Re:    Mortgage Originator Convention September 9-11, 2010

Dear Mortgage Industry Leaders:

The Officers and Members of the Texas Association of Mortgage Professionals want to personally invite you and your staff of loan originators to join us at Texas’s Premier Conference and Convention for Licensed and Registered Texas Mortgage Originators.  This convention is being held in Austin at the Hilton Austin Hotel September 9^th through the 11^th.

With all of the changes affecting our Industry this past year, we felt it was important to offer a conference/convention that is specifically designed for All Loan Originators, be they Broker or Banker.  This convention will both prepare and motivate your staff for the challenges that lie ahead in our industry.  You won’t want to miss Frank Garay and Brian Stevens of “Think Big,Work Small” or “The Mortgage Marketing Animals “ to help your originators to better market your company in this ever changing industry.  This is also an opportunity for those originators that haven’t completed their NMLS Prep Course to do so and to allow them to get to know their Texas Savings and Mortgage Lending Department Regulators. 

As noted in the attached flyer, we have opened this convention to All Mortgage Originators that are not member’s at a low industry investment cost of $275 for preregistration until August 31^st.  We sincerely hope that you find the value in preparing your Loan Originators for the future of this industry and look forward to your attendance.

Please do not hesitate to contact me or our staff at 800-850-8262 or email: TAMP@TAMB.org with any questions that you may have.  We look forward to seeing you and your staff in Austin!! 

Sincerely,
Kimberly Ward / President

Despite earlier reports to the contrary, it turns out that your mortgage lender will not have to pull a second full credit report on you hours before closing on your home purchase or refinancing.

In a clarification of a policy announced earlier this year, mortgage giant Fannie Mae now says that applicants will need to come clean about any debts they have incurred since they submitted their mortgage application — or debts they never disclosed on the application. But a formal pre-closing credit report will not be mandatory to confirm creditworthiness.

Instead, loan officers can use other techniques to verify that you haven’t financed a new car, taken out a personal loan or even applied for new credit in any amount that might make it more difficult for you to afford your monthly mortgage payments.

Among the techniques Fannie expects lenders to use on all applicants: commercial or in-house fraud-detection systems are capable of tracking applicants’ credit files from the day their loan request is approved to closing.

Although Fannie made no reference to specific services in its recent clarification letter to lenders, some commercially available programs claim to be able to monitor mortgage borrowers’ credit activities on a 24/7 basis, flagging such things as inquiries, new credit accounts and previous accounts that did not show up on the credit report that was pulled at the time of initial application.

One of those services is marketed by national credit bureau Equifax and dubbed “Undisclosed Debt Monitoring.” Aimed at what Equifax calls “the quiet period” between application and closing — often one month to three months — the system is “always on,” the company says in marketing pitches to mortgage lenders.

Home loan applicants failed to mention — or loan officers failed to detect — “up to $142 million in auto loan payments” during mortgage underwriting in first mortgage files reviewed by Equifax last year alone, according to the credit bureau. Those loan accounts had average balances of $361 per month — more than enough to disqualify many borrowers on maximum debt-to-income ratio standards required by Fannie Mae, Freddie Mac and major lenders.

Why the sudden concern about new debts incurred after mortgage applications? It’s mainly because Fannie and others have picked up on a key type of consumer behavior that has helped trigger big losses for the mortgage industry in recent years: Some buyers and refinancers hold off on creating new credit accounts until they have cleared strict underwriting tests on the debt-to-income ratios and have been approved for a loan. Then they splurge.

Additional debt loads can run into the tens of thousands of dollars, executives in the credit industry say. Had those new accounts been in their credit files during the application process, borrowers might have been turned down for the mortgage, required to make a larger down payment or charged a higher interest rate.

Fannie’s new policy puts the burden of detecting these debts squarely on lenders or loan officers. Whether they pull additional credit reports — still an option allowed under the revised policy — or use some form of monitoring service, lenders must guarantee that the debt loads stated in any mortgage package submitted for purchase by Fannie Mae are scrupulously accurate as of the moment of closing. If not, the lender probably will be forced to endure the most painful form of punishment in the financial industry: a forced “buyback” of the entire mortgage from Fannie Mae.

