Category Archives: Mortgage Banking

Advertising Reverse Mortgages ? Beware !

Seniors, especially older retirees who haven’t worked for years and whose income from savings or investments may be limited, can be house rich but cash poor. They’ve paid off most or all of their home loan. Yet they can find themselves in a financial bind when they need more money than they have available.

A reverse mortgage is a type of mortgage loan that can help those in such circumstances. It’s intended for homeowners age 62 or older with significant home equity.1

With a reverse mortgage, homeowners can borrow money against the value of their homes and take the money in various ways. For example, they can obtain the loan as either a lump sum or a regular and fixed monthly payment. Or it can be delivered to them as a line of credit.

Importantly, the money loaned to them becomes due only after they die, move out of the home permanently, or sell it. [1]

It’s an appealing financial proposition when lack of cash is, or may become, a persistent problem. However, there have been some troubling issues related to how reverse mortgages are advertised.

Read on to learn about the federal and state regulations that have been put in place to protect consumers.

KEY TAKEAWAYS

Several federal laws—including the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010—control the way that reverse mortgages can be advertised.

These rules forbid deceptive claims in mortgage advertising and other commercial communications sent to consumers by mortgage brokers, lenders, services, and advertising agencies.

A number of states have also passed laws to control reverse mortgage advertising.

Despite these rules, the Consumer Financial Protection Bureau (CFPB) has raised concerns about how reverse mortgages are advertised.

Consumers should be wary of advertisements for reverse mortgages that present this product as a source of income or a government benefit; reverse mortgages are loans and should be treated as such.

Problems With Reverse Mortgage Advertising

There always seem to be an endless plague of scams that target seniors and their money. Reverse mortgages have been included in these.
That aside, reverse mortgages have inherent risks which every potential borrower must consider. For example, it’s possible that after a homeowner’s death, the remaining spouse or children might lose the family home. Potential fees (closing and ongoing) can affect your liquidity, as well.

Harmful Advertising

However, in addition to the product’s legitimate potential pitfalls, there also have been instances in which reverse mortgages have been described or advertised with false claims.[1]

For example, a California-based reverse mortgage broker falsely told potential customers that a reverse mortgage would mean no payments. The broker further claimed that borrowers would not be subject to costs associated with refinancing a reverse mortgage.[2]

The fact is, people who take out a reverse mortgage do incur a range of costs, including fees for closing, appraisals, title insurance, and property, insurance, and maintenance fees.[3]

Because of consumer confusion, some states have passed laws that prohibit what lenders can and can’t state when they promote reverse mortgages. These rules are in addition to federal regulations that control how mortgages can be advertised.

Moreover, the CFPB has repeatedly raised concerns about how reverse mortgages are advertised. In a 2015 report, the agency stated that after viewing advertisements for reverse mortgages, “consumers were confused about reverse mortgages being loans, and they were left with false impressions that they are a government benefit or that they would ensure consumers could stay in their homes for the rest of their lives.”[4]

Federal Laws on Reverse Mortgage Advertising

Mortgage advertising is a heavily regulated part of the financial services market. In part, that’s because property is usually the single biggest purchase that most people will ever make.

Broad Regulation

To prevent unscrupulous lenders from taking advantage of borrowers, mortgage advertising is regulated by federal law. The most important of these laws are the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.[2][5][6][7]

The MAPs Rule, also known as Regulation N, controls the way mortgage services as a whole are advertised, making deceptive claims illegal.[5]

Specific FHA Reverse Mortgage Regulation

In addition, there are rules that apply specifically to reverse mortgages. The vast majority of reverse mortgages in the United States are home equity conversion mortgages (HECMs), which the Federal Housing Administration (FHA) insures.

The FHA regulates the advertising of FHA-backed loans and has specific rules for reverse mortgages. Under FHA rules, lenders must explain all requirements and features of the HECM program in clear, consistent language to consumers.[3]

Federal laws relating to reverse mortgage advertising are overseen by the Federal Trade Commission (FTC) and the CFPB, both of which have taken action against many mortgage lenders for false claims associated with reverse mortgage advertising.[8][2]

State Laws on Reverse Mortgage Advertising

In addition to federal legislation, several states have passed laws that limit the way in which reverse mortgages can be advertised.

Some of these laws, such as those in North Carolina and Tennessee, aim to further restrict the ability of reverse mortgage lenders to misrepresent how these loans work.[9][10]

Others, such as the laws in effect in Oregon, define and require a number of disclosures—important pieces of information that the lender must communicate to the potential borrower—and specify that these must be prominent and not just appear in the fine print.[11]

A number of states, rather than prohibiting certain types of advertising, have sought to protect consumers by enhancing the counseling session that all potential HECM borrowers must attend.[12]

The U.S. Department of Housing and Urban Development (HUD) requires that all prospective HECM borrowers complete this counseling session. HUD requires the counselors to detail the pros and cons of taking out a reverse mortgage.[3][13]

How Does the Government Control Reverse Mortgage Advertising?

