Although getting rid of the bad actors in the mortgage business is a good thing, customers can expect ever increasing difficulty in getting approved for a mortgage and also higher costs and interest rates as many good loan officers are driven out of the business along with the bad.

Here is the full text of the news release:

This FREE Webinar will help you better understand the FHA Refinance general guidelines. Presenters will discuss Streamline Refinances, Cash-Out, & Rate & Term Refinances.

Basic calculations will be included in this training for anyone wanting to improve their knowledge of FHA refinances. An emphasis will be on the changes to the Streamline Refinance guidelines.

Registrants will receive an email confirmation prior to the webinar with a web link, a toll-free dial-in number, & instructions for participating in the training. Registrants must have internet access. All times listed on the registration are mountain daylight time. Registration required, no fee.

More info at: http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=550&update=N

Here is the complete text of the statement. I have bolded some of the more interesting sections:

“After touring the country and talking to lenders over the past few weeks, I think it is important to take a moment and emphasize to all lenders the important role they play in this housing market, particularly in their role as responsible stewards of underwriting quality loans that will perform sustainably over time. In some cases I am seeing activities that reflect an over exuberance in the marketplace to find ways to increase loan origination revenues. Some may say it’s only “a few opportunistic lenders,” while others may say it’s a more widespread trend. It is our job at FHA to ensure that the FHA portfolio is not impacted by dangerous lender behavior that could threaten the safety of a financially sound, viable program for decades to come. Therefore, I want to be very clear on FHA’s position as it relates to underwriting, lender accountability and affordable programs.

Quality underwriting is not only essential; it is expected. Every lender engaging in business with FHA is expected to perform and maintain quality underwriting standards. FHA has flexible guidelines in place so we can best serve our mission of providing affordable housing opportunities to American families and be a source for insuring the availability of mortgages in a time of market contraction. We delegate that responsibility to you, our lender partners, each and every day. We expect your organization to have the right people and processes in place to make quality underwriting decisions, perform thoughtful analysis of a borrower’s ability to repay the loan, and adhere to realistic underwriting ratios.

We know that in today’s economy, there are a wide range of applicant profiles. We expect you to ensure that your processes and staff are well-equipped to assess the overall quality of the loan, determine a realistic income level and analyze the borrower’s true ability to repay the loan. It is imperative we look at income levels, credit history, and qualifying ratios realistically and make decisions responsibly.

To ensure that our partners perform the quality underwriting we expect, we have refined and re-tooled our loan level review processes to more effectively spot unsatisfactory underwriting performance. Utilizing updated risk targeting criteria and a collaborative approach, we are executing an enhanced strategy to identify underwriting deficiencies and take action to protect FHA from unwarranted risks and losses. This comprehensive and calculated risk management endeavor will permit us to single out those lenders that are needlessly endangering FHA and the continued availability of its programs.

FHA’s loan level review processes have been enhanced to more effectively manage risks and minimize losses arising from poorly underwritten or fraudulent loans. Processes have been modified and aligned across all Single Family offices to achieve a collaborative and comprehensive approach to evaluating loans throughout the loan lifecycle. For Post-Endorsement Technical Reviews, case selection criteria have been revised and review procedures enhanced and standardized. For lender and servicer reviews, the targeting tools and methodology have been strengthened to better target lenders and loans that pose the greatest risks to FHA.

And, as FHA continues to increase our quality control efforts, we are paying close attention to areas where some may try to take unique advantage of the flexibility of FHA without the appropriate focus on quality. One example is in how loans are originated for our non-FHA to FHA refinanced loans. Even with our FHA streamline refinance program we can identify risk simply by looking at the original loan quality before it was refinanced into an FHA loan. Through this process of reviewing the original loan we can ensure that it was a quality loan and one of FHA caliber.

Affordable products are core to FHA serving its mission. FHA plays a critical role in the market. Not only does FHA help to stabilize the housing recovery by providing liquidity at a much needed time, but FHA, as a mission driven organization, also has a goal to provide affordable homeownership opportunities in America. We want to make sure those who buy a home today, buy a home they can keep over the long term.

