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Rising Loan Errors Spell Trouble Ahead

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | March 2nd, 2018

Last year’s two monster hurricanes aside, homeowners were making their mortgage payments at a better clip in 2017 than in any year in nearly two decades. But there are indications that borrower fraud and lender slip-ups could portend an increase in late payments, and possibly even foreclosures.

Fortunately, the upward trend in defective home loans is not likely to impact borrowers -- at least not directly, says Phil McCall, president of ACES Risk Management (ARMCO), which offers quality control services to lenders. But bad loans could have devastating consequences for mortgage producers, who could be forced to buy them back from investors who purchased them on the secondary market.

Only the uptick in misrepresentation is likely to be troublesome for borrowers. It is a federal crime to tell so much as a little white lie on your mortgage application. Borrowers who exaggerate their incomes and employment, fail to disclose their liabilities or falsify documents are rarely prosecuted, but it can happen. The greater worry should be that lying on your loan application could get you approved for a loan you’re not actually able to pay back.

ARMCO’s quarterly post-closing review of more than 90,000 loans, selected at random, found a surprising increase in the rate of critical defects in last year’s second quarter. A “critical defect” is any problem with a loan that renders it uninsurable or ineligible for sale. The most common loan defect found by ARMCO’s audit was in the “borrower or loan eligibility” category, which refers to loans that didn’t meet the rules of the investors who bought them. Typically in these cases, the lender either has to fix the problem or buy back the loan.

If the lender has to repurchase the loan, the impact could ruin them, especially if they’ve made more than a few bad loans. Most lenders aren’t well capitalized -- in a constantly repeating cycle, they make mortgages, sell them and use the proceeds to make more loans. So they don’t have the scratch on hand to buy back too many rotten apples.

Issues with credit, or the lack thereof, were the second most common defect in ARMCO’s survey. This relates to borrowers who, between the date they’re approved for a loan and the day they close, open one or more new credit accounts. Perhaps they purchased a slew of furniture for the new house, or took out a loan on a new truck to move said furniture.

Whatever the case, opening new accounts could push your all-important debt-to-income (DTI) ratio beyond the investor’s parameters. To guard against that, lenders are supposed to run a new credit report a day or two before settlement. But sometimes they don’t, and the bad loan slips through the cracks.

However, investors almost always perform quality control reviews on their end. And when they see that the DTI ratio has been exceeded, the lender will probably have to take the loan back. “Investors were burned enough during the 2008 downturn,” says McCall.

Consumers are on the hook for the next-highest category of loan errors found by ARMCO: mistakes about income and employment. Some borrowers will stretch a bit when they report their earnings or bonuses. Maybe they won’t report business expenses or losses, or perhaps they’ll say the rent they take in from their investment properties is greater than it actually is. In some cases, the borrower doesn’t report that he has to make alimony payments or payments on an unrecorded mortgage, either of which counts as a debt.

“Any type of misrepresentation on the part of the consumer could come back to bite him,” says McCall.

Sometimes, it’s the lender who flubs up by using outdated documentation or an inaccurate income history. Or maybe they didn’t properly source a large deposit in the borrower’s bank account, or validate that a gift from Mom and Dad was truly a gift, not a loan. In these types of errors, it’s the lender, not the borrower, who could pay dearly.

ARMCO isn’t the only firm that is finding a higher incidence of loan mistakes -- so has title insurer First American. Overall, First American’s defect index in December was down 18.6 percent from its high point four years ago. But it is up 20.3 percent from December a year ago. “Much of the elevated risk can be attributed to an increase in the share of purchase mortgage transactions, which tend to carry more risk,” reports the company’s chief economist, Mark Fleming.

And as mortgage rates rise, the share of purchase money loans will increase, “putting upward pressure on the overall risk of defect, fraud and misrepresentation,” says Fleming. “We have seen this before.”

But for now, home loans are performing admirably, according to Black Knight’s latest mortgage monitor.

While hurricanes Harvey and Irma significantly impacted loan performance, take them out of the equation and the national delinquency rate -- which covers 90 percent of the entire active mortgage universe -- was 11 percent below long-term norms in December, Black Knight found. Also, the number of seriously delinquent loans (90 days or more past due) was down 14 percent.