Billions of dollars in buybacks have been demanded by Fannie Mae and Freddie Mac this year alone — a fact that is likely to make lenders even more eager to conduct some type of refresher credit check or continuous monitoring of all new loan applicants.

What does this mean if you’re planning to finance a home purchase or refinance your existing mortgage into a new loan with a lower interest rate? Tops on the list: Be aware that sophisticated credit surveillance systems are now being used in the mortgage industry.

Next, try not to inquire about, shop for or take on new credit obligations during the period between your application and the scheduled closing. If you seriously want that new loan, keep your credit picture simple — no significant changes, no additions — until you settle on the mortgage.

During the heady days of the housing boom, nobody was looking for debt add-ons before closings. Now they are scanning for them all the time.

WASHINGTON — Although President Obama made the creation of a Consumer Financial Protection Bureau a hallmark of the financial reform law enacted July 21, his delay in nominating the agency’s first director could hamper its ability to get off the ground.

With so much riding on the appointment, several observers had expected Obama to make his choice clear within days of the law’s enactment. Instead, the absence of a pick has given rise to a grassroots campaign to appoint Elizabeth Warren to the job, which could create a political issue for the administration whether it ultimately chooses her or not.

The Treasury Department, in the meantime, is tasked with getting the agency up and running, and observers said it is critical that a director be nominated and confirmed relatively soon.

“There’s a lot of operational work that can be done without a director being done, but some of the most profoundly difficult things comes down to having a leader,” said Raj Date, the chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. “Leadership matters. If you are trying to have an agency that attracts the best and brightest for the sector, then you have to have a leader.

Creating the consumer bureau was the first in a long list of tasks the agency must accomplish in its first year. Among other things, it must merge mortgage disclosure laws and outline a vision of its own authority.

Industry observers said that the Treasury can start much of the work, but that a new director will have to make hard choices.

The idea of letting the Treasury run the bureau has “a short life,” said Jerry Buckley, a partner at BuckleySandler LLP. “As time goes by, there will be more and more pressure to appoint a leader who will take responsibility for getting the Bureau launched on the right foot. The president has said the CFPB is essential, he’s campaigned for it, and he’s rejoiced in its creation. A months-long delay in appointing a leader could start to raise questions about how important a priority this really is for the administration.”

Several observers noted that Treasury is scheduled to a host a meeting in September with consumer groups, industry representatives and others about the consumer bureau’s agenda. While it would be all but impossible for a new director to be confirmed by that point, many said a nominee could at least attend to help drive the process forward. “I think the director will be pretty important, because they are given a lot of responsibilities. So I would think that would be one of the first steps,” said Stephanie Robinson, a lawyer at K&L Gates. “I would assume they have plenty of knowledgeable people to get the process, but if they don’t have a director in [by the September meeting], I would think they would need to get one in soon.”

Despite the growing unease, the administration does not appear to be in a rush. White House spokesman Robert Gibbs told reporters last week that a nomination was “weeks” away. A spokeswoman for the White House did not comment for this article.

Exactly why Obama is waiting is something of a mystery, and may hurt him politically. The consumer agency was always a top priority for the administration and guaranteed to be part of the final regulatory reform bill. By the time the president signed it, the administration had had months to consider candidates.

A shortlist of possible nominees has been circulating for months. It includes Warren, a Harvard professor who came up with the idea of a consumer financial protection agency, and Michael Barr, a consumer advocate who is currently Treasury assistant secretary for financial institutions.

Some said the delay is not just holding up the future of the consumer bureau. Because Barr is also a candidate for the next comptroller of the currency — a seat that has been vacant since John Dugan finished his five-year term this month — several observers said that decision will come after a CFPB move.

“They are waiting to see who gets this first before the” Office of Comptroller of the Currency, said Paul Miller, managing director of FBR Capital Markets Corp.

Consumer groups like Barr, but they have devoted most of their energy and attention to Warren.

Several top lawmakers, including House Financial Services Committee Chairman Barney Frank, have openly pushed the administration to choose Warren for the job, and her potential nomination has been embraced by the liberal blogosphere.

