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Many of our clients who originate, purchase and service mortgage loans have been impacted by the national subprime mortgage crisis. The problem has taken the form of a severe curtailment in funds available for investment in mortgages generally, and subprime mortgages particularly. Bond investors on Wall Street have lost some of their prior confidence in the ability of the mortgage industry to deliver a safe, investment grade product. Foreclosures are on the rise and originators are having difficulty placing mortgage loans with wholesale lenders. The one good sign appears to be that consumer demand for mortgages appears to remain strong, although the purchase money market has slumped substantially since the beginning of 2007.
FHA - A Viable Option for Many
A significant number of mortgage originators have turned to FHA-insured loans as an alternate source of funding for some of their formerly subprime borrowers. FHA-insured loans continue to be popular with investors. Also, Congress and HUD appear to be responding favorably to calls to expand FHA eligibility.
Currently, in order to originate FHA loans, an originator must obtain approval as a direct endorsement lender (the so-called “full eagle”). Alternatively, originators can be approved to broker (the “mini-eagle”) if they have sponsorship by a direct endorsement lender. There are audit, net worth and quality control requirements for eligibility under both of these origination programs. We are assisting numerous clients with FHA issues and applications for approval, and we are actively monitoring the governmental response to the credit crunch in terms of potential enhancements to the FHA process.
Buyback Blues
Now more than ever it pays for originators to review broker and correspondent agreements with wholesale lenders and investors. The trend has been for the larger companies to hire outside investigators to review loan files for compliance with underwriting standards and any potential misrepresentation. If problems are found, many wholesale investors have demanded that originators buy loans back under repurchase provisions in those agreements. Buyback demands have even extended to performing loans where material flaws in the underwriting exist. There are often defenses available to the buyback demands, and some wholesalers have settled for indemnification against loss, or even relatively low payments to fill the loss gap after a foreclosure results in a deficiency.
Regulatory Action by State and Federal Governments
Various initiatives intended to address the adverse impact on some consumers of subprime loans are presently under consideration at both the national and state levels. Maryland and Pennsylvania are no exceptions. We are working with several trade groups in Maryland on tandem task force reports, which are likely to result in proposed legislation. Bob Levy, Reg Evans, Paul Adams and I have also been engaged in Harrisburg providing input relative to various legislative proposals from the Pennsylvania Department of Banking.
At the federal level, the U.S. Congress, the Bush administration and the Federal Reserve Board are all actively pursuing measures designed to address various aspects of the lending crisis, including possible new disclosure requirements, new loan restrictions and rate freezes under certain products. The coming year promises a full plate of such proposals. We are working to ensure that the governmental response does not unduly restrict popular loan products or result in excessive regulation of an already highly regulated industry.
Contact us if you need more information concerning these issues. The mortgage “crisis” looks to be with us for at least six more months.
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