An Accountant’s Perspective on the Mortgage Industry December 2011

An Accountant’s Perspective on the Mortgage Industry December 2011

Are You Doing What You Should?

[author-style]By Jeanette Emmons, CPA, Senior Manager[/author-style]

Now that HUD is no longer approving loan correspondents, it’s up to sponsors to determine their own approval criteria and monitoring procedures for third party originators (“TPOs”). HUD contends that the responsibilities of the sponsors remain unchanged, meaning that they were always responsible for the loans originated through the brokers. However, many sponsors gained comfort in knowing that HUD was watching the broker. In the past, a broker went through an approval process, was required to maintain certain minimums (such as net worth) and was submitting annual audited financial statements which indicated that they appeared to be in compliance with applicable HUD regulations. Now that it is entirely up to the sponsors, how are you managing the risks associated with third party originations?

As stated in Mortgagee Letter 2010-20, “HUD will hold FHA-approved mortgagees responsible for compliance with FHA requirements in all aspects of an FHA loan transaction, whether performed by the approved mortgagee or by its sponsored third party originator,” and “HUD expects that FHA-approved mortgagees will pursue sponsoring relationships with responsible originators, and that approved mortgagees will diligently monitor and evaluate the activities and performance of those they sponsor.”

So, HUD is coming to get you if a TPO’s loan defaults, which means that it is your responsibility to know who you are doing business with and you should really put some thought into your approval and oversight process for TPOs. Of course there are any number of measures you can put in place from requiring audited financial statements and instituting minimum net worth or liquidity limits to personal guarantees by the owners and quality control reviews.

First and foremost, this is the time to consult your attorney if you haven’t already done so. Make sure that you have a properly written and executed agreement with all of your TPOs including all broker compensation agreements. Consider the need to have provisions allowing you to recover losses on loans originated through the TPO, as well as provisions for suspension of the relationship should you find that there’s a problem with the relationship. Also, revisit the representations and warranties section of the document to ensure it properly protects your company’s interests.

WHAT TO LOOK FOR UPFRONT – DETERMINE INTERNAL ELIGIBILITY REQUIREMENTS:

• Require a written application with specific disclosure questions to identify any pending litigation, defaults and/or repurchases.
• Require investor references — it doesn’t take long to confirm that a broker is or is NOT in good standing with another lender.
• Request authorization to pull credit and a background check. Conduct checks on principals of the TPO. Are there open judgments, foreclosures, etc.?
• Verify Broker, Branch, and Individual Loan Originators licenses are active. This can be done for free through NMLS Consumer Access. This will also show a history of any suspended, terminated or withdrawn applications.
• Review of the TPO’s internally prepared financial data for sound practices and financial stability.
• Review the TPO’s historical default data available through FHA Connection’s Neighborhood Watch.
• Review of historical reports from various state departments of banking or HUD audits. Search State Banking Department websites for disciplinary action or consent orders.
• Make inquires of the Better Business Bureau.
• Even something as simple as a Google search can alert you to potential issues.
• Require the TPO to provide their quality control plan and ask them how they monitor their loan quality and compliance with laws, regulations and other requirements.

MONITOR AND MAINTAIN – OPTIONS FOR CONTINUED MONITORING INCLUDE:

• Controlling underwriting and credit decisions rather than leveraging these functions to the TPO.
• Monitoring TPO’s licensing through NMLS Consumer Access.
• Inclusion of all TPO loans in quality control reviews (as required by HUD). Put procedures in place to ensure that all TPOs are regularly reviewed (don’t leave it to chance with random sampling) and actively review results for each TPO. These reviews should include TPO and the individual loan officer.
• Regular monitoring of default rates or underwriting issues that come up with respect to the TPO’s files.
• Review of the TPO’s historical default data available through delinquency history in FHA Connection’s Neighborhood Watch.
• Regular monitoring of key loan ratios to prevent unintended relaxation of standards.
• Regular review of the TPO’s internally prepared financial statements, or statements that have been compiled, reviewed or audited by an independent CPA (each a little more pricey than the last, however, each providing an additional level of assurance).

