The dynamics of the relationships between mortgage broker and wholesaler have been changed as a result of the housing crisis.
And for many on the mortgage broker side of the equation, those changes have not been for the better. Among the issues have been lender overlays, which are adding additional requirements to loan programs beyond what the secondary market investor demands.
That was one of the topics discussed by members of the board of directors of the National Association of Mortgage Brokers at the group’s recent NAMB/West conference in Las Vegas.
An earlier part of the discussion covered both the future of the mortgage broker industry as well as the future of NAMB as an organization.
The conference took place at a time of uncertainty regarding NAMB, as two of the organization’s leaders announced they were leaving.
Bill Howe, who had become president of the organization during the summer, resigned due to illness.
Also announced at the meeting was that NAMB chief executive Roy DeLoach was leaving to join a lobbying firm.
National Mortgage News met with Michael D’Alonzo, NAMB’s new president; DeLoach, the former chief executive who will represent NAMB at his new firm DC Strategies Group; new president-elect Don Frommeyer; secretary Ginny Ferguson; treasurer John Councilman; government affairs chairman Mike Anderson; and immediate past president Jim Pair. Representing NMN was senior housing correspondent Lew Sichelman.
SICHELMAN: The Federal Housing Administration is starting to complain about investor overlays. How do you all feel about overlays?
COUNCILMAN: FHA feels powerless to do anything about it other than simply advise them that this isn’t a great idea to get too carried away with these overlays. You have to remember that when you have a loan that doesn’t perform very well, it costs a lot of money to service it. I don’t know whether that is a part of it. If you assume a little more risk, FHA is very tough on people that have loans that do not perform well. Yet FHA is mandating that you must give loans to a certain group of people that may not have a record of loans performing very well. So you are caught in between the pressure of what FHA wants you to do and what other government regulations want you to do and what is going to be practical for your business. The answer to that has been, partially, overlays. And that may discourage, possibly, some people who are not as creditworthy from going out and getting a loan and FHA is not particularly happy with that. So there is a tension here that certainly exists.
FERGUSON: FHA will restrict someone if their percentage of defaults exceeds the norm for their immediate area. So you’re being penalized to do what they tell you do by providing loan avenues to folks that are less creditworthy and more apt to be delinquent on the loan that gets originated.
COUNCILMAN: In my situation, we write a lot of loans for one particular institution. They’ve encouraged us to reach out to minorities. We did precisely that and we picked up quite a few more defaults as a result of that. Now, I could be at risk for losing my FHA approval because of the fact that I reached out to minority borrowers. That seems like an inappropriate punishment for somebody who is trying to reach an underserved community. So we really have a tremendous tension here of trying to do what we think is right in serving the public and yet at the same time being slapped for doing that.
SICHELMAN: So what is the answer regarding overlays? Is it just a matter of waiting for the pendulum to swing?
ANDERSON: If you think about it, it is a shame the difference between somebody with a 639 credit score and somebody with a 640. One’s getting a loan and one’s not. I think that you need to look at each region differently. If you look at the South, Texas and Louisiana—Louisiana’s got the third worst credit scores in America, Texas has got second worst, yet we’re at the bottom of the list when it comes to foreclosures. So it is not all just the credit score. So that is where it comes into play about discrimination. It seems like we’re going back in time, we’re going back to the way it used to be many, many years ago when a lot of us in this room started originating loans. Back when I started, you got a credit report, you also got a letter of explanation. That’s out of the picture now. You are a number, you are a score. There are lots of different reasons why somebody’s score can go down. You have the job loss bucket. How many of those loans are in default because they lost their jobs? It doesn’t matter what your credit score is. If you lose your job, you’re not going to make the payments. So I think we need to re-evaluate this whole idea of loan level price adjustments and overlays based on credit scores.
COUNCILMAN: There is one other thing that FHA’s done that still bothers all of us just a little bit. That is the streamlined refinance, where we have an individual who has a loan already which is performing. Now I understand there was a time when you could make a little extra as a borrower before you were going into default because their was the ability to finance everything in and actually pad your pocket a little bit before you were getting ready to default. That has gone by the wayside. Now we have people, who qualify for their FHA loan, that have been making perfect payments, and suddenly they don’t meet the criteria just to simply have their interest rate lowered. There is something fundamentally wrong with that, and that has to be changed. Because these people are very likely going to default if they can’t get a lower interest rate and they will just walk away from the loan.
D’ALONZO: That is the same with Fannie Mae and Freddie Mac. The same overlays are pre-empting from getting refinances where it would help them out dramatically. But if you have a 640 credit score and you’re trying to go conventional, you’re going to have a tremendous amount of problems. Mike’s got a GFE example where the borrower wants a cash out refinance and you have 650 score, the add-ons could be three-and-one-half, four points, on to the rate, on to the cost of the loan. A person could save $300, $400 a month but they can’t because of the overlays on the GFE. That is a huge issue we have been dealing with for four or five years now.
SICHELMAN: The mortgage bankers are very concerned about risk retention. Are you guys worried about that at all?
DELOACH: When that went through the Dodd-Frank bill we kept an eye on it. It all relates to the definition of qualified residential mortgage and that debate is starting. What types of loans are going to be inside that safe harbor to the 5% risk retention? What we are worried as the debate starts is that going to be defined so narrowly that is knocks out more middle-market players, so that brokers only have a few, five or less, lenders to sell to? Will brokers have to hold 5%? No, they are not going to do that. That is not the part we’re worried about. The part we’re worried about is how does it affect the people we do business with.
COUNCILMAN: We believe a wide marketplace is a better marketplace and if this industry gets reduced to where there are only five people doing mortgages, that is a dangerous thing, we think, for everybody concerned, even more importantly for consumers than what happens to us. Because if you have five people offering loans, the entire structure of everything we have in the regulatory scheme and consumer protection are totally invalidated. Things like the current GFE would give carte blanche to somebody to charge anything that they wanted without disclosing anything about where the items were breaking down or shaking out. The whole regulatory scheme is based on a wide and vibrant market. If we do away with that, if we break it down to just a few players, consumers are at tremendous risk.
ANDERSON: The Federal Reserve Bank of Kansas City created a chart on foreclosures by loan type, a 10-year history from 1999 to 2008. The bottom line was fixed-rate mortgages, which should be a qualified mortgage. Up here were the exotic loan types. They are trying to define a qualified mortgage and they are trying to throw everything in the bucket, when this is what caused the problem to begin with, the exotic loans.
SICHELMAN: A lot of borrowers are in trouble. Do any of them come back to you for help? What can you do for them, what do you do for them?
D’ALONZO: We have 15,000-16,000 names in my client base and over the years there have been issues and their credit is not that great, so they come back to us and do look for help. We try to help them, we’ll go over the credit report with them, we’ll try to give them advice on what they can do. We can go to our credit provider and do “what if” simulators—if you pay this off, what will it do to your credit, if you pay that off, what will it do to your credit—so we do work as consultants in that area. We try to maintain our customer base. That is one of the services a mortgage broker offers.
FERGUSON: Fortunately, knock on wood, I have not had a whole lot of my clients get into any kind of issue because I’ve used fixed-rate product forever. But they have friends that they have referred to me, who didn’t necessarily utilize us way back when and have gotten into trouble. And while I don’t do loan modifications, I will sit down and help someone with paperwork and forms that they can use to help themselves.
