Mortgages without appraisals?

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Fannie and Freddie are relaxing their rules!

Government-chartered entities Fannie Mae and Freddie Mac are relaxing their decades-old appraisal rules to allow some refinances and, more significantly, some sales to close without new appraisals. Both entities indicate they will only permit loans to close without appraisals in situations where they have substantial data on the properties in question as well as the local real estate markets.

How will the new plans work? Lenders will submit loan files to either Fannie or Freddie for underwriter analysis. The entities’ proprietary systems (automated valuation models) will be employed to determine whether sufficient valuation data is available to support the requested loan amounts.  These systems are said to be depositories of millions of prior appraisal reports and “proprietary analytics” that allow for computer-driven valuations of properties. If the system determines that no appraisal is required, the borrower will be given the choice of proceeding without an appraisal or coming out of pocket for an appraisal.

Should local residential contracts be tweaked? Should lawyers advise their purchaser clients to obtain appraisals?  We will have to cross those particular bridges.

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This seems reminiscent of the situation in the early 1990s where title insurance companies limited their requirements for current surveys. Residential lenders were given the survey coverage they required without the cost of updated surveys. Lawyers were left holding the bag, so to speak, to advise their purchaser clients of the benefits of surveys and to encourage them to incur the cost despite the fact that there was suddenly no lender or title company requirement.

Lawyers are not typically involved in residential transactions prior to loan approval, however, so it is entirely possible they will not be involved with the question of whether to obtain appraisals unless astute and cautious buyers specifically seek advice up front.

Fannie and Freddie have been quietly phasing in this new process for months and indicate appraisals will continue to be required for most loans. Fannie estimated that only ten percent of loans were eligible to close without appraisals at the inception of its program for refinances. That percentage is likely to be smaller for sales.

Both entities require at least twenty percent equity to qualify. Fannie’s program includes single-family homes, second homes and condominiums.  Freddie’s program is limited to single-family, single-unit primary residences. Homes in disaster areas, manufactured homes, and homes valued at more than $1 million will not qualify. The borrower’s credit scores and credit worthiness will also be considered.

Real estate agents are likely to love this new technology-based innovation. It will save money as well as time. Appraisers (like surveyors in the 1990s) will not be happy as this program is phased in.

What do you think? Are appraisals a good thing?  Will foregoing appraisals be akin to the “no doc” and “low doc” mortgages that helped lead us to the financial crisis of 2008? Are actual inspections by trained human beings of the interiors of residences necessary to establish value? Let’s see how this plays out!

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Two positive articles for dirt lawyers from national sources

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REALTOR®Mag is reporting that although financing remains the top roadblock to successful closings, fewer real estate agents are reporting financing as an issue today as opposed to previous months. This trend is a good one! Check out the article here.

The article indicates that, according to the REALTORS® Confidence Index, which is based on the responses from 2,500 real estate agents nationwide, the decline in complaints about financing may reflect an improvement in the economy, better credit histories from buyers and an improvement in loan evaluation processes.

But the article does report that appraisals are becoming a growing concern. Real estate agents indicated that a shortage of appraisers, valuations that are not in line with market conditions and “out-of-town” appraisers who are not familiar with local markets create the difficulties.

And for the first time in eleven years, the Fannie Mae and Freddie Mac conforming loan limit has increased to $424,100, allowing more home buyers to avoid jumbo loans, obtain lower interest rates and deliver lower down payments. The non-conforming loan limit had previously been stuck at $417,000. Read the article from INFOGRAPHIC here.

The economic news surrounding real estate closings is generally positive nationally. And the news is good in South Carolina, too. I’ve traveled around the state a good bit since the beginning of the year, and everywhere I go, I ask lawyers about business.

Early in the year, it seemed residential practices were sluggish in some markets while commercial practices were extremely busy statewide. In the last few weeks, I’m hearing much more encouraging news about residential practices, and commercial lawyers continue to report that business is excellent.

Our office is in the middle of a seminar series we have entitled “The future’s so bright, we have to wear shades.” We’re drinking the Kool-Aid and enjoying these economic good times. Those of us who weathered 2008 – 2012 deserve it!

Wells Fargo distributes new settlement agent communication

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Note: Settlement agents are scheduled to be re-evaluated

Wells Fargo delivered a memo entitled “News for Wells Fargo Settlement Agents” on March 23. The first paragraph cryptically announced that future communications will detail the Uniform Closing Dataset (UCD) that will become effective for lenders in 2018.

