At first this may seem like an audacious idea, a violation somehow of the free market absolutism preferred by so many businesses and industries — at least until they need a special rule, tax break or handout from Uncle Sam.

In fact, it was not too long ago that Uncle Sam actually set mortgage rates for government-insured loans. For instance:

• Until November 30, 1983 HUD set interest rates for FHA mortgages. The practice ended with passage of the Housing and Rural Recovery Act of 1983.
• Under the Veterans Home Loan Program Amendments of 1992, the VA is allowed to set the maximum interest rate that can be charged for a VA loan as well as the maximum number of points. Today, the VA still has the right to set mortgage rates for vets but has elected not to do so.

Imagine what would happen if the government set daily mortgage rates for FHA and VA loans. Each day at 9 AM the daily rate would be made available online. Every borrower would have an opportunity to see the available rate for qualifying borrowers. Borrowers could compare the FHA and VA rates with rates for conventional financing — meaning there would be no need to set conventional interest levels, though if we wanted that could also by done through the Federal Housing Finance Agency.

The rates would be show at “par” — meaning with zero points — and with points so that borrowers could see a number of rate-and-point combinations. For instance, today a loan might be at:

• 3.75 percent and 1 point.
• 4 percent and 0 point (par pricing)
• 4.25 and -1 point (borrower gets a cash credit at closing or lender pays some or all closing costs).

In a marketplace filled with openness and clarity borrowers would have more of a chance of getting a fair deal.

Alternatively, we could go back to 2006.

The Wall Street Journal says in 2006 that 61 percent of all subprime loans originated that year went to borrowers who actually qualified for FHA, VA and conventional mortgages. Think how much borrowers could have saved if only they had known their real financial position. Think how many foreclosures could have been prevented. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007).

And while lenders might object to HUD and the VA setting rates for their insured loan products, they certainly have not complained with new rules which have benefitted mortgage companies.

For instance,  HUD limits on lender fees for FHA borrowers were ended in November 2008 — just two weeks after the presidential election. The Bush Administration said it decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

While many lenders have acted fairly and in good faith, some have not. That’s why better regulation is needed and that’s why the government should publish daily loan rates that anyone with Internet access can see.

Should Government Set Mortgage Rates? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 1982, 2008, fees, FHA, home, home loans, HUD, interest, lenders, loans, mortgage rates, Mortgages, par, par pricing, points, points and fees, real estate, regulation, regulations, rules, subprime, VA, zero

Don’t believe it? Let’s look at some facts:

Lender Fees

With most forms of mortgage financing lenders have been able to extract such fees as the market would bear — except for FHA loans. HUD rules limited lender fees to 1 percent for most mortgages insured under the program.

All of this changed in November 2008 — two weeks after the presidential election — the outgoing Bush Administration announced that it had decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

Translation: A gift to lenders.

FHA Refunds

The FHA was originally established as a “mutual” insurance fund. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

Unfortunately, the FHA refund program ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

Is this a big deal? You bet. An estimated $9.76 billion in FHA borrower premiums will be added to the FHA’s Mutual Mortgage Insurance in fiscal 2011 — what the government calls a “negative subsidy.” That’s in addition to the $2.65 billion generated in fiscal 2010 and $5.01 billion surplus that’s expected in fiscal 2012.

A “subsidy” is something you put into an account, a “negative subsidy” is — in plain language — something you take out. And where does the money go? As past FHA Commissioner David H. Stevens explains: the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Excess Insurance Fees

On April 18, 2011 the FHA’s annual mortgage insurance premium (MIP) for new loans was increased by .25 percent. Doesn’t sound like much, but for most new borrowers the annual cost for FHA insurance will rise from .90 percent to .115 percent or around $30 a month.

That’s $360 extra a year.

So why was the fee increased? There certainly is no financial reason in the sense of insurance program shortages — remember the FHA is shuttling billions of dollars to the Treasury and has never had a taxpayer bailout according to Ron Phipps, president of the National Association of Realtors.

What the fee increase really does is make the FHA mortgage program less attractive to borrowers. That’s good news for private-sector lenders, the very folks who plainly have needed a taxpayer bailout and now worry that the FHA program will be over-utilized.

Of course, private lenders could assure that the FHA program would be less popular by offering better loan products or cheaper ones, a market-based solution that everyone can support.

