FHA Streamlines and The False Claims Act – 3x Damages? Conference Call on Basel III for Small Banks

President Obama just played his 100th round of golf since being elected
President. In 4 years he has gone through more white tees than the cast of Jersey
Shore. I am not a golfer, but many in the business are, and people are most
focused on a) whether or not the nation is going to nearly shut down for an
entire week, next week, given the middle-of-the-week 4th holiday,
and b) making sure locked pipelines are closing. Will lenders close
those pipelines and meet delivery timelines for trades? Were the hedges put on
correctly, or will trades have to be rolled/extended and at what cost? Life in
mortgage banking… 

And mortgage bankers continue to expand. Freedom Mortgage Corp. is looking
for experienced AE’s in most markets across the country.  Freedom is
licensed in all states, has its FNMA Seller/Servicer & GNMA Servicer/Issuer
approvals, and currently services in excess of $13 billion (retaining servicing
on most of its current production). The lender offers the usual products
to brokers but also the FHA Streamline, VA IRRL, and HARP loans.  If you
are interested in talking with Freedom please contact Keith Bilodeau, who
recently joined Freedom as their VP, as its Director of Recruiting.  Keith
can be reached at keith.bilodeau@freedommortgage .com;
Freedom’s website is freedomwholesale.com.

Today at 1PM EST investment banker KBW is offering a conference call
to discuss “Proposed Basel III Capital Rules for U.S. Banks — How They
Affect Regional and Community Banks, and What Bankers Should Be Doing
Now.” Basel III doesn’t only drive down servicing values, which
directly impacts borrower’s rates & prices, and anyone who believes it only
impacts the multi-billion dollar banks is mistaken. “These far-ranging
rules will affect all banks as they are implemented in various stages over the
next ten years.  But bankers need to be aware of how they may affect their
industry and their banks, right now, during the comment period, if there is any
hope of molding the final product.  On the call will be five KBW
specialists on bank regulatory issues and research analysts.” It will be
followed by a Q&A session. Dial-In: (888) 212-5201, Passcode: 9343267;
during the call, slides will be made available by following this link.

lenders & investors, such as Stearns & Nationwide, changed their FHA
Streamline pricing or polices
. (See recent investor/agency/webinar updates below.)
Why is this continuing? The headline from a well-known investment bank
caught my eye: “Enormous Liability Poses Problem for FHA Lending.” “Several of
the mortgagees have publicly indicated that the moves are being made due to
secondary market conditions or a desire to maintain service to existing
borrowers. But what is really behind the retreat are emerging government actions
and potentially enormous liability in originating and servicing FHA-insured
business – and of course originators love the product given the low cost to
process and service a streamline refinance. Out of the 237,698 refinance
transactions for $47 billion that FHA has endorsed so far during fiscal-year 2012, around 53 percent have been streamline
transactions per Mortgage Daily.”

The piece goes on to discuss the “potential liability associated with
originating and servicing FHA mortgages, especially streamline transactions.” Per
Dave Stevens, quoted in the piece, many FHA mortgagees are being contacted by
the HUD Office of Inspector General about auditing issues, and concerns are
increasing about accusations of False Claims Act violations. “The real
issue here is reps and warrants, risks associated with originating FHA loans
and the huge penalties that are involved in the FHA program if you make an
error,” Stevens said. “He explained that with defects on loans sold to
Fannie Mae and Freddie Mac, the worst-case scenario is repurchase liability or
indemnification. But errors or defects discovered on FHA-insured loans that go
bad where an FHA insurance claim has already been filed can be considered a
violation of the False Claims Act. ‘That means you’ve filed a claim on a
loan that should have never been insured in the first place and it violates the
False Claims Act,’ Stevens explained. ‘So, the difference here is that the
False Claims Act comes with treble damage risk, meaning you pay three times the
outstanding balance of the loan. Not three time the net of the loss; three
times the outstanding balance of the loan.’ While the extreme liability applies
to both purchase and refinance transactions, streamline refinances have default
rates that are twice as high as non-streamline transactions — including fully
underwritten refinances. Another problem outlined by Stevens is the length of
time it takes to foreclose on an FHA loan as a result of the loss mitigation
and loss intervention required by law.”

Speaking of changes, here are some recent investor/agency/webinar
, providing a flavor for the environment. As always, it is best to
read the actual bulletin.

(This is the last darned note on cancelling MI for Freddie Mac, begun
last week. A reader wrote, “To further clarify, mortgage insurance for a
fixed rate mortgage on a one-unit primary residence can be automatically
cancelled based on: 1.  When the mortgage would have been cancelled
calculated on the original value of the mortgaged premises.  In other
words, the calculation of 78% LTV is based on the original value of the
mortgaged premises at the time of loan origination, not the current value of
the mortgaged premises – or two – it is when the midpoint of the amortization
period of the mortgage is reached. To illustrate, if a loan is amortized
over 30 years, and the 360th month is December 2021, the midpoint is the 1st
day of the 180th month, or January 2006. For an Adjustable Rate Mortgage or a
Balloon/Reset Mortgage (either HPA or Pre-HPA), the above LTV ratio calculation
and the midpoint of the amortization period are both based on the current
amortization schedule following the most recent rate change. Paying down the
mortgage principal will not eliminate the need for MI unless the current
balance is 80% or less of the current value.” So what the reader and the
Guide are saying is the same thing: that the 78% is based on the original value
and the original amortization.  That is correct.  But to pay down the
balance to 78% and then cancel based on original value is not permitted.)


