MPOFA – Mortgage Professionals Of America

On appraisals, should you follow the money?

Consumer Financial Protection Bureau hopes to clarify confusing closing fees

January 27, 2012 09:00AM

By Kenneth R. Harney

The new Consumer Financial Protection Bureau is working on a real estate issue that gets to the core of the agency’s purpose: Bringing clarity and better disclosures about the often opaque and costly fees that homebuyers, sellers and refinancers are hit with at closings.

One of the disclosures now under review might surprise you: appraisal charges. Why do they need clarifying? Doesn’t just about everybody who applies for a mortgage, whether it’s to buy a house or refinance, have to pay $450 to $600 – sometimes more – to find out what the property is worth?

Correct. But the reality is a bit more complicated. Start with the fact that in three out of every four purchases or refinancings, according to industry estimates, the person who visits, inspects, measures and puts a market value on your property is receiving only a fraction of the money you are paying. Some are being paid less than half of the fee, while the balance flows to an enterprise you’ve never heard of – an appraisal management company – that assigns the job to the appraiser. That management company, in turn, may be wholly owned by or in a joint venture or affiliate relationship with your lender, which in turn may be pocketing a significant portion of your appraisal dollars.

Current federal settlement disclosures give you no hint of where that money is really going. There is just a single line item for appraisal charges on the standard HUD-1 settlement statement. Say you’re charged $550. There is no hint that the appraiser gets $250 and the rest goes to the management company and the lender. The CFPB is considering whether to shed light on this by mandating two disclosures – what the appraiser is paid and what the management company is taking.

Should you care about this? Absolutely. Although banks and mortgage lenders maintain there is no need for additional disclosure, appraisers, builders, realty brokers and others say the costs of appraisals to consumers have increased in the past two years, while the quality and accuracy of the work have declined. In a poll of its members last year, the National Association of Realtors found that 70 percent reported consumers were being charged higher appraisal fees at closing – sometimes $100 or more than was the typical charge previously.

At the same time, appraiser members reported sharp reductions in their own compensation by 40 percent to 50 percent per assignment. Many of the agents polled said they saw significant increases in the number of appraisers who were unfamiliar with local market conditions because they were from another geographic area. The same poll also found a growing incidence of sales transactions being derailed by appraisals that came in below the contract price agreed upon between the seller and the buyer.

Critics say the drops in fees to appraisers combined with higher charges to consumers are byproducts of the rapid spread of management companies, whose growth during the post-boom years has been fueled by rules from Fannie Mae, Freddie Mac and Congress aimed at ensuring “appraiser independence.”

Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, which oversees and regulates the industry in that state, said that while appraiser independence is an important goal, banks and their affiliated management firms are raising the costs of appraisals to consumers without improving services.

“The borrower receives no benefit from the [appraisal management] ‘service,’” he said in an email. “The lender is able to outsource a significant responsibility” – the selection of an appraiser – “to an affiliated subsidiary, and profit from that task by making the consumer and the appraiser pay for the privilege. [This] business arrangement is concealed from the consumer/borrower, and the charge is misrepresented as an ‘appraisal fee’ on the HUD-1. This is dishonest, deceitful and unfair.”

Industry defenders of management firms, such as Donald Kelly, executive director of the Real Estate Valuation Advocacy Association, strongly disagree. Kelly said management firms perform the “back office” functions – including reviews and quality control – “that in the past were done by lender staff and employees.” In other words, they earn the money they get. And there’s no pressing need for consumers to see additional disclosures. They just need to know the bottom line.

Which brings the matter back to the Consumer Financial Protection Bureau. Though it can’t comment on pending rules, the agency has a statutory deadline in July to produce an improved version of the HUD-1 settlement form. How it comes down on real estate appraisal fee disclosures – more transparency for consumers or not – will be a revealing early test.

Bernanke: No Silver Bullet for Underwater Borrowers

By Donna Borak

JAN 25, 2012 6:40pm ET

WASHINGTON – One day after President Obama proposed a new plan to accelerate refinancings, Federal Reserve Board Chairman Ben Bernanke warned that no single government solution can by itself fix the housing crisis.

“There is no conceivable program that is going to put everybody in the country above water,” Bernanke told reporters at a press conference following the two-day meeting of the Federal Open Markets Committee.

Bernanke’s comments echoed a recent white paper by the Fed that, while urging policymakers to develop answers for the housing problem, shied from recommending one approach, which could be seen as going beyond the central bank’s mandate.