Reverse mortgage advertising is relatively strictly controlled, and a number of federal laws prohibit lenders from making deceptive claims in their advertising. These include the Mortgage Acts and Practices Advertising Rule (Regulation N), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010.

What Is an Example of Reverse Mortgage False Advertising?

The CFPB has found that reverse mortgage advertisements left consumers confused about reverse mortgages being loans, whether they were a government benefit, and whether they ensured that consumers could stay in their homes for the rest of their lives.

Who Regulates Reverse Mortgage Companies?

At the federal level, the CFPB, the Department of Housing and Urban Development (HUD), and the Federal Trade Commission (FTC) regulate reverse mortgage lenders’ activities.[8]
Federal Trade Commission, Consumer Advice. “Reverse Mortgages.”

Additionally, some states have passed laws that control how reverse mortgages are advertised.

The Bottom Line

A number of federal and state laws control the way that reverse mortgages can be advertised. They make it against the law for mortgage brokers, lenders, servicers, and advertising agencies to make deceptive claims in mortgage advertising and other commercial communications sent to consumers.

Despite these rules, the CFPB has been concerned about the way that reverse mortgages are promoted. Therefore, consumers should be wary of advertisements that present this product as a source of income or a government benefit. Reverse mortgages are a loan, and they should be treated as such.

Source:https://www.investopedia.com/what-s-prohibited-in-reverse-mortgage-advertising-5235459

Prevent Mortgage Fraud – Verify, Verify, Verify

Federal prosecutors said the “sheer volume of false documents and material misrepresentations’’ concocted to deceive lenders in the scheme involving cousins Jacob and Aron Deutsch “is staggering.”

in U.S. District Court. Aron Deutsch, 63, of Monsey was fined $1 million and put on probation for five years.

Under their guilty pleas to federal fraud charges, the two men admitted to a scheme in which they acquired 17 multi-family housing complexes across the city between 2016 and 2021 by creating hundreds of phony financial documents to obtain 24 separate mortgages.

Among other things, Jacob Deutsch admitted creating an elaborate ruse that convinced lenders that a empty, 24-unit apartment complex the cousins succeeded in buying at 16 Evergreen Ave. was not only fully occupied, but was occupied by tenants paying inflated rents. The properties ran from Washington Street south of downtown, through the West End and onto Asylum Hill.

“All told, he fraudulently induced numerous victim financial institutions to finance the purchase of assets from which he is now profiting, fraudulently procuring 24 mortgage loans totaling nearly $50 million dollars, and shifting the risk of catastrophic loss onto the victim financial institutions and the secondary markets on which they rely,” the U.S. Attorney’s office said of Jacob Deutsch in a court filing.

Because of the stability of the Hartford retail market over the period of the conspiracy, prosecutors said lenders — four banks and secondary mortgage market players like Fannie Mae — suffered no significant losses.

After realizing they would be prosecuted, the cousins, who operated B H Property Management on Wethersfield Avenue, claimed they were able to sell off the properties at break-even prices, meaning there was no loss to lenders. Federal prosecutors claimed the lenders lost about $3.5 million on $50 million in loans.

The mortgage fraud conspiracy unraveled when federal housing authorities decided that the mortgage application and due diligence materials associated with the 16 Evergreen Ave. purchase were “wildly false,” prosecutors said.

Among other things, the loan application for 16 Evergreen to the lender CBRE Capital Markets contained a rent roll showing gross yearly rental income of $280,000 when, in reality, the complex was empty.

To support the phony application, prosecutors said Jacob Deutsch admitted creating an elaborate — but phony — list of tenants, accompanied with their forged signatures on phony leases and fake moving in dates. He then hired a company to “stage” empty apartments with furniture, clothing and other furnishings before making them available for inspection by the lender.

When the Federal Home Loan Mortgage Corporation, to which CBRE planned to sell the loan, wanted additional proof of occupancy, prosecutors said Jacob Deutsch arranged for an employee to collect dozens of electric utility bills, doctor them to correspond with names on the fake rent roll and send them to CBRE. He was accused of doing the same thing with natural gas bills.

Jacob Deutsch next fabricated a banking record that purported to show deposits to his company’s Evergreen Avenue rent account, complete with copies of money orders, cashier’s checks and stamped envelopes. Prosecutors said Aron Deutsch purchased the cashier’s checks.

Later, the cousins decided to refinance 16 Evergreen Ave. with a new lender and reconciled the new loan application with the phony records associated with the first one.

Similar kinds of frauds were associated with loans for other properties around the city.

Prosecutors said Jacob Deutsch falsely inflated the occupancy rate of another of the partnership’s buildings, at 12 Willard Street, by listing employees as tenants — without their knowledge.

The partnership also lied to lenders about improvements to properties. It created invoices showing $526,000 in improvement at 1650-1680 Broad St., when actual work involved only the installation of a $38,000 boiler system, prosecutors said.

Prosecutors said the cousins used the fraudulent loan proceeds to acquire new buildings and make improvements to those previously acquired.