Exit Fees

Mortgage interest is paid on a per-diem basis, a fair arrangement because for each day money is rented the lender gets compensation. The exception to this concerns the last month of an FHA loan: No matter what day of the month you pay off an FHA mortgage under current rules, the lender gets a full month’s interest.

Here’s an illustration: If you sell your home and closing is on April 5th, you must pay interest for the entire month if the property is financed with an FHA loan. If the total interest cost for the month is $1,000 then you would pay the entire $1,000 — even though you only had use of the money for five days or one-sixth of the month. If you had a conventional loan your cost would be just $166.67.

In other words, in this example the borrower pays $833.33 in excess, unearned interest.

Translation: Another gift to lenders! Multiply by a large number of closings and you have real money.

Sen. Benjamin Cardin (D-MD) and Sen. Johnny Isakson (R-GA) have now proposed an end to this gross overpayment policy. They have introduced a bill — S.488, the Reduce Excessive Interest Payments Act — legislation that would prohibit FHA interest charges on anything but a daily basis, just like all other forms of mortgage lending.

Will this bipartisan bill pass? Not without a fight.

How The FHA Is Sinking Mortgage Borrowers is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: annual mortgage insurance premium, exit, fees, FHA, insurance, lender, loan, MIP, mortgage, mutual, Reduce Excessive Interest Payments Act, refund

There is also an origination fee and, often, also one or more points.

The origination fee is a charge to compensate the lender for his or her work, typically an amount equal to 1 percent of the loan.

A full point is equal to 1 percent of the loan. In rough terms, if you pay 1 point at closing the cost of a 30-year mortgage will increase by 3/8ths of a percent over the life of a loan.

For instance, if you borrow $250,000 at 5 percent and pay 1 point at closing, the real interest cost for the loan over 30 years is roughly 5.36 percent. Note that 1 percent at closing is equal to $2,500 in this example.

The confusion comes when the lender says, “well, would you like to refinance at 5.36 percent and 0 points or 5 percent and 1 point? Or, we can finance your closing costs if you will pay 5.5% percent so you will have a no-cost refinance?

Huh?

To start, a loan with 0 points is called par pricing. It’s smart to always ask for loan quotes with zero points because that gives you a way to compare rates.

With the lender’s offer, here are some, er, points to consider.

1. Points are paid in cash at closing. Generally they can be financed in the form of a higher loan amount.
2. Interest rates with points are calculated over 30 years in the case of a 30-year mortgage, 15 years with 15-year loans, etc. The catch is that you might not live in a property for 30 years. In fact, the odds are overwhelming that you will sell or refinance long before 30 years (just think how often people move).
3. If you sell or refinance before the loan term is up then your effective interest rate will increase. Why? Because you paid a set amount up front — say $2,500 for a $250,000 mortgage with 1 point — but the loan didn’t last 30 years. Once the money is paid it’s gone — there are no refunds.
4. In reality, there’s no such thing as a “no cost” mortgage. Like a unicorn, it’s a rumor. Borrowers always pay. With so-called no cost financing the lender pays some or all closing expenses in return for a a higher rate. Given your credit standing and the premium interest rate, the lender can sell the note on the secondary market for additional money, thus getting back the closing costs plus (hopefully) a profit.
5. If you’re refinancing it can pay to get a no-cost mortgage as long as your new monthly cost for principal and interest is lower than then current cost.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act lenders can no longer charge a yield-spread premium or YSP by up-selling a loan with a higher rate or more points.

Should I Pay More Points For A Lower Mortgage Rate? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: charges, fees, loan, loan origination fee, mortgage, par, points, yield spread premium

“Purchase applications fell last week, driven primarily by a sharp decrease in government purchase applications as new, higher FHA premiums went into effect,” said Michael Fratantoni, the Mortgage Bankers Association Vice President of Research and Economics. “This decrease reverses a 20 percent increase in government purchase applications over a four week period, which was likely driven by borrowers attempting to beat this deadline.”

The deadline borrowers were trying to beat was April 18th, the day FHA loan requirements changed with the addition of a .25 percent increase in the annual mortgage insurance premium (MIP). For most new borrowers the annual cost for FHA insurance will rise from .90 percent to .115 percent or around $30 a month.