“It’s important to say our intent in that white paper is to provide the benefit of our analysis to those who will be making policy,” he said. “We did not take specific stands on individual issues; what we did was try to provide the pros and the cons and provide some context for these debates.”

He did not weigh in specifically about the plan Obama discussed Tuesday night in the State of the Union. The proposal – which would require congressional approval – would use fees paid by banks to support an expanded effort to get troubled borrowers into cheaper loans.

Instead, Bernanke reiterated the Fed’s view that some measure is needed to address the housing problem, which is still holding back the economic recovery. That was partially made evident by the FOMC’s decision on Wednesday to postpone lifting record-low interest rates any earlier than late 2014.

Combined with a poor labor market, the excess supply of vacant homes, restricted access to mortgage credit and ongoing costs from an inefficient foreclosure process continue to hamper Fed efforts to promote a stable economy.

“The weakness in the housing sector is an important reason why the economy is not recovering more robustly,” said Bernanke. “The problems in housing finance are part of the reason why monetary policy has not been more powerful because part of our transmission mechanism is to lower interest rates. It affects refinancings. It affects sales and purchases as well.”

While not advocating any one approach, Bernanke did touch on some proposed measures to provide relief.

Bernanke said the Fed has “no official position” on one idea to have servicers write down a portion of borrowers’ principal. He suggested that principal writedowns could help, but that they also have drawbacks.

“It seems very likely that principle forgiveness could be helpful depending on how it’s structured in reducing delinquencies,” said Bernanke.

As federal officials, state attorneys general and mortgage services continue to negotiate terms of a settlement to resolve claims of poor foreclosure processes – which is rumored to be upwards of $25 billion – Bernanke said whatever settlement amount results should answer the question: “What is the most cost-effective way to help as many people as possible?”

Lawmakers Land Few Punches as CFPB’s Cordray Visits Capitol Hill

By Kate Davidson

JAN 24, 2012 5:39pm ET

WASHINGTON – For all the angst over Richard Cordray’s controversial recess appointment to run the Consumer Financial Protection Bureau, the new agency chief came out of his first congressional hearing since starting the job remarkably unscathed.

Questions from the GOP-run House Oversight subcommittee were pointed, and revealed continued doubt by some lawmakers about the legitimacy of his hiring. But the tenor was considerably more constructive than past hearings with CFPB officials, including former agency chief Elizabeth Warren.

For his part, Cordray was resolute about his ability to execute the bureau’s full power.

“The one thing we cannot do, and I think would be a dereliction of duty, is for me to say that we’re not going to go forward and do the things that the law of the land has asked us to do” because of concerns about the recess appointment, Cordray said. “That is not tenable.”

To be sure, GOP members did not give Cordray a free pass. They not only reiterated concerns about the bureau’s accountability and transparency, but continued criticism of the White House for using a recess appointment to install Cordray even though the Senate was still in a “pro forma” session.

Subcommittee Chairman Patrick McHenry, R-N.C., who had infamously butted heads with Warren during one of her appearances before the panel, called Cordray an “unelected and unaccountable bureaucrat.”

“If having a regulator with unprecedented and ill-defined power was not enough, the administration decided to double down by bringing into question the validity of its director,” McHenry said. The move “jeopardizes the sanctity of the bureau’s operations and is unfair to Mr. Cordray, the bureau and most importantly, the American public,” he added.

In response to McHenry and other members’ doubts, Cordray said he is not focused on the circumstances around his appointment but rather the bureau’s duties.

“I understand the controversy that people have raised about the appointment,” Corday said. “My intention here is, I’m in the job, it’s an important job, it’s a big job. All I can do is try to carry out the responsibilities that the law of the land now has put on my back and to try to do it in a way that is consistent with the values you attributed, which I think are good ones – transparency and accountability.”

And, indeed, members seemed interested in his appointment only to a point, spending considerable more time asking Cordray about the agency’s work than his own job status.

Rep. Guinta, R-N.H., urged Cordray to err on the side of being “over-transparent” about the bureau’s initiatives, including the posting of more information on the CFPB’s website.

“Those things are extremely important, I think for the country and for those that you oversee, so you have credibility and the agency has credibility,” Guinta said.

Responding to a question from McHenry, Cordray sounded open to adopting a disclosure model similar to that used by the Securities and Exchange Commission, in which the CFPB would post publicly everything expected on the bureau’s agenda for a coming year.

“If that seems to be a best practice, that’s something that we are happy to do . . . if you want to have it on a piece of paper or our website,” Cordray said.