Although the administration may have hoped the campaign would die down, it has shown no signs of abating. Last week Warren was the subject of a widely distributed video featuring the comedian Ryan Anthony Lumas wearing a cowboy hat and rapping the song “Got a New Sheriff.”

Maureen Thompson, a steering committee member for Americans for Financial Reform, said her group’s campaign for Warren will only grow.

“The groundswell of support for Elizabeth Warren was big a month ago and it will be even bigger a month from now,” Thompson said. “The more time that supporters of Warren get to make their case, the clearer it becomes that there is no other presumptive front-runner emerging. Another effect of more time being allowed for the process is that the weak case made against Warren by some in the bank lobby is seen to be full of more and more holes.”

In many ways, the campaign has also put the administration in a box. If it selects Warren it will look like it is yielding to pressure from the left and opening itself up to a confirmation fight in the Senate. If it does not choose her, it will anger the administration’s base shortly before the November midterm elections.

Some said the fact that Warren has not yet been nominated is a sign the administration will not pick her.

“It seems to me the longer it sits there, the less likely she is to get it,” said Oliver Ireland, a partner at Morrison & Foerster LLP. “If they were going to nominate Elizabeth Warren, they could have done that any time along the way. They could have announced it when they signed the bill. It’s not like they didn’t know about her.”

Some observers said the campaign itself, unprecedented for a banking regulatory position, weakens Warren’s chances.

“Pushing her out there in my opinion increases your opposition rather than increases the intensity of her support,” said Mark Calabria, a former Republican Senate aide and now director of financial regulations studies at the Cato Institute.

Others argue the opposite, saying the campaign may help Warren gain support and get lawmakers used to the idea.

“The longer it takes, it may be affording an opportunity for those who are hawkish of her to get to know her better,” said David Berenbaum, chief program officer for the National Community Reinvestment Coalition.

But time is running out if the administration wants a new director, particularly a controversial choice like Warren, confirmed this year. With midterm elections within two months of the Senate’s return next month, the Banking Committee would have to move quickly to hold a confirmation hearing and a vote before turning the issue over to the full chamber.

Some said it was already too late.

“It’s nearly impossible to have her confirmed between now and Election Day,” said Richard Hunt, president of the Consumer Bankers Association. “I don’t care who the nominee is; we are expecting a thorough process. This is akin to a Supreme Court nominee for financial services.”

Yet if the administration waits until after the elections, Democrats will likely face a narrower majority in the Senate.

“The bill passed over a month ago you would have thought they would have put someone up by now,” said Gregory Lyons, a partner at Debevoise & Plimpton LLP. “If [Obama] does in fact want Warren to be the nominee, he’s going to have to do it soon, because if the Republicans take a strong hold over Congress, it will be more difficult.”

Even with Democrats holding 59 seats in the Senate, it is unclear whether Warren or another liberal choice is confirmable. Many moderate Democrats are said to have reservations with Warren and may balk if she is the nominee.

“If it was just a Democrat-Republican battle, they would fight that, because even if they lose it would make Republicans look bad. But there are Democrats fighting this, too,” Miller said.

Senate Banking Committee Chairman Chris Dodd has warned he does not think Warren is confirmable, but he has also urged the administration to make a choice.

“If the administration goes through an eight-month debate over who is going to run this, you are going to do damage before you start,” Dodd said in a recent interview. “You need to have a good-quality individual, and if [Warren] can be confirmed, then step up and do it. I just think it’s a problem, but I could be wrong.”

Some industry representatives said that as a result, they do not expect a nominee to be named until after the elections. But several observers said such a move would further harm the agency, potentially setting back confirmation of a new director until sometime next year.

“If they wait until after the mid term election and you don’t see the selection coming forward, that is a signal to the markets and consumer groups and all the interested groups that’s where the administration seems to not know what it wants to do,” said Kevin Jacques, Boynton D. Murch Chair in Finance at Baldwin-Wallace College.

Obama has said he plans for Warren to have some kind of role in the agency’s formation. Some have speculated she might be chosen for a White House position, one that does not require confirmation, that has some oversight of consumer protection activities. Gibbs acknowledged last week that Warren had visited the White House to talk with senior adviser David Axelrod, but did not give many specifics.