For marginal borrowers trying to get the biggest possible loans or for people who simply don’t like to pay more than they should, the steeper premium increases costs by about $360 a year.

In March FHA applications were down almost 36 percent when compared with March 2010. Endorsements were off 25 percent. Normally such results would produce cries for new leadership, and in this case former FHA Commission David H. Stevens is moving on to become the President and CEO of the Mortgage Bankers Association. This hardly seems like a demotion.

So who wins with this new policy?

Yes, HUD will get additional dollars for its insurance program but so what. The program already yields huge “receipts for the Treasury,” what normal human beings would call a profit.

As Mr. Stevens has explained, the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Taxpayers, of course, pay for none of this. As Lawrence Yun, chief economist for the National Association of Realtors, explains, the “FHA and VA government-backed loan programs turned a modest profit over to the U.S. Treasury last year, and have never required a taxpayer bailout.”

And unlike in past years, excess FHA premiums now go to the government instead of being returned to borrowers, as was the practice until December 8, 2004 when the policy changed under the Bush Administration.

How The Public Loses

With less FHA financing available there will be artificially-reduced buyer demand, higher costs and fewer home sales. Is this really a good idea given the critical condition of the housing market?

Home sales — despite claims to the contrary — are down. As the National Association of Realtors explains, existing home sales in March were 6.33 percent below March 2010.

Prices are also off — they’re down 18.6 percent from the peak in April 2007 according to the government.

Given this environment, the obvious path is to stimulate home sales because more real estate transactions are inherently good for the economy. We did that with the tax credit for first-time home buyers and it was a program which boosted real estate sales.

Today, the equally-obvious path with the FHA is to simply keep the standards which made the program a success. That means a 3 percent or 3.5 percent down payment and not more than a 1 percent fee for lenders. This was the standard fee for FHA loans until — in an outright gift to lenders from the Obama Administration — the cap on lender fees for most FHA programs was eliminated on December 30, 2009, a date when media coverage would be at an absolute minimum.

The FHA has traditionally been a leading financing option for first-time buyers and those in the lower- and middle-income brackets. Now access to that choice is being made unnaturally less attractive so that borrowers will be increasingly forced to obtain private-sector financing. This artificial lack of choice — a choice not based on better products or lower costs from private lenders — is not good for the housing market or the country.

Less FHA Mortgage Loan Demand Undermines American Home Prices is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: annual, fees, FHA, home, insurance, loan, MIP, mortgage, OurBroker.com, premium, prices, real estate, sales, value

“Independent mortgage banks and subsidiaries made an average profit of $1,423 on each loan they originated in the third quarter of 2010, up from $917 per loan in the second quarter of 2010,” according to the Association.

In addition, the MBA also reported that “88 percent of the firms in the study posted pre-tax net financial profits in the third quarter of 2010, compared to 85 percent in the second quarter of 2010 and 82 percent in the third quarter of 2009.”

These are strong results. Initial worries that federal mortgage reforms would hinder industry profits have proven wrong.

Good Faith Estimates

After 14 years of wrangling the government introduced a new Good Faith Estimate form this year which HUD says can consumers as much as $700 per transaction.

The new GFE is a three-page form designed to show total loan costs — NOT total closing expenses. By obtaining a GFE and not a “worksheet” or something else consumers know that lenders are obligated to deliver loans with certain terms and conditions by closing, assuming that the value of the property and consumer information satisfy required loan criteria.

HUD-1

The new GFE ties into a new HUD-1, the summary form which settlement agents must use as closing. The new HUD-1 is designed to clearly explain all transaction costs, including taxes, title insurance and closing expenses — and to show the costs being paid by buyers and sellers.

An important part of the new HUD-1 is that a portion of the information it shows comes from the lender’s GFE. In other words, borrowers can look at the HUD-1 to assure that rates and terms promised with the GFE have been delivered.

Dodd-Frank

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203), passed this summer despite strong industry opposition, established new protections for borrowers.

In basic terms, the new protections include restrictions against financial steering and a new duty of care requirement. Lenders can obtain a “safe harbor” to protect against lawsuits and reduce reserve requirements when they originate qualified residential mortgages. QRMs are defined essentially as conventional, VA and FHA mortgages with three or fewer points and origination fees and fully documented (full docs) loan applications.

