FHA Announces Major Changes

From the Mortgage Bankers Association of America

HUD announced a new series of changes aimed at strengthening the troubled FHA Mutual Mortgage Insurance Fund.

The steps include:

• Consolidation of FHA’s Home Equity Conversion Mortgage options;

• An additional 10 basis-point increase in FHA mortgage insurance premiums;

• Requiring borrowers to pay annual mortgage insurance premiums for the life of the loan;

• Requiring lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent;

• A proposed increased down payment requirement for mortgages with original principal balances above $625,500;

• Increased enforcement efforts for FHA-approved lenders regarding “aggressive” marketing to borrowers with previous foreclosures

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs,” said FHA Commissioner Carol Galante. “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American home buyers.”

The changes come in the wake of FHA’s most recent actuarial report on the MMIF. The December report said in fiscal 2012, the Fund’s capital reserve ratio fell below zero to negative 1.44 percent, well below its congressionally mandated 2 percent capital reserve ratio, while the Fund’s economic value fell to negative $16.3 billion.

The report cited continued losses stemming from FHA’s former practice of allowing down payment assistance programs, as well as losses from FHA’s Home Equity Mortgage Conversion program, also known as reverse mortgages and spurred concerns on Capitol Hill that FHA might have to ask the federal government for additional financial support. HUD Secretary Shaun Donovan in December said no such decision would take place until the Obama Administration submits its proposed fiscal 2014 budget in February.

A summary of FHA actions announced yesterday:

Home Equity Conversion Mortgage Consolidation. FHA said it will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage and Saver Fixed-Rate HECM pricing options, effective for FHA case numbers assigned on or after April 1. Galante noted the Fixed-Rate Standard HECM pricing option currently represents a “large majority” of the loans insured through FHA’s HECM program and is responsible for placing “significant stress” on the MMIF. 

“To help sustain the program as a viable financial resource for aging homeowners, the HECM Fixed-Rate Saver will be the only pricing option available to borrowers who seek a fixed interest rate mortgage,” FHA said. “Using the HECM Fixed-Rate Saver for fixed-rate mortgages will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage Insurance Fund.” 

Additional details can be found in a new HECM Mortgagee Letter: http://portal.hud.gov/hudportal/documents/huddoc?id=13-01ml.pdf.

Changes to Mortgage Insurance Premiums. FHA said it will increase its annual mortgage insurance premium for most new mortgages by 10 basis points (0.10 percent) and will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent. These premium increases exclude certain streamline refinance transactions. 

FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a 2001 change in which FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA acknowledged that it remained responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the cessation of these MIP payments. 

Galante said FHA’s Office of Risk Management and Regulatory Affairs estimated that the MMIF has foregone “billions of dollars” in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy.

“Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled,” Galante said. “This will permit FHA to retain significant revenue that is currently being forfeited prematurely.”

Manual Underwriting Requirement on Loans with Decision Credit Scores below 620 & DTI Ratios Above 43 Percent. FHA will require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent. Lenders will be required to document compensating factors that support the underwriting decision to approve loans where these parameters are exceeded, using FHA manual underwriting and compensating factor guidelines.

Raising Down Payment on Loans above $625,500. Through a Federal Register notice to be published in the next several days, FHA will announce a proposed increased down payment requirement for mortgages with original principal balances above $625,500. The minimum down payment for these mortgages will increase from 3.5 to 5 percent. 

“This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market,” FHA said.

Access to FHA after Foreclosure. FHA also announced it will step up its enforcement efforts for FHA-approved lenders regarding aggressive marketing to borrowers with previous foreclosures and remind lenders of their duty to fully underwrite loan applications. FHA also said it will work with other federal agencies to address such false advertising by non-FHA-approved entities. 

“It has come to FHA’s attention that a few lenders are inappropriately advertising and soliciting borrowers with the false pretense that they can somehow ‘automatically’ qualify for an FHA-insured mortgage three years after their foreclosure,” FHA said. “This is simply not true and such misleading advertising will not be tolerated.”

 

CFPB Head Appointment In Jeopardy

Source: Weiner, Brodsky, Kider, PC

On Friday, January 25, 2013, the United States Court of Appeals for the D.C. Circuit emphatically struck down President Obama’s January 2012 “recess appointments” of three members to the National Labor Relations Board. In doing so, the Court emphasized the narrow construction of the Constitution’s Recess Appointments Clause in a sweeping manner that is sure to bolster current challenges to Richard Cordray’s “recess appointment” as Director of the Consumer Financial Protection Bureau on the same day.

