Lending

On January 21, 2010 – HUD(Housing and Urban Development) released a letter stating that all FHA loans will have increased mortgage insurance. The new FHA Mortgage insurance requirements are as follows:

• Up front FHA mortgage insurance premium increases from around 1.75% to 2.25%.
• These changes go into effect for Case Numbers created after April 5, 2010 (Though you may have applied for a FHA loan prior to this date, a case number is not always assigned). So at least there is a few months of breathing room.

What does these changes to FHA mean in layman’s terms? As a quick review, FHA loans have two types of mortgage insurance. FHA up front mortgage insurance is calculated as a percentage of the loan amount, and is typically financed a.k.a. added to the loan amount as a one-time event. This is why on FHA loans, though a downpayment was made the total loan amount is higher than the actual loan amount. FHA monthly mortgage insurance is a percentage of the loan amount as well, but it is calculated on an annual basis and collected on a monthly basis with each mortgage payment. The average person may not be aware that FHA mortgage insurance is mandatory on all loans no matter how large the down payment.

Let’s look at an example of the FHA MI changes for 2010.

Prior to April 5, 2010:

Purchase price: $200,000

Down Payment(3.5%):$7,000

New loan $193,000

1.75% FHA up front MI: $3377.50

New total FHA loan: $196377.50

After April 5, 2010:

Purchase price: $200,000

Down Payment(3.5%):$7,000

New loan $193,000

1.75% FHA up front MI: $3377.50

New total FHA loan: $196377.50

Here’s the link to HUD for the Mortgagee letter detailing this new increase in FHA mortgage insurance premiums.

More FHA MIP resources available at FHA.gov (aka HUD.gov)

Our analysis is that these increases in FHA MIP are due to the recent default rate spike in FHA loans- they are scrambling to keep capital up. We’ll cover this in our next post.

I have received many questions from realtors, loan officers and clients alike about what these Respa changes mean for YSP (aka Yield Spread Premium). Below is the result of our research.

Among the chaos for mortgage lenders to comply with HUD’s new RESPA, the primary issue is the treatment of Yield Spread Premiums (YSP).
As you may have read in other post about RESPA effective of January 1, 2010, YSP will only  be considered a credit to the borrower. What does this mean? For many years, yield spread premiums have been that silent kickback that the lender received in addition to up front fees. But now the notion of “front-end” and “back-end” compensation is gone, and all compensation the Originator will get must be clearly indicated upfront, and may not change. There will be no YSP kickback in the present form.

Since mortgage originators must include the precise amount they will be compensated in Block 1 of the new GFE, YSP does not affect the originator’s compensation directly; it just lowers the  closing costs, which can then be applied to pay the originator’s compensation. What the heck does that mean? That essentially, originators must be careful what they charge you. There can be no hidden kickback which you do not see.

So what will happen to YSP? Well, the word is pretty much obsolete. Going forward, an understanding is needed that the specific interest rate chosen by the customer may give an indirect payment that is a credit for acceptance of an above market interest rate. Conversely, the chosen interest rate may result in customer cost (Discount) in order to get the desired interest rate. In other words HUD’s stance is the possible credit/discount(+/-) that YSP has must be combined with upfront costs. There is no YSP, back end kickback, or discount points it is now one and the same.

We look to some real scenarios to better explain.

1. Sample loan amount $100,000. Originator wants to make 2% total compensation on the deal. They charge a processing fees of $300 and underwriting fee of $450. In the new GFE required by RESPA, Block 1, “Our Origination Charge” would display $2,750 (2,000 + 300 + 450 = $2750).

Now, the borrower says an interest rate of 5.5% is desired. For simplicity, the lender’s rate sheet gives 5.5% is exactly PAR (no
kickback or cost to obtain the rate).

• a. If the originator is a Lender, they could check the first checkbox in Section 2,”Your credit or charge for the specific interest rate chosen” which indicates any(+/-)for that rate is included in “Our Origination Charge.”
• b. If they are a mortgage broker, they use either the second or third checkboxes, and $0 would be shown in the amount column. On the new GFE, Block A, “Your Adjusted Origination Charges” would show $2750.

2. Same scenario, but say the borrower decides they want a rate instead at at 4.875%. Based on the rate sheet pricing, 4.875% has a cost (discount) of 1.5%. rate selected by the borrower does not impact the compensation to originator.

• Block 1 will still show $2,750. But now, regardless if the originator is a Lender or a mortgage broker, the third checkbox in Section 2 of the new RESPA must be checked, showing the borrower is paying a charge or cost for the 4.875% rate. $1500 would be included in the Amount column and Block A would display $4,250 (2750 + 1500 = $4250).

3. Finally, again using the same basics, say the client instead wants a higher monthly mortgage payment and in exchange less cash to close. The rate sheet shows a rate of 6.5% provides an indirect payment to the borrower of 2%(this would formerly be a 2% YSP premium to the broker). The main point is that the interest rate selected by the borrower has no relation to compensation the originator gets. Block 1 on the GFE still shows $2,750.