Overall, the mood between Cordray and members of the subcommittee was more respectful than in hearings past, most notably in May when an exchange between McHenry and Warren – who first proposed the idea for the bureau – grew tense and Warren was later accused of not answering all of the panel’s questions. (Warren is now running for a U.S. Senate seat from Massachusetts.)

Highlighting the contrasts, McHenry thanked Cordray for being responsive to inquiries while noting Warren’s responses were “fuzzy at best.”

Toward the end of the hearing Tuesday, McHenry said to Cordray, “You’ve given a great deal of explanation, we appreciate that, and we certainly appreciate the exchange of ideas.”

Cordray reiterated a pledge that he made at his nomination hearing last summer to actively reach out to small businesses and to convene panels of small business leaders, as required by the Dodd-Frank, related to any major regulation that could potentially impact on those businesses.

Democrats on the committee dismissed Republican claims that the bureau is unaccountable to Congress by highlighting the number of times CFPB officials have been called to testify on Capitol Hill – 12 times since last March.

“Today is the third time in eight months that CFPB officials have been called before our committee,” Rep. Elijah Cummings, the full committee’s top Democrat, said in his opening remarks. “Our committee has targeted the CFPB – unfairly in my view – as part of a broader campaign to prevent it from becoming fully operational.”

Rep. Carolyn Maloney, D-N.Y., implored Republicans on the panel to respectful toward the new CFPB chief.

“Some hearings can be described as a ‘fishing expedition’; I hope today’s hearing doesn’t become a ‘bashing expedition’ by the members of the majority, treating Director Cordray as badly as they treated Elizabeth Warren in the past,” she said.

Who Will Be the First to Sue the CFPB?

By Kate Davidson

JAN 23, 2012 1:18pm ET

WASHINGTON – When President Obama installed Richard Cordray as director of the Consumer Financial Protection Bureau, industry observers declared that a lawsuit was imminent.

But in the weeks following the controversial recess appointment, would-be plaintiffs have held up their hands one-by-one and said, “Don’t look at us.” Challenging the president’s Constitutional authority – and the power of an agency director whose appointment may not be valid – is more complicated than many first assumed.

A successful lawsuit depends entirely on whether the plaintiff has standing – or the legal right – to bring a case in court, and whether they can prove that they were harmed by some action the bureau took that it wouldn’t be able to take without a director.

That means a lawsuit will likely wait until the agency takes an enforcement action against a nonbank lender, lawyers said.

“The only people who are going to have standing in the near future are people who the bureau targets for an enforcement action, either in court or through the administrative process at the CFPB,” said Alan Kaplinsky, a partner with Ballard Spahr. “Once that happens, then the target of that enforcement action may very well have standing.”

An enforcement action would make it easier for a firm to claim the CFPB has done it material harm, such as imposing a civil money penalty or requiring a bank to change the way it does business.

But no one is sure when the first enforcement action will come.

CFPB officials have made clear that addressing problems in the mortgage market and stopping illegal payday lending practices are top priorities.

Asked about ongoing investigations and potential enforcement actions, Cordray told a crowd at the Brookings Institution earlier this month that the agency had “lots of work in the pipeline,” but declined to say when it might take action.

“We are actively moving forward on all fronts and will have more to say as things ripen,” he said.

While the bureau will issue enforcement actions against banks and nonbanks, observers said banks are unlikely to challenge the bureau’s authority.

For one, banks are subject to supervision and enforcement even without a Senate-confirmed director, and the question of whether Cordray’s recess appointment was valid has no bearing.

Although a bank could challenge an enforcement action related to “abusive” acts or practices – the bureau does not have the authority to enforce that standard without a director – banks are also usually reluctant to take a regulator to court.

“You don’t see the Bank of America’s suing because you cannot be a federal depository and not get along with your regulator,” said Mark Calabria, a former top aide to Sen. Richard Shelby, and the director of financial regulations studies at the Cato Institute. “If you’re some little payday lender somewhere, you don’t care what Washington thinks – or you care a lot less.”

Nonbank lenders could also try to sue after the CFPB issues a regulation directly affecting them.

The bureau already has several rules on its plate, including a larger participant regulation that would establish a test to determine which nonbanks are subject to CFPB supervision. It must also finalize a rule requiring a lender to verify a borrower’s ability to repay a loan, and establishing a so-called qualified mortgage that would presumably satisfy that requirement.

The bureau is also working with other regulators to establish new industry standards for mortgage servicing, a process that has been delayed as officials try to coordinate their actions with a global settlement led by state attorneys general.

Agency officials have said they are working to finalize the larger participant rule, but Cordray told reporters on Jan. 12 that he “can’t really anticipate” when the bureau will release a qualified mortgage rule.

