Lew Ranieri was quoted yesterday by Calculated Risk as stating that "as much as 50 percent of (subprime) production could have gone to the agencies, meaning, Fannie, Freddie and FHA" over the last five or six quarters. Ranieri, who is credited as the father of mortgage securitization, seems to believe that the subprime "mess" is a symptom of a broken MBS system.
Without knowing where Ranieri is getting his data, the comment still provocatively gut-checks to origination insiders. But why? Both Fannie and Freddie have psuedo subprime programs that will qualify lower FICO borrowers with only modest rate premiums. FHA programs have always allowed for borrowers with expanded FICOs.
Focusing on mortgage broker production (which makes up the lion share of US residential loan production), the issue was more one of accessibility and ease of process than necessarily one of pure greed.
Subprime lenders such as Option One, New Century, Argent had a cadre of Account Executives pushing products that granted almost instant approval and no documentation requirements. A process that could take months via an FHA product. Yet the FHA loan will drive an affordable product to the consumer, priced substantially lower, making it a win-win for both parties if it weren't for the unnecessary obstacles: minimum loan amount, broker approval.
The agency subprime products are also less possible for similar reasons. Although they have less process hurdles than the FHA product, the pricing is still not significantly better enough to justify the extra effort.
The focus on enhancing FHA is long overdue. According to NAMB testimony, 38.6% of all FHA loans were originated by mortgage brokers. However, they state that prohibitive audit and net worth requirements for mortgage brokers substantially reduce public access to this product, as many mortgage brokers are unable or unwilling to offer the product as a result of HUD hurdles and hassle.
FHA does not require the broker to be approved if the broker is contracted by the borrower and the borrower is willing to pay the broker's fee. Compensation cannot be paid to the borrowers broker by the lender.
The HUD approved broker is the lender's agent, and must complete all processing functions for the lender and complete an individual application Interview for the lender in accordance with HUD guidelines.
In accordance with the 4155.1, a copy of the mortgage contract must be included in the case binder and the mortgage broker fee must be shown on the HUD 1. Additionally, funds to pay the broker fee must be verified at the time of underwriting and factored into the borrower's required cash to close.
When a HUD approved broker originates a loan, the broker is a dual agent of the borrower and the lender (In Agency states). In California, it is a violation of the Civil Code to conduct a dual agency without the knowledge and consent of all principals.
As a HUD approved broker, I would welcome working with a borrower and their exclusive broker, and would waive the origination fee and reduce my company's fee to be relieved of the dual agency role and direct fiduciary duty to the borrower. It would allow my office to focus on underwriting and quality control while relieving conflicting duties.
I think brokers who wish to remain on a 1099 or schedule C or a company that wants to engage in Real Estate or allow independent agents to work from home or other satelite location should be allowed to do so AND provide access to FHA loans for their borrowers.
There is a perceived barrier between mortgage brokers and FHA which is false. FHA is available to ALL brokers. The barrier to non-approved brokers is that they cannot process loans, complete the official application interview for HUD, or receive compensation from the lender.
However, if the broker is functioning as the borrower's agent, represents the borrower's best interest, owes the borrower a fiduciary duty, and is performing an actual service to the borrower by showing the borrower their loan options, helping them with their paperwork, and negotiating the loan for the borrower, then HUD approval is not required as the broker would not be completing lender agent functions.
Krista, thanks for your detailed comments. You are a welcomed resource!
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