Better yet, 2017 was “a record-setting year” in terms of foreclosure activity, says Black Knight’s chief economist, Ben Graboske. Fewer than 650,000 loans started the foreclosure process last year, which is the fewest in any year since 2000.

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Harassment a Problem in the Mortgage World

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | February 23rd, 2018

#MeToo, say as many as 3 out of 4 women in the mortgage business.

That’s how many say they’ve experienced sexual harassment as defined by the Equal Employment Opportunity Commission (EEOC).

Claire Weber, chief operating officer of FormFree -- a technology company that provides verification of borrower assets, employment and income -- is one of them. She says she has been assessed and devalued by men who assume her goal is to be physically pleasing in a professional setting.

“Frank, unwarranted, unrelated assessments of my appearance and the fit of my clothing in the middle of a serious business conversation is one of the milder examples that I can cite,” Weber says.

She has experienced such poor behavior on numerous occasions. So she knew instinctively what could happen to a new female employee, just five months out of college, at the Mortgage Banker Association’s (MBA) convention last fall in Denver.

It “was a topic I could not overlook, both as a female professional in this industry and as an executive at our company,” she says. So over lunch with her rookie worker, Weber got right to the point:

“At this conference, one or more of the following will happen: You will be spoken to inappropriately, looked at inappropriately, touched inappropriately, have comments about your appearance or clothing made, have inappropriate invitations extended to you,” she warned. “One way or another, you will be treated as a sexual object instead of a business professional.”

Sure enough, within a few hours of the opening bell, Weber recalls, “one of the very things I had warned her of took place right before my eyes.” She quickly interrupted the unwanted interaction and escorted the powerful man back to his male colleagues.

“Despite the fact that I have encountered this so many times myself, and despite the fact that I was prepared and had prepared her, I felt shocked,” Weber says.

Scenes like this seem to play out just as often in the mortgage business as they do in the worlds of entertainment, politics, the media and sports. “It is an open secret that the mortgage industry harbors a subculture of male privilege and adolescent impulse that repulses female professionals,” says Weber.

According to a poll by the MBA’s mPower platform for female members, 3 out of 4 of the approximately 260 respondents said they had experienced at least one incident of sexual harassment.

The most frequent incidents happened in the office, and the most frequent behavior was inappropriate comments. But less than 1 in 10 reported the offending remarks to human resources, and just 1 in 5 ever mentioned them to someone in the chain of command who could address the poor behavior. Sound familiar?

The survey was not scientific, nor can the results be seen as indicative of the broader population, says Marcia Davies, chief operating officer at the MBA. Rather, mPower intends to use the data to start a conversation among its members about workplace sexual harassment.

“The women in mPower have been eager to discuss the issue head-on,” Davies says.

Some people maintain that they don’t know exactly what sexual harassment is, just that they “know it when they see it.” But the federal government’s definition is quite explicit. The EEOC defines it as: “unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature.”

Whether such conduct expresses itself as open leering and suggestiveness, or the subtler practices of minimization and exclusion, says Weber, “there is a vestigial fraternity of poorly evolved males for which women have developed a keen sense, and aversion.”

Other than perhaps a little flirting, Rosalie Berg says she has been the target of improper and unwanted sexual advances twice in the 15 years since she opened Strategic Vantage, one of the top marketing and advertising companies in the mortgage field. Both incidents were instigated by “very well-known, very powerful CEOs, who were probably used to getting what they want,” she recalls.

In one case, she was asked to continue a business conversation in the “gentleman’s” hotel room. Twice he implored her to join him in his room, and twice she said “no.” After that, it never came up again, Berg says. “When men leave home, many feel like they never had a wedding ring on.”

As Berg sees it, the way a women deals with harassment is paramount. “How you handle it defines who you are,” she says. “In my case, I felt empowered enough that if I lose business, so what? At least I still feel good about myself.”

As the MBA survey pointed out, many women aren’t in that strong of a position. And many simply don’t know how to handle it when men come on to them in a business setting.

