R C's Blog

By now everyone involved in residential real estate here in Colorado is aware that we have a handful of new laws governing mortgage brokers. 

Let's start with the lawmakers' definition of mortgage broker.  Simply put, anyone who originates a residential mortgage loan in the state is a mortgage broker - EXCEPT those who are employees of a state or federally chartered financial institution . . . so if you're working for a bank, a savings bank, or a credit union, you're exempt.  Why?  because those institutions are regulated by the Fed., and state laws can't pre-empt Federal regulation.   There used to be a difference in the State law between a mortgage broker and a mortgage banker - no more (as regards licensing, that is). 

If the loan officer you're working with isn't an employee of a bank or credit union, then they need a license from the Colorado Dept. of Regulatory Agencies (DORA) to be legal.  It's perfectly legit for you to ask for that number, or you can go to DORA's website and query their database using the loan officer's name.  If they're licensed, thelicense # will pop up.  L.O.'s have until Jan. 1, 2008 to obtain their licenses.

What's it take to obtain the license?  not much.  Fingerprints, CBI background check, $25,000 bond.  The total cost for all that is about $500.  How is the public better served?  That's debatable, but what's now in place will give the State the authority to remove the license for future violations and behaviours detrimental to the public interest.  In effect, throw the rascal out if they're a bad guy.  We've never had that ability in the past.  The specifics of what constitutes revocable cause is not yet specifically defined, nor is the regulatory process that will determine revocation. 

I once had a loan officer work for me that we fired after 60 days.  We discovered that she had been stealing appraisal fees by changing the payee written on the customer's check to her own name.  She was arrested and convicted.  The prosecutor called me when she was coming up for sentencing and asked if I had any input.  I told him that I wanted her out of the business - and he reminded me that no-one had the authority to accomplish that.  The loan officer in question went right back to making loans at another company.  She'd have her license revoked under the new system.  I think that's a good thing. 

Coming soon - early in 2008 - will be mandatory education as well as continuing education  in a fashion similar to that required of realtors.

My next post will describe the various disclosure duties and forms now required on every loan application.  If your loan officer isn't using these disclosures now, they need to be encouraged to do so immediately.

My very first job in mortgage finance was with a little S & L on Colorado's Western Slope.  Title Insurance was 'newfangled' and considered a nefarious scheme to put attorneys out of business; the secondary mortgage market was thought to be a communist plot; and a country attorney taught me a few things about real estate, business, and the law that I won't ever forget.

One of my favorites had to do with partnerships . . . "Rog, there's only two kinds of partnerships - the good ones, and the other ones - and there's precious few of the good ones."

His other thought, the one pertaining to our topic here, was . . . "In contracts and in the law, every word has a meaning - it's there for a purpose.  If you don't understand it, go find out - don't just pass it over or you're apt to wake up in trouble."

. . . which brings us to the Colorado Mortgage Broker Compensation Disclosure form recently published by DORA.  The recently-passed Colorado statute requires that the licensed party responsible to perform the required disclosures - and to whom the other duties fall, is the licensed mortgage broker.  The compensation disclosure then requires that the licensed Mortgage Broker disclose his/her compensation on the loan.  That sounds simple enough . . . let's see, if I'm at a 50 basis point commission level, I'll earn $500 on a $100,000 loan - so that's what I'll disclose . . . because the compensation disclosure talks about what I'll earn.  Seems simple enough.

But that's not the right way to disclose - in fact, what needs to be disclosed is what the Mortgage Broker (the loan officer) will earn plus what the Mortgage Broker's employing company will earn.  For example, it wouldn't be unusual in our industry for a retail mortgage company to earn a total of about 200 basis points on the transaction . . . and that's what must be disclosed.

Again, we'll talk "typical" here.  Anything that contributes to revenue for the originating company needs to be disclosed.  If the loan is priced at 101.00 to the originating company and the customer closes at par, the company will earn a point when the loan is sold.  That's "ysp", or yield spread premium.  If the loan closes with a 1 point origination fee (fairly typical in our market) that origination fee is compensation also.  So in order to disclose properly, the Mortgage Loan Broker needs to disclose income to his/her company, not the direct compensation he/she will earn on the loan.