Generally, the Constitution requires Presidential Appointments to be confirmed with the “advice and consent” of the Senate. The Recess Appointments Clause provides the President with the power to appoint executive officers during times of Congressional recess, without Senate confirmation, when the Senate cannot provide its advice and consent. The DC Circuit struck down the President’s NLRB “recess appointments” on two separate grounds: (1) “Recess” as used in the Constitution means only the specific time period between official sessions of Congress; and (2) the vacancy being filled by a
“recess appointment” must arise during a recess of Congress. The DC Circuit found that neither of these conditions was present in the President’s “recess appointments” to the NLRB in January 2012.

In its ruling regarding the definition of “the Recess,” the DC Circuit construed the term narrowly because the Constitution uses different terms in different portions of its enumerated powers, specifically using the terms “adjournment” and “Recess” in different aspects for its enumeration of Congressional powers, and found no basis to adopt the NLRB’s argument that recess can mean indeterminate periods of inactivity by Congress and should be within Presidential discretion to determine. The DC Circuit forcefully and colorfully rejected these arguments: “An interpretation of ‘the Recess’ that permits the President to decide when the Senate is in recess would demolish the checks and balances inherent in the advice-and-consent requirement, giving the President free rein to appoint his desired nominees at any time he pleases, whether that time be a weekend, lunch, or even when the Senate is in session and he is merely displeased with its inaction.”

The DC Circuit also rejected the government’s position that any vacancy can be filled during recess, instead holding that the explicit language of the Constitution holds that recess appointments may only be used for vacancies that arise during the recess. The DC Circuit further held that any such vacancy must be filled during the same recess, otherwise the President cannot use the recess appointment power.

This decision will likely heavily influence the current litigation pending against the recess appointment of Richard Cordray as Director of the CFPB, as Director Cordray was appointed by President Obama on the same day by a purported “recess appointment.” This decision places not only Director Cordray’s appointment in doubt, but places into question the validity of a number of actions taken by him or the CFPB since the Dodd- Frank Act required a Director to be in place prior to the CFPB obtaining certain of its supervisory authorities.

We will continue to monitor this situation as new developments arise.

New Loan Officer Compensation Rules Finalized

From Mortgage Daily

A final rule on loan originator compensation aims to eliminate incentives for originators to steer borrowers into high-cost loans.

Prior to the subprime mortgage meltdown in 2007, mortgage brokers and loan officers were encouraged by subprime lenders to forego low-rate options for their clients that yielded smaller commissions and instead push prospects into higher-cost subprime products that paid big yield-spread premiums.

While many originators behaved responsibly and put borrowers into the lowest cost programs, some succumbed to the incentives and opted to put prime borrowers into subprime loans.

Provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act were designed to eliminate such incentives.

The Consumer Financial Protection Bureau Friday released final rules that implement the Dodd-Frank provisions. The rules, which were originally proposed in August 2012, revise Regulation Z to implement amendments to the Truth in Lending Act.

Compensation that varies with the loan terms is prohibited by the rules. This means that originators cannot earn more because they convince a customer to take a mortgage with a higher interest rate, a prepayment penalty or higher fees. Also prohibited is compensation paid for steering the borrower to a lender-affiliated title company.

“To prevent evasion, the final rule prohibits compensation based on a ‘proxy’ for a term of a transaction,” the CFPB explained. “The rule also further clarifies the definition of a proxy to focus on whether: (1) the factor consistently varies with a transaction term over a significant number of transactions; and (2) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.”

While originators are generally prohibited from reducing their compensation to offset the cost of a change in transaction terms, the final rule allows originators to reduce compensation to defray some unexpected increases in estimated settlement costs.

The final rule, however, does allow business profits to be used to make contributions to certain tax-advantaged retirement plans like 401(k) plans. It also authorizes bonuses and contributions to other plans that don’t exceed 10 percent of an individual originator’s total compensation.

Originators are prohibited from being paid by both the borrower and other parties like creditors, though mortgage brokers are allowed to pay commissions to employees or contractors as long as the commissions are not based on loan terms.

While the Dodd-Frank act generally prohibits originators from collecting up-front points or fees from the consumer while also being paid by another party, the CFPB elected to exercise its authority to completely exempt the prohibition while it scrutinizes the proposal’s design, operation and possible effects in a mortgage market undergoing regulatory overhaul.

