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

Moody’s hit for role in mortgage crash

Last Friday the Department of Justice (DOJ), along with Attorneys General in 21 states, resolved a federal investigation into Moody’s Analytics’ role in the financial crisis.

While mortgage lenders and investment banks certainly played a leading role in the mortgage meltdown, credit-rating agencies were a strong supporting role. The DOJ investigation looked into allegations that Moody’s was rating mortgage-backed securities and other financial products higher ratings than was merited, out of fear that rating realistically would lead financial institutions to take their business elsewhere.

Rating the same institutions that pay them is a huge conflict of interest, but Moody’s has long claimed their ratings are based on strict credit rating standards. However, the DOJ investigation concluded Moody’s was using an extremely lenient ratings standard.

The problem stems back to 2001

Problems were evident even in back in 2001, when Moody’s introduced an internal rating tool that utilize the company’s established rating standards. The company failed to announce changes in rating models and standards to the public, allowing them to mislead investors.

As it turns out though, several banks and lenders were well aware of Moody’s skewed rating system.

The Justice Department’s investigation uncovered internal communications from 2007 showing senior management were aware that mortgage-backed security ratings were not quite right. And by not quite right, I mean green-lighting seriously inaccurate ratings that contributed to investors believing securities were low-risk (which history has proven to be untrue).

Moody’s to pony up $864M

The DOJ announced the case settlement comes in around $864 million, with about half going to federal civil penalty and the rest divided up among the 21 states in involved in the investigation. While this is a relatively large chunk of money, others involved in the mortgage meltdown didn’t get off so easy.

For similar allegations, Standard & Poor (S&P) ended up shelling out a bit over a billion.

Moody’s apparently sees very little problem with their role in the financial crisis. In a press release the company stated, “Moody’s stands behind the integrity of its ratings, methodologies and processes, and the settlement contains no finding of any violation of law, nor any admission of liability.”

In spite of this, they company will adhere to compliance measures for five years, which they note is “final and is not conditioned on court approval.” While they can act like they’re just being good guys playing along with the DOJ, some lawmakers are calling for changes in how we deal with conflict of interests for credit-rating businesses.

Lawmakers call for change

Senator Al Franken suggests creating an independent agency that would assign rating jobs, effectively reducing the threat of lost business for inaccurate ratings.

Regardless of the steps taken to minimize problems in the future, the fact remains that many lax standards allowed companies to get away with some pretty shady dealings.

We need to not just look at how to prevent this, but also which practices we allow to remain in place. An independent agency overseeing ratings is certainly a step in the right direction, but businesses must also create and maintain an internal culture of integrity if we want to avoid another meltdown.

#MoodysFine

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