An interesting twist with Dodd-Frank is that it allows prepayment penalties for QRMs but NOT for unqualified mortgages. The maximum prepayment penalty is restricted to three percent of the loan amount in year one, two percent in year two and three percent in year three.

Despite Wall Street reform mortgage banker profits surge is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, duty of care, fees, financial, full docs, fully documented, GFE, Goof Faith Estimate, HUD, loan, mortgage, mortgage bankers, points, prepayment, profits, QRMs, qualified residential mortgages, reform, safe harbor, steering, Wall Street

Missed Payments

If an owner has missed one or more payments the lender will threaten to foreclose, If the borrower brings the loan current there’s no foreclosure, however there may be an assortment of legal fees because the lender has engaged a local law firm to process the foreclosure. The result is that in addition to the full cost of the mortgage and all penalties, the borrower will also have an additional cost for the work of attorneys selected by the lender.

Short Sale

With short sales the property is sold for less than the value of the mortgage balance. Example, a buyer offers $250,000 for a property with $300,000 still owed to the lender. The lender is asked to take a loss by the purchaser and to release the debt even though the entire amount is not being paid.

With short sales everything is up for negotiation. Since the lender is the “seller” it might be expected to pay some or all of the brokerage fee. In addition to the mortgage there might also be costs for foreclosure attorneys,late fees and various penalties. Who pays what is a matter of negotiation between the the buyer, the owner and the lender.

Money owed to the lender after the transaction may be seen as a debt from the owner. In most states the lender has the right to go after that debt by seeking a deficiency judgment. In the case above the buyer paid $250,000 for a property with a $300,000 loan balance, so the deficiency would be $50,000 plus costs, fees and penalties. However, in some states and in some situations a deficiency claim is not allowed. Also, the elimination of a deficiency claim can sometimes be negotiated as part of a short sale. For specifics in your jurisdiction please speak with an attorney or legal clinic.

Foreclosure Sale

With a foreclosure the property is bought at auction. The terms of the auction are disclosed in advance. By bidding on the property buyers accept the bidding terms, which can include a variety of fees and charges in addition to the basic cost of the property.

Real Estate Owned (REOs)

When a property is sold at auction the lender will typically bid an amount sufficient to repay all of the debt and related foreclosure costs. However, in severe foreclosure markets, the lender may bid less than the mortgage balance which means a buyer can purchase the property for an amount which is below the outstanding debt.

However, if no one meets the lender’s bid it means that the lender gets title to the property. It now owns the home and its “costs” include the price of acquisition, the expense of foreclosure, and the money required to maintain the property, pay taxes, etc. The property becomes “real estate owned” by the lender, or a REO.

Buyers can now approach the lender to purchase the property. The price of the property and the expense of various fees and charges are all negotiable. For specifics, speak local brokers with experience buying REOs for client purchasers.

Buyer Brokers

Foreclosure and REO purchasers who use the services of a buyer broker typically shift the cost to the lender when possible. However, if the broker is owed $12,000 and the lender will only pay $10,000 the buyer can be responsible for the rest.

Many savvy buyers avoid the potential liability from brokerage fees by negotiating the listing agreement to say that the purchaser is not responsible for the payment of any brokerage fee above the amount paid by the lender or the lender’s broker.

Who Pays Foreclosure Fees? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auction, brokerage, Buyers, deficiency, fees, foreclosure, foreclosure fees, judgment, lenders, owners, short sale

In each step there are fees and more fees, and the fees can be steep. In some cases there are state guidelines outlining the maximum legal fee. While an attorney might take less, what’s the incentive to do so?

Also, notice that the same legal fee to fill out the same form may apply regardless of the amount owed. In effect, fees can be seen as regressive costs that hurt small borrowers more than those who have big loans.

Foreclosure Fee

What kind of fees might you see? The answer depends on the jurisdiction where you live and the type of foreclosure — judicial or non-judicial — that you face. Examples include overnight delivery fees well above what a delivery service might charge, monthly inspection fees to check the property, processing fees, valuation fees to check the market price of the home, legal fees above actual lender costs, court costs, and payoff statement fees (demand fees). In total, the fees can amount to thousands of dollars,

Can you get rid of the lender’s foreclosure fees?

In some cases, if you have an attorney or legal clinic, it may be possible to have them reduced or eliminated as part of an overall settlement with the lender.