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For insight into the UCD, review Fannie Mae’s or Freddie Mac’s websites. Briefly, the UCD is going to be a common industry dataset to allow information on the Closing Disclosure to be communicated electronically. Fannie Mae and Freddie Mac have developed the UCD at the direction of the Federal Housing Finance Agency in an effort to enhance loan quality and consistency through uniform loan date standards. Stay tuned for more information on this topic and lenders gear up to comply.

The Wells Fargo memo also touted continued expansion of settlement agents who are using Closing Insight™.  Settlement agents who are just getting started were asked to take advantage of the support available at RealEC’s Closing Insight Resource Center at http://www.closinginsightresourcecenter.com or to contact the company at CISupport@realec.com or 800.893.3241. I encourage all South Carolina closing attorneys to get up to speed on this system as soon as possible.

The serious news from Wells Fargo, however, relates to a new effort to evaluate settlement agents.

The memo warned that Wells Fargo will evaluate the population of settlement agents who have closed loans within the past twelve months for problems such as missing documents, execution errors and other frequent problems that require curative work. As a result, settlement agents may receive letters indicating they are being removed from Wells’ list of approved settlement agents.

Processes are in place, however, to accommodate the customer’s choice for a settlement agent who is not on the approved list. Apparently, a new approval process will be instituted, but no detail on this process is provided.

house made of cashThe memo further indicates that attorneys’ ability to act as counsel for customers will not be impacted.  I don’t read this last directive to mean that attorneys who are not on the approved list will be in a position to close loans. They will only be in a position to dispense legal advice, if I am interpreting this correctly.

Settlement agents with questions are encouraged to communicate with Wells at WellsFargoSEttlementAgentCommunicatons@wellsfargo.com. I urge anyone who is interested in continuing to close Wells Fargo loans to hang onto this information.

Finally, the memo is requesting acknowledgement of Master Closing Instructions from all active and approved settlement agencies. Requests for this acknowledgement are coming from Wells Fargo in the form of e-mails to settlement agents. Please respond!

All lenders are beginning to hold settlement agents to higher standards. South Carolina closing attorneys are encouraged to stay abreast of changes and train, train, train staff members.

And, as always, contact your title insurance companies for insight into these matters.

Into the mystic: Fannie and Freddie predict what is in store for housing in 2017.

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In a sign that the average cost of houses is increasing across the country, the conforming loan limit for loans to be purchased by Fannie Mae and Freddie Mac will increase in 2017 for the first time in ten years.

The Federal Housing Finance Agency has announced the maximum conforming loan in most parts of the country (including South Carolina) will increase from $417,000 to $424,100. Stated another way, a borrower will not have to qualify for a “jumbo loan” unless the amount to be borrowed exceeds $424,100.

This change should help qualified buyers, particularly in our coastal areas where home prices are higher, obtain mortgages backed by Fannie Mae and Freddie Mac, even though credit remains tight and interest rates are likely to increase.

This is the time of the year when all of us involved in the housing industry are charged with looking into the proverbial crystal ball and projecting how we think the real estate market for the new year will compare with the current year.  For what it’s worth (and this and $5 will buy you a cup of coffee at Starbucks), I’m projecting around a 3 percent increase for next year in South Carolina. Let me know what your crystal ball is disclosing!

Dirt Lawyers: Prepare to Advise Clients Struck by Disaster

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Georgetown, South Carolina (Image by abcnews.go.com)

Just prior to the destruction brought on by Hurricane Matthew to our beloved state on October 8th, I saw two funny quips, which proved that humor is not always lost in the face of disaster. A friend posted on Facebook a football metaphor, hoping Matthew’s aim would be “wide right”.  That didn’t happen. And a preacher friend of a friend put up a sign at his church:  “Mark, Luke and John, please come get your boy.”  That didn’t happen either.

What did happen, according to CoreLogic was $4-6 billion in damage from wind and storm surge damage in all states affected by Matthew. CoreLogic’s media advisory, which compares the destruction of Matthew to Katrina in 2005, Sandy in 2012, Floyd and 1999 and David in 1979, can be read here.  The damage from Katrina, for example, was in the range of $35-40 billion. Of the $4-6 billion damage from Matthew, 90 percent of insurance claims are expected to be related to wind and 10 percent to storm surge, according to the article.

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Springmaid Pier rubble, Myrtle Beach, South Carolina (Image by myrtlebeachonline.com)

Our hearts are breaking for our family members, friends and neighbors who have lost so much in this disaster. Some have not yet been able to return home and don’t know the extent of the damage at this point.

It was just one year ago that South Carolina was forced to begin recovery efforts from the 1,000 year-flood, and those efforts are far from complete. I said in a blog about the flood, and I will repeat here that for those of us old enough to remember, this disaster feels incredibly like the aftermath of Hurricane Hugo in 1989.

