Last Wednesday, while most of us were closing our offices to go home and prepare our turkey and dressing, HUD was busy publishing a notice in the Federal Register which could have a huge impact on wholesale mortgage lending. On November 24, HUD published a Notice that is it considering issuing new guidelines regarding RESPA compliance with regard to warehouse lending and other financing mechanisms. You can read the Notice at: http://edocket.access.gpo.gov/2010/pdf/2010-29663.pdf
HUD is asking for comments to 10 questions, some of which contain multiple subquestions. All deal with the structure of current warehouse lending arrangements including buy back provisions, ownership of loans, whether the warehouse lender is involved in the credit or underwriting decisions, and whether the warehouse lender scrutinizes individual files. HUD wants to know whether the size or credit worthiness of the lender determines the extent to which their files are scrutinized. HUD also asks, "what characteristics indicate a bona fide transfer of the loan obligation, such that the transaction would be a secondary market transaction that is not covered by HUD's RESPA regulations?"
The fact that HUD has posted this Notice is extremely significant, and the timing is not a coincidence. When the new good faith estimate went into effect last January, the mortgage broker industry cried foul because the new rule discriminates against the smaller broker in the way that interest rate spreads are disclosed. Stronger, more credit worthy brokers with cash got warehouse lines so that they could continue to do business as they had done before. Since only those brokers with more cash and experience were able to qualify to receive warehouse lines, these stronger players were able to escape to higher ground.
Now, however, HUD is demanding an explanation of the inner workings of warehouse lending and that does not bode well for the future of these mortgage brokers turned correspondents. Remember that in January of 2011, the Treasury is supposed to present to Congress a new blueprint for housing finance in the United States, which according to indications we see in statements made by Barney Frank last year, will probably include a complete disbanding of Fannie Mae and Freddie Mac. Presumably these two mortgage giants who have bled hundreds of millions of dollars in taxpayer money since they went into conservatorship in 2008, are going to be replaced by a completely government-owned, government backed system. HUD's demand for information regarding warehouse lending right now is in anticipation of these larger changes that we expect to see early next year.
My own belief is that when the review process is finished, HUD will develop its own guidelines for what the agency will accept as a "bona fide, legitimate" warehousing relationship. To qualify, a lender will have to have a fairly substantial amount of his money in the loan, a high net worth, and a good amount of experience with operating a warehouse line. Lenders who do not meet the HUD standards will have to be treated as brokers rather than as correspondent lenders. This will mean that when the new Federal Reserve rule takes effect in April, the lenders whose warehouse lines do not qualify under whatever standards HUD sets will not be able to receive yield spread premium or service release premium when they sell the loans. (Under the new rule, neither a loan officer nor a mortgage broker company can receive yield spread premium or service release premium if they are compensated in any way by the consumer. However, a correspondent lender closing loans through a warehouse line can receive the service release premium even though it cannot be paid to the loan originator.) If I am correct about this, we will see many lenders who have invested in warehouse lines who are now going to be told that they do not qualify in HUD's eyes. Once again, the federal government is picking the winners and the losers in the housing finance market.
The comment period for this notice ends December 27, 2010. Instructions for making comments are included in the link I have included in this post.
Thousands face extra bills as court ruling hits property sales
There are also warnings of the impact of the judgment on the cash-strapped courts service, with thousands of cases scrapped and having to come back into the system. Last night, the Law Society of Scotland called on solicitors to put the brakes on all purchases of repossessed homes until it can be proven it is compliant with last week’s “earthquake” judgment.
Bruce Ritchie, director of professional practice at the Law Society of Scotland, said: “The society’s conveyancing and civil justice committee will be looking at this in detail but our preliminary view on current transactions that have not yet settled is that buyers’ solicitors should be firm about declining to settle the transaction until selling creditors can produce evidence of having followed correct procedure.”
Mike Dailly, of the Govan Law Centre, said he would pursue legal action against the lenders for putting the bill for dealing with the judgment on to his clients. He said: “The question that no-one has asked is ‘who’s going to pay for all this?’ I have no doubt UK banks will do what they always do and pass these costs onto consumers by adding them to their mortgage – which they can do if the costs are reasonable. “We could be looking at up to £40 million or more. “It’s not reasonable to expect vulnerable Scots facing repossession to pay banks and their lawyers twice for what is essentially their solicitors’ responsibility and failure.” "
Update: unfair bank charges on BBC 1's Rip-off Britain
Unfair bank charges, including clients of Govan Law Centre, were featured on BBC 1's Rip-off Britain at 9.15am on Monday, 29 November 2010.Sadly, the programme decided to take a soft approach and focus on peripheral issues around charges (e.g. communication concerns) as opposed to the tough question of whether the UK bank charging model was unfair in law, whether it was morally acceptable to exploit vulnerable consumers to subsidise better off customers, as well as overlooking the plight of thousands of UK consumers still trying to seek refunds of unfair charges.
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