Source:https://www.courant.com/2024/01/09/feds-ny-landlords-obtained-50m-in-fraudulent-mortgage-loans-to-build-hartford-real-estate-portfolio/

Fair Lending Compliance in the Midst of Mortgage M&A

Today’s high interest rates and historically low levels of housing availability create a difficult business environment for residential mortgage lenders. This is especially true for non-bank lenders that lack the larger balance sheets and diversified revenue channels of their bank competitors.

Prolonged stress may lead mortgage lenders to consider strategic transactions, whether to raise capital, sell to a strategic buyer, or acquire a distressed competitor. When evaluating these opportunities, lenders should be aware that fair lending scrutiny is rising. They should carefully consider risk profiles of the target and combined institution to minimize post-transaction compliance issues.

Access Priorities

The Biden administration’s position is that federal government “has a critical role to play in overcoming and redressing this history of discrimination and in protecting against other forms of discrimination by applying and enforcing Federal civil rights and fair housing laws.”

Federal agencies with fair lending enforcement authority have been aggressively following this policy directive, including those responsible for supervising mortgage lenders’ compliance.

The Department of Justice “vigorously enforces federal fair lending laws to protect equal access to credit,” and recent enforcement trends confirm that non-banks face multiple areas of heightened fair lending risk.

Perhaps most significantly, in 2021, Attorney General Merrick Garland launched a DOJ initiative to combat redlining—or failing to make credit available in minority communities—in partnership with the Consumer Financial Protection Bureau and other agencies.

The DOJ announced it would expand investigations of “potential redlining to both depository and non-depository institutions,” and made public a consent order resolving redlining allegations against a non-bank—the first of its kind.

Since then, mortgage lenders responsible for complying with fair lending laws have been notified that they must effectively monitor and manage redlining risk to ensure credit is made available in both minority and non-minority communities.

Property valuations are another increased fair lending risk area. In 2021, the Biden administration initiated a task force to combat bias in home valuations. The DOJ made its position clear in a statement of interest it filed in lawsuit brought by individual plaintiffs.

In Connolly v. Lanham, an online mortgage lender allegedly violated fair lending laws by relying on an appraisal conducted by an appraiser who supposedly lowered the home valuation because of the homeowners’ race. The DOJ argued it is illegal for a mortgage lender to rely on an appraisal it knows or should know is discriminatory.

The CFPB most recently reported to Congress that it “focused much of its fair lending supervision efforts on mortgage origination” issues. Such issues include redlining, potential discrimination in underwriting and pricing, steering applicants on a prohibited basis, and integrity of demographic data reported by lenders under the Home Mortgage Disclosure Act.

Fair Lending

Current economic conditions present increased merger and acquisition opportunities for mortgage lenders. With this in mind, lenders must take a proactive approach when assessing fair lending risk. Every buyer of a mortgage lender should prepare to confront increased risk around fair lending in the post-transaction phase as well.

It’s critical to assess the target mortgage lender’s system of managing compliance around fair lending, as the surviving entity will inherit the target’s fair lending problems, if there are any. Such assessments can help identify potential compliance management system weaknesses and enable the surviving mortgage lender to prepare an action plan ahead of the transaction.

Common post-acquisition enhancements to fair lending programs include fair lending training, modifying fair lending policies, implementing statistical fair lending monitoring of underwriting, pricing, product steering, and minority-area lending, and reporting risk to the board.

Best practices also include evaluating any new service area or market areas where the target lender operates, ensuring the acquiring institution can continue serving credit needs of minority and non-minority communities within those areas. Buyers should consider the target lender’s product offerings, loan officers, and physical locations from a fair lending perspective.

They also should ensure the fair lending impacts of any contemplated post-closing discontinuations of products or services, or closures of brick-and-mortar locations, are thoroughly evaluated and documented.

Comprehensive due diligence may include reviewing the target lender’s fair lending monitoring reports on underwriting, pricing, and geographical distribution of mortgage loans. This step can help evaluate trends and anticipate possible adverse impacts on the surviving lender.

When negotiating an acquisition, buyers should seek to negotiate protections into their transaction documents—against fair lending-related issues that might arise between signing and closing, or liabilities that might arise after closing.

Being thoughtful about issues—such as conditions to the buyer’s obligation to close, how and when the purchase price is payable and released, and seller indemnities for post-closing liabilities—can significantly mitigate these risks to a buyer.

Ideally, the buyer’s position on these issues will be informed by comprehensive due diligence on the fair lending risks associated with the target’s existing business, and the anticipated combined organization’s post-closing business plan.

The stress many mortgage lenders are facing in the current environment creates opportunities for strategic investors, opportunistic buyers, and sellers looking for an exit.

When evaluating and negotiating their deals, parties need to bear in mind that fair lending is a government policy priority, and risk is therefore heightened. This risk can be mitigated by careful consideration of fair lending issues during due diligence and proper structuring of the transaction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Source:https://news.bloomberglaw.com/ip-law/due-diligence-on-fair-lending-helps-improve-m-a-transactions

Processing Mortgage Payments – BEWARE

WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) issued an order against ACI Worldwide and one of its subsidiaries, ACI Payments, for improperly initiating approximately $2.3 billion in unlawful mortgage payments transactions. ACI’s data handling practices negatively impacted nearly 500,000 homeowners with mortgages serviced by Mr. Cooper (formerly known as Nationstar). By unlawfully processing erroneous and unauthorized transactions, ACI opened homeowners to overdraft and insufficient funds fees from their financial institutions. Today’s order requires ACI, among other things, to pay a $25 million civil money penalty.