• a. If the originator is a broker, they must check the second checkbox in Section 2, showing that the credit to the borrower reduces their settlement charges. -$2,000 would be displayed. Block A would display $750 (2750 – 2000 = $750) showing lower costs because the credit from the higher rate is backed out of the total costs.
• b. If the originator is a Lender, they may use the first checkbox in Section 2, indicating the charge for the interest rate is included in Block 1; but it is more likely the originator would be paid from the lender and their 2% charge(again, what WAS YSP is still money, but now considered a charge) would be backed out of Block 1. If the latter, Block 1 would display just $750. Section 2 would display $0 and Block A would display $750.

These examples show a significant concept to the RESPA Rules. Originators no longer get paid based on the pricing related to the interest rate. The money/credit is still there, but treated much differently. This comes from government/HUD belief that some borrowers were taken advantage of and that interest rates were used as a sales tool. Any loan officer will find it hard to say that they haven’t benefited from YSP being pretty much invisible to the end customer.
Ivy Jackson, Director, Office of RESPA and Interstate Land Sales US Department of Housing and Urban Development wrote on 5/22/08: “HUD’s intention of the revised Rules is to increase transparency of the costs for obtaining a mortgage and to increase shopping, which they estimate will reduce the cost of financing by $668 per loan”.
While the changes to YSP has been subject to much speculation, I feel that the creation of a direct separation between originator’s compensation and the borrower’s chosen rate is a good thing. As mentioned Block 1, “Our Origination Charge” cannot change one penny from when the GFE is issued. But Washington is not heartless, and allows for (+/-)cost/rebate in the specific interest rate before the interest rate is locked. So if Block 2 changes, it will affect Block A, “Your Adjusted Origination Charges.” Clients will be benefit from the fact that there is a zero tolerance for change in the rate or (+/-) after the rate is locked. There are a few exceptions under “Changed Circumstance”.

If the line between originator compensation and the credit or charge for the interest rate chosen were blurred, it is likely the figure in Block A would also be held to a $0 tolerance, leaving originators subject to market conditions while the interest rate was not locked.
So, while the mystery of how to document YSP on the GFE beginning in January has hopefully been solved, the saga of originator compensation continues. The Federal Reserve Board’s
proposed amendments to the Truth in Lending Act (TILA) contain restrictions on how loan originators may legally be compensated and how that figure is determined. For instance, the proposed
rule changes state that originator’s compensation may not be based on the “Terms and Conditions” of the loan, leaving many industry participants wondering what the charge would then be based
on.

The current pace of RESPA and YSP change is frenetic and odds are things will continue like this for quite some time.

A new array of challenges has hit the battered mortgage industry. Pros and Cons alike are both heavy in the new version of RESPA, or the Real Estate Procedures Settlement act. HUD (housing and urban development), the overseer of these laws and policies, has had made some sweeping changes to the required documents.

The primary thing is the new Good Faith Estimate. There have been a multitude of changes to this document, and we don’t have space to cover all of them but here’s the highlights:

• 6 pieces of data must be collected before a GFE is required: borrower’s name, social security # for pulling credit, monthly income, property address, loan amount sought, estimated value of property.
• New Good Faith Estimate must be issued to the person applying for a mortgage within 3 days of application.
• After, origination, points, YSP and lender fees CANNOT CHANGE*.
• Effective now GFE’s and HUD sheets must contain much more info such as length of time rate/fees are good for and the prepayment penalty
• After, 3rd party fees such as title, escrow etc can change but have different tolerances (I E they can only change 10% from original and so on) depending on if the borrower picked that 3rd party provide or not.
• * Broker/lender fees can change in a few exception scenarios such as change in loan type, borrower request, new construction and a handful of other loopholes. However, there is still a process and the borrower must sign a letter of intent before a new GFE is issued.
• There is a 10 day waiting period after issuance of the original good faith estimate before a revised one can be sent for any reason.
• There is a phase in period for the new GFE which is complex by itself. See the links below for a full explanation.

I could go on and on. The mortgage broker I work for has had us go through several hours of classes and we have had more than a few meetings about the new Good Faith Estimate and all the changes. There is one vital analysis that we’ve made- since the GFE is triggered on 6 pieces of information, one being property address, this means on purchase preapproval situations wont require a GFE for compliance. For loan originators this is vital. If you are a realtor or loan officer you should check out this very excellent reference card here RESPA_MDIA Quick Reference Guide.

Some other documents for your review:

Settlement Booklet December 15 REVISED this by law must go out with all GFE’s

RESPA Manual FINAL pretty large

HUD’s consumer testing report of the new GFE while looking for something else, I stumbled on this crazy document. Behold.

And so, in summation: This new red tape will not be an obstacle to quality mortgage brokers who take pride in their ethics, morals and customer service. I do think that the consumer will receive both benefits and detriments due to the new RESPA. On the one hand it will be very difficult for shady loan officers to bait and switch anymore. On the other hand Real Estate is never without it’s surprises and I can see this being very difficult to work with. I estimate that these changes will add another 1-2 hours of compliance to my work week.