In response to public comments from the mortgage industry, consumer groups and other government stakeholders, the CFPB abandoned a proposal to require that originators provide borrowers prospects with an option that has no up-front discount points or origination fees. Among those that had opposed the provision was the National Association of Federal Credit Unions.

“Once the new set of Dodd-Frank rules that the bureau is implementing take effect, the bureau will evaluate how those rules are affecting consumers’ understanding of up-front charges and the decisions consumers make,” the bureau stated.

In order to level the playing field between bank and non-bank originators, both types of originators will be required to meet character, fitness and financial responsibility reviews. In addition, both types of originators will be required to undergo criminal background checks for felony convictions and completed training about mortgage rules.

The rule clarifies that certain employees of manufactured home retailers, servicers and seller financers are excluded from the definition of a loan originator. Also excluded are real estate brokers; management, clerical and administrative staff; and loan processors, underwriters and closers.

On mortgages and home-equity loans, mandatory arbitration of disputes are generally prohibited under the new rules. In addition, the practice of increasing loan amounts to cover credit insurance premiums is also not allowed.

The rules go into effect in January 2014, though the prohibition against mandatory arbitration and credit insurance financing takes effect in June 2013.

“The CFPB plans to work with creditors and mortgage originators to ensure a smooth transition to implementation,” the announcement said. “To help with compliance, the CFPB will, among other things, be publishing implementation guides, and, in coordination with other agencies, be releasing materials that help creditors and originators understand supervisory expectations.”

The “New” Mortgage Insurance Deduction

From MGIC on the mortgage insurance deduction passed as part of the fiscal cliff deal

MI basics: tax-deductible MI

MI Tax Deductibility passed as part of the American Taxpayer Relief Act of 2012.

Borrower-paid MI premiums are tax-deductible through the year 2013. Borrowers should consult their tax advisors regarding MI tax deductibility. See disclaimer note below.

FAQs

Does the bill apply to MGIC mortgage insurance?

Yes, borrower-paid MI provided by MGIC qualifies for the deduction. This includes our Monthly, Single and Split Premium plans. There are varied opinions on the deductibility of lender-paid MI as the IRS has not yet clarified the deductibility. It is recommended that borrowers consult their tax advisors regarding the amount that is deductible.

What types of mortgage loans qualify for the MI tax deduction?

Loans used for “acquisition indebtedness” — that is, money borrowed to buy, build or substantially improve a residence — are eligible, as long as the debt is secured by the same residence.

This includes purchase loans and refinance loans, up to the original acquisition indebtedness. (Money borrowed against the equity in a home or when refinancing a home for any reason other than to buy, build or substantially improve a residence is called “equity indebtedness.”)

When refinancing a piggyback loan originally used to acquire a property, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included?

The original acquisition indebtedness is considered to be the sum of the two mortgages.

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Is deductibility applicable for all loan types?

There is no differentiation among loan types.

What types of properties are eligible for tax deductibility?

The deduction applies to “qualified residences,” as defined in the Internal Revenue Code. Generally, that includes the borrower’s primary residence and a nonrental second home. As with mortgage interest, borrowers can deduct mortgage insurance premiums paid on both their primary residence and one other qualified residence each year. Investor loans are not eligible.

Who qualifies for this itemized deduction?

Households with adjusted gross incomes of $100,000 or less will be able to deduct 100% of their MI premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, phasing out after $109,000. (Details below.)

Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their MI premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500. (Details below.)

The deduction is not restricted to first-time homebuyers.

 

Adjusted Gross Income Limits

Single OR Married, Filing Jointly	Allowable MI Premium Deduction	Married, Filing Separately	Allowable MI Premium Deduction
$0 – $100,000	100%	$0 – $50,000	50%
$100,000.01 – $101,000	90%	$50,000.01 – $50,500	45%
$101,000.01 – $102,000	80%	$50,500.01 – $51,000	40%
$102,000.01 – $103,000	70%	$51,000.01 – $51,500	35%
$103,000.01 – $104,000	60%	$51,500.01 – $52,000	30%
$104,000.01 – $105,000	50%	$52,000.01 – $52,500	25%
$105,000.01 – $106,000	40%	$52,500.01 – $53,000	20%
$106,000.01 – $107,000	30%	$53,000.01 – $53,500	15%
$107,000.01 – $108,000	20%	$53,500.01 – $54,000	10%
$108,000.01 – $109,000	10%	$54,000.01 – $54,500	5%

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Is adjusted gross income calculated before or after deductions?