Advantage Mortgage
sent a note to clients, “Due to the current lending
environment NAMC has decided not to purchase FHA Streamlines at this time. NAMC
will honor (underwrite and purchase) FHA Streamline loans that have been
reserved prior to Monday, June 25, 2012. We will still require compliance with
NAMC overlays with respect to the FHA Streamlines registered prior to June

Stearns Lending spread the word, “Due to continuing shifts in the FHA
streamline refinance market, the following guideline changes are being made to
minimize risk and remain competitive…effective with all transactions closed
after June 29, 2012: Maximum LTV limit of 115% will be placed on all streamline
refinances without an appraisal and non-credit qualifying streamline refinances
with appraisal. CLTV/HCLTV will remain at 100% if there is existing subordinate
financing. Value will be confirmed by an AVM for loans without an appraisal. If
an AVM is inconclusive or is not available, a conventional 2055 will be
required. Employment verification process will not change. Employer name,
address, and phone number must be included on the 1003, income should not be
included. A verbal VOE will continue to be obtained; a 4506T will not be
executed. 12 months ownership history is required for the property being
refinanced.” But with yesterday’s rate sheet Stearns changed pricing (no longer
cumulative) and improved its pricing on FHA Streamline loans from a flat 1.0%
fee plus FICO adds to no fee and combining the FICO and streamline charges into
a tiered FICO structure.

Union Financial
told clients that it “offers FHA products with
limited to no overlays, which allows you to approve more loans with confidence.
Just document and underwrite in accordance with HUD handbook 4155.1 as amended
by any applicable mortgagee letter and submit them to us…We will purchase your
streamline loans regardless of current servicer, no credit report required, loans
submitted without a credit report will be priced using a 580 FICO, if a credit
report is submitted, the credit score can be as low as 560 FICO, all non-credit
qualifying streamlines must have a mortgage only rating, no appraisal or AVM

A while back GMAC, regarding DU Refi Plus loans, clarified, “the
borrower being removed is also removed from the deed and retains no ownership
interest in the property, and at least one of the original borrowers is
retained on the new loan.” Condo Requirements: The requirement to confirm
fidelity insurance coverage for condo projects has been removed. Modified
Loans: Permanent Modified loans are eligible for refinance under DU Refi Plus
as long as the borrower benefit is met. The terms of the permanent, modified
loan must be used for this comparison. If the borrower was previously in a
trial period plan, but denied a permanent modification, the original terms of
the loan must be used. Borrowers who have not completed the trial period are
not eligible. Leasehold Estate Eligibility: Leasehold review required. Subordinate
Financing (The following applies to all loans): Subordination of existing
junior liens permitted without maximum CLTV/HCLTV limitations. Subordinate
financing repayment terms must be documented by the Note but review and
compliance is not required. There is no restriction on the type of subordinate
financing, excluding Down Payment Assistance Programs (DPA). DPAs are not

SunTrust reminded clients to prepare for Virginia Senate Bill 409, which
amended Section 58.1-803 of the Virginia Code, effective on July 1, 2012, by
eliminating the “same lender” recordation tax exemption for deeds of trust and
mortgages securing a refinanced obligation and changes the calculation of the
amount of the recordation tax to be paid.

Yesterday in the markets, despite some intra-day volatility, there was much ado
about nothing. The U.S.’s 10-yr T-note is still in the 1.60’s (closing at
1.61%) after closing Friday at 1.67%. Mortgage-backed security prices improved
about .125-.250 – whether or not that improvement made its way onto rate sheets
is unlikely. There are too many companies out there tampering with profit
margins to either slow business down or cover future overhead costs – and
rightfully so.

Today the economic calendar has the S&P Case Shiller home price index
for April with consensus estimates seen improved +0.3 percent versus +0.1
percent last, and also June’s Consumer Confidence – estimated to drop. And at
1PM EST the Treasury holds the first of its three note auctions this week with
2-yr. notes leading off at $35 billion. (A total of $99 billion will likely be
sold by Thursday after 5yr notes and 7yr notes complete the monthly sales.) In
the early going MBS prices are nearly unchanged as is the 10-yr at 1.61%.

Here are the “Top 10 things you wish you could say to your borrowers but
can’t.” (Part 2 of 2.)
5. Since you only have $6 worth of verifiable liquid assets, I will need more
of an explanation regarding the four $3,000 non-payroll deposits. Right now, it
looks like you are collecting income from a meth lab in your rental garage.
4. At what point when I was talking about the importance of not moving money
did you decide to pay off $20,000 in student loans?
3. It’s a little less hard to believe these “tax liens” and “mortgage rates” on
your credit report are the “first you are hearing of this.”
2. It took you three weeks to get me your documents. I will need a little more
than five minutes to get your docs out.
1. No, we don’t really need all of your tax returns – just the random pages
that you feel like sending.


…(read more)

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