Mortgage Banker Magazine October 2021 by ambizmedia

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WHO WANTS TO ‘OWN’ THE CUSTOMER? LIABILITIES ABOUND WHEN COMPANIES ACT LIKE CLIENTS ARE ‘THEIRS’ A PUBL I C ATI O N O F A M E R IC AN B U S IN ES S M ED IA

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REGULATORY CORNER FEDERAL COMPLIANCE FHFA: FORECLOSURE PREVENTION AND REFINANCE REPORT

The Federal Housing Finance Agency released its second quarter 2021 Foreclosure Prevention and Refinance Report, which shows that Fannie Mae and Freddie Mac (the Enterprises) completed 217,020 foreclosure prevention actions in the second quarter of 2021, bringing the total number of homeowners who have been helped during conservatorships to 6.030 million. The report also shows that 47 percent of loan modifications completed in the second quarter reduced borrowers’ monthly payments by more than 20 percent. The number of refinances decreased from 2.016 million in the first quarter to 1.614 million in the second quarter. The Enterprises’ serious delinquency rate dropped from 2.48 percent to 1.99 percent at the end of the quarter. This compares with 9.48 percent for FHA loans, 5.02 percent for VA loans, and 4.03 percent for all loans (industry average).

FFIEC: HMDA FILING INSTRUCTIONS GUIDES AVAILABLE

The FFIEC posted the Filing Instructions Guide (FIG) for data collected in 2022 and the Supplemental Guide for Quarterly Filers for 2022. Links to current and historical FIGs and Supplemental Guides for HMDA filing are listed at https://ffiec.cfpb.gov/.

HUD/FHFA: FREDDIE MAC GROUP HOME POLICY CLARIFIED

The FHFA and the HUD reported clarifications of Freddie Mac’s policies to make clear it will purchase mortgages secured by a property owned by an individual and rented to a group home for persons with disabilities. The clarifications were made to encourage lenders in extending credit for such mortgages, thus providing more community-based living opportunities for persons with disabilities. These clarifications were included in Freddie Mac’s September 1 update to Freddie Mac’s Seller/Servicer Guide. The clarifications follow a HUD investigation of a mortgage lender who had refused to lend to a homeowner that was renting their property to a company that was operating a group home. The lender’s refusal was based on the incorrect belief that Freddie Mac would not agree to buy the mortgage. After HUD reported this misunderstanding to Freddie Mac and FHFA, Freddie Mac worked with both agencies and ultimately agreed to revise its policies and make this announcement to clarify that Freddie Mac has always been willing to buy these mortgages secured by a group home.

MortgageBanker OUR MISSION Mortgage Banker magazine is dedicated to providing quality informational/educational content that betters the mortgage process at every step. The content is oriented to help professionals progress their understanding of the residential mortgage banking business and develop their skills at improving the efficiency and profitability at all levels. VINCENT VALVO, CEO, Publisher & Editor-in-Chief vvalvo@ambizmedia.com ASSOCIATE PUBLISHER Beverly Bolnick bbolnick@ambizmedia.com FOUNDING PUBLISHER Ben Slayton BSlayton@ambizmedia.com EDITOR David Krechevsky davek@ambizmedia.com STAFF WRITER Katie Jensen kjensen@ambizmedia.com SENIOR EDITOR Jill Emerson Jill@ambizmedia.com ADVERTISING David Hoierman David@ambizmedia.com GRAPHIC DESIGN MANAGER Christopher Wallace cwallace@ambizmedia.com MARKETING MANAGER Michael Castro mcastro@ambizmedia.com GRAPHIC DESIGN Stacy Murray smurray@ambizmedia.com HEAD OF ENGAGEMENT AND OUTREACH Andrew Berman andrew@ambizmedia.com DIRECTOR OF STRATEGIC GROWTH Alison Valvo avalvo@ambizmedia.com ONLINE CONTENT DIRECTOR Navindra Persaud npersaud@ambizmedia.com USER EXPERIENCE DESIGNER Billy Valvo bvalvo@ambizmedia.com MARKETING & EVENTS ASSOCIATE Melissa Pianin mpianin@ambizmedia.com

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MORTGAGE BANKER | OCTOBER 2021 3