“Obviously she was here,” Gibbs said at a briefing. “The consumer office is an aspect of the financial reform, Wall Street reform bill the president signed recently. It in many ways was an idea conceptualized by Elizabeth Warren several years ago. Obviously we have said that she is among those being looked at for a role in that new bureau. … She was here to talk about the office.”

While the banking industry continues to oppose the idea of the consumer agency, and a selection of Warren in particular, some observers said banks were hurting their own case.

“I am struck that the industry’s lobbyists have been feverish in their enthusiasm to bad-mouth Prof. Warren, but they’ve been seemingly unable to point to any issue in the last decade when the bank lobby has been right in retrospect, and Prof. Warren has been wrong,” Date said. “And they’ve been weirdly shy about advancing any particular alternative candidates. Taken together, I think this is why the lobbyists’ complaints on this subject seem shrill and childish.”

WASHINGTON — Though the regulatory reform law took a crucial step toward simplifying mortgage disclosures by ordering a new consumer protection regulator to harmonize two conflicting statutes, the road ahead will be long and difficult.

Several past attempts to reconcile requirements of the Truth in Lending Act with those in the Real Estate Settlement Procedures Act have failed due to regulatory turf fights and a lack of direction from Congress.

But the Dodd-Frank Act gave sole oversight of both laws to the Consumer Financial Protection Bureau, stripping TILA authority from the Federal Reserve Board and Respa oversight from the Department of Housing and Urban Development.

This alone may make a big difference on moving forward after decades of struggle to harmonize the two laws. “It’s the mortgage industry’s Vietnam,” said Brian Chappelle, a partner in Potomac Partners, referring to melding the two sets of disclosure requirements. “Once you bring it under one roof, you remove the turf battle between the Fed and HUD.”

Though the new agency was given only one year to complete the task, Obama administration officials said they are confident this can be done.

“I think the fact that the agency can look across the marketplace” will help, said Michael Barr, Treasury assistant secretary for financial institutions.

CFPB “has authority over Respa and TILA …; the combination of those authorities will make it easier to unify the legal approach. The central challenge is finding an approach that reduces the regulatory burden on the industry and improves the ability of consumers to understand the disclosures.”

Many hurdles remain, including differences in the laws themselves.

TILA, enacted in 1968, requires lenders to disclose the lending terms, including finance charges and the annual percentage rate, for mortgages.

Respa, enacted in 1974, focuses more on closing and settlement costs, including requiring a good faith estimate. The laws differ in content, coverage, timing and liability provisions.

“I think the biggest impediment is, the laws themselves impose specific disclosure and timing requirements that are inconsistent,” said Steve Kaplan, a partner at K&L Gates.

The CFPB will have to decide what it wants consumers to focus on, he said.

“We’ve had this dance several times with hearings, and it always ends the same way, with no movement,” Kaplan said. “Do people just want to know the interest rate and the total fees with some specificity, or is the model a cost-of-credit model, which is more TILA and the annual percentage rate?”

Though Respa focuses on bundling of services, TILA itemizes the charges to be used in determining the annual percentage rate.

Some industry representatives warned that the new agency must not lose sight of the goal of both laws: creating a simple, understandable mortgage disclosure for consumers.

“It’s important for the disclosures to be clear, digestible and in a form consumers are going to notice,” said Nessa Feddis, regulatory counsel for the American Bankers Association. “It’s not possible to put everything relevant in a disclosure and still make it digestible.”

But the vastly different desires of the various stakeholders, including originators, brokers, appraisers and consumer groups, have made the simplification process difficult. Consumer groups, for example, generally favor more disclosure over less, but the industry contends that too much information could just confuse borrowers.

“The consumer groups want lots of disclosure and private rights of action,” said Stephen Ornstein, a partner at Sonnenschein Nath & Rosenthal LLP. “I think the industry would like a simpler disclosure and far less exposure to civil liabilities for the secondary market.”

Liability issues could prove crucial to lenders. Under TILA, lenders can face civil liability if their disclosures are inaccurate, an issue not addressed by Respa.