Financial institutions could start preparing a challenge now based on what they’ve seen in the bureau’s requests for comment, said John Elwood, a partner with Vinson and Elkins LLP and a former senior deputy in the Justice Department’s Office of Legal Counsel.

“People will have a look at the proposed regulations when they’re published and be able to decide, based on that, whether there is a basis for a challenge, so that they could have a challenge in the can ready to file on the day that the regulations are made final,” Elwood said. “I think you can say with a great deal of certainty that a challenger would be able to bring a challenge within a week.”

It’s even potentially possible a nonbank lender could move before a regulation has been finalized.

Victor Williams, a law professor at the Columbus School of Law at Catholic University in Washington, who has studied and written articles on the recess appointment process, said a nonbank could claim it has been harmed simply because it will now be supervised.

“I could see going ahead and moving forward with a lawsuit even before that time,” Williams said. “If I’m a business and I’m about to be regulated, I’m already incurring costs. I’m already lawyering up in ways that I had not had to before. I don’t want to run afoul of the law.”

The question is whether any individual nonbank wants to shoulder the burden – and bad publicity – that a lawsuit against the CFPB would bring.

Some observers said nonbanks have just as much fear as banks in going after their new regulator. They may prefer for a trade association to file the lawsuit.

“It certainly would be safer for the individual company for the trade association to do it rather than themselves,” said L. Richard Fischer, a partner with Morrison & Foerster.

So far, however, the trade groups most affected by the recess appointment have signaled they intend to play nice with Cordray.

The Chamber of Commerce, which opposed the bureau’s creation under Dodd-Frank and has pushed for Republican-led reforms to its governance and structure, is considered a top candidate to sue.

“They have a superb litigation group – very, very sophisticated and very, very well run,” Elwood said. “And as a trade group they would have representational standing on behalf of their members.”

But Chamber President and CEO Tom Donohue said this month the group does not intend to sue the bureau.

That echoed remarks from other trade groups.

“I want to make it perfectly clear, we are not suing our regulator,” Bill Himpler, the executive vice president of federal affairs at the American Financial Services Association, said at a conference of bank consumer lawyers in Salt Lake City this month.

Ted Saunders, the spokesman for the Financial Service Centers of America, a trade group representing payday lenders and other alternative financial services, said “my understanding is that our trade organization is not going to actively participate in any legal action with the bureau.”

Still, many lawyers don’t accept that a nonbank lender will not sue.

“If something impacts them they’ll sue,” said Kip Weissman, a partner with Luse, Gorman, Pomerenck & Schick. “It seems more likely that it could be some type of payday lender or (other nonbank) where the regulations really threaten their entire business model. But I think the strategy for everybody is to keep your powder dry.”

They may not want to wait long, however.

Ray Natter, a partner with the law firm Barnett, Sivon and Natter, published an article in the firm’s newsletter that said early court cases found that a person couldn’t challenge the validity of an appointment in the same lawsuit challenging an agency action.

Recent court cases have found that a plaintiff may challenge an administrative action based on the validity of the appointment only if two conditions are met. One, the plaintiff must bring his lawsuit at or around the time that the challenged action occurred, and he must show that the agency was aware “of claimed defect in the official’s title to office.”

The sooner a plaintiff files a challenge, the more likely it may be that a court will overturn an agency’s actions.

Natter said courts have long recognized the “de facto officer doctrine,” which says that rules or decisions issued by a person acting under an official title are valid, even if the person’s appointment is later determined to be invalid. This allows the court to come up with a remedy that causes the least amount of disruption as possible, Natter said.

“If this gets resolved in the next month or two and the courts find the appointment unconstitutional, they could very well decide that nothing he’s done is valid, because it’s only been a few months,” Natter said. “But if it’s two years from now, they’re not going to do that.”

Fannie, Freddie tweaking forbearance policies

January 20, 2012 11:30AM

By Kenneth R. Harney

If you or someone you know has lost a job and are in danger of falling behind on mortgage payments, here’s some potentially important news for you: The two largest players in home mortgages, Fannie Mae and Freddie Mac, are revising their policies on forbearance when unemployment interferes with your ability to stay current on your loan.

Forbearance means that a lender or mortgage servicing company will suspend – cut to zero – or reduce required monthly payments for a specific period of time. On loans they own or have securitized, Fannie and Freddie are now directing servicers to forbear when a borrower can show the loss of a job.