T H E MO RTGAGE ADV I S O R

Fannie Mae & Freddie Mac: Steady As She Goes? WITH NEW LEADERSHIP AND CONGRESS LOOKING FOR NEW REVENUE, WHAT CHANGES ARE LIKELY AT THE GSEs? By R O B CHR IS M A N, M ORTG AGE BAN KE R M AG A ZIN E CON TRIB U TIN G WRITER

rillions of dollars of residential home loans are originated each year in the United States. And given that the majority of these loans are processed, underwritten, funded using Agency guidelines, and sold primarily to Freddie Mac and Fannie Mae, it is understandable that the industry watches their every move with great interest. As we head through autumn, let’s take a look at the shifts that these Agencies (Freddie and Fannie, aka Government Sponsored Enterprises, or GSEs), overseen by the Federal Home Finance Association (FHFA), have undergone recently to determine what lies ahead. First, with the exit of Mark Calabria earlier this year from the helm of the FHFA, talk of removing Freddie and Fannie from conservatorship has virtually ceased. Both entities continue to be profitable, with revenue from their fee income and secondary market activities outpacing their losses and expenses. During the Trump Administration, and into the first months of 2021, the FHFA made changes to scale down the footprint of Fannie Mae and Freddie Mac and shift volume to “private label” investors. But with Acting Director Sandra Thompson, the narrative has changed. FHFA rescinded Freddie Mac and Fannie Mae’s controversial 50-basis point adverse market refinance fee and is well aware of the industry’s goal of eliminating the 7 percent cap on GSE purchases of mortgages

4 MORTGAGE BANKER | OCTOBER 2021

for investment properties (nonhigher credit scores, more owner occupied) and second complete documentation is homes. There has also been required for assets, income, talk of reviewing or revising and liabilities. Investors are still the Preferred Stock Purchase very interested in mortgageAgreement (PSPA) with the U.S. backed securities underwritten Treasury. and processed using Agency Certainly the qualifications guidelines. of the typical borrower have ROB CHRISMAN improved since 2007. The WISH LISTS industry is working under Where do insiders think Freddie the Ability to Repay (ATR) and Fannie are heading in terms guidelines set for by the Dodd Frank Act. of guidelines, policies, and market share? The quality of the borrower is much higher First, it is hoped that the GSEs, and the now than leading up to the financial crisis. FHFA, realize that the minimum amount Average LTVs are lower, borrowers have of time needed for any “negative” changes is 90 days, if not 120. A 120-day lead time on changes, meaning they could be assimilated into market without any pipeline losses, would be a healthy operating procedure even if a lender was against the actual policy. For positive changes, such as a fee reduction, 45 days is adequate. The elimination of risk overlays on high DTIs, low LTVs, and first-time homebuyers would be on the wish list for MLOs. Any veteran originator, however, will say that they don’t want to return to the stated income or stated asset days of 2006. The Biden Administration has made it clear that affordable housing and first-time homebuyers are a priority. We could easily see a focus by Freddie and Fannie on riskier programs that center on this priorities, and we should see some work on products for high density living. All of this is good news for anyone

WHERE DO INSIDERS THINK FREDDIE AND FANNIE ARE HEADING IN TERMS OF GUIDELINES, POLICIES, AND MARKET SHARE?

who makes their living in residential lending. But there are a couple clouds on the horizon. First, despite the presidential administration desiring affordable housing, translating that into state, local, county, and town priorities will be an uphill battle. Building permit costs are high, zoning ordinances can be onerous, few residents in any given area are excited about a collection of affordable housing units being built nearby, and the cost of labor and building supplies drive up costs. There may not be much hope on for changes to second home and non-owneroccupied caps because that has not been a demographic Democrats have historically looked to protect. In other words, in a world of finite resources, and the GSEs’ charters, helping those who want to finance a 2nd home or a rental takes a back seat to helping first-time buyers and promoting general home ownership goals.

HIGHER FEES PROBABILITY

The high G-fees and other loan-level price adjustments that we have seen during prior Democratic administrations, and payroll tax increases, may come back to satisfy the more liberal component in Congress. Freddie and Fannie have proved a source of funds for non-lending purposes in the past. Think back to 2011/2012 when Congress and the Obama Administration turned to Fannie Mae and Freddie Mac to pay for the proposed extension of the payroll-tax cut. The revenue source, in the form of higher G-fees, is a tax that has been passed on to mortgage borrowers ever since. And once a government has a source of revenue, well, the odds of giving that up are nil. Lastly, lowering credit guidelines, or expanding credit in general, may increase the number of potential home buyers. We are already suffering from a lack of homes for sale in many desirable parts of the nation, for a variety of reasons: cheap credit,

millions of people in their late 20s and 30s hitting home-buying age, and lack of builder activity for the last several years. Expanding the credit box will increase the number of bidders on starter homes, driving up prices even more. “Unintended consequences” is not something we need again in lending. Fortunately for lenders and investors across the nation and around the world, “stable” appears to be the description for Freddie and Fannie’s direction. Markets don’t enjoy surprises, instead preferring a steady course and predictable changes and activities. Private securitization markets appear to be healthy, as indicated by the demand for jumbo and non-QM production. And at this point the GSEs are not “broken” and not in need for any sweeping changes. And so “steady as she goes” may be the best course of action in the foreseeable future.