David Berenbaum, the chief program officer for the National Community Reinvestment Coalition, said consumer groups want to ensure that a final interpretation has tough liability standards.

“Most important is to ensure standards that hold lenders accountable at origination and make sure a consumer understands a loan,” he said. “Right now, the process is so complex [that] a bad actor can manipulate it.”

The disclosure laws also differ on when information must be delivered to borrowers. Though both laws say people must get disclosures three days after a loan application, TILA requires another disclosure at closing. “The timing — while more consistent than it used to be — still does not mesh together,” Kaplan said.

How to treat yield-spread premiums was also an issue until passage of regulatory reform. Though Respa severely restricted them, the reform law effectively banned them altogether, making the issue mostly moot, experts said.

“The mortgage broker fee has always been a real sticking point,” said Ken Markison, an associate vice president and regulatory counsel for the Mortgage Bankers Association. “I think, now that there are changes around yield-spread premiums, maybe that will help because it will make it less of a problem. You won’t spend as much energy on broker compensation based on rate because you can’t do it anymore.”

But industry representatives are worried that the new disclosures will come so soon after recent TILA and Respa changes. The Fed made changes in TILA rules this month, and HUD completed a six-year effort to revamp Respa just two years ago, releasing a four-page model disclosure form. Lenders complain that they spend significant resources each time a required disclosure is changed.

“I think, when people worry about merging TILA and Respa together, they worry about the implementation and technology costs associated with implementation,” Chappelle said. “For the industry to make the changes in Respa last fall, that was very expensive.”

John Kromer, a partner in BuckleySandler LLP, said the industry is still recovering from the Respa changes.

“A lot of people in the industry, while we would welcome greater simplification and uniformity in the various disclosures, are very much concerned about the implementation process and the challenges that will present,” he said. “Given the experience of Respa where the new ‘good-faith estimate’ took effect this year, there continue to be a number of operational challenges. … There needs to be recognition that these kinds of disclosure changes can have enormous challenges for lenders.”

Steve Ziesel, a vice president and senior counsel for the Consumer Bankers Association, also said this is coming too soon.

“People have made a lot of changes to comply with Respa, and there are a lot of mortgage proposals coming down the pike from the Federal Reserve Board before the CFPB gets involved, so it’s, ‘Make new changes and then make new changes,’ ” he said.

But the Treasury’s Barr dismissed complaints about the compliance burden of another rulemaking proposal.

“There are going to be significant changes in mortgage regulation and other regulations because of Dodd-Frank,” he said. “This piece is not likely to be a large change in relation to those others but is fundamental for families to understand the mortgage they are considering.”

Past attempts to harmonize the laws fell flat. In 1995, lawmakers considered adding a provision to a regulatory relief bill that would have given the Fed oversight of Respa so that mortgage disclosures were under the jurisdiction of a single regulator, but ultimately the measure was dropped from the final bill.

Instead, in 1996, Congress ordered the Fed and HUD to create a single TILA-Respa disclosure form. By the next year, the agencies had concluded that meaningful change could come only through legislation. In 1998, they submitted a 152-page report on ways to harmonize disclosures. Congress responded with hearings but took no action until the Dodd-Frank bill, which ordered the CFPB to address the issue.

“They did try it, but when you dig to the nitty-gritty, they found the disclosures cover different things and come out at different times,” said Joe Gabai, a partner in Morrison & Foerster LLP. “It is going to be difficult to combine the two.”

Most observers said they expect the CFPB to succeed but that the process may prove difficult.

“Now they actually do have a dictate that they do it,” Gabai said. “I think they will need to be awfully creative and have to go about this in a more pragmatic way, identify disclosures susceptible to combination and those that are not feasible.”

Consumer groups say they hope the CFPB will approach the issue differently.

“Previously, the consumer organizations had to fight to be at the table with the regulators,” said Berenbaum of the National Community Reinvestment Coalition. “I do believe this new bureau will approach this with consumers and industry as a whole. … I think grabbing hold of the entire issue to develop a working model for Respa and TILA together is going to be a daunting project but putting it in the hands of a capable regulator like the CFPB is helpful.”