“The CFPB’s investigation found that ACI perpetrated the 2021 Mr. Cooper mortgage fiasco that impacted homeowners across the country,” said CFPB Director Rohit Chopra. “While borrower accounts have now been fixed, we are penalizing ACI for its unlawful actions that created headaches for hundreds of thousands of borrowers.”

ACI (NASDAQ:ACIW) is a publicly traded firm headquartered in Elkhorn, Nebraska. The company offers payment processing services across a wide range of industries including utilities, student loan servicing, healthcare, education, insurance, telecommunications, and mortgage servicing. ACI counts more than 6,000 firms as customers, and the company claims to process more than 225 billion consumer transactions annually. The company processes mortgage payments through the Automated Clearing House (ACH) network. For 2022, ACI reported revenue of $1.422 billion and net income of $142 million.

Mr. Cooper was one of ACI’s largest mortgage servicing customers until at least 2021. Mr. Cooper services the mortgages of more than four million borrowers and collects their monthly mortgage payments. Many homeowners with mortgages serviced through Mr. Cooper chose to schedule their monthly mortgage payments using ACI’s Speedpay product, which allowed the company to automatically transfer homeowners’ authorized mortgage payments from their personal bank accounts to Mr. Cooper.

On Saturday, April 24, 2021, impacted account holders began noticing inaccuracies in their account balances. Immediately, people began experiencing negative financial consequences. At one bank, for example, more than 60,000 accounts experienced more than $330 million in combined unlawful debits by that morning. Among these account holders, approximately 7,300 had their available balances reduced by more than $10,000—overnight.

The CFPB found that ACI’s actions violated federal consumer financial protection laws, including the Consumer Financial Protection Act and the Electronic Fund Transfer Act and its implementing rule, Regulation E. Specifically, the company harmed homeowners by:

Illegally initiating withdrawals from borrower bank accounts: ACI initiated approximately 1.4 million ACH withdrawals on behalf of Mr. Cooper from homeowners’ accounts on April 23, 2021, without a valid written authorization. This included initiating electronic fund transfers on days when they were not scheduled and initiating multiple transfers from the same accounts on the same day.

Improperly handling sensitive consumer data: As one of the largest global providers of payment services, ACI handles sensitive financial data of millions of homeowners and other consumers. The unlawful transactions, and the subsequent harm they caused, occurred as a direct result of the company’s inappropriate use of consumer data in its testing process. Specifically, the company failed to establish and enforce reasonable information security practices that would have prevented files created for testing purposes from ever being able to enter the ACH network.

This is the CFPB’s first action addressing unlawful information handling practices in processing mortgage payments. Last year, the CFPB issued an enforcement circular describing how shoddy data handling practices can constitute violations of the Consumer Financial Protection Act.

Enforcement Action

Under the Consumer Financial Protection Act, the CFPB has the authority to take action against companies that violate federal consumer financial protection laws, including engaging in unfair, deceptive, or abusive acts or practices. The CFPB also has authority to enforce the Electronic Fund Transfer Act and its implementing rule, Regulation E.

On Friday, April 23, 2021, ACI conducted tests of its electronic payments platform. But instead of using deidentified or dummy data in its tests, ACI used actual consumer data it had received from Mr. Cooper, which included names, bank account numbers, bank routing numbers, and amounts to be debited or credited. During its performance testing, ACI improperly sent several large files filled with Mr. Cooper’s customer data into the ACH network, unlawfully initiating approximately $2.3 billion in electronic mortgage payment transactions from homeowners’ accounts. None of the nearly 500,000 impacted borrowers anticipated, authorized, or were aware of these transactions until after they had been processed by their respective banks.

The order requires ACI to:

Stop its unlawful practices: ACI must adopt and enforce reasonable information security practices, and is prohibited from processing payments without obtaining proper authorization. It is also prohibited from using sensitive consumer financial information for software development or testing purposes without documenting a compelling business reason and obtaining consumer consent.

Pay $25 million in penalties: ACI is required to pay a $25 million penalty to the CFPB, which will be deposited into the CFPB’s victims relief fund.

Read today’s order.

Consumers can submit complaints about mortgage products and other financial products and services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their companies have violated federal consumer financial protection laws, including the Electronic Fund Transfer Act and its implementing rule, Regulation E, are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.

Source: https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-aci-worldwide-illegally-processing-2-3-billion-mortgage-payments-homeowners-did-not-authorize/

Current Status of Mortgage Rate Buydowns

Summary

The housing boom has lasted longer than housing bears have expected, with shares of homebuilders seeing significant gains.

The iShares Home Construction ETF is up 33% for the year and SPDR S&P Homebuilders ETF has a 27% YTD return.