Although HUD has not issued much by way of guidance on how to monitor TPOs, both Fannie Mae and Freddie Mac have weighed in on the subject. Their commentary can be reviewed for further details on how to best manage your risks when it comes to third party originations. As website links change all too quickly, I’ll leave it to Google to aid you in locating their commentary. Search “FNMA selling guides” and “Freddie Mac wholesale originations best practices.” We can’t stress it enough; there is risk in third party originations that must be addressed and managed to protect the profits, reputation and continuity of the sponsoring mortgage lender.

Special thanks to Mary Ann Barrett from Maverick Funding Corporation for her contributions to the article.

What Did I Miss At Members’ Day At Fannie Mae?

[author-style]By Jessica Offer, CPA, Senior Accountant[/author-style]

In the opening remark, a specific comment stands out, “Find opportunities despite the challenges we are in.” Everyone can agree that as potential borrowers consider the uncertainties surrounding unemployment, politics, the economy, and regulations, most have yet to feel optimistic about a turnaround. Housing prices and interest rates remain static and public impression is that prices will continue to decline further. Given these conditions, potential consumers are hesitant to take on new debt or incur the expense to refinance currently outstanding loans. When revenue is sluggish, to weather the storm, expenses must be reduced and an examination of procedures and operations should be performed to see where other efficiencies can be obtained (see WS+B’s July 2011 issue “Improving the Mortgage Lender’s Bottom Line”). Evaluations such as profitability by loan type can be performed to identify whether certain loans are unprofitable, thus alerting lenders that they should focus their attention elsewhere.

MORTGAGE FRAUD

Based upon the information presented, there was not an apparent overall rise in fraud despite poor market conditions. There was however, a shift in regional locations of frauds, and the types of frauds being committed. The top three types of fraud occurring in loan originations according to the presentation are the misrepresentation of income, undisclosed liabilities, and occupancy misrepresentation. These three types of frauds constituted 65% – 75% of all frauds from the research performed by Fannie Mae (on data from 2009 through August 2011).

UNDERSTANDING THE UNIFORM MORTGAGE DATA PLATFORM (UMDP)

A common tactic among industries to improve efficiencies and comparability of data is standardization. Both Fannie Mae and Freddie Mac are mandating a new loan file delivery platform titled UMDP in order to standardize the collection of data, of which certain phases have already become effective.

Uniform Appraisal Dataset (UAD): The first phase of this new system became effective September 1, 2011. Compliant appraisal forms are required for loans with appraisal effective dates on and following September 1, 2011.

Uniform Collateral Data Portal (UCDP): The UCDP became effective for loans originated after December 1, 2011. This is the system through which lenders will electronically submit appraisal reports. A user ID is required, so if the company has yet to register, this should be completed as soon as possible to avoid problems at the last minute. If the appraisal submission is successful, a Doc File ID will be issued. Only loans with successful appraisal uploads with a Doc File ID will be accepted by Fannie and Freddie.

Uniform Loan Delivery Dataset (ULDD): The final process, the Uniform Loan Delivery Dataset (ULDD), details the common data fields which will be required by both Fannie and Freddie for all loans being sold to them. Capturing data conforming to this new loan delivery system will be required on loans being originated on and after December 1, 2011, although it is not until March 19, 2012, that loans are required to be delivered through this platform. Lenders will be able to begin testing ULDD uploads starting January 23, 2012.

Lenders should make sure their current origination software has an integration feature with this new system to streamline uploads and avoid potential problems once this new platform becomes effective. Organizations should also make sure all of their staff are properly trained and informed of any new policies and procedures. Fannie and Freddie will not accept any loan that does not conform to the new standards under UMDP. Although a loan might not be sold directly to Fannie or Freddie, any seasoned loan which eventually winds up being sold to Fannie or Freddie is subject to the same requirements as if it was a new loan being sold upon closing. To see how the changes that you have already implemented compare to where you should be, see Fannie Mae’s monthly Yardstick Report at https://www.efanniemae.com/sf/lqi/umdp/pdf/umdpyardstick.pdf.