Alternatively, if you can engage in a deed in lieu of foreclosure then there’s no foreclosure, thus there are no foreclosure fees in the usual sense. It’s not a great option, but then the alternative is a foreclosure and that’s not a happy event in the first place.

For specifics in your area, please contact an attorney, legal clinic or community housing organization.

What’s A Typical Foreclosure Fee? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auction, court, fees, foreclosure, inspection, legal, maximum, payoff, processing, regressive, Valuation

I last held a job in 1971, and since then have managed to cobble together a reasonable existence as an author and consultant. Clients and publishers pay for my thoughts and words, and I gleefully deposit their checks.

This was a fine arrangement and everyone seemed pleased until a few weeks ago when the huge financial institution where I’ve banked for nearly 15 years suddenly decided they could not accept my deposits. The problem, it seems, was that some checks were made out to the business name I use in trade and not the name on my birth certificate.

“These checks were good last month,” I said to the banker. “In fact, this bank has been taking these checks for more than a decade and not one has bounced. I operate a sole proprietorship. I have no partners and no shareholders. There is no difference between me and the name on this check.”

“Well,” explained the bank officer, “You operate a business and thus require a business account. You can deposit this check into the business account and shift it into the personal account. I can sign you up for a business account right now. The cost is only $13 a month, plus a fee for checks.”

“You mean you will only take my money if I give you $13 a month?”

“Yes. That’s our policy.”

Well, okay, two can play this game. Depositors of the world unite — you have nothing to lose but excess fees and indifferent service. If bankers can have policies, so can consumers. Here are mine.

First, I don’t do business with any bank with more personnel than the Norwegian Army. What used to be my local bank has been bought, sold, absorbed, and downsized to the point where it is now a minor outpost of some distant financial colossus. Since I don’t need $500 million to open an electronics plant in Thailand, it’s fairly plain that my status as a desirable client is in question.

Second, I don’t do business with any bank where the president cannot be reached with a local phone call. With the old bank, the president seems to have moved over the years from downtown, to the suburbs, to another part of the state, and finally to a different time zone.

Third, I don’t do business with any bank that plays employee roulette. For years on end I could go into my bank and know the officers and tellers. It was good to see people starting as tellers and working their way up the system. They knew me and they knew my business. Now my big bank seems to have a new branch manager each month, and neither the tellers nor officers can identify me without a computer printout, photo ID, and thumbprint.

Do these principles work? You bet. While big banks are getting bigger, more distant, more expensive, and less useful, there are plenty of little banks that actually want my business — and yours.

After being rejected by my big bank, I went to see if I could do better at a smaller institution. In about six minutes I found one that was a hundred years old, had about local 20 branches, didn’t have a company jet, and was glad to see me.

“Can I open an account here so I can cash my checks?”

“Sure,” said the branch manager at the little bank.

“But it’s made out to the name I trade under,” I said, testing the waters.

“So what,” said the manager, as she handed me a Norman Rockwell appointment calendar. “There’s no difference between you and the name on this check.”

“I think I heard that somewhere. What will it cost to set up accounts?”

“You’ll need a business account,” said the manager, my hopes quickly fading. “But we can open one at no charge and waive all fees for the next three years. We’ll give you a $50 credit so you can get some checks to start. And then we can provide a personal account as well.”

But as good as all of this sounded, I still had one lingering question for the branch manager at the little bank.

“You think anyone will buy this place in the next few years?”

“Not a chance,” she said, “our president doesn’t know anything about financing electronic plants in Thailand.”

I’m now in the process of moving various accounts and services to my new bank — checking, savings, credit, children’s accounts, safety deposit boxes, everything. My new bank has lots of parking, short lines (or no lines) drive-in windows, ATMs, credit cards, and Saturday hours. Most importantly, they want my business.

As to the big bank, they don’t seem to miss me. I haven’t heard from this month’s manager. Perhaps next month the new person will call.

Postscript: I’m still with the same community bank, they still know my name and I can still reach the bank president with a local phone call.
_____________

Published originally by The Washington Post on December 22, 1997.

Tales Of A Big Bank Refugee is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: banks, business, checking, community, fees, personal

>>>Instead of a majority of valuation assignments going to appraisal managment companies we now have virtually ALL assignments being controlled by these joint venture arrangments. Notice how the market is doing?