Why won’t the housing market turn when every economic indicator says it should? I’d argue that new home sales have held up largely because of homebuilders offering buyers teaser rates.

Homebuilders are using short-term mortgage buydowns to attract buyers, but this could lead to chaos as payments automatically reset to higher amounts. This is particularly risky for jumbo mortgages.

I estimate that 600,000 to 700,000 households could face rate resets in the next year, which could quietly put pressure on the economy and housing market.

Recent data shows what was a surprisingly strong spring selling season for homebuilders and an existing home sales market that has rebounded in price, even amidst plunging volumes. For shares of homebuilders, this means that the pandemic boom in new construction has carried on longer than most analysts thought it would. The iShares Home Construction ETF (BATS:ITB) is up roughly 33% for the year, and the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) also clocks in at a 27% YTD return. Over the full business cycle, however, publicly traded homebuilders are lousy businesses. Homebuilders are highly leveraged, highly cyclical businesses. Historically, they’ve had poor returns on capital compared with the market at large and tend to go bust during recessions– a fact that is somewhat hidden by survivorship bias when looking at historical returns.

More recently in 2022, this led to the question of whether homebuilders trading for 5x peak earnings or so were good value investments or value traps. I’ve repeatedly taken the position that they’re value traps, but now here we are with homebuilder stocks having rocketed back to all-time highs since the October lows, along with many of the most speculative corners of the market.

The one factor that I massively underestimated was the prevalence of short-term mortgage rate buydowns provided by homebuilders. How these typically work is that builders will buy down borrowers’ mortgage rates for 1-3 years, at which point the mortgage resets to a higher monthly payment. Common forms include 3-2-1 (i.e. 3% reduction in interest in year 1, 2% in year 2, and 1% in year 3), and 2-1.

Research shows that around 75% of builders are using them, with the greatest concentrations of use in Texas and the Southwest. On a $500,000 loan with a 2-1 and prevailing mortgage rates at 7%, the monthly payment would be $2,684 in year 1, $2,997 in year 2, and $3,326 in year 3. By and large, this allowed builders to sell homes that would have piled up by offering teaser payments that reset to levels that are technically legal, but often at rather uncomfortable debt-to-income ratios when combined with property tax increases and skyrocketing utility bills. Throw in some cheap construction and 110-degree summer temperatures, and you have a recipe for potential regret, especially for out-of-state buyers.

Fannie Mae and Freddie Mac restrict buydowns that exceed these thresholds (because of the potential for fraud and abuse), but highly publicized troubles at lenders like First Republic (OTCPK:FRCB) show that the jumbo market has seen some more exotic underwriting. The unspoken implication here is that lenders, real estate agents, and builders are selling these to buyers with the implicit or explicit suggestion that they should refinance down the road and lower their payments, (a.k.a. the infamous “date the rate, marry the house” sales pitch). That works if interest rates go down, but interest rates have actually gone up and the Treasury now has a boatload of deficit-financed debt to sell, which threatens to push mortgage rates above 8% by late summer. Fannie Mae and Freddie Mac at least force buyers to qualify for the payments after they reset, but it’s not clear whether the jumbo market has the same level of protection.

Mortgage buydowns may be innovative for builders, but they’re not newly invented. One of the untold stories of the 2008 financial crisis was the role that homebuilder rate incentives had in fueling the crisis. Adjustable rate mortgages get all the attention for massive balloon payments, but the story in jumbo mortgages was actually quite similar. Many, many buyers who bought in 2005 and 2006 had their mortgages reset in 2008 and 2009 after their rate buydowns expired, and their assumptions about mortgage rates turned out to be wildly wrong. In fact, jumbo mortgage rates hit nearly 8% in early 2009. That’s because jumbo mortgages are heavily dependent on credit, which rapidly tightened then starting in 2007 and also is tightening now. Only after the economy recovered did mortgages start to get cheaper again.

This means that taking out a jumbo mortgage because you think you can refinance it later is riskier than you think! It’s smart for homebuilders to offer these and it extended the business cycle long enough for investors to make profits. However, these rate resets are potentially disastrous for buyers making huge economic bets with scarce information about whether they’ll truly be able to refinance for cheaper rates.

Jumbo Mortgage Rates- 2007-2013

Different data sources on mortgages will generally show slightly different numbers, the main reason being that many mortgage rate surveys don’t count points charged to acquire the loan. But jumbo mortgage rates rose in the early stages of the 2000 recession. And throughout the 2008 recession, we see here that jumbo mortgages actually rose significantly.

So how many people have these rate buydowns? A minority of builders do buy the rate down for the whole 30-year term and a few buyers pay cash, so I think a fair estimate is that roughly 50% of new home buyers have rate buydowns that are 3-2-1 or faster. Roughly 600,000 new homes were sold in 2022, and this year is tracking for about 800,000. Divide by two, and we can ballpark that maybe 600,000 to 700,000 households have rate reset balloon payments coming due over the next couple of years. It may not sound like much, but that’s a figure roughly equal to all of the homes in the US currently listed for sale. Since housing supply for sale is low compared to the size of the overall housing stock, it could change the supply/demand dynamics considerably. My guess is that this will start to quietly become a problem for new homeowners, as we’re just now starting to see rates reset from last summer when mortgage rates first hit 6%.