I'm certain about this because I was arguing that "words mean something" in the law - and the law says Mortgage Broker Compensation, and defines Mortgage Broker as the loan originator who's licensed by the State.  And others were patiently telling me that I was wrong (ok, what they really said was "it's your license Mr. Smart Guy, do what you want to do"). . . so I called DORA for clarification.  They admitted that the wording was, indeed, ambiguous but that the intent and the interpretation they will bring to enforcement is "total income to the company needs to be disclosed".

So I guess we'd have to change our country lawyer advice to something like "words usually mean something". 

What's important here though is that you not get caught in the words on the new "comp" form and end up in trouble.  Remember,"Total income to your company", not what you personally earn on the loan.  And for our Realtor business partners out there - if you see a comp. disclosure that looks like loan officer commission only, it's probably wrong.  Don't let your customers get unintentionally mislead or your favorite loan officer "get dead" because they misunderstood the words.

Sorry, gang.  This ain't particularly entertaining . . . but it's important - especially if you're a Mortgage Broker in Colorado.

OK, on your toes - who's a mortgage broker, according to the State?  Right!  Every mortgage loan officer in the business who's not employed by a bank, credit union, or bank holding company.

Erin Toll, Head of the Real Estate Division of the Colorado DORA (she's probably got a cooler title than that), and her staff have been burning the midnight oil to write the rules we need to know and follow to not break our new laws.  (Brief aside here, personal opinion - Erin and her staff are a hard-working team who want to get it right - they deserve our thanks for both their work and attitude on behalf of the consumer and our industry.) 

So here we go with the new - required by State law - forms, for the most part required as of the publication dates:

1. Compensation Disclosure Form - Effective date October 26, 2007 - the form is a one-pager that does its best to define the broker's compensation on the transaction.  The amount disclosed must be accurate but it is allowable to disclose a range so long as it's not more than 1% of the loan amount (and, of course, the actual number is within that range) duh.  The form is available on Dora's website http://www.dora.state.co.us/real-estate/index.htm
2. Lock-in Disclosure Form - Effective date October 26, 2007 -  this form is also one page (thank you) and needs to be delivered no more than three days (including Saturday) of loan application.  The form details whether the rate is floating or locked, among other things, and must be re-disclosed when the rate actually locks if it was initially a float disclosure.  The regulations require disclosure within 1/8 of 1% accuracy and re-disclosure if any change subsequently occurs in the rate.  Go to the website above to get more specific on this one.
3. Tangible Net Benefit Disclosure - Effective date January 1, 2008 - not really sure why this disclosure has a different effective date than the others, but it will be required for loan applications Jan 1 next year, forward.  This one is clearly targeted at the worst operators in our business.  The borrower must certify the purpose of the new loan, and in the case of a refinance, must specify why they're refinancing.  If the loan has an adjustable rate, negative amortization, or a higher rate than the old loan, such must be acknowledged in writing and certified by the borrower's signature.

From a best-practices standpoint, most companies and loan officers have always used rate-lock disclosures and would continue to do so with or without a legal requirement.  Customer satisfaction depends most on fulfilled customer expectations, after all.  Some I have talked to in companies not regulated by the State are seriously considering complying with the new disclosure laws even though not required of them.

So here we are figuring out how to do business the right way - only this time the right way is defined by the law.  Pretty sad comentary on our industry.

Stay tuned for Federal regulation.

Have a great week.  rc

I know . . . I know . . . this is supposed to be something I wrote, not just the typical cut & paste job - but this is something worth reading and it just fits the tone of this chilly overcast morning.  Don't worry, credit to the author is listed at the end of the artical.

This is an observation of Ben's Congressional testimony last week.  It won't make you feel much better about what's going on, but is a view that I can't help agreeing with; no matter how optimistic I'd prefer to be.

“No one should doubt the credit of Fannie Mae or Freddie Mac.”

ECONOMIC NOTES Monday November 12th, 2007

Despite a continuing decline in the 10-year T-note to the 4.20s, mortgages are stuck near 6.25%. That extraordinary spread is due in part to the poisonous status of mortgages; the rest is an aspect of leadership failure in this credit crisis.

In times of plague, wagons and carts each day clattered through cities and towns, the draymen calling, “Bring out your dead!” So it is on Wall Street today. You would think by now that surprise would have faded at the number and identity of new shrouds, contagion perfectly obvious. But, no, the secretive and blame-shifting culture of Wall Street is intact, markets as shocked each new day as the last.