There is a certain irony here. The worry pre-NVCC used to be that lenders and loan officers would pressure appraisers to come up with the “right” valuation. Now the worry is the cost and speed of services. Here’s a concept, why not let the borrower — who is paying for the appraisal — select the appraiser from the names on a local roster approved by the lender? The list would have to have at least 50 names for properties within a major metro area. No management companies would be needed.

>>>These appraisal managment companies, usually someway affiliated with First American Title, will have data on almost every home in America through their data collection process. Taken right from the appraisal reports, floorplans, interior and exterior photos, upgrades all the data that can be misused, abused but most importantly; resold. Because thats what its all about.

This is not really an HVCC problem; rather this is an issue which now confronts many professions: How do we deal with technological change? Many in real estate plainly believe there will be lower appraisal fees and fewer revenue opportunities for appraisers in the future. Many also believe that reduced appraisal costs should be passed through to borrowers and not used to pump up profits elsewhere in the lending process. As always, it pays to follow the money.

Automated appraisals may well work when you have a thousand identical townhouses with three models and lots of recent sales. The problem is that if an appraisal is inaccurate the lender is safe because it’s risk is spread among thousands of loans. The borrower, however, typically has one house — for the borrower an errant appraisal can be a disaster.

I think, though, that borrowers are better served when appraisers physically see the inside of a property and borrowers are certainly better off with a full appraisal when a property is in anyway distinctive — think of a homes in an older neighborhood with no common model or a house which has been unusually well maintained (or not).

>>>Just another line of easy profit by our big banking system. We should never have bailed them out, they have not demonstrated any gratitude to the taxpayer. Rates are still to high, credit is way to tight and no loans are being modified. Refinancing is not even an option. Best way to purchase is cash if you want to close in less than two months.

I suspect the dawning conclusion among the public is that bank reform is urgently needed. Let’s start with a Consumer Financial Protection Agency that can subpoena records and documents and let’s allow state regulators to finally have a real voice in the banking system.

>>>So how is this HVCC deal working out ?

Not badly enough that the entire idea should be “suspended” for 18 months. Fixed and made better, sure.

We thank Tim for a great post.

Appraisal Worries Really About The Future is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: agency, appraisal, banks, code, Conduct, consumer, fees, financial, home, HVCC, management, Protection, Valuation

A number of leading real estate and lending trade associations are seeking an 18-month HVCC suspension — which no doubt will be followed by another suspension and another suspension so that the consumer protections in HVCC are never implemented. Of course, if we get rid of HVCC entirely then rules that would ban lender conflicts of interest would also be thrown out.

Now, however, several appraisal groups have come out with a proposal which would keep HVCC while getting rid of the elements which are actually causing problems.

As you read the letter below you can see what the appraisers are getting at: In the same way that HMOs add to medical costs so do appraisal management companies (AMCs). Essentially the appraisers want to dump the AMCs, their hidden fees and their absurd rules.

The full letter is below:

July 1, 2009

The Honorable Shaun Donovan
Secretary
Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410

Re: Mortgagee Letter 97-46

Dear Secretary Donovan:

On behalf of the more than 35,000 members of our respective professional appraisal organizations, please accept our congratulations on your appointment as Secretary of the Department of Housing and Urban Development. We are confident that your service will prove valuable as our nation works through the challenging times we face.

As you know, real estate appraisers play an important role in the mortgage finance system. Appraisers are independent third-party professionals who deliver unbiased opinions on the market value of real estate held as collateral for mortgage loans. Recent changes in appraisal requirements stemming from an agreement between Fannie Mae and Freddie Mac and the New York Attorney General (i.e., the Home Valuation Code of Conduct) have so greatly worsened a flaw in past guidance received from the Federal Housing Administration (FHA) [i.e., Mortgagee Letter 97-46] that we believe it requires your immediate attention.

Mortgagee Letter 97-46 revised the Department’s policy governing appraisal fees and the use of third-party entities providing appraisal services. In earlier guidance (Mortgagee Letter 97-22), FHA stated that it no longer would establish maximum dollar limits on appraisal fees, but would limit the fee that could be charged to a mortgagor to the amount actually paid to the appraiser when a third-party appraisal management firm was used.