Davies of the MBA says that, based on mPower’s poll, “it is clear that many women in our industry have to put significant effort into dealing with workplace sexual harassment.”

But, she adds, “the business does not need a scientific survey to estimate how many women (this has to affect) before we start to take action, because one is too many.”

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Odd Parcels: Immigrants, Love, Alexa

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | February 16th, 2018

While the immigration debate rages in Washington, it needs to be pointed out that any new restrictions are likely to impact the new-home sector in a “bigly” way.

Homebuilders are already dealing with a labor shortage, perhaps the No. 1 issue they face -- over and above rising material prices and a lack of buildable home sites. If new immigration is curtailed, and if immigrants already here are deported, the labor problem will be exacerbated greatly.

The result: New houses won’t be built as quickly as they are today, and they may not be built as well, either. If builders have to pay more to find the workers they need to put up their houses, which they most assuredly will, the end product is likely to be even more expensive.

According to the Census Bureau, immigrants now account for almost 1 in 4 workers in the construction field. That’s the highest share ever recorded by the Bureau’s American Community Survey (ACS).

In some states, builders’ reliance on foreign-born workers is even more pronounced. In California and the District of Columbia, 42 percent of the construction workforce comes from abroad. In Texas, it’s 41 percent; in New York and Nevada, 37 percent.

In Georgia, Virginia and Maryland, immigrants account for close to 30 percent of the construction labor force. Interestingly, while immigrants comprise less than 16 percent of the labor force in Virginia, their share in construction exceeds 29 percent. Similarly, in Georgia, less than 14 percent of the labor force is foreign-born, but the share of immigrants in the construction labor force is twice that.

Even though the share of immigrants in construction is now at its highest since the ACS was fully implemented in 2004, and their number exceeds 2.5 million, this is still almost 200,000 fewer than in 2007, according to the National Association of Home Builders (NAHB).

The flow of new immigrants into the construction workforce is also significantly slower than it was in the housing boom years. Fewer than 60,000 new immigrants entered the construction industry in 2015. By comparison, over 130,000 were joining the construction labor force annually in 2004 and 2005.

The rising share of immigrants in construction, says NAHB economist Natalia Siniavskaia, is attributable to “a slow, delayed and reluctant post-recession return of native-born workers.”

Close to 1.7 million native-born workers left the construction labor force during the housing downturn, and the vast majority had not returned to the business as of 2016. That year, the number of native-born workers remained 16 percent below the cyclical high reached a decade earlier.

Homebuyers: Write all the love letters you want to sellers, to try to persuade them you’re the right buyer for their home. But leave your heart-wrenching missive out of the package of documents to give to your lender.

That’s the word from Rob Spinosa, a loan adviser with Supreme Lending in Mill Valley, California, who says some letters contain not-so-flattering information about the house that you probably don’t want underwriters to know. Such as these three examples:

-- “The repairs in the downstairs kitchen don’t concern us. John is good with his hands, and we plan to fix this upon moving in.”

-- “We realize that the home has some deferred maintenance, but we find it charming and are ready for the challenge.”

-- “The termite damage in the report is trivial, in our opinion ... we still love the house!”

Spinosa says he has nothing against love letters per se. He and his wife wrote one themselves when they made an offer on a home. But he and his colleagues remove them from the loan package when they notice them.

Still, he says, “it only takes one oversight from me or anyone on my team before a love letter that may say something (like the above) finds its way in front of an underwriter.”

Lending is not like it used to be, when any applicant who could fog a mirror could get a mortgage. Today, it’s full-bore, full-documentation underwriting. And as Spinosa cautions, “what’s been seen cannot be unseen.”

So go ahead and woo your seller, just don’t let the lender in on the love-fest. Otherwise, you could get the equivalent of a Dear John letter from the lender -- one that says something like, “We’ve found another borrower to love.”

“Alexa, make my mortgage payment.”

Yes, Quicken Loans, the nation’s largest online lender, has developed technology that allows its clients to ask Amazon’s Alexa to make a monthly payment by a secure voice command.

By asking Alexa, clients also can review nearly all account details, such as their current loan balance and payment due dates, and listen to Alexa deliver current interest rates for all of Quicken’s mortgage programs.

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