Unlike the companies’ earlier rules, servicers can grant a half year of reduced or suspended payments without getting special permission in advance. If unemployment continues beyond six months, and if the servicer believes additional forbearance for up to another six months would be appropriate, it can ask Fannie or Freddie for approval to do so. During any unemployment forbearance period under the rule revision, borrowers will not be subject to foreclosure, even if they had fallen behind on payments before the forbearance began.

Fannie Mae’s policy becomes mandatory for all loan servicers March 1. Freddie Mac’s policy takes effect Feb. 1. Though no estimates were available on how many borrowers could be assisted under the new guidelines, the numbers nationwide are likely to be substantial at a time when the unemployment rate is at 8.5 percent.

Forbearance, it should be noted, does not mean a forgiveness or reduction of the principal balance on the mortgage. Think of it instead as a timeout. Whatever amounts go uncollected during the forbearance period must eventually be repaid. Say, for instance, that you owe $2,000 a month on your loan. Suddenly you lose your job and that payment becomes impossible. An unemployment forbearance agreement might allow you to pay nothing on the mortgage while you search for a new job. Or, if your spouse still has a job and you can afford it, your monthly payment might be cut to $1,000.

If your job search ultimately took four months, you’d owe $4,000 on the partial reduction plan or $8,000 on the suspension plan at the end of the forbearance period. You’d be expected to resume your regular $2,000 payments and work out an arrangement with your servicer to repay the deferred amounts in affordable increments. If this happened to be $500 extra a month, your repayment would take eight months on the reduction plan, 16 months on the suspension.

Not everybody owning a home with a Fannie or Freddie mortgage will be eligible for the expanded job-loss relief. To begin with, the house will need to be a principal residence, not a second home or investment property. Fannie’s guidance to servicers specifically rules out assistance when the home was financed with an FHA, VA or Rural Housing mortgage. Most important, there must be a documented “financial hardship” caused by the employment loss and there must be a reasonable chance that without forbearance, the borrowers could sink into default and eventually lose the house.

In cases where borrowers are being considered for an extension of an existing forbearance plan, borrowers will also have to document that they don’t have cash reserves – bank accounts, other liquid assets – that exceed 12 months worth of their monthly housing expenses. In other words, if you’ve got money socked away that you could use to pay the mortgage, don’t expect another forbearance. Also under Fannie’s rules, borrowers’ monthly housing expenses must be more than 31 percent of their monthly income, excluding unemployment benefits. Put another way: Only borrowers whose mortgage bills are consuming an inordinate amount of their total household budget need apply.

Tracy Mooney, Freddie Mac’s senior vice president for single-family servicing, said the purpose of the expanded forbearance is to “provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new [jobs] and resolve their delinquencies.”

How do you get a pause on your mortgage payments? The first step is to communicate with your servicer as soon as you learn of your job loss. Don’t wait until you fall behind on a payment. Ask the servicer whether Fannie or Freddie owns or has guaranteed your mortgage, then walk through the rules and numbers: Are we eligible for a forbearance plan? How much can we afford to pay and how much will be deferred? What alternatives may be available such as a loan modification?

House Dems Press FHFA on Principal Reductions

By Kevin Wack

JAN 18, 2012 5:21pm ET

WASHINGTON – House Democrats who hope to see reductions in mortgage principal as a way to stimulate the economy are turning up the heat on the Federal Housing Finance Agency.

At a congressional hearing in November, acting FHFA director Edward DeMarco told Democratic Rep. John Tierney that his agency could provide Congress with an analysis that shows why principal reductions on Fannie Mae and Freddie Mac mortgages are a worse outcome for taxpayers than foreclosures.

But the FHFA has yet to provide that analysis, according to Tierney and Rep. Elijah Cummings, the top Democrat on the House Oversight Committee.

So now those two Democrats are asking Republican Chairman Darrell Issa to issue a subpoena that would require the agency to turn over its analysis to Congress.

“We requested that this information be provided by December 9, 2011, but Mr. DeMarco has failed to provide even a single document,” the Democrats wrote Wednesday in a letter to Issa.

A spokeswoman for Issa did not immediately respond to a request for comment. House Republicans have generally been supportive of DeMarco and hostile to the idea of principal reductions.

Also Wednesday, Democratic Rep. Brad Miller sent his own letter directly to DeMarco, asking for him to provide the same documents to Congress.

“I assume the analysis was completed before your decision that the GSEs would not pursue principal modification to mitigate losses,” Miller wrote. “I do not understand, therefore, the continued delay in disclosing the methodology and results of your analysis.”

An FHFA spokeswoman declined to comment on the letters.