The MBA’s Markison, too, said this time is likely to be different.

“The effort to simplify and combine Respa and TILA disclosures has confounded people for years,” Markison commented. “I think part of the problem has been that Respa and TILA have been assigned to different agencies, and part of it is that it is much easier said than done. If we can land people on the moon, though, we can certainly do this.”

A federal agency is moving to prohibit controversial “private transfer fees” on all mortgages funded by Fannie Mae and Freddie Mac. But its proposed ban might extend to transfer fees routinely collected by community associations across the country — potentially forcing some of them to raise assessments on thousands of unsuspecting homeowners.

The Federal Housing Finance Agency (FHFA), which oversees the two mortgage giants in conservatorship, issued proposed “guidance” Aug. 12 that would prohibit Fannie and Freddie plus the federal home loan banks from investing in mortgages carrying private transfer-fee covenants.

Private transfer fees are starkly different from transfer fees imposed by local governments to raise revenue for public services when properties change hands. In a private transfer-fee arrangement, a developer or property owner records a long-term covenant requiring payments to trustees or other private parties every time the property is resold. The best-known and most controversial version of this plan is being promoted by Freehold Capital Partners of New York. The Freehold program, which the company says has attracted the participation of “thousands” of development projects worth “hundreds of billions of dollars” across the country, imposes a 1 percent fee that must be paid by the home seller out of the settlement proceeds every time the house is resold during the next 99 years. The money flows from the closing to a trustee, who distributes shares of it to private investors and others, including the developer in some cases.

Freehold’s activities have raised widespread opposition — 18 state legislatures have either restricted or banned the use of private transfer fees in varying forms. The proposal from the FHFA seeks to cut off federally related funding or guarantees for the underlying conventional mortgages that support private transfer-fee programs such as Freehold’s.

Although under conservatorship, Fannie Mae and Freddie Mac still account for a large share of new conventional mortgages. Along with the Federal Housing Administration, which had earlier indicated opposition to private transfer-fee plans, the three entities are responsible for upwards of 95 percent of mortgage market volume, according to industry estimates.

Edward J. DeMarco, acting director of the FHFA, said the proposed ban — pending a 60-day public comment period — is necessary because the fees “may impede the marketability and the valuation of properties,” may raise homeownership costs and “contribute to reduced transparency for consumers because the fees are not disclosed by sellers and are difficult to discover through customary title searches.”

The wording of the ban, however, appears to reach well beyond Freehold-type fees to include mortgages where covenants require payments to homeowners associations, affordable housing groups, or other community or nonprofit organizations upon each resale of the property.

Many new housing development projects come with not-for-profit homeowners associations that collect assessments from owners to fund community improvements and property management. Some also receive covenanted transfer-fee payments to fund part of their work. Still others impose long-term transfer fees designed to benefit specific charities.

For example, Lennar, a builder based in Miami, has imposed mandatory transfer fees on thousands of homes constructed in its California developments. The fees, which amount to one-20th of a percent of the price of the home each time it resells, support the efforts of the Lennar Charitable Housing Foundation’s anti-homeless and affordable shelter activities, according to a spokesman for the firm, Marshall Ames.

But the FHFA’s proposal explicitly includes a broad spectrum of such programs in the ban. It says “even where such fees are payable to a homeowners association,” they are “likely to be unrelated to the value rendered and at times may apply even if the property’s value has significantly diminished since the time the covenant was imposed.”

Andrew Fortin, vice president of government affairs for the 30,000-member Community Associations Institute, which represents homeowners and association managers nationwide, said that banning investments in mortgages on properties with transfer fees payable to associations “is potentially a big problem.” Among other negatives, it could force associations to increase annual assessments on individual homeowners.

Fortin said his group “shares the concerns of FHFA about programs that create neo-feudal arrangements” with outside investors, but believes the agency needs to better distinguish between profit-motivated transfer fees and those that benefit public interest and nonprofit organizations.

Meanwhile, a spokesman for Freehold Capital Partners deplored the FHFA’s proposal. Arguing that private transfer fees provide crucial financial support for developers and their customers, Bryan J. Cohen, the company’s executive vice president and general counsel, said “this is precisely the wrong time to eliminate a program that halts foreclosures, helps restart failed projects, creates jobs and reduces upfront costs to American homebuyers.”