MORTGAGE BANKER | OCTOBER 2021 5

MortgageBanker MAGAZINE

Arivs

Mesa, Arizona www.arivs.com Arivs (Pronounced arrives) is the industry’s first and only appraisal management company that combines the strengths and resources of a national presence with the expertise and personal touch of local management. Feedback from lenders: ”I am consistently impressed with their ability to rise to the challenges they are faced with in our industry” ”We have built a relationship with Arivs over the years because their service is stellar and they are a top notch management company. We simply wouldn’t use anyone else” ”I would highly recommend ARIVS to anyone looking to add an AMC.” States Your Licensed In: Arivs currently has 16 offices around the country strategically placed in each market to maximize appraiser rapport, accountability, and management’s geographical competency. Arivs is currently doing business in 49 states excluding Hawaii.

APPRAISER AMC

Class Valuation

Troy, MI www.classvaluation.com Class Valuation is a top nationwide AMC, delivering outstanding quality and service to every client. We are committed to combining the best people, processes, and technology to support our clients. Class is consistently ranked highly in client service by top lenders and has received various other industry awards and recognition. What sets your company apart from the competition? Order tracking and management through easy to use Fast Track Pro interface. Real-time county-bycounty turn time estimates to help plan and manage expectations. Best-in-class technology integration with INvision and Property Fingerprint. Superior appraiser relations, including 24-hour payment to incentivize appraisers to get orders completed on time. Feedback from lenders: ”Appraisals come back on time and if there’s ever a time that i need to call and check on the status of an order, the staff immediately goes to work to get an answer for me! I am kept informed during the appraisal process and the appraisers represent Class well!” (additional testimonials on our website) States Your Licensed In: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY

6 MORTGAGE BANKER | OCTOBER 2021

DIRECTORY

SingleSource Property Solutions Canonsburg, PA

www.singlesourceproperty.com

SingleSource provides nationwide valuations, title and settlement, REO asset management, and field services to many of the largest loan origination, servicing, and secondary entities. Our client base ranges from top ten lenders to regional credit unions – we can customize our services to fit the needs of any lender. What sets your company apart from the competition? SingleSource’s experienced team provides a wealth of mortgage origination, servicing, and property management experience. We provide national appraisal services utilizing industryleading tools that include: a proprietary scoring model that grades every valuation report, MLS tools that verify data points in delivered products, use of robotic process automation (RPA), and staff field appraisers in key markets nationwide. Feedback from lenders: “I can honestly say that SingleSource is one of the most service-focused organizations I have encountered. Our relationship with SingleSource has been expanded numerous times over the past few years in large part due to our comfort and trust in dealing with them. Our inquiries and requests are always promptly resolved and in a professional and friendly manner.” States Your Licensed In: SingleSource is licensed nationwide.

Clear Capital

Location Reno, NV www.clearcapital.com Clear Capital is a national real estate valuation technology company with a simple purpose: build confidence in real estate decisions to strengthen communities and improve lives. Our commitment to excellence is embodied by nearly 800 team members and has remained steadfast since our first order in 2001. What sets your company apart from the competition? Our goal is to provide customers with a complete understanding of every U.S. property through our field valuation services and analytics tools, and improve their workflows with our platform technologies. We operate nationwide with one of the largest networks of appraisers, all dedicated to going wherever it leads and doing whatever it takes to get the job done. Feedback from lenders: “Clear Capital has become our go-to AMC. Their turntimes are untouchable, just outstanding. Their communication is more thorough than any other partner and they put it all together with competitive quality.” States Your Licensed In: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY

THE ‘OM-BOBS-MAN’

It’s Fall, But Not Fail…

By B O B NIEM I, M ORTG AG E BAN KE R M AG A ZIN E CON TRIB U TIN G WRITER

es, fall has returned once again. The changing of the leaves and cooler temperatures reminds us that it is time for… Renewals. NMLS Renewals in the second year of working remote may or may not be scarier than Halloween. These both occur almost at the same time and that can bring ghosts and goblin-like behavior when trying to validate the production staff and their renewal requirements. Mortgage originators may soon find that there could more tricks than treats as Halloween fades into Renewal Season. The NMLS Renewal Period is already short at only 61 days beginning on November 1 and ending on December 31, not to mention the holidays and holiday festivities. But there are some states that have earlier filing deadlines, such as Minnesota and West Virginia, allowing only a day or so for renewals. This is a short window for renewal submissions but also licenses that have not been approved by December 31st must discontinue mortgage activity until the renewal has been approved. Talk about scary! Longer and longer lists of state specific continuing education hours have grown in recent years so now is the time of the year to triple check that everyone on your team is ready for renewal. Many states will also require mortgage originators to get updated criminal background checks, such as Connecticut and Kentucky this year. Updated credit reports will also be required by many states, adding to the list of items that could delay a timely renewal. Companies that do business in Delaware, Hawaii, Idaho, Iowa, Kansas, Wyoming, and Vermont need to check the NMLS Annual Renewal Information page for similar dates. The webpage contains valuable resources, renewal checklists, and a detailed chart that summarizes these