MERS Settles, Avoiding Class Action Foreclosure Fee Lawsuit

By Austin Kilgore

JAN 19, 2012 10:48am ET

An 11th-hour settlement is expected to stave off potential class action status in a lawsuit that claims foreclosed borrowers were overcharged for attorneys’ fees that the Mortgage Electronic Registration Systems Inc. did not actually incur.

The plaintiffs, Jose and Lorry Trevino, filed a motion seeking class action status and an amended complaint on Jan. 12. The defendants had until Jan. 17 to respond, but received a two-week extension, “so that the parties can memorialize their settlement,” according to court documents filed Jan. 13.

The parties have agreed to terms, but the settlement is pending final paperwork. The case hasn’t been dismissed and likely won’t until the settlement is finalized.

The suit, originally filed in 2007, names Merscorp and a number of its shareholders, including Citigroup, Countrywide, Fannie Mae, Freddie Mac, GMAC Residential Funding, HSBC, JPMorgan Chase, Washington Mutual and Wells Fargo.

The shareholder defendants were dismissed from the case in 2008, though they were renamed in the recent amended complaint. Representatives from the companies declined to comment about the case.

Janis Smith, Merscorp vice president of corporate communications, said the parties resolved the case, but declined to provide additional details, citing the settlement’s confidentiality agreement.

The lawsuit claims foreclosed borrowers were overcharged for attorneys’ fees and other expenses that were not actually incurred during the foreclosure process.

“MERS has extracted and continues to extract improper costs, fees and expenses from Plaintiffs and members of the Class in excess of sums they actually incurred and/or were obligated to pay,” the complaint reads.

By seeking class action status, the plaintiffs in the case would have been expanded to include all foreclosed borrowers since Sept. 20, 2001 whose mortgages or deeds of trust were assigned to MERS and who received a demand to pay expenses in excess of what MERS and its member servicers actually paid.

Mortgage documents authorize note holders to be reimbursed for their expenses when a loan goes into foreclosure. But since MERS and the servicers have prearranged set fees with foreclosure attorneys, those costs are limited, the plaintiffs argue. The suit claims MERS has a flat-fee arrangement of $400 to $500 per foreclosure, but that attorneys are sending demands for payment ranging from $1,200 to $2,000 “and upwards.”

“A demand for payment of fees and expenses that exceed actually incurred or obligated amounts, represents a clear breach of contract under the laws of the various states in which MERS operates,” the complaint reads.

The lawsuit claims breach of contract, unjust enrichment, and breach of duty of good faith and fair dealing.

“Defendants breached the agreement with Plaintiffs and the other members of the Class by causing, directing and/or allowing their loan servicers and retained attorneys to overcharge for costs, fees and expenses in connection with enforcement or foreclosure proceedings, in an amount in excess of the amounts actually incurred or obligated to be paid,” it reads.

According to court documents, the Trevinos borrowed a $194,000 Veterans Administration-backed mortgage in 2003 and subsequently defaulted, causing Wells Fargo to initiate a foreclosure on the property.

The complaint seeks to recover the alleged excessive expenses, but does not specify how much the Trevinos were allegedly overcharged, nor does it provide an estimate of the number of potential members in the class and how much they were allegedly overcharged.

Homeownership costs set to skyrocket with new fees, loss of tax write-offs

January 13, 2012 12:45PM

By Kenneth R. Harney

Though its demise drew little attention because of the partisan year-end brawl over the payroll tax cut extension in Congress, a key mortgage financing benefit disappeared at the end of December: The ability of large numbers of homebuyers and owners to write off the premiums they pay for mortgage insurance.

The loss of that tax deduction – plus mandatory new fees imposed by Congress on all new conventional and Federal Housing Administration loans – could effectively ratchet up the costs of homeownership this year.

The expiration of mortgage insurance deductibility will hit many low-down payment conventional loans originated since 2007, plus virtually all new mortgages closed this year where the down payment is less than 20 percent. Though industry experts do not have precise numbers, their estimates range into the millions of existing owners and new purchasers potentially touched by the deductibility termination. Borrowers using guaranteed veterans and rural housing loans, where down payments can drop to zero, also are affected.

The change in the law took effect last month, along with the expiration of 58 other tax code benefits that Congress failed to renew, such as credits for home energy improvements, credits for builders of energy-efficient new houses and deductions for state and local sales tax payments. They were all components of what would have been an annual “tax extenders” bill authorizing continuation of relatively noncontroversial expiring benefits for another year or more.

Congress could still reauthorize all or some of the write-offs retroactively this year, but the current poisonous political atmosphere on Capitol Hill raises doubts about the timing of that scenario.