American Banker  |  Wednesday, August 18, 2010
By Donna Borak

WASHINGTON — Although there were sharp disagreements at a Treasury Department conference Tuesday about what kind of role the government should take in the future of housing finance, one idea in particular seems to be gaining momentum: creating an insurance fund to back mortgage-backed securities.

Under a plan advanced by several participants, Fannie Mae and Freddie Mac would be replaced by privately capitalized, federally chartered companies that buy mortgages from the primary market and deliver them into a federally guaranteed mortgage-backed security.

The new companies would pay a risk-based fee used to establish an insurance fund, similar to that of the Federal Deposit Insurance Corp., which would cover catastrophic losses on MBS.

Although details of the plan vary, the idea has won considerable support.

“Any guarantee should be explicit and the government should charge a fee to create a reserve fund to cover potential losses,” said Ingrid Gould Ellen, a professor at New York University’s Wagner Graduate School of Public Service and co-director of the Furman Center for Real Estate and Urban Policy.

To be sure, others offered differing visions of the GSEs’ future, with Bill Gross of Pimco calling for full nationalization and Alex Pollock of the American Enterprise Institute suggesting a more private-market-oriented approach.

But amid the various ideas, the insurance fund was the subject of a surprising consensus.

The basic thrust of the plan involves an explicit, narrowly targeted government guarantee that would be used to cover “catastrophic” losses on certain kinds of MBS. For example, the government would give a guarantee only to 30-year fixed mortgages with significant down payments.

“Public participation should be limited to providing only a layer of guarantee and setting credit standards for tightly defined conventional mortgages behind the borrower down payment, private mortgage insurance, and layers of reserves and capital at whatever future entities play this limited role,” said S.A. Ibrahim, chief executive of the private mortgage insurer Radian Group Inc. “Public participation can be paid for through fees and further protect taxpayers through sound underwriting and appraisals, while additionally limiting the government guarantees to a historically safer catastrophic loan-to-value gap of, say, 70% or lower.”

The idea has already been endorsed by several groups and companies, including the Housing Policy Council, the Mortgage Bankers Association and Wells Fargo & Co.

Speaking at the conference Tuesday, Mike Heid, president of Wells Fargo Home Mortgage, said a government guarantee is “required to ensure that there’s a reliable flow of mortgage credit across the whole wide range of economic cycles we will experience in the future.”

“I want to emphasize that the guarantee itself should only apply to the performance of the mortgage security itself,” he said. “It should not apply in any shape or form to the particular entity that’s involved in the securitization process itself.”

Susan Wachter, Richard B. Worley Professor of Financial Management, professor of Real Estate, Finance and City and Regional Planning at the University of Pennsylvania’s Wharton School, agreed. “There is a role for a government guarantee that is very limited in successor entities such as Fannie and Freddie,” Wachter said. “There should be perhaps successors not solely, in my mind, in the government, but outside the government, with a limited role for a government guarantee with private capital in the first-loss position.”

She, too, said the government should not guarantee debt of any new entities, but only the security.

Barbara Desoer, president of Bank of America Home Loans, said the government’s role in housing finance needs to be cleared up. Fannie and Freddie were considered implicitly backed by the government, a role that allowed them to sell their debt for cheaper because of a perceived government guarantee but not technically be on the government’s books. “The future role for the government must be transparent and clear,” Desoer said. “Institutions or products will either need to be explicitly guaranteed or not guaranteed at all.”

Although Treasury Secretary Tim Geithner moderated the panel, which included in-depth discussion of the insurance fund idea, he did not take a position on it. Instead, he said he favored some type of government role in housing finance. The administration is due to unveil its own plan in January.

“The question is really about whether the government — in order to make sure that Americans can borrow at reasonable interest rates to buy a house even in a deep recession — has to provide a form of guarantee or insurance against losses,” Geithner said. “I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns.”

The challenge is “to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure,” Geithner said.