renewal deadlines, fees and more. All this and training as well are available via the NMLS Resource Center. Now, fall is also a time of year overloaded with distractions and official and unofficial holidays. Hopefully New Year’s Day is cause for celebration and not a company shutdown. BOB NIEMI This could happen as many states require that licenses must be approved as of January 1 to continue mortgage business in their state: Another reason to prepare now and file early. Some states, like California and Oregon, allow for companies to apply for late reinstatement as late as February 28, but no business can be conducted between January 1st and the formal reinstatement. Reinstatement is preferred to applying for a new license, but not all states allow for this process and any state that does will charge additional fees. The hope of this endeavor is to submit all renewals on November 1 in anticipation of early approvals. However, the reality is that not all states will be able to review and approve in a short time. Working from home, staffing issues and the dramatic growth of licensees in the last few years will make this year a longer process than before. Do what you can now to avoid delays or surprises. Make your list and check it twice, then submit early!

MORTGAGE BANKER | OCTOBER 2021 7

N M L S

CE TIME Engage with a team of seasoned mortgage instructors. MEC offers continuing education in a variety of formats for the NMLS renewal process.

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10 MORTGAGE BANKER | OCTOBER 2021

ADVERTORIAL

THOUGHT LEADER Ensure appraisal compliance while providing a better borrower experience and its supporting documentation that is needed to close the deal. Unfortunately, not all systems are created equal and many lack the ability to dynamically adjust to the lender’s unique workflow, resulting in costly customizations and slow implementations.

ortgage lending institutions are required to be compliant with all federal and state regulations, in addition to GSE, VA and FHA mortgage lending policies. There are numerous challenges in meeting this burden, but the appraisal process has its own set of complexity and nuances that make it particularly difficult. Attempting to manually address the plethora of requirements can squander significant resources. Global DMS® helps mortgage lenders seamlessly comply with the Appraiser Independence Requirements (AIR), ECOA Borrower 3-day delivery rule, PCI compliance, collateral program quality monitoring, the third-party oversight requirement, as well as Supplier Diversity. For over 20 years, mortgage lenders have trusted our profound understanding of the real estate appraisal compliance challenges they face and our proven track record of helping them meet their regulatory obligations. Global DMS leverages its experience, technology and best practices to offer the industry’s only appraisal platform that guarantees compliance, EVO™. When it comes to managing the appraisal process lenders have three options to maintain compliance. They can choose to manage their appraisal process inhouse, using internal staff to play the role of the Appraisal Management Company (AMC) or leverage a traditional third-party AMC, or a hybrid of both. Each method has their merits and disadvantages but there are compliance risks with either option. Regardless of the approach, AIR compliance is of paramount importance

and has significant risk and consequences if not managed properly. Most lenders understand that the rule in principle is designed to prevent production staff, like loan officers, from directly or indirectly coercing, extorting, inducing, bribing, intimidating, compensating or colluding with a person preparing real estate valuations. What most lenders are unaware of is that each person who violates this section shall forfeit and pay a civil penalty of up to $10,000 for each day the violation continues and $20,000 each day for any subsequent violation. In these uncertain times, where staffing availability, retention, consistency and expense can be problematic, mortgage technology can provide a significant operational lift – especially in regard to appraisal process automation. Technology that creates a virtual firewall between parties to enforce AIR, while still allowing for authorized communication between the loan officers and valuation professionals, minimizes friction in the process. This best-in-class solution integrates with the lender’s Loan Origination System (LOS), providing secure and simplified ordering, tracking and delivery of the real estate appraisal

Certain lenders require loan officers to take credit cards payments for the appraisal at the point of sale, while others want to deliver a branded, personalized and secure credit card payment request email message to the borrower later in the process. With a 100% configurable solution, the lender has the flexibility to react to the borrower’s needs while also ensuring PCI compliance for processing credit card transactions. The importance of the borrower experience cannot be denied, yet surprisingly so many lenders still insist on physically mailing the appraisal report to the borrower via snail mail. This outdated process increases the time it takes to close the loan, adds significant costs of printing, packaging, and postage, and undermines transparency. Lenders that elect to utilize AMCs often have limited visibility into the process, yet unknowingly have the same amount of risk. In relation to utilizing third-party vendors, such as AMCs, the CFPB clearly communicates: “The lending institution is not absolved from responsibility of the third party’s compliance.” Lenders who incorporate an appraisal management software that can appropriately support an AMC model, an in-house appraiser panel model, or combination of both, will reduce their collateral risk significantly. The ability to manage valuation requests, communications, complex AMC autoassignments, automated appraisal reviews, UCDP and EAD submissions, and more will undoubtedly save time, save money, and save borrowers.