The mortgage insurance premium deduction dates to legislation enacted in 2006. It allows purchasers and refinancers who use either private mortgage insurance or federal insurance or guarantees, and who itemize on their federal tax returns, to write off their premiums. Borrowers who are single or married and filing jointly with adjusted gross incomes of $100,000 or less can write off 100 percent of their annual mortgage insurance premiums. Married homeowners filing singly can write off 50 percent of premiums. Borrowers with incomes above $100,000 may qualify for partial deductions on a sliding scale.

In many cases, the post-tax savings for these borrowers are significant. New buyers with an income around $100,000 and a mortgage of $200,000 would save between $600 and $1,000 a year, depending on their credit score and loan-to-value ratio, according to MGIC, one of the largest private mortgage insurers in the country. For households with lower incomes, the impact would be less, depending on their marginal federal tax brackets.

David Stevens, who served as FHA commissioner and is now CEO of the Mortgage Bankers Association, said the loss of deductibility of mortgage insurance “hits a segment [of consumers] – middle-income and first-time buyers – where affordability is especially important.”

But mortgage insurance was not the only housing-related casualty of the pre-Christmas skirmishing. As part of the temporary extension of the payroll tax cut, negotiators tacked an unusual provision that raises fees on the majority of conventional mortgages – those originated for sale to or guarantee by Fannie Mae and Freddie Mac. Starting in April, Fannie and Freddie will impose a surtax on the guarantee fees they charge private lenders equal to one-tenth of 1 percent. Lenders are virtually certain to pass those fees to consumers in the form of a higher note rate or loan charges up front. Industry estimates suggest the surtax could add an eighth of a percentage point to rates and raise costs to borrowers over the life of the loan by more than $4,000 on a $200,000 mortgage.

Unlike standard guarantee fees, which are used by Fannie and Freddie to defray loan-default expenses, the new funds will be sent directly to the Treasury to help pay for the $36 billion cost of the temporary payroll tax cut. FHA loans also will be hit with a fee increase by the payroll bill, raising the annual premiums it charges new borrowers by one-tenth of a point.

At a time when the Federal Reserve is warning that there can be no broad economic improvement until housing recovers, it may strike you as odd public policy to raise costs for homebuyers and refinancers in order to fund unrelated, temporary tax relief. But that’s not the way they saw it on Capitol Hill in the rush to holiday recess.

Bottom line: The mortgage insurance deductibility problem may disappear if mortgage insurance gets included in an election-year “extender” package. But the fee hikes on most new mortgages are here for the foreseeable future, so buyers should factor them into their housing budgets.

Justice Dept: Cordray Recess Appointment Was Legal

By Rob Blackwell

JAN 12, 2012 12:46pm ET

WASHINGTON – The Justice Department issued a critical legal opinion Thursday asserting that President Obama is allowed to make recess appointments despite pro-forma Senate sessions in which no business is conducted, effectively validating the appointment of Richard Cordray to the Consumer Financial Protection Bureau.

But the opinion also said a legal challenge to such appointments was likely – and the outcome uncertain – noting there is little judicial precedence to rely on.

“Due to this limited judicial authority, we cannot predict with certainty how courts will react to challenges of appointments made during intrasession recesses, particularly short ones,” the opinion says. “If an official appointed during the current recess takes action that gives rise to a justiciable claim, litigants might challenge the appointment on the ground that the Constitution’s reference to ‘the recess of the Senate’ contemplates only the recess at the end of a session.”

Obama made four recess appointments last week, including that of Cordray to head the CFPB. Senate Republicans decried the move as a “power grab,” saying the president did not have the right to make such appointments because the Senate was still technically in session. Although the Senate had adjourned in mid-December, it had continued to hold “pro-forma” sessions every three days in which no business was conducted.

In its legal opinion, the Justice Department said that both Republican and Democrat administrations had concluded such sessions don’t really count.

“The Senate could remove the basis for the President’s exercise of his recess appointment authority by remaining continuously in session and being available to receive and act on nominations, but it cannot do so by providing for pro forma sessions at which no business is to be conducted,” the opinion says.

The opinion notes that not even members of the Senate consider the pro-forma sessions as proper sessions of the chamber, noting several press releases and official notes in which lawmakers from both political parties describe the Senate as being on “recess.”

It also points to the Senate’s Web site, which describes a recess as “a break in House or Senate proceedings of three days or more, excluding Sundays.”

Still, the opinion notes there is legal uncertainty around the issue, saying it has rarely been decided before a court of law. When such decisions have been made, however, courts have sided with the president.