ECONOMIC OUTLOOK

One question on everyone’s mind is “are current economic conditions the new normal?” Douglas Duncan, Fannie Mae’s Chief Economist and Vice President provided an interesting outlook on the current state of the mortgage industry and the factors and conditions driving its performance. In his presentation, Duncan stated that we have returned to the “old normal”. The appreciation which had overwhelmed the housing market was not sustainable hence current conditions are not the new standard but the return to the “old normal”. Unemployment and public perception are the two driving forces affecting the housing market today. Despite slight improvements to gross-domestic product (GDP), unemployment rates have remained high. Without disposable income and job stability, people are reluctant to take on new debt and potential applicants who would have previously qualified for a mortgage, no longer meet the criteria. Additionally, for those who already have a mortgage and have not refinanced, the thought process is similar, is it worth the upfront costs to reduce the monthly mortgage payments over time if I am uncertain if my income stream will continue (or continue at the same rate). There are also non-economical factors affecting the market today. More people are going to college, students are staying in college longer, and people are getting married at an older age, all of which delay the urgency of moving out and purchasing a home.

There is one thing for certain and that is uncertainly is a driving force preventing the housing market from recovery. Due to the uncertainty in the near future between changes to the tax law, government spending, implementation of new regulations and governing bodies (i.e. Dodd-Frank Act), inflation, and unemployment, consumers are being cautious. Perception, fears, and other non-economic factors are discouraging potential borrowers despite low interest rates and favorable housing prices. The overall outlook is that the housing market will remain fairly status quo until changes are implemented which improve public perception or transform the economy and increase stability. These changes however, are not expected to occur in the near future. As mentioned in the opening remarks, the little things matter most when dealing with the challenges being faced by today’s lenders and supporting service providers.

LinkedIn Poll Results

Our Next LinkedIn Poll Question

Is your organization comfortable that its loan officer compensation methods fully comply with new Federal regulations?
a. Yes, definitely
b. No, not at all
c. Maybe, not sure

Join in on the conversation and participate in our next LinkedIn Poll Question by visiting https://linkd.in/sdX8Wf and see the poll results in our next issue.

Check Us Out Online

for a Special Web Feature article:
My Home is in Foreclosure, and I Have a $100,000 Capital Gain!?!
Unfortunately, foreclosures are surprisingly common today as an aftermath of the recent housing meltdown, and adding insult to injury for the borrower undergoing the foreclosure, there are often unfavorable tax consequences that result from the process.

Email Us at [email protected] and we will send a PDF version of this article.

Audit Season Is Approaching

Top Ten Checklist: Are Your Ready?

See below for ten items to consider while preparing for this year’s audit:

1. Perform reviews to determine whether the company is in compliance with net worth and liquidity requirements.
2. Obtain a waiver if the company was in violation of a covenant relating to a warehouse line agreement or other debt agreement.
3. Perform a review of the “Schedule of Findings” included with the prior year’s audited financial statements (if applicable). Be prepared to discuss with the auditors whether the findings were addressed and corrected in accordance with the “Corrective Action Plan”.
4. Consider prior year audit adjustments and determine if any further year-end adjustments are needed prior to providing financial information to the auditors. Additionally, consider the effect of these adjustments on net income and net worth and whether the adjustments will put the company in violation of any covenants.
5. Make sure the company’s quality control reviews are up to date and complete with management responses.
6. Ensure appropriate negotiations and renewals of warehouse lines and repurchase facilities have been completed.
7. Organize and gather all new agreements, leases, correspondence and examinations from any regulatory agencies (federal and state).
8. Prepare a contact list of banks, investors, warehouse providers, and attorneys.
9. Make sure the company has sufficient documentation to support the classification of loan officers in accordance with the Department of Labor’s Administrative Exemption and their respective hours worked, including overtime.
10. Make sure the company has sufficient documentation to support compensation paid to loan officers in accordance with recent regulations, including the Federal Reserve Regulation Z Part 226.36 and the Dodd-Frank Act.

BONUS: Perform a review of loan loss reserves including any repurchase demands or indemnifications to ensure the reserve is sufficient.

If you have any questions or concerns please contact a member of the Mortgage Banking Services Group.

An Accountant’s Perspective on the Mortgage Industry is published by WithumSmith+Brown, PC, Certified Public Accountants and Consultants. The information contained in this publication is for informational purposes and should not be acted upon without professional advice. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Please contact a member of the Mortgage Banking Services Group with your inquiries.

Learn More About our Financial Services>>