MORTGAGE BANKER | OCTOBER 2021 11

MortgageBanker MAGAZINE

DATABANK Aug-21

Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure):

Month-overmonth change

Year-over-year change

4.00%

-3.48%

-41.84%

Total U.S. foreclosure pre-sale inventory rate:

0.27%

1.73%

-23.55%

7,100

69.05%

18.33%

Monthly Prepayment Rate (SMM):

2.21%

8.62%

-18.16%

Foreclosure Sales as % of 90+:

0.19%

11.80%

245.81%

Total U.S. foreclosure starts:

Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure): Total U.S. foreclosure pre-sale inventory rate:

Number of properties that are 30 or more days past due, but not in foreclosure:

2,122,000

Number of properties that are 90 or more days past due, but not in foreclosure:

1,339,000

Jun-21

Month-overmonth change

Year-over-year change

4.37%

-7.62%

-42.39%

0.27%

-1.73%

-24.23%

Total U.S. foreclosure starts: 4,400 15.79% -84,000 -1,557,000

-25.42%

6.23%

-14.11%

Foreclosure Sales as % of 90+: 0.12% 0.39% -108,000 -1,027,000

160.52%

Monthly Prepayment Rate (SMM):

2.28%

Number of properties that are 30 or more days past due, but not in foreclosure: 2,320,000 Number of properties in foreclosure pre-sale inventory: 142,000 2,000 -45,000 Number of properties that are 90 or more days past due, but not in foreclosure:

Number of properties that are 30 or more days past due or in foreclosure:

2,264,000

-82,000

Number of properties in foreclosure pre-sale inventory:

Number of properties that are 30 or more days past due or in foreclosure:

1,550,000

Wisconsin

-324,000

145,000

-3,000

-47,000

2,466,000

-193,000

-1,760,000

● Low

Month-overmonth change

Year-over-year change

-7.62%

-42.39%

foreclosure):

4.17%

Total U.S. foreclosure pre-sale inventory rate: 10.43% Feb-10

0.27%

-1.73% 2.35%

-24.23%

4,400

15.79%

-25.42%

-26.22%

3.66%

Rate (SMM): 11.66%Monthly Prepayment Jan-10

2.28%

6.23% 2.56%

-14.11%

Foreclosure Sales as % of 90+:

0.12%

0.39%

160.52%

Number of properties that are 30 or more days past due, but not in foreclosure:

2,320,000

-191,000

-1,714,000

Number of properties that are 90 or more days past due, but not in foreclosure:

1,550,000

-119,000

-324,000

145,000

-3,000

-47,000

-193,000

-1,760,000

Month-overmonth change

Year-over-year change

-26.33%

Iowa

-26.48% -26.91%

4.59% 3.89%

Total U.S. foreclosure starts:

8.16%

Jan-10

9.32%

Jan-10

Number of properties in foreclosure pre-sale inventory:

5.10% Number of properties that 10.27% are 30 or more days past due or Jun-20 in foreclosure:

2.41%

Total U.S. foreclosure pre-sale inventory rate:

Nevada

-38.46%

4.84%

23.86%

Arizona

-37.93%

3.18%

17.03%

Rhode Island

-37.72%

4.37%

15.31%

Utah

-36.99%

Montana

-36.98%

Feb-10

Total U.S. foreclosure starts:

●-7.62% Low -1.73%

2.35%

4,400 2.28%

Foreclosure Sales as % of 90+:

0.12%

Jan-10

15.79% 6.23%

Number of properties that are 30 or more days past due, but not inConfidential, foreclosure: 2,320,000 Proprietary and/or Trade Secret

2.55%

Number of properties that are 30 or more days past due or in foreclosure:

2.67%

7.50%

Feb-10

145,000 2,466,000

-36.93%

Total U.S. foreclosure starts:

10.18%Monthly Prepayment Dec-05 Rate (SMM): Foreclosure Sales as % of 90+:

4,400 2.28% 0.12%

3.53%

-41.58% 6.04% Aug-20 Number of properties that are 30 or more days past due or in foreclosure:

Maryland

3.51%

-38.26%

12 MORTGAGE BANKER | OCTOBER 2021

5.85%

Feb-10

2,466,000

-14.11%

-324,000 -47,000

Month-overmonth change

Year-over-year change

-7.62%

-42.39%

●-1.73% Low

-24.23%

15.79%

-25.42%

0.39%

160.52%

-191,000

-1,714,000

1.14% 6.23% 1.19%

145,000

-25.42%

-1,760,000

2.13%

-42.91% 6.20% Aug-20 Confidential, Proprietary and/or Trade Secret 0.27% Number of properties that are 90 or more days past due, but not in foreclosure: 1,550,000 -119,000 Number of properties in foreclosure pre-sale inventory:

-24.23%

-193,000

-39.33%

Hawaii

-42.39%

Mar-00 Oct-03

12 Month Trend

● Date of Low Mar-06

Mar-05

3.54%

2,320,000

Mar-00

-1,714,000

2.19% -3,000

3.96%

Dec-05

Mar-00

2.55%

-191,000

Alaska

13.30%

Jan-20

Mar-06

Louisiana

Number of properties that are 30 or more days past due, but not in foreclosure:

12 Month ● Date of Low Trend

160.52%

TM SM ® Trademark(s) of Black Knight IP Holding Company, LLC, or an affiliate.