Markets weakened by oil and dollar worries were hit with a new wave of credit news on Wednesday, November 7th: Capital One (the credit card giant), IndyMac, and other banks indicated deepening trouble; and credit insurers MBIA and Ambac continued their nosedive, exposing $1 trillion worth of insured bonds. All a complete surprise, of course.

That same day the New York AG, Andrew Cuomo, announced appraisal fraud action against Fannie, Freddie, and WaMu, adding their stocks to the heap on the way down. Young Cuomo was an embarrassing failure at HUD, is qualified for public office only by ego and his father’s good name, and in this grandstanding never contacted OFHEO, the regulator of his pretend perps. Civilians don’t know these things, so the news flash helped to push stocks below crucial support levels. Going lower.

Thursday the 8th... stocks stabilized, but a Cisco forecast changed the overall economic view. A collapse in sales to automotive and financial buyers says yes, there is linkage from housing and credit to the real economy, and hazard to the gold standard of the optimists: technology.

The worst of the week was Mr. Bernanke’s anti-inspirational appearance before Congress. Every Fed Chairman has to deliver tough news from time to time, and it’s not a surprise that the Fed is cornered. His insistence that growth and inflation risks are “balanced” is earning widespread derision in the markets, but it should not: these risks are balanced, equally awful, the worst since the ‘70s. The only way to deal with $100 oil is to destroy some demand, here and elsewhere, and that’s what the Fed must do.

The confidence-damaging aspects of the testimony was the man’s demeanor, and the void of ideas. He sat in half-smile (not Dubya’s smirk, but too close) until a very annoyed Congressman from Baltimore broke from describing foreclosure pain in his district to snap at Bernanke, “You seem very calm about all this.” Throughout, the Chairman seemed no more engaged than a man taking notes for a future book.

His blinking surprise at each new development is destructive. “Plague? Really? More bodies? Again? How odd.” The Fed’s phone log early in the August crunch shows a conversation between Robert Rubin and the Chairman. Rubin, greatly admired as Treasury Secretary and Goldman’s best-ever currency trader, has recently been hauling down a $17-million salary at Citi as resident nobility without portfolio. Now, three months later, neither Citi nor the Fed appears to have any idea the extent of Citi’s credit exposure, let alone systemic exposure, nor any sense of urgency to find out. No Fed since the 1930s has been as far behind the insight/information curve as this one.

The absence of invention is just as deadly. It’s okay to be cautious about rate cuts, but it’s not okay to just... sit. We need, immediately, a restoration of new credit, starting with mortgages. Bernanke floated a good idea about Fannie and jumbos... without conviction or urgency, gone on the afternoon breeze.

Right now, today, drop the Agency sand-box fight about mission and privatizing, and say something useful: “No one should doubt the credit of Fannie Mae or Freddie Mac.” Toxicity removed, mortgage rates would fall into the fives in an instant. The best quarantine for housing: refi bad loans to good, cheap, high-quality, low-risk, long-term, fixed-rate. If that means dropping a fixation with market solutions in favor of government guarantee, well, that’s where Fannie came in, in 1938. Late, that time.

Economic Notes is published weekly by the Economics Department of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2007, all rights reserved.

A U.S. District Court ruled late on October 30, 2007 that HUD is barred from implementing the new "Standards for Mortgagor's Investment in Mortgaged Property", which was published in the Federal Register on October 1, 2007 and scheduled to take effect on October 31, 2007.  Earlier, on October 25th, HUD had already granted an exception to AmeriDream until February 29, 2008.

. . . so until further court action, it looks like all the downpayment assistance programs that were due to expire will stay in business.

I had a chance to speak with one of AmeriDream's account managers a few weeks back who informed me that his firm had sued to prevent HUD from implementing the rule.  I told him that frankly, I liked the new rule, particularly given the astronomical default rates on FHA loans that had used his method of downpayment assistance.  He responded, "that is exactly the core of our argument to the court - the true default rates on downpayment assistance FHA loans are not measurably higher than those using more traditional gift sources, like relatives."  If what he said is true (and I guess the courts will sort that one out), then HUD has some 'splainin to do as to how, who, and why someone used trumped-up data to kill a program that wasn't maybe so bad in the first place.  . . . things that make you go hmmmmm?

In the meantime - nehemiah/ameridream away out there, folks.  Just make sure your lender got the message, too.