Adjusted gross income is calculated before itemized deductions, including the MI deduction.

How does the MI tax deduction work?

Borrowers who itemize deductions are able to reduce their overall taxable income in the same manner as mortgage interest.

Are borrower-paid, single premiums, which are paid up front in a lump sum, eligible for the deduction?

Yes, borrower-paid, single-premiums are eligible for the deduction under the new law. Borrowers should consult with a professional tax advisor to determine the amount of the MI premium eligible for the tax deduction.

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If the single premium is financed, are both the mortgage insurance premium and the interest tax deductible?

We believe that if the loan is for acquisition indebtedness, both the interest attributable to the entire loan balance as well as the allocated portion of the mortgage insurance premium are tax deductible.

How would a premium refund issued during the tax year affect eligibility and the amount of the MI deduction?

Borrowers are only permitted to deduct that portion of their MI premium attributable to a tax year. If the MI is dropped, and a refund is paid, the amount refunded would reduce the amount of MI premium that could be attributable to that tax year and be deducted.

Note: MGIC cannot provide tax advice. Taxpayers should consult their tax advisor to ascertain if they are eligible to take this deduction. The answers to these questions are based on an interpretation of the language of the statute, the Joint Committee on Taxation’s Technical Explanation of the statutory language, and present law. The Internal Revenue Service (“IRS”) will issue guidance interpreting the new provision, and could reach different conclusions for some of the issues raised.

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Fiscal Cliff Deal Helps Housing

The industry can breath a sigh of relief with the final fiscal cliff deal bringing back a popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction. A topic that is still up for discussion and likely to surface later in the year is whether the popular home loan interest tax deduction will be part of a long-term deficit reduction plan. Still, the deal passed by the Senate and House on Jan. 1 is one that leaves room for hope in the housing market. The American Taxpayer Relief Act of 2012 apparently extends a law that expired at the end of 2011, which allowed for the deductibility of MI premiums, according to a research report from Isaac Boltansky with Compass Point Research & Trading. The law now applies to fiscal years 2012 and 2013.

“The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual MI premiums,” Compass Point said. “Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private MI as well FHA mortgage insurance and VA and Rural Housing Service fees. In 2009, about 3.6 million taxpayers claimed the MI deduction,” the research firm added.

One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31. The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through principal forgiveness or a short sale are exempt from being taxed on the forgiven amount. “The amount extends up to $2 million of debt forgiven on the homeowner’s principal residence,” Compass Point Research & Trading said. “For homeowner’s to qualify, their debt must have been used to ‘buy, build, or substantially improve’ their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014.”

Another win for housing is a provision tied to the government’s plan to increase the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. While in theory, this is harder on higher-income homeowners, Compass Point sees a silver lining through an exclusion. Compass Point notes the law “states that only gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. Point being, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited.” Source: HousingWire

FHA Extends Flipping Waiver

An anti-flipping requirement on home loans insured by the Federal Housing Administration that was waived during the depths of the housing market meltdown and subsequently extended has been extended again. This time around, the term of the extension was doubled. On home purchase transactions, properties securing FHA loans cannot have been acquired during the prior 90 days. However, the Department of Housing and Urban Development waived the requirement in May 2010.

The waiver impacted sales contracts executed between Feb. 1, 2010, and Feb. 1, 2011.”During this period of high foreclosures, FHA seeks to encourage investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes,” HUD explained at the time. In a January 2011 statement proclaiming the waiver a success with more than 21,000 home loans insured for over $3.6 billion as a result of the exemption, then-federal housing commissioner David H. Stevens said that the exemption would be extended until Dec. 31, 2011.

A few days before the extension was set to expire, another extension was announced until the end of this year. HUD has, yet again, decided to extend the anti-flipping waiver, according to a Federal Register notice. This time around, however, HUD is taking a longer-term approach — extending the waiver two years until Dec. 31, 2014.

Qualified transactions must be arms-length with no identity of interest between the buyer and seller or other parties. Price increases in excess of 20 percent must be justified by a second FHA appraisal or supported by documented renovation costs. If there aren’t sufficient renovation expenditures, then the appraiser needs to provide an appropriate explanation for the increase in value. In addition, property inspections are needed, and any needed repairs for “health and safety” issues that are identified need to be completed prior to closing.