10.94% Feb-10 Number of properties in foreclosure pre-sale inventory:

12 Month Trend

2.07% 0.39%

Top 5 States by 90+ Days Delinquent Percentage Jun-21 Total U.S. loan delinquency rate (loans 30 or more days past due, but not in 4.37% 90+ Delinquency % foreclosure): Aug-21 Y/Y Change ●Total Peak ● Date of Peak0.27% U.S. foreclosure pre-sale inventory rate: 2005-Current 4.29%

2.34%

0.27%

Monthly Prepayment Rate (SMM):

Jan-10

2.98%

2,466,000

Top 5 States by 6-Month Improvement in Non-Current Percentage Non-Curr % Change in Jun-21 Total U.S. loan delinquency ● ratePeak (loans 30 or more days past due, but in Aug-21 ● Date ofnotPeak 4.37% 2005-Current Non-Curr % foreclosure):

Mississippi

-1,714,000

-119,000

-24.09%

Nebraska

Alaska

-191,000

-1,603,000

Top 5 States by 6-Month Deterioration in Non-Current Percentage Non-Curr % Change in Aug-21 ● Peak ● Date of PeakJun-21 2005-Current Non-Curr % Total U.S. loan delinquency rate (loans 30 or more days past due, but not in 4.37% District of Columbia

12 Month Trend

-3,000

0.13% -193,000 0.58%

-14.11%

-324,000 -47,000 -1,760,000

Jan-20

Page 1 of 1

Jan-20

12 Month Trend

● Date of Low May-00 May-00 Dec-00 Jun-06

Page 1 of 1

Jun-06

Page 1 of 1

MORTGAGE BANKER | OCTOBER 2021 13

MO RTGAGE MU S I NGS

Yoga Injuries, Dog Bites And Cross-Selling Liability CONFLICTS OF INTEREST AND THE DOWNSIDE OF OWNING THE CUSTOMER RELATIONSHIP

By B R IA N L EVY, S PECI A L TO M ORTGAGE BAN KE R M AG A ZIN E

ob Chrisman always reminds me that in America, anyone can sue anyone for anything1. It’s not that simple, but mortgage companies often need a reminder.

PREDICTING WITH EASY MATH

First, however, Freddie Mac’s quarterly forecast recently predicted that total originations will decline from $3.9 trillion in 2021 to $2.6 trillion in 2022. Shout out to Freddie’s economics/data team for making a prediction like that with easy math for arithmetically challenged types like myself to easily be able to calculate that origination volume is predicted to decline by 1/3 next year.2 I don’t have any actual statistics to back me up on this, but if history is prologue, as a result of fear of that production decline, I am predicting that mortgage companies are going to be having a lot more conversation 14 MORTGAGE BANKER | OCTOBER 2021

MANUFACTURED

around who owns the customer in the coming weeks: both with their LOs and secondary market partners. This is because one common reaction to lower production volume is to seek ways to squeeze more revenue out of fewer customers. Thus, the timing of this article.

WHO ACTUALLY OWNS THE CUSTOMER RELATIONSHIP?

Inevitably, a conversation about squeezing more revenue from fewer customers results in questions about conflicts of interest, especially for originators. I’ll get to that shortly. Those conversations, however, can also reveal one of the bigger lies3 (ok, that’s a strong word-let’s just call it a “sales pitch”) in the business. That is, when someone above you in the mortgage chain tells you some variation of the theme that, “you own the customer relationship and all they want to do is to support you in that effort”. Some companies (and mortgage broker

groups) try to make the concept of customer ownership a huge point of differentiation, but at the end of the day, they are overselling because everyone wants to BRIAN LEVY find ways to squeeze more revenue from “your” customer. For example, perhaps a wholesaler or subservicer won’t solicit an originator’s customers for refinance, but that won’t stop them from trying to sell homeowner’s insurance, lawn and garden tools or Nespresso machines to your customers. Meanwhile, the debate about customer ownership is mostly myopically centered around who should get the benefits from the customer relationship. As a mortgage industry lawyer, I don’t often get asked to

muse4 on the upside of a customer relationship which is usually measured in expected revenue. Rather, I typically just get asked if something can be done legally and compliantly. As I’ll illustrate below, that question, however, misses the risks in cross (or up)-selling a customer because can doesn’t always equal should.

