A Shifting Reality

How Changing Industry Standards Affect Us All

By Sherry Olsen, 2010 President of the Arizona Mortgage Lenders Association

Arizona REALTOR® Magazine - September 2010

Industry Partners Conference September 22 | Chaparral Resort (Scottsdale) $89 | Event Flyer | Register Online   Getting a deal done today requires close coordination between REALTORS®, mortgage lenders and title companies. At this annual conference, all parties sit down together to hash out challenging scenarios plucked directly from today’s transactions. Topics include short sales, cancellation disputes, foreclosures, E&O, GFE/HUD, contract/LSR and more. Don’t miss it!   This event is sponsored by the Arizona Association of REALTORS®, Arizona Mortgage Lenders Association and the Arizona State Escrow Association.

What should REALTORS® know about today’s lending market? The pertinent concept to be aware of is CHANGE. As the lending industry is being reengineered and reexamined, the process, requirements and guidelines from the top down are changing.

Reality shift: The industry guidelines are in constant flux, and investors have raised the bar to ensure they are purchasing loans that have undergone intense scrutiny from numerous perspectives. (Who is this “investor”? When a mortgage banker closes a loan, they have a choice to retain the loan and service it or to sell the loan to an investor.) The lender processes the loan based on standard FHA, VA and conforming guidelines. In addition to meeting those guidelines, this investor may require a higher credit score, additional cash reserves or an extra comp for the appraisal. These extras guidelines are referred to as “overlays” and vary between investors. The overlays are incorporated in the underwriting evaluations, and by their very existence, they further restrict approvals.

It is important to understand why lenders keep referring to the investor. Investors are still recovering from on-going losses from the market meltdown, and they dictate under what terms they will purchase loans as well as “charge them back” for repurchase. Investors decide upfront if they will purchase a loan. After purchase, they may chose to perform a quality review to determine if they will keep the loan, request corrected deficiencies or require the loan to be re-purchased. When a lender is required to repurchase a loan, it pays back the loan and keeps the loan on its books, which reduces its cash assets. Eventually, if a pattern develops, the investor will likely stop purchasing that lender’s loans, and the lender could find itself out of business.

Appraisals reflect another part of this reality shift. Say you are working on a listing. You establish a sales price after evaluating the information available and getting approval from the seller. An offer is received and accepted, but the appraisal comes in low. Appraisals have become workups on the history of the property from a sales perspective in addition to a precise market evaluation. This evaluation includes properties currently listed that influence the appraisal determination considerably. Today’s technology provides instantaneous information on properties, and Arizona still carries the declining market stigma, which leads to everyone with a financial interest/risk in this loan double-checking the integrity of the appraisal.

Additionally, with the staggering increase in foreclosures and short sales, the modules for credit reports cannot be updated fast enough. A line-by-line review of credit reports has become a time-consuming but critical piece of the process. Standards for reporting short sales are not set, and the burden falls on the lender to establish and document how applicants disposed of previously owned properties. There has been a lot of chatter suggesting that short sales will not be discovered. I suggest that no one should encourage a buyer to withhold information. Consider the financial impact of paying for a home inspection and perhaps an appraisal only to be denied later when the short sale is discovered or credit report updated.

The changes don’t stop there. This summer, Fannie Mae initiated a “Loan Quality Initiative.” This requires lenders to refresh credit right before closing to ensure that all debts are disclosed and also institutes additional checks and balances. Even FHA has been busy establishing new guidelines and practices to ensure that their programs do not collapse under the weight of loans in default. The newest announcement effective with FHA case numbers assigned after October 4 changes the upfront mortgage insurance premium (MIP) to 1%, and the monthly MIP will be .90% with the minimum 3.5% down and .85% with 5% or more down. Although still pending, expect seller contribution limits to be lowered later this year.

In February of this year, FHA allowed a waiver to the 90-day holding time frame, but even lenders struggle with the details, which require an arms-length transaction among other things. Our local HUD office has emphasized that the seller cannot also be the REALTOR®/lister or representative for the buyer. This can require reviewing an LLC to verify relationships and insure that all the other players in the transaction are wearing only one hat.

We are all adjusting to the new risk reality. Real estate brokers are concerned with E&O coverage. In many cases, title companies will not accept escrows or will not close an existing escrow upon discovery of issues that carry risk for them. Whatever role you play—REALTOR®, escrow officer, loan officer—how you conduct your business does impact the success and even survival of everyone else. I see this as an old-time version of a Pacman game. We professionals are just gobbling it up one bite at a time so that we can take care of the client. For me as a loan officer, that “client” is the REALTOR®, title company and consumer. We are all in this together.

Our industries currently exist in a fluid, changing environment. Often we have buyers in the process for a few months before closing on a home for any number of reasons. Yesterday’s approval does not guarantee next month’s closing. No matter how I try to explain this, someone will reply, “I can get it done! Just use my title company or my lender.” For that one transaction, they might actually be correct, but that is not the point. I am referring to the big picture. Consumers buying a home in this new environment deserve to understand the process and have the opportunity to discuss potential consequences.

On one hand, we can communicate instantly regarding the availability of properties. But breaking the process down to timeframes for inspections, disclosures (every interested entity has disclosures with different timeframe requirements), appraisals and documentation leads us back to all the details I mentioned earlier. As a 20+ year veteran in lending, I fondly remember the good old days and acknowledge that one of the most difficult concepts to accept is that while a lender may have approved the file, it is not a done deal. I realize how harsh that sounds, but a new guideline or overlay could have been implemented since approval, the credit report may have changed, an addendum to the contract can add a new layer of issues, title might discover that the seller does not own the property—any number of issues can arise.

The bar for professionalism and accountability certainly has been raised. Loan officers like me who work for non-institutional lenders were required to be licensed as of July 1, 2010, which includes on-going education requirements that should benefit the industry. It is in your best interest to remain pro-actively plugged into reputable lending updates since the information you just learned can become outdated quickly. Continue to take classes, spend some time at www.Hud.gov where you can learn about FHA in depth, and visit www.AARonline.com as the association is an excellent resource for webinars, articles, etc.

And I have not even mentioned the federal financial reform bill that has passed but is not yet implemented! For those who ask when the changes will end, I would have to answer “Never!” Part of what drew us to these exciting industries was a new story each day. It is certainly never boring. Now we have many stories each day that must be fully developed. Each of our industries has input in the final chapter.

Sherry Olsen is a mortgage originator with Wallick & Volk and is the 2010 president of the Arizona Mortgage Lenders Association. For over 20 years, Sherry has been passionate about helping people achieve homeownership. She has used her background in real estate sales to develop a foundation to guide people through the lending process. Sherry is an instructor for the Arizona Association of REALTORS® and an instructor and contributing writer for the Arizona School of Real Estate Business Journal. She has achieved trainer certification from the Mortgage Bankers Association and has earned the CMPS designation. Sherry will gladly take your call at 480-813-1777.

 
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