“Through the regulatory waiver, FHA encourages investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes, with the objective of increasing the availability of affordable homes for first-time and other purchasers, helping to stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high,” the filing stated. Source: Mortgage Daily

Closer Look at Proposed LO Compensation RuleWebinar discusses CFPB proposal Oct. 15, 2012 By JERRY DeMUTH MortgageDaily.com

The Consumer Finance Protection Bureau’s current proposal for loan originator compensation, while clarifying many aspects of the current rule, also could lead to violations of some state laws, or even Internal Revenue Service codes, according to a recent online event on the subject. The deadline for public comments on the proposal is Tuesday. The presentation was made by three attorneys with the mortgage banking and the consumer financial services groups at the national law firm, Ballard Spahr LLP. They spoke during a webinar on the proposed new rule sponsored by the Washington, D.C.-based firm. First, the definition of loan originator is “very broad” under the proposed rule, said John D. Socknat, and even includes persons who assist consumers by advising them on credit terms, preparing application packages, collecting application and supporting information, or even advertises or otherwise communicates to the public that they provide such services. The latter, he said, would include business cards, rate sheets and promotional items. But managers and administrative and clerical staff are excluded if they do not arrange, negotiate or otherwise obtain an extension of credit for a consumer or if their compensation is not based actual loan originations. The proposal also “finally addresses” the anti-steering safe harbor issue, said Richard J. Andreano. The key to complying, he said, is that loan originators have to present the loan with the lowest rate to consumers, even if it includes more points than they said they are willing to pay and if they qualify for that loan. The current rule does not specifically require originators to present to borrowers the loan with the lowest rate, only the one with the lowest rates and fees. “But the originator can’t impose points and fees on a loan unless it results in a lower rate. But this only applies before the consumer has received the good-faith estimate and since this is occurring before the good-faith estimate,” Andreano pondered, “how do you determine if they may not qualify for a loan?” He also noted all of this is in the preamble to the proposed new rule, not in the section on pricing policies. That section sets forth ties between specific increases and decreases in rates and the size of points and fees, with a specific rate reduction for each additional point. “These are very complex proposals,” he commented. Andreano also pointed out that the CFPB, which originally had considered a flat-fee approach to originations, with the same fee applying to all loans, now proposes a “zero-zero alternative.” Under this proposal, any originator who receives compensation from any person other than the consumer may not impose on the consumer any points or fees unless a comparable, alternative loan without points and fees is made available to the consumer. “That’s an interesting concept,” he said. To prevent manipulation of loan qualifications and loan availability, the CFPB, Andreano said, is considering two different alternatives that would either prevent originators from changing their underwriting standards for the purpose of disqualifying consumers from a “zero-zero alternative” or prevent originators from offering loans with points and fees unless the consumer would qualify for a comparable loan without points and fees. The proposed rules, said Michael S. Waldron, also now address the matter of compensation paid on a borrower’s behalf by parties other than the borrower. “This was not addressed previously,” he said, but warned that such an arrangement can be impacted by state laws. “You have to make sure you follow state law,” Waldron emphasized. Waldron also noted that while the current rule does not expressly address the sharing of pooled compensation, the proposed rule “outright bans” pooled compensation among loan originators who are compensated differently for loans with different terms. “Point blanks,” Waldron noted, are not expressly addressed by the current rule and may not be allowed under the proposed rule. Citing a CFPB advisory comment on the proposed rule that “there are no circumstances under which point blanks are permissible, and they there continue to be prohibited,” Waldron said, “‘Continue’ is a critical word. It truly shuts the door on point blanks.” New conditions also are placed on contributions to both qualified and non-qualified profit-sharing plans, Waldron pointed out. When applying these, he said, loan originator participants have to make sure they do not violate Internal Revenue Codes or become non-compliant with other rules. “There’s a lot of pitfalls when amending qualified and non-qualified plans,” he cautioned. Finally, while under the current rule a loan originator’s compensation may not be changed based on changes to a specific loan’s terms or conditions, Socknat pointed out that the proposed rule would permit a reduction in an originator’s compensation to cover unanticipated increased non-affiliated, third-party closing costs that cause the actual amount of costs to exceed limits imposed by applicable law. However, Socknat said, the proposed rule forbids an originator from agreeing to pay part of a borrower’s closing costs to avoid high-cost loan provisions. The comment deadline on the proposed rule is Oct. 16. Comments can be submitted to www.regulations.gov.