NO ONE WANTS TO MAKE LESS NEXT YEAR

The customer ownership issue frequently crosses my desk5 when a mortgage banker’s LO has a real estate license or wants to sell other products or services to the mortgage customer such as insurance, financial advice or even something like subscriptions to the LO’s spouse’s yoga studio6. Faced with the anticipated drop in next year’s overall production noted by Freddie Mac, some LOs might look around and say, “if I could sell something else to my customers, maybe I could make up the commission decline”. Setting aside the FHA conflict of interest rules about getting paid by two sources on the same transaction7, most LO employment agreements prohibit dual employment/compensation for full time LOs. The primary reason for that prohibition is so a full time LO doesn’t get distracted8 by selling other stuff and remains focused on producing as many loans for the mortgage company as possible. Critically, however, that prohibition can also limit the employer’s liability for those other activities. But what happens when a loyal “top producer” just wants to maintain their FOOTNOTES

I’m not going to tell you the other biggest lies, but there’s a punch line in there somewhere. 4 But I do muse often. See www. mortgagemusings.com 5 Apparently the desks of many other mortgage compliance folks see this as well based on how it is a frequent topic on the Reg Lists email forum. 6 I haven’t actually heard that one yet, but it sounded like a good example for this article. 7 You cannot set that aside if you are an FHA lender. In addition to 3

This article is not to be construed as legal advice, and no attorneyclient relationship is created hereby. Consult a lawyer licensed in your state if you are sued or want to avoid being sued. 2 Freddie’s report also described a 17% increase in home values which, if carried forward, means an even greater drop in production on a unit basis. Please don’t make me do the math, but that means over a 50% decline in units! 1

SETTING UP AN AFFILIATED BUSINESS ARRANGEMENT TO SELL OTHER STUFF TO YOUR CUSTOMERS MAY BE A GOOD IDEA, BUT THAT CAN ALSO SIMILARLY TEND TO TAKE AWAY YOUR OWN FOCUS ON MORTGAGE LENDING. income levels in a declining volume market (beyond their control) and can be trusted not to lose focus or effort?9 Isn’t that ok as long as they are not selling something else in connection with just FHA transactions? Well, here’s where the uncomfortable truth about who really owns the customer gets revealed. That is, if a mortgage company permits its employee to also sell insurance, financial planning or even yoga lessons to a mortgage customer, the company will get no upside10, but may still legally be responsible for the other sale11; at least that’s what the plaintiff ’s lawyers and maybe the regulators might say. And, you will keep that downside risk even if that employee later leaves.12

RISKY YOGA AND DOG BITES

Imagine what your mortgage consumer might say if your LO also sells homeowner’s insurance that doesn’t fully cover a loss13. Similarly, consider if someone were to be paralyzed by a risky yoga pose14 at the LO’s spouse’s uninsured yoga studio after your LO sold the mortgage customer a membership? Unfortunately, it is likely that the mortgage company will be sued for liability (and the company’s liability insurance policy may not cover the claim).15 If your LO acts as a general sensitivity around conflicts of interest, FHA has a hard stop prohibiting dual compensation on the same transaction. 8 “Distracted” is another way to describe a conflict of interests. 9 Tell me how much they’re going to get paid for selling something else and I’ll tell you if they will be distracted. 10 Setting up an affiliated business arrangement to sell other stuff to your customers may be a good idea, but that can also similarly tend to take

away your own focus on mortgage lending. 11 There are several theories of liability that could be offered, but the most obvious would be respondeat superior which says that employers are responsible for the actions of their employees while engaged in work for the employer. It’s hard to remove and change hats while talking to a customer. 12 Again, consult a lawyer in your state to obtain guidance with any

both RE agent and mortgage originator to a homebuyer who thinks they got ripped off over latent defects or promised repairs…., well, at least buyers never feel that way, right?16 I would add, however, that even though mortgage brokers operate independently and are typically required to indemnify wholesalers for what they do, given the extraordinary level of oversight and support wholesalers provide to brokers presently, I wouldn’t be surprised to see similar claims brought in the future against wholesalers who knowingly permit brokers to crosssell other services to consumers (especially if a consumer class brings claims against a judgment-proof broker). Ironically, aside from the conflicts of interest, potential liability, and distraction concerns, perhaps the biggest problem with the many cross-selling ideas I hear about is that, for the most part, cross selling is just really difficult to execute well. Even if you’re successful, overemphasizing cross-selling can get you in a boatload of trouble too. Just ask Wells Fargo. particular situation(s). 13 What they might say is something like, “the mortgage company induced me to buy insufficient insurance so I could qualify for the loan and so the mortgage company should pay for any uninsured loss.” 14 All yoga poses are highly risky for me. 15 Read your insurance policy exclusions carefully. True story: when I was in-house, we got sued in, and our insurance company had to settle, a dog bite case because our

underwriter’s dog bit a child while they had neighbors over for dinner. Plaintiffs alleged the underwriter talked to the neighbors about applying for a loan during dinner (unlikely for an underwriter, but whatever). We probably still would have been sued had the underwriter also tried to sell yoga lessons, but our insurance provider probably would have denied coverage for that. 16 Sarcasm.