Our affordable lending programs and those specifically created to help during the housing crisis, such as Hope for Homeowners, are designed to provide flexibility to serve this unique, often distressed segment of the population. We expect you to maintain the spirit and intention of these programs by providing close control over how these programs are executed in the marketplace and how compensation on these loans is paid to your staff. We need to learn from past lessons and protect consumers from behaviors where they are overcharged or adversely selected. We are paying close attention to how these programs are administered and expect you will too. Lenders must keep very close control over compensation programs to ensure borrowers are not paying more than they should to have access to FHA’s affordable programs.

We have to join together to oppose predatory lending, fraud, and irresponsible business practices that threaten the housing industry and the financial security of homeowners and people trying to save for retirements. We have to create a climate of trust and confidence that will attract investors and free liquidity. If we are wise now, the market will be healthier and more secure in the future.

Our goal must be nothing less than to craft a solid, sustainable housing market, a market with a secure foundation based on trust and integrity for the future. Let’s continue to work together.”

Let’s hope that this effort is successful in helping FHA continue to remain strong and viable.

• The first proposal is that FHA require a minimum credit score of 580 in order to eligible for maximum financing, and that no scores lower than 500 be accepted at all. Borrowers with credit scores between 500 and 579 would be required to make a 10% minimum down payment.

In my opinion this change would have very little meaning in the real world outside the bureaucracies. Lenders have already implemented very similar guidelines.

As I have expressed on these pages in the past, excessive reliance on credit scoring is a huge factor in the mortgage industry crash over the last few years. Credit scores were created to predict consumer credit outcomes and aren’t the great predictors of mortgage success that some would have you believe. I believe that credit scores and automated underwriting are too often used as crutches to speed up underwriting and avoid real analysis of the credit risks particular to individual loans. However, the industry is too far down this road to turn around now.

• The second proposal is to reduce the allowed seller contributions from 6% to 3%.

The rationale behind this change is that appraisals are inflated to cover the difference. This might have been the case at some point in the past, but the idea is almost silly today with all the incredible scrutiny that appraisals now go through. This would only serve to either a) stop some good borrowers from buying at all because they don’t have the extra funds available, or more likely b) put more borrowers with limited reserve funds into homes, thus making the whole transaction more of a risk. Why add something else to slow down the market when the change will likely create more risk instead of less.

• The third proposal is to “Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.”

I am quoting all of that exactly because I don’t really understand what it means! I was under the impression this was already the thought process underwriters were supposed to be using.

I’m sure the trouble has been that bad underwriters regularly make the decision blindly that a particular number of compensating factors from the official list are all that is needed for approval rather than a real analysis of the credit profile. As noted above, I would prefer to drop all the credit scoring and automated underwriting and use this common sense old style rule.

Has anyone thought to just crack down on the underwriters making bad decisions rather than trying to leave it up to a bureaucrat with 20/20 hindsight to second guess which factors were more predictive for that particular loan? More than likely this particular rule is geared to leave HUD an out to avoid paying claims by citing violations of this rule. My opinion is that the uncertainty involved here will create an atmosphere in which underwriters overcompensate and more loans get turned down.

Bottom line, the simplest solution to all of this would be to crack down hard on lenders with high default rates. Judge everyone by their results and let the lenders themselves decide how they are going to underwrite. Quit trying to have bureaucrats micromanage things. There isn’t anything in the world a bureaucrat does better than someone in the real world.

Here is the website where you can make your comments until August 13, 2010.

Looking for a QUICK Fix to the NMLS Exam? Here is the answer…

The statistics are in….. almost 1/3 of ALL loan originators are FAILING the NMLS test on the first try! Worse yet – only 44% pass on the second try!

These numbers are alarming, but not surprising. Fact is – the test is tough! Even people who have been in the industry for over 20 years are failing the NMLS tests – WHY? Easy – they’re not prepared FOR THE TEST!

Now here is the solution you need A special 4-hour class on just the specifics that you need – to pass the exams!  This session will come complete with study manual and hundreds of actual sample test questions! Learn in confidence from long-time mortgage expert Chip Cummings in this “Chip Tips” version of test preparation for the NMLS exams.

Failing means a 30-day wait, and having to shell out more money for re-takes. Avoid becoming a statistic… Get enrolled for an Exam Prep Class TODAY!