For jumbo buyers, these can amount to payment hikes of $1,000 to $2,000 per month. Jumbo buyers aren’t likely to get much sympathy from the Fed or Treasury either, as encouraging marginal holders to sell is part of the process of bringing supply and demand back into balance. The strategy of taking out a mortgage and trying to refinance is somewhat better for those buying lower-priced homes with conventional mortgages. At lower mortgage amounts, the government is more likely to intervene to help you if things go south. Still, I wouldn’t expect a whole lot of help without unemployment rising sharply, in which case many buyers will need to sell anyway, driving down prices. Now add student loans restarting, with 40 million borrowers affected. Interesting times indeed.

The Cure For High Prices Is High Prices

While homebuilders have done well, the looming oversupply in rental housing and falling margins for homebuilders will continue to accelerate. If current trends hold, new homes could soon be cheaper than existing homes, which almost never happens. Builders are aggressively discounting homes, including using rate buydowns, and it’s allowing them to offload houses.

But as a recent report from Reventure Consulting shows, much of this new construction is far out from existing cities, which may help explain why there has been relatively little pressure on the existing home sales market so far. For example, this is a map of new construction in North Texas, where much of the new construction is an hour or longer drive to the city itself. In the 2008 real estate bubble, these kinds of homes were the hardest hit, particularly in areas like Arizona, Las Vegas, and the Inland Empire of California.

But with the median prices of new homes falling from $497,000 at the pandemic peak to $416,000, it’s only a matter of time before buyers start responding in earnest to the market signal they’re being given. As prices for new construction continue to fall, it’s going to pressure the existing home sales market because the two are nearly perfect substitutes. And ask yourself, with new home prices already falling to near the levels of existing homes, who’s going to buy the next 1.7 million units under construction, and at mortgage rates of 7% or more?

Homebuilders clearly had some hefty profit margins to work with in 2022 when they began discounting inventory. But the next 1.7 million houses under construction will be a much tougher proposition to sell or rent. Rents are now falling, interest rates continue rising, and there’s little long-term demographic demand for housing in excess of what’s already been pulled forward. While housing market bears may have been early in calling a downturn, underlying demographic trends likely mean they won’t be wrong about the ultimate destination.

With these in mind, I’m highly skeptical of stocks like Lennar (LEN) now trading for 10.5x earnings, D.R. Horton (DHI) trading for 11.5x earnings, and even from Toll Brothers (TOL) trading for 7.8x. If builders want to buy down mortgages for the full 30-year term for borrowers it’s fine, but doing so affects margins similarly to how price cuts would. When most of the industry is offering short-term teaser rates to new home buyers, the very clear risk is that the houses they sell come back onto the market when the mortgages reset, just like they did in the 2000s, but on a smaller scale. This, combined with the massive wave of construction hitting the market means homebuilder profit margins likely won’t stop falling when they hit 0%.

Key Takeaways

The housing market has been surprisingly strong in 2023, despite the ratio of a typical mortgage payment to a typical wage reaching a level surpassing the 2000s housing bubble.

One reason that the housing market hasn’t turned down as sharply as feared may be due to widespread mortgage rate buydowns by builders.

Many buyers are rolling the dice and betting that they can refinance in a couple of years for a lower interest rate before their payments reset, but jumbo mortgage rates in particular tend to rise, not fall during a recession.

Will home buyers who bought in 2022 with mortgage buydowns sell en masse when their payments reset this year and next? We’ll see.

It remains to be seen whether the economy will achieve a soft landing, but the widespread existence and adoption of mortgage rate buydowns are likely to exacerbate the swings of the business cycle. Count this as one more data point suggesting a soft landing is less likely than pundits think.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Source : https://seekingalpha.com/article/4617622-us-homebuilder-mortgage-rate-buydowns-starting-to-expire

Shared Appreciation Mortgage Loans Update

The Maryland governor recently signed HB 1150 (the “Act”), which subjects certain shared appreciation agreements (SAAs) to the Maryland Mortgage Lender Law. Under the Act, the term “loan” now “includes an advance made in accordance with the terms of a shared appreciation agreement.” An SAA is defined by the Act to mean “a writing evidencing a transaction or any option, future, or any other derivative between a person and a consumer where the consumer receives money or any other item of value in exchange for an interest or future interest in a dwelling or residential real estate, or a future obligation to repay a sum on the occurrence of [certain] events,” such as an ownership transfer, a repayment maturity date, a consumer’s death, or other events. The Act specifies that a loan is subject to the state’s mortgage lender law if the loan is an SAA and “allows a borrower to repay advances and have any repaid amounts subsequently readvanced to the borrower.”