MORTGAGE BANKER | OCTOBER 2021 15

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O C T. 1 7 – 2 0 • S A N D I E G O C O N V E N T I O N C E N T E R

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L EGAL

MORTGAGE BANKING LAWYERS These attorneys are universally recognized by their peers as setting the highest standard for the legal profession, excelling in all fields – knowledge, analytical ability, judgment, communication, and ethics.

Thomas King Attorney

Mitchel H. Kider Managing Partner

Gregory S. Graham Co-Managing Partner

Ja Mort

tking@ravdocs.com 713-980-9521

kider@thewbkfirm.com 202-557-3511

ggraham@bmandg.com 972-353-4174

jbrody

Thomas (Tom) King’s practice is focused on federal financial servicesrelated regulatory and compliancerelated issues. He advises small and medium-sized mortgage and consumer lenders and servicers on a broad variety of topics including, among others, implementation of Dodd-Frank Act requirements, compliance program development and management, examination preparation, employee regulatory compliance training, general counseling, transactional work and loan level advice. King has a juris doctorate, cum laude, from The Thomas M. Cooley Law School where he was notes editor of the school’s law review. He has a bachelor of science from Michigan State University with majors in Psychology, Sociology and Political Science. Licensed to practice in Michigan; not licensed in Texas; practice limited to federal regulatory law.

In his 35 years as a practicing attorney, Mitch has represented banks, mortgage companies, residential homebuilders, real estate settlement service providers, credit card issuers, and other financial service companies in a broad range of matters. Mitch represents clients in investigations and enforcement actions before the Consumer Financial Protection Bureau, Department of Housing and Urban Development, Department of Veterans Affairs, Department of Justice, Federal Trade Commission, Ginnie Mae, Fannie Mae, Freddie Mac, and various state and local regulatory authorities and Attorneys General offices. In addition, Mitch acts as outside general counsel to smaller companies and special regulatory and litigation counsel to Fortune 500 companies.

Black, Mann & Graham Co-Managing Partner Gregory S. Graham has practiced in the areas of real estate, litigation, and bankruptcy law since 1989, and is currently licensed in Texas and admitted to practice before the United States District Courts for the Northern and Eastern Districts of Texas. Mr. Graham is also currently licensed to practice law in Georgia and has been since 2017. He received his Juris Doctor degree from Southern Methodist University School of Law in 1989 after receiving a Bachelor of Arts cum laude from UT Dallas.

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Mr. Graham’s affiliations include the Dallas MBA, where he previously served as a Director & Chairperson of the Legislative Committee; DFW Mortgage Brokers Association, where he previously served as Legal Counsel; MBA; NAMB; Texas AMB prior to its closure; and Texas MBA.

James Br the compl litigation, matters fo Brody’s e legal issu originatio loan secu bankruptc indemnifi his B.A. in from Dra his J.D., w in Advoca of the Pac of Law. H American Whitney A practice l been adm the Unite the Centr Southern addition, lead litiga mortgage related di and feder or on a pr FL, MD, PA, TN, a

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ames W. Brody, Esq. tgage Banking Practice Group Chair y@johnstonthomas.com 415-246-3995

rody actively manages all lex mortgage banking , mitigation, and compliance or Johnston Thomas. Mr. experience centers on those ues that arise during loan ons, loan purchase sales, uritizations, foreclosures, cy, and repurchase & fication claims. He received n International Relations ake University and received with a certified concentration acy, from the University cific, McGeorge School He was a recipient of the n Jurisprudence BancroftAward. He is licensed to law in California and has mitted to practice in front of ed States District Courts for ral, Eastern, Northern, and Districts of California. In Mr. Brody has served as ation counsel for numerous e banking and commercial isputes venued in both state ral courts, in a direct capacity ro hac vice basis, in AZ, CA, MI, MN, MO, OR, NJ, NY, and TX.

Marty Green Attorney marty.green@mortgagelaw.com 214-691-4488 ext 203 Marty Green leads the Dallas office of Polunsky Beitel Green, one of the country's top residential mortgage law firms. Mr. Green is an accomplished attorney with more than 20 years of experience in the legal, banking and financial services industries. He is the former Executive Vice President and General Counsel for Dallas’ CTX Mortgage Co. and previously worked with the Baker Botts law firm in Dallas as Special Counsel. In his role as leader of the firm’s Dallas office, Mr. Green advises clients on the latest rules and regulations covering residential lending, in addition to building on Polunsky Beitel Green’s long tradition of delivering loan closing documents with speed and accuracy. Mr. Green is admitted to practice before all Texas state and federal district courts in addition to the U.S. Court of Appeals for the Fifth Circuit. An honors graduate of the University of Texas School of Law, he earned his undergraduate degree at Southern Utah University. Texas Monthly has selected him as a Super Lawyer multiple years.

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