Click Here for information on upcoming classes

ABC’s of FHA Lending
July 1-2, 2010
12:00pm – 3:00pm Eastern (9AM Pacific)
FHATrainingSource.com/go/online

Many new companies and wholesalers are REQUIRING this class prior to origination (or even employment!). Completion Certificates WILL be issued to attendees for you to show all your customers, friends and neighbors (or your boss).

This is the SAME class that is taught to the U.S. Dept. of HUD staff at the HOC.

Again, for details on the upcoming online interactive training, go to:

http://FHATrainingSource.com/go/online

FHA recently issued ML 2010-20 which provides an overview of key provisions of HUD’s final rule referenced above, and provides guidance to mortgagees on HUD’s implementation of this final rule. This rule increased the net worth requirements for FHA-approved mortgagees, eliminated FHA approval of loan correspondents, codified requirements of the Helping Families Save Their Homes Act of 2009 (Public Law 111-22), and made minor modifications to other aspects of FHA’s regulations governing lender activities.  After a brief overview of the new policy decisions, FHA staff will field questions from callers.

The call is scheduled for Tuesday, 6/29/2010 at: 2:00 pm eastern time.

The call-in number is (866) 207-0413

The conference id number is 84423109

Because there are a limited number of lines associated with this call, we encourage industry groups and lenders to call in from a central location.

You can view a copy of ML 2010-20 online at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

A copy of Final Rule FR 5356-F-02 can be viewed at: http://edocket.access.gpo.gov/2010/pdf/2010-8837.pdf

The FHA Streamline Refinance program has helped many borrowers lower their interest rates and housing payments. FHA has long held the view that decreasing a borrower’s monthly payment should be a good thing and very easy to accomplish as long as the borrower has been making their payments on time. After all, if the borrower is already making the payments and FHA has already insured the mortgage either way, then why be picky about the details. Thus, the FHA streamline refinance process has always been an easy one.

Unfortunately, as we hear so commonly in the mortgage business today, the times are changing. In response to today’s economic climate and increasing defaults on FHA, FHA streamline refinance requirements were tightened considerably at the beginning of 2010.

Here are the highlights of the primary changes:

1. FHA borrowers must now be employed at the time of application
2. Any cash needed to close must be fully verified
3. If the borrower needs to “roll in” any closing costs at all to their loan amount, then the lender must have a full appraisal done
4. Borrowers must now have made at least 6 payments on their loan before refinancing
5. There must be a specifically allowed net tangible benefit to the borrower.

Keep in mind that lenders are also allowed to tighten up these guidelines even further, and many have. An FHA streamline refinance is still only insured by FHA. FHA is not the lender. So before you commit to an FHA streamline refinance, be sure to obtain quotes from different lenders and realize that the guidelines may be different for different lenders.

Following are the exact details of all the changes:

Revisions for ALL Streamline Refinance Transactions

Seasoning: At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

Payment History: At the time of loan application, the borrower must exhibit an acceptable payment history.  For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due. For mortgages with a 12 months payment history or greater, the borrower must have experienced no more than one 30 day late payment in the preceding 12 months, AND made all mortgage payments within the month due for the three months prior to the date of loan application.

Net Tangible Benefit: The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal.  Net tangible benefit is defined as:  a) reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens), b) refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage, OR c) reducing the term of the mortgage.

Reduction in Total Mortgage Payment:  The new total mortgage payment is 5 percent lower than the total mortgage payment for the mortgage being refinanced.  Example:  Total mortgage payment on the existing FHA-insured mortgage is $895; the total mortgage payment for the new FHA-insured mortgage must be $850 or less.

This requirement is applicable when refinancing from a Fixed Rate to Fixed Rate, from an ARM to ARM, from a Graduated Payment Mortgage (GPM) to Fixed Rate, from GPM to ARM, from a 203(k) to 203(b) and from a 235 to 203(b).

Fixed Rate to ARM:  Fixed rate mortgages may be refinanced to a one-year ARM provided that the interest rate on the new mortgage is at least 2 percentage points below the interest rate of the current mortgage.

ARM to Fixed Rate:  The interest rate on the new fixed rate mortgage will be no greater than 2 percentage points above the current rate of the one-year ARM.  For hybrid ARMs, the total mortgage payment on the new fixed rate mortgage may not increase by more than 20 percent .  Example:  total mortgage payment on the hybrid ARM is $895; the total mortgage payment for the new fixed rate mortgage must be $1,074 or less.