Interim guidance released by the Maryland Commissioner of Financial Regulation further clarifies that SAAs are mortgage loans, and that those who offer SAAs to consumers in the state are required to obtain a Maryland mortgage lender licensing unless exempt. Under the Act, the commissioner will issue regulations addressing enforcement and compliance, including SAA disclosure requirements. The Act takes effect July 1. However, for SAA applications taken on or after July 1 (and until regulations are promulgated and effective), the commissioner will not cite a licensee for disclosure requirement violations, provided the licensee makes a good faith effort to give the applicant specified information within ten days of receiving an application. Licensees will be required to provide the information again at least 72 hours before settlement if the actual terms of the SAA differ from those provided in the initial disclosure.

AI and Automated Mortgage Loan Decisions – An Update

WASHINGTON, D.C. – Four federal agencies jointly pledged today to uphold America’s commitment to the core principles of fairness, equality, and justice as emerging automated systems, including those sometimes marketed as “artificial intelligence” or “AI,” have become increasingly common in our daily lives – impacting civil rights, fair competition, consumer protection, and equal opportunity.

The Civil Rights Division of the United States Department of Justice, the Consumer Financial Protection Bureau, the Federal Trade Commission, and the U.S. Equal Employment Opportunity Commission released a  joint statement outlining a commitment to enforce their respective laws and regulations.

All four agencies have previously expressed concerns about potentially harmful uses of automated systems and resolved to vigorously enforce their collective authorities and to monitor the development and use of automated systems.

“Technology marketed as AI has spread to every corner of the economy, and regulators need to stay ahead of its growth to prevent discriminatory outcomes that threaten families’ financial stability,” said CFPB Director Rohit Chopra. “Today’s joint statement makes it clear that the CFPB will work with its partner enforcement agencies to root out discrimination caused by any tool or system that enables unlawful decision making.”

“We have come together to make clear that the use of advanced technologies, including artificial intelligence, must be consistent with federal laws,” said Charlotte A. Burrows, Chair of the EEOC. “America’s workplace civil rights laws reflect our most cherished values of justice, fairness and opportunity, and the EEOC has a solemn responsibility to vigorously enforce them in this new context. We will continue to raise awareness on this topic; to help educate employers, vendors, and workers; and where necessary, to use our enforcement authorities to ensure AI does not become a high-tech pathway to discrimination.”

“We already see how AI tools can turbocharge fraud and automate discrimination, and we won’t hesitate to use the full scope of our legal authorities to protect Americans from these threats,” said FTC Chair Lina M. Khan. “Technological advances can deliver critical innovation—but claims of innovation must not be cover for lawbreaking. There is no AI exemption to the laws on the books, and the FTC will vigorously enforce the law to combat unfair or deceptive practices or unfair methods of competition.”

“As social media platforms, banks, landlords, employers, and other businesses that choose to rely on artificial intelligence, algorithms and other data tools to automate decision-making and to conduct business, we stand ready to hold accountable those entities that fail to address the discriminatory outcomes that too often result,” said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division. “This is an all hands on deck moment and the Justice Department will continue to work with our government partners to investigate, challenge, and combat discrimination based on automated systems.”

Today’s joint statement follows a series of CFPB actions to ensure advanced technologies do not violate the rights of consumers. Specifically, the CFPB has taken steps to protect consumers from:

Black box algorithms: In a May 2022, circular the CFPB advised that when the technology used to make credit decisions is too complex, opaque, or new to explain adverse credit decisions, companies cannot claim that same complexity or opaqueness as a defense against violations of the Equal Credit Opportunity Act.

Algorithmic marketing and advertising: In August 2022, the CFPB issued an interpretive rule stating when digital marketers are involved in the identification or selection of prospective customers or the selection or placement of content to affect consumer behavior, they are typically service providers under the Consumer Financial Protection Act. When their actions, such as using an algorithm to determine who to market products and services to, violate federal consumer financial protection law, they can be held accountable.

Abusive use of AI technology: Earlier this month, the CFPB issued a policy statement to explain abusive conduct. The statement is about unlawful conduct in consumer financial markets generally, but the prohibition would cover abusive uses of AI technologies to, for instance, obscure important features of a product or service or leverage gaps in consumer understanding.

Digital redlining: The CFPB has prioritized digital redlining, including bias in algorithms and technologies marketed as AI. As part of this effort, the CFPB is working with federal partners to protect homebuyers and homeowners from algorithmic bias within home valuations and appraisals through rulemaking.

Repeat offenders’ use of AI technology: The CFPB proposed a registry to detect repeat offenders. The registry would require covered nonbanks to report certain agency and court orders connected to consumer financial products and services. The registry would allow the CFPB to track companies whose repeat offenses involved the use of automated systems.

The CFPB has also launched a way for tech workers to blow the whistle. The CFPB encourages engineers, data scientists and others who have detailed knowledge of the algorithms and technologies used by companies and who know of potential discrimination or other misconduct within the CFPB’s authority to report it. CFPB subject-matter experts review and assess credible tips, and the CFPB’s process ensures that all credible tips receive appropriate analysis and investigation.

The CFPB will continue to monitor the development and use of automated systems, including AI-marketed technology, and work closely with the Civil Rights Division of the DOJ, FTC, and EEOC to enforce federal consumer financial protection laws and to protect the rights of American consumers, regardless of whether legal violations occur through traditional means or advanced technologies.