“While there is little judicial precedent addressing the President’s authority to make intrasession recess appointments, what decisions there are uniformly conclude that the President does have such authority,” the opinion states.

MetLife’s Failure to Sell Unit Shows Mortgages Still ‘Toxic’

By Kate Berry

JAN 13, 2012 12:55pm ET

MetLife Inc.’s decision to shutter its huge home lending unit after trying to sell it shows bankers still consider this business radioactively risky five years into the housing slump.

“Banks at the end of the cycle don’t want mortgage,” says Bill Dallas, the chairman and chief executive of Skyline Financial Corp., an Agoura Hills, Calif. mortgage bank. What was once considered “the safest asset class on the planet has been declared toxic,” he says.

On Tuesday MetLife announced that its Irving, Tex., home loans unit will shut its doors, eliminating 4,300 jobs. The insurance company will take a $90 million to $100 million after-tax charge for closing the business, which it had put on the block in October.

“It’s hard to sell a mortgage company right now because the bid levels are probably below what your cash value is,” says Cameron Findlay, chief economist at LendingTree, a unit of Tree.com Inc. (which agreed in May to sell its mortgage origination subsidiary, Home Loan Center, to Discover Financial Services).

Potential buyers of mortgage operations are afraid to take on the risk of having to repurchase soured loans from investors, Findlay says. “That really hurts on the trading side with multiples and valuations. Buyers think they’re better off putting capital to work some other way.”

Steven A. Kandarian, who became MetLife’s president and chief executive officer in May, has led a retreat from the banking business and its regulatory burdens. MetLife is already positioned to be marked by regulators as a systemically important financial institution and thus subject to upcoming Basel III requirements to hold higher capital levels.

In late December, MetLife agreed to sell $7.5 billion of its roughly $10.7 billion in deposits to GE Capital Finance Inc. for an undisclosed price. The deal is expected to close in the second quarter. MetLife’s entire retail banking business, including mortgages, accounted for less than 2% of operating earnings in the third quarter.

MetLife has said it plans to keep its reverse mortgage business because it complements other insurance products that it sells to seniors. There is speculation that it may close its warehouse lending unit, which had about $1 billion in commitments at year-end, if it cannot find a buyer. The company also is engaging offers for its $85 billion servicing unit, insiders say.

But MetLife has suffered from bad timing since its announcement in October that it planned to get out of the mortgage business.

A drop in mortgage lending volumes to the lowest levels in over a decade has forced other lenders to cut costs and staff. Big mortgage players, including Bank of America Corp. and Ally Financial Inc., have pulled back on correspondent lending and other operations in the face of regulatory scrutiny, bond investors’ lawsuits, and the dismal state of the housing market.

Dave C. Stephens, the chief operating and financial officer at United Capital Markets Inc., a Denver company that hedges mortgage servicing rights, says MetLife did not have much to sell beyond its people.

“Nobody today would pay for a production platform,” Stephens says. “When [mortgage] volumes are down producers are looking for a place to land so you just hire them, you don’t have to assume any losses, leases or corporate responsibilities.”

There also are fewer interested buyers in its mortgage servicing unit, Stephens says, because the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, is in the process of revamping the economics of mortgage servicing. Potential buyers are “really low-balling on servicing,” Stephens says, reflecting the overall uncertainty.

One mortgage expert says he was “stupefied” that the company would quit a profitable business given that MetLife gained market share in the third quarter and has been growing for the past year. MetLife originated 1.98% of all the residential mortgages written in the third quarter, up from 1.61% the previous quarter and from 1.21% a year earlier, according to National Mortgage News.

The closure of MetLife Home Loans is sending ripples effects through the mortgage market. Lead generation companies that were feeding MetLife are now trying to dump leads on the market, Findlay at LendingTree says.

Dallas at Skyline Financial says he has received calls from 30 MetLife loan officers. But they are not immediately employable by a nonbank firm like his.

That’s because loan officers working for federally-chartered banks do not have the same stiff licensing requirements as mortgage bankers and brokers. Under the 2008 SAFE Mortgage Licensing Act, federally insured banks are required to submit fingerprints and forms detailing their personal history and experience to the Federal Bureau of Investigation for state and national criminal background checks.

It can take three to five months for nonbank loan officers to get licensed in individual states, making it much tougher for MetLife’s loan officers to move to a nonbank and resume originating loans.

“MetLife has really put their people in a terrible situation because it’s the worst quarter of the year and half of them are unlicensed,” Dallas says. “You can’t originate loans without being licensed.”

A spokesman for MetLife did not respond to requests for comment.