Reduction in Term:   For transactions that include a reduction in the mortgage term, that loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction.

Investment Properties/Secondary Residences:  In addition to meeting the requirement for a reduction in the total mortgage payment, investment properties or secondary residences are not eligible for streamline refinancing to ARMs.

Certifications and Verifications: When submitting the loan for insurance endorsement, the lender must include a signed and dated cover letter on their letterhead certifying  that the borrower is employed and has income at the time of loan application. If assets are needed to close, the lender must verify and document those assets. The lenders must also include the pay-off statement in the case binder.

Credit  Score: If a credit score is available, the lender must enter the credit score into FHA Connection.  If more than one credit score is available, lenders must enter all available credit scores.

Maximum Combined Loan to Value: If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

TOTAL Scorecard: Lenders should not use TOTAL on streamline refinance transactions.  However, lenders may score streamline refinances through TOTAL and still process and underwrite the loan as a streamline refinance transaction if doing so is in the borrowers’ best interest.

Uniform Residential Loan Application (URLA): Mortgagees may no longer use an abbreviated version of the URLA.  The application for mortgage insurance must be signed and dated by the borrower(s) before the loan is underwritten.  Mortgagees are permitted to process and underwrite the loan after the borrowers and interviewer complete the initial URLA and initial form HUD-92900A, HUD/VA Addendum to Uniform Residential Loan Application.

Revised Streamline Refinance Transactions WITHOUT an Appraisal

The maximum insurable mortgage cannot exceed: The outstanding principal balance  minus the applicable refund of the Upfront Mortgage Insurance Premium, PLUS The new UFMIP that will be charged on the refinance.

Revised Streamline Transaction WITH an Appraisal

The maximum insurable mortgage is the lower of: 1) The outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance; OR 2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance. Discount points may not be included in the new mortgage.  If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.

Unchanged Streamline Refinance Rules

The following on streamline refinance transactions remains unchanged:

• Maximum mortgage limits and maximum mortgage term
• Streamline Refinances for investors/secondary residences
• Cash back at closing
• Permissible geographic areas
• Appraisals
• HUD LDP and GSA exclusion lists
• Credit Reports
• Credit Qualifying [except maximum insurable mortgage]
• Holding period for assumed loans
• Adding/Deleting Borrowers
• Withdrawn Condominium Approval
• Seven Unit Limitation
• No Cost Refinances
• 203(k) to 203(b) [completion of rehabilitation]
• 235 to 203(b) [overpaid subsidy and junior liens]

As a result of this TBW grew to be one of the largest privately held mortgage lenders in the country. Many thousands of people own their homes today because of TBW.

For several years, I had daily experience with TBW management, underwriting, closing and servicing. My impression was that the company had good intentions but that there was a serious lack of organization. A sort of “fly by the seat of your pants” attitude. I believe in the end, this was the downfall of the company. In spite of turning over enormous amounts of money, the company obviously ended up in a position where new business couldn’t quite wallpaper over the mistakes of the past.

I really believe that what allegedly happened in this situation was the result of simply floundering around trying to stay in business. Not a true attempt to steal anyone’s money, but the result of people becoming so mired in the day to day struggle that they lost sight of right and wrong, and what might happen if their attempts to fix things didn’t work. For all the mistakes that were made, I still find it sad that TBW is no longer in the picture. It started with a good idea that could have really gone on a long time if it had been better executed.

Following are some links with all the details of what was happening behind the scenes when TBW shut down:

The Department of Justice Statement
The Securities and Exchange Commission
Former TBW Chairman Charged in $2bn Fraud Scheme – Housingwire

It was one of the most moving experiences of my life. There was scarcely a dry eye on the field as we watched over a 1000 cancer survivors make the first lap of the event.

Our team registered late for the event, but still in only 4 weeks we are proud to have raised almost $12,000 to help the American Cancer Society in the fight against this terrible disease.

Fundraising for this event goes on through the end of August. If you would like to help the American Cancer Society, please go to our team website provided by the American Cancer Society at http://main.acsevents.org/goto/FHBHSAlumni to make a direct donation. Every small donation makes a difference.

Again, the website for making donations to the American Cancer Society is at http://main.acsevents.org/goto/FHBHSAlumni

Thank you for your help!

Carl Pruitt