The CFPB will also release a white paper this spring discussing the current chatbot market and the technology’s limitations, its integration by financial institutions, and the ways the CFPB is already seeing chatbots interfere with consumers’ ability to interact with financial institutions.

Read today’s Joint Statement on Enforcement Efforts Against Discrimination and Bias in Automated Systems. 

Read Director Chopra’s Prepared Remarks on the Interagency Enforcement Policy Statement on “Artificial Intelligence.”

Consumers can submit complaints about other financial products and services, by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).

Employees who believe their company has violated federal consumer financial laws, including violations involving advanced technologies, are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.

The Consumer Financial Protection Bureau (CFPB) is a 21st-century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.

Source: https://www.consumerfinance.gov/about-us/newsroom/cfpb-federal-partners-confirm-automated-systems-advanced-technology-not-an-excuse-for-lawbreaking-behavior/

CFPB Issues HUGE Fine for This Illegal Practice in the Mortgage Industry

March 23 (Reuters) – A Virginia debt collection company has agreed to pay $24 million over allegedly illegal practices, the top U.S. agency for consumer financial protection said on Thursday, adding that the company had violated a previous order.

Rohit Chopra, director of the Consumer Financial Protection Bureau, said Portfolio Recovery Associates had been “caught red handed” in 2015, but had persisted in “intimidation, deception and illegal … tactics” to collect on unsubstantiated and undocumented consumer debt in recent years.

“CFPB orders are not suggestions, and companies cannot ignore them simply because they are large or dominant in the market,” Chopra added. Portfolio Recovery Associates said it had admitted to no wrongdoing.

In 2015 the CFPB ordered Portfolio Recovery Associates to cease collecting on debts without reasonable basis, selling debt, or threatening to sue or suing when it had no intent to prove the claims. The company agreed to pay $27 million to resolve the allegations.

The CFPB on Thursday said the company broke a number of provisions related to that order. The $24 million payment agreement includes a fine, as well as repayment to consumers harmed, pending court approval.

In a statement, Portfolio Recovery Associates said it was committed to dealing fairly and respectfully with its clients.

“Although we have admitted to no wrongdoing as part of the resolution, and we continue to disagree with the CFPB’s characterization of our conduct, we are pleased to have this matter resolved and behind us,” Kevin Stevenson, president and chief executive of parent company PRA Group Inc (PRAA.O), said in a statement.

Source : https://www.reuters.com/business/finance/us-watchdog-orders-virginia-debt-collector-pay-24-mln-illegal-practices-2023-03-23/

Latest Developments on VA Loan Appraisals

The U.S. House of Representatives has passed HR 7735, Improving Access to the VA Home Loan Benefit Act of 2022, a measure that would direct the U.S. Department of Veterans Affairs (VA) to update their regulations on appraisals. They would be required to consider when an appraisal is not necessary, and when a desktop appraisal should be utilized.

Introduced by Rep. Mike Bost of Illinois, HR 7735 would enhance VA’s home loan program by streamlining the home buying process for veterans and their families. HR 7735 would ease the home buying process by allowing the nation’s veterans to use the same modern purchaser tools that non-veteran buyers already use.

The VA home loan program has afforded millions of servicemembers, veterans, and their families the opportunity to become homeowners, a benefit that has empowered U.S. veterans with the resources they need to purchase, retain, and adapt homes at a competitive interest rate, and helps to ease the transition from active duty to civilian life. While VA’s home loan program has historically performed well and assisted many nationwide in achieving homeownership, it has not kept pace with today’s homebuying practices in certain ways. Veterans using a VA home loan are required to have an in-person appraisal performed by a VA-approved appraiser prior to purchasing their home. However, there are often lengthy wait times for the relatively few VA-approved appraisers to become available to perform these appraisals, resulting in in veterans being forced to wait longer to complete the homebuying process, and move into their new home.

“The bill will encourage important reforms to the agency’s requirements regarding when an appraisal is necessary, how appraisals are conducted, and who is eligible to conduct an appraisal,” said Bob Broeksmit, CMB, President and CEO of the Mortgage Bankers Association (MBA). “This legislation is an important first step towards broad modernization of VA appraisal processes and could make veterans’ home purchase offers more viable in today’s competitive housing market.”

Now that HR 7735 has passed the house, its companion bill in the Senate, S4208, the Improving Access to the VA Home Loan Act of 2022, introduced in May 2022 by Sen. Dan Sullivan of Alaska awaits passage.

“VA home loans have given millions of veterans and their families the opportunity to purchase a home,” said Rep. Bost. “Yet, on average, veterans wait longer and pay more during the closing process due to VA’s out-of-date appraisal requirements. That’s why I am introducing the Improving Access to the VA Home Loan Act of 2022 with my friend, Senator Sullivan. This bill will make sure that veterans are not unfairly disadvantaged during the home buying process and allow for a modern, digital appraisal process, which will get them into their new home faster.”

Source:https://themreport.com/daily-dose/09-15-2022/house-passes-bill-modernize-va-appraisals

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