As we think back to the beautiful areas of South Carolina that were hardest hit then and reflect on those areas today, it seems that almost all of them are better and stronger and more beautiful than they were before the disaster. South Carolinians are strong and resilient, and we are stronger today than we were last year.

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Historic City Market under water in Charleston, South Carolina (Image by abcnews.go.com)

Dirt lawyers are in a unique position to advise clients who are not familiar with the assistance that may be available to them. I challenge each of us to pass along the information that will assist in recovery efforts.

For example, Fannie Mae and Freddie Mac wrote press releases reminding mortgagors of the options available for mortgage assistance in the affected areas. Those press releases can be read here and here.  FEMA resources are outlined here.

As always, I have confidence that South Carolina real estate lawyers will rise to the occasion and provide the best advice available for their clients. I am proud to be associated with this dedicated group of lawyers.

Federal Housing Finance Agency Announces Conforming Loan Limits for 2016

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The maximum remains the same in most markets

FHFA LogoSpeculation earlier this year was that the Federal Housing Finance Agency (FHFA) would increase the limits for conforming loans in 2016 above the current amount of $417,000. But FHFA recently announced that the current limit would remain in place for most of the country.

The limit is increased above $417,000 in only 39 counties in the United States. The so called “high cost” counties are located in the metro areas surrounding Denver, Boston, Nashville and Seattle as well as four counties in California.

By way of background, a conforming loan is a mortgage loan that meets the guidelines established by government-sponsored enterprises Fannie Mae and Freddie Mac. Conforming loans require uniform mortgage documentation and national standards dealing with loan-to-value ratios, debt-to-income ratios, credit scores and credit history. Conforming loans are repackaged to be sold on the secondary market. Because Fannie and Freddie do not purchase non-conforming loans, there is a much smaller secondary market for those loans.

The FHFA publishes conforming loan limits each year. Loans above the conforming limit are considered jumbo loans, which cannot be purchased by Fannie and Freddie and which typically have higher interest rates.

The Housing and Economic Recovery Act of 2008 established a baseline loan limit of $417,000 and required that after a period of housing price declines, the baseline loan limit cannot be increased until housing prices return to pre-decline levels.

Grace Period for TRID Enforcement? Sort of ….

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hourglassOn October 1, Director Richard Cordray of the CFPB, responded to a request* from the American Bankers Association (ABA) for clarification on how the TRID rules will be enforced in the first few months of implementation. The answer was complicated but ultimately signified examiners will initially look at the good faith efforts of lenders to comply.

The letter, which copied 17 industry trade associations, recognized the burden on the mortgage industry to make significant systems and operational changes and engage in extensive coordination with third parties. Initially, according to the letter, examiners will evaluate a lender’s compliance management system, implementation plan, staff training and overall efforts to comply, recognizing the scope and scale of the necessary changes. The letter stated:

 “Examiners will expect supervised entities to make good faith efforts to comply with the Rule’s requirements in a timely manner.”

As a vote of confidence, the letter concluded that this examination process will be similar to the agency’s approach after the January 2014 effective date of several mortgage rules, where the experience was “our institutions did make good faith efforts to comply and were typically successful in doing so.”

No time limit was stated for this initial examination methodology.

On October 6, Fannie Mae and Freddie Mac followed with announcements that they will not conduct routine file reviews for technical compliance with TRID but will evaluate whether correct forms are being used in the closing process. Fannie and Freddie expect lenders to make good faith efforts to comply with TRID. Failure to use the correct forms will be deemed a violation of the good faith effort standard.

Lenders were reminded that Fannie and Freddie have several remedies for a lender’s violation of law that may impair the ability to enforce notes and mortgages. But the announcements stated that the remedies will be used in two limited circumstances in connection with TRID: (1) where the required forms are not used; and (2) where a court of law, regulator or other authoritative body determines that a practice violates TRID and impairs the ability to enforce the note and mortgage or would results in assignee liability

No time limit was placed on this grace period.

On October 16, Federal Housing Administration’s (FHA) Office of Single Family Housing announced that it will not include technical TRID compliance as an element of its routine quality control reviews, except to determine that correct forms were used, until April 16, 2016.

Efforts are underway in Congress to establish a formal grace period until January 1, 2016. The Homebuyer’s Assistance Act has passed in the House and is up for a vote in the Senate.

*The request was made by the ABA to FFIEC, which is comprised of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Comptroller of the Currency, the CFPB, and the State Liaison Committee.