Not so distant past

In case you’ve forgotten, in 2008 the country suffered a major financial crisis. This crisis came by the hands of mortgage lending and extravagantly risky investment bankers and brokers. The stock market went kaput, everyone’s IRAs were cut in half – the crisis affected just about everyone.

Fast forward nearly a decade and private lenders want riskier mortgage brokers back.

Brokers come back

Since the 2008 crisis, the number of regulations have skyrocketed. Mortgage brokers used to be the man in the middle talking between the lenders and the borrowers, but the newer financial regulations have made them all but extinct.

It doesn’t help that big banks with national sales teams refuse to use the middlemen anymore due to the fact that it’s harder to police loan quality from third-party contractors.

Now, a solid nine years after the crisis, the smaller and independent money lenders are asking for those brokers to come back.

The fact that the middlemen did not check mortgage applications for accuracy (see: fraud) and let loan quality evaporate is what makes small and midsize independent lenders want them back.

Non-bank lenders typically cater to riskier borrowers.

Those lenders say they need brokers back to spread out across the country and be the middleman for mortgages for people with less than ideal credit scores, or who can’t prove their income through a typical tax return.

Non-bank lenders

Usually a mortgage broker will survey lenders for the best loan to fit the customer. Think Kayak for loans. Once there is a decision, the lender funds the borrower’s loan and off ya go.

Pre-2008, mortgage brokers served banks and independent lenders.

However, today most brokers work for non-bank lenders who make up a majority of the mortgage market.

So much of a majority that in the first quarter, those non-bank lenders accounted for about half the mortgages originated in the U.S.

Looming potential

Lenders say there is an untapped market among borrowers with good credit scores.

Borrowers such as self-employed workers who don’t have proper income documentation, for example.

Lenders also believe that there is an untapped market for responsibly-made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth.

If the lenders are successful in recruiting mortgage brokers, they believe the market potential for both types of loans could reach $200 billion annually.

#mortgagegame

A shift in FHA’s condo requirements

At last year’s National Association of Realtors (NAR) Conference and Expo, Federal Housing Administration (FHA) Principal Deputy Assistant Secretary Edward Golding announced a shift toward a lower owner-occupancy rate requirement on condominiums, something NAR has long fought for.

Today, the FHA issued a mortgagee letter signed by Golding, lowering the owner-occupancy requirement for existing condominiums from 50 to 35 percent, effective immediately.

But there are some strings…

The FHA says the requirements are necessary in order to “maintain the stability of the Mutual Mortgage Insurance Fund” (MMIF). However, lowering the requirement to 35 percent does not threaten the MMIF if other requirements are met, such as “higher reserves, a low percentage of association dues in arrears, and evidence of long-term financial stability (as evidenced by financial documents).”

For proposed, under construction (including existing projects less than 12 months old), or gut rehab conversions, the FHA will allow a minimum owner-occupancy percentage of 30 percent of the declared units.

NAR calls this a big step

Jon Boughtin, Public Issues Media Manager, Media Communications at NAR tells The Real Daily, “NAR still believes the 35 percent owner-occupancy requirement should apply to all condos, and we’ll continue to make that case as FHA moves forward with the rulemaking process that’s currently underway, but from our perspective this is a big leap forward.”

“We’ll also continue to work with them to address transfer fees, commercial space requirements, and other pending issues related to condo approval,” Boughtin added.

NAR President Tom Salomone asserted, “NAR has been fighting for changes to FHA’s condominium rules for years, and the mortgagee letter announced will bring some much needed relief to the market.

Condominiums will have a much easier time getting certified by FHA, and Realtors® will have more options for clients looking to purchase a condo with an FHA mortgage.”

“This is a big win for NAR, and while we believe all condominiums should have the rules applied to them equally, we also believe FHA has heard the concerns of Realtors® and is moving in the right direction,” Salomone concluded.

#FHAcondos

Would you pay for an insurance policy on your car if it didn’t cover you in any way shape or form, rather covered your lender’s loss if you get in an accident? Of course not, that’s ludicrous, but mortgage lenders have long done it on homes with most barely batting an eye at the tiny line item.

Lender Paid Mortgage Insurance (LPMI) is an insurance policy a homeowner can’t collect on, rather protects the bank in the event that the property is lost to say a fire, which is exactly what happened to Rolling Lazzarone’s home in Reno three years ago which is still no more than a concrete slab.

Lazzarone’s Attorney, Ken McKenna tells News 4, “Nobody knows about LPMI. It’s fraud.”

Fraudulent or not, they must disclose

Whether fraudulent or not, Wells Fargo is being sued for failing to disclose the LPMI policy when Lazzarone bought his house, contending that he is not the only homeowner who never signed a disclosure, paying on an insurance policy on the bank, and when a homeowner attempts to talk to the insurance company, no details can be given because it’s the bank’s policy, not the homeowner’s.

In this instance, the homeowner said they hadn’t heard of LPMI until recently, and according to the Wells Fargo website, the homeowner pays the LPMI through a higher interest rate on their mortgage. The Federal Homeowners Protection Act was passed by Congress to require that if LPMI is tacked on to a loan, the borrower must be informed first, particularly since they cannot collect on the policy.

Lawsuit seeks punitive damages

McKenna says banks are skirting the disclosure laws, and is seeking punitive damages to make a statement. “The problem in this case and we believe in a lot of cases is the LPMI is being taken out, by the bank, but the person who’s buying the home doesn’t even know its happening.”

Lazzarone equates LPMI to double dipping. “If the bank forecloses on your house, they get the property, but they also get the value of that insurance policy; a policy the customer has been paying for.”

The grenade: loan mods

“I think it speaks to the core of why you don’t see anybody getting loan mods the past 6-7 years,” he added. “Why would I refinance you if I’m going to get my money back, collect all your payments and then I get to sell your property?”

What you need to do for your clients

Despite legalities, a troubling premise remains: “If the average joe was to call up tomorrow and ask, ‘Do I have LPMI on my property,’ can they find out? I don’t think so,” said Lazzarone.

As a real estate professional, you should at a minimum be aware of LPMI, and at a maximum, make sure your clients are being informed of it up front, maybe even go check on a few that have already closed. LPMI may not be illegal, but some see it as double dipping – will this court case change the direction of this fee that is not consumer-centric?