumers are frustrated by the short amount of time they have to review a large stack of complex closing documents when finalizing a mortgage. The Bureau also released guidelines for an upcoming eClosing pilot project to assess how electronic closings can benefit consumers as they navigate the mortgage closing process. "Mortgage closings are often fraught with anxiety," said CFPB Director Richard Cordray. "We have taken action to address some of the problems consumers face, but more needs to be done. Our eClosing pilot project will provide valuable insight into how to improve the closing experience for consumers. "

The Bureau is now in the process of preparing for this rule to be implemented in August 2015. The report is the culmination of research conducted over the past year. As part of that research, in January 2014, the Bureau published a Request for Information about the challenges consumers face when closing on a home. The request asked for input from market participants, consumers, and other stakeholders on ways to encourage the development of a more streamlined, efficient, and educational closing process that would be beneficial to consumers.

The Bureau heard about three major pain points for consumers during the closing process: Not enough time to review, overwhelming stack of paperwork, and the complexity of documents and errors. Gosh, any single borrower, Realtor, or lender could have told the CFPB that in about 10 minutes.

The CFPB identified electronic closings, also known as eClosings, as one solution to address the problems. "eClosings are already happening in the market today, but adoption is low. There is a lot of misinformation about the legality and feasibility of eClosings. Today, the Bureau is releasing its guidelines for a pilot project to study eClosings. The pilot project, which will launch later this year, is designed to enable the CFPB to better understand the role that eClosings can play in addressing consumers' pain points."

It was recently brought to my attention, although I was looking for the break room at the time and didn't necessarily want to talk about home equity rescissions, that some LOS systems may claim that they provide all the "material disclosures" for the right of rescission but fail to outline what disclosures are supposed to be given to the borrowers. For purposes of the right of rescission in home equity plans, the five following disclosures are considered "material disclosure" requirements: the method of determining the finance charge and balance upon which the finance charge will be imposed, Annual Percentage Rate (APR), the amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan, the length of the draw period and repayment period, and, for both the draw period and repayment period, an explanation of how the minimum periodic payment will be determined and the timing of the payments, including the required disclosures if paying the minimum payment may or will result in a balloon payment.

Recently the Mortgage Bankers Association of the Carolinas addressed the "Dangers of a QM Loan Gone Non-QM". I quote, "Many lenders think repurchase or nonsalable, when they think of the possibility of a mistake on a QM loan that actually causes the loan to fall into Non-QM status. While this is certainly a significant problem, the issues with the sale or possible repurchase of the loan only represent the beginning of a lender's troubles. Indeed, the lender -- who has just essentially admitted to having botched the origination and/or underwriting of the loan by identifying it as something it is not -- is extremely vulnerable to a lawsuit under the ability to repay rules. Remember, the ATR rules require a lender to have a good faith belief the borrower can repay the loan. Yet, the existence of that good faith belief can be easily challenged where the lender's internal errors caused it to improperly classify the loan as QM when it really was a Non-Qm loan. Making the jump from a "mistake" to lacking a "good faith belief" will likely not be too difficult for a jury, unless the error is the result of some improper action by the borrower. Where the lender's internal processes fail, the finding of an ATR violation is extremely possible. For this reason, lenders must be especially careful when dealing with loans that have a higher propensity for QM determinative error. If those loans (e.g. at 42.9 Debt to Income Ratio) ultimately cross into non-QM territory, not only does the lender lose the safe-harbor and experience multiple problems relating to salability, the lender is likely stuck in an extremely vulnerable position if the loan ultimately defaults. As such, it would be wise to place extra scrutiny on those loans having the greatest risks of error. This is especially true when mistakes could be material to QM status."

Besides all this news, something else that caught everyone's attention was the New Home Sales numbers yesterday. New Home Sales dropped 14.5% in March to a 384,000 annualized pace, lower than any forecast of economists and the weakest since July and were down 13.3% from a year earlier. (It follows Tuesday's drop in Existing Home Sales.) But the median price of a new home reached its highest level ever in March at $290,000, the report said, up 11.2% from February. (And remember that sales of new homes represent a small portion of houses purchased in the U.S. and can be subject to large revisions.) Quicken Loans Vice President Bill Banfield offered, "The sharp decline in March's new home sales is further evidence that winter weather is not the catalyst for the sluggish housing data the past few months. The rise in interest rates and prices of new homes is leaving some potential buyers with sticker shock and ultimately prolonging their home search process." Bill - let's not forget loan level price adjustments, no inventory, the narrow QM box, and the fact that many don't want to leave their cozy 3.5% 30-yr fixed rate financed homes!

But the fixed-income markets took it as a sign of weakness in the economy, pushing prices higher and rates lower. Plus, fewer homes means fewer mortgages, which means less supply of MBS. So agency MBS prices improved about .250, and the 10-yr closed at 2.69%. But that was yesterday. Today we've had March Durable Goods (+2.0 expected, actually +2.6%) and Initial Claims (expected +310k, it was +329k up from 305k). Later is a $29 billion 7-year note auction and the NYFRB release of its weekly report on MBS purchases for the week ending April 23. After these early numbers rates are slightly higher with the 10-yr at 2.72% and agency MBS prices worse about .125.

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