Yet, later in Mortgagee Letter 97-46, HUD states:

“[T]he Department will allow the mortgagor to pay a fee for the appraisal which may encompass fees for services performed by an appraisal management firm as well as fees for the appraisal itself. However, the total of these fees is limited to the customary and reasonable fee for an appraisal in the market area where the appraisal is performed.–

Given the rapidly growing reliance by residential mortgage lenders on appraisal management companies (AMCs) to provide appraisal services, the restriction on total appraisal fees to “no more than– the customary fee for an appraisal has driven down the fees paid to large numbers of appraisers to well below what has been customary and reasonable in given market areas. This has become a problem of enormous proportions because the Home Valuation Code of Conduct (HVCC) has caused a significant transfer of appraisal orders from mortgage brokers to AMCs. Mortgagee Letter 97-46′s pricing restriction is causing many experienced and qualified appraisers decline FHA appraisal assignments ordered by AMCs because of their below market appraisal fees., adding unnecessary and substantial risk to the FHA program. While the HVCC does not directly impose rules upon FHA appraisal ordering practices, many lenders are now applying the same standard to their entire appraisal ordering practices.

Further, regarding HUD-1 reporting, the Mortgagee Letter makes no distinction, as we believe it should, between the fee paid to the individual who performs the appraisal (in compliance with the Uniform Standards of Professional Appraisal Practice) with fees charged for the administration of the appraisal process (the AMC charges). Traditionally, appraisal administration functions of lenders/banks were paid for through overhead costs (i.e., loan processing charges, interest rates, etc.) and reported on the appropriate line of the HUD-1. However, with lenders increasingly outsourcing these functions to AMCs, the costs are being passed through the Appraisal line of the HUD-1 statement. This leaves consumers with the mistaken impression that they are paying the customary fee for the highest level of service from an appraiser who has substantial experience in performing appraisals in their geographic area when, in fact, the consumer is receiving a much lower level of service — often from appraisers who do not know the local market — in many cases. This is not transparent and should be remedied as soon as possible.

The procedure is compounded by a common practice among AMCs to instruct the appraiser not to have any conversation with the homeowner about the actual fee paid to the appraiser. HUD has a rule requiring that the lender pay the appraiser. Some AMCs managing FHA appraisals reportedly have instructed appraisers to collect a fee at the door (despite this being a violation of the HVCC and HUD regulations), keep a part of the fee, and send the remainder to the appraisal management company. In at least one instance that we are aware of, an appraiser blatantly was instructed to commit fraud by submitting an invoice with the appraiser’s name, firm name, date and address, while leaving the amount of the fee blank, which the management company intended to fill in and submit to the lender.

The consequences of this are dire for FHA, mortgagors, and terrible for the mortgage process. With Mortgagee Letter 97-46, many highly qualified and experienced appraisers are declining to perform assignments for AMCs. In many instances, those companies are being forced to use appraisers from distant locations with less experience and training, or more pointedly: those who will work for less. Using less experienced and less qualified appraisers to perform FHA assignments is not a good business practice and is not good public policy.

We know that it was not the intent of these directives to create these issues, and we respectfully would like to request that you review this policy and take immediate action to rescind Mortgagee Letter 97-46. Further, we would like to request that the HUD-1 be revised to include a separate line for all AMC related fees such that the appraisal fee might
be separate from non-appraisal fees. Finally, we request that the Department follow through on a commitment to propose rules for public comment relating to AMCs that would ban inappropriate practices, such as hiring an appraiser primarily on price or turnaround time, without consideration of competency or qualifications. The positive impact of such rules on the lending community, consumers, and the appraisal community would be profound.

Thank you, in advance, for your consideration of this request. If you need additional information, please contact Bill Garber, Director of Government and External Relations, Appraisal Institute at 202.298.5586 or bgarber@appraisalinstitute.org, or Peter Barash, Government Relations Consultant, American Society of Appraisers, at (202) 466-2221 or peter@barashassociates.com.

Sincerely,

Appraisal Institute
American Society of Appraisers
American Society of Farm Managers and Rural Appraisers
National Association of Independent Fee Appraisers

Appraisers Seek Sensible Reform is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: appraisal, appraiser, code, Conduct, fee, fees, hidden, home, HVCC, Independent, Institute, Society, suspension, Valuation