One participant pushed for a much more substantial role for the government. Gross, a co-founder and co-chief investment officer of Pacific Investment Management Co., said all government programs should be combined into Ginnie Mae. “We should consolidate all of the agencies into one true Ginnie Mae, a government national mortgage association — one agency,” he said. “We are skeptical of other public-private models currently being considered, discussed today, because they’re more expensive primarily, resulting in higher mortgage rates and therefore favoring Wall Street as opposed to Main Street.”

Gross said several options would essentially create “clones” of Fannie Mae and Freddie Mac.

“Private mortgage insurance, for instance, is untrustworthy and comes at a very expensive costs going forward,” Gross said. “We need one national agency with sufficient backing, down payments and guarantees going forward.”

He was balanced out by Pollock, who said Fannie and Freddie should be split into three parts: a private company that provides a guarantee, a government agency that provides housing subsidies and a liquidating trust to run off continuing losses from the existing GSEs.

One option that does not appear to be on the table: returning Fannie and Freddie to the structure they had before they were seized by the government two years ago. In his remarks, Geithner specifically rejected the idea.

“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support,” he said. We will not support a return to the system where private gains are subsidized by taxpayer losses.”

During the boom years, mortgage lenders paid Fannie Mae and Freddie Mac a small fee for accepting stated-income loans. Today those lenders are paying a whole lot more.

Loan-buyback requests from the government-sponsored enterprises are mounting, and alternative-A loans are at the center of many disputes. At issue are the terms of the GSEs’ reduced-documentation programs and who should be responsible for a loan product that most industry experts now concede never should have been mass marketed in the first place.

Originating lenders and the GSEs are arguing about such sticking points as whether the lender should have caught borrowers who were lying about their incomes and whether having performed the requisite due diligence is a justification for rejecting the buyback demand.

“The dirty little secret was that the investors all knew this stuff was garbage, and they bought it anyway,” said Michael Pfeifer, a managing partner in the Pfeifer & DeLaMora LLP law firm in Orange, Calif., which represents mortgage lenders and banks. “The buyers were just economically stronger than the sellers, but they are not innocent victims.”

Representatives of Fannie and the Federal Housing Finance Agency, now the conservator of both GSEs, reject the lenders’ claims. Even if the bar for diligence on alt-A loans was low, they said, lenders were still responsible for vetting the information provided by the borrower (or, in many cases, the broker who arranged the loan.)

“Lenders should be reviewing the customer’s position, industry, and years on the job to determine if the stated income appeared plausible and accurate,” Fannie said in a statement to American Banker. “They should also determine whether their assets and credit history support the stated income as well.” (Freddie did not return a call seeking comment.)

When the housing market was humming along, the GSEs supplied guidelines explaining to lenders precisely what types of loans they would buy. After the loans went into default, the investors forced the lenders to buy the loans back — even though they were originated according to the guidelines, lenders now say.

A key sticking point in such disputes is that many stated-income loans now being pushed back to originators failed not because of problems with the original underwriting but because the real estate market tanked or the borrower lost his or her job.

“By creating the stated-income product, they essentially waived that representation by saying they don’t care what the income is,” said Brian Levy, a lawyer at Katten & Temple LLP in Chicago, who represents mostly small and midsize banks and mortgage lenders. “If the originating lender thought they were going to be held responsible for the income being accurate, they would have checked it.”

Normally such disputes would end up in a trial, with a history of case law. But litigation is rare, though stated-income loans were originated on a mass scale from 2005 to 2008. Few investors sue the originator because of the expense and difficulty of bringing such cases and the risk of losing at trial, lawyers said.

“If the courts looked at it, they would say this is unconscionable and outrageous because the interpretations of reps and warrants are extreme,” Pfeifer said. “It’s a Ford Pinto problem — a product defect. They said, ‘Here are the specs, build the loan exactly as we said,’ and then they want them bought back.”

Instead of litigation, Fannie and Freddie and other large investors have hired armies of auditors to pore over loan files finding other errors that can justify a repurchase request, lawyers say. If Fannie determines the borrower’s income was inaccurate, a mortgage insurer often will rescind coverage, which prompts a repurchase request.

Originators claim they cannot be held responsible for the increasing debt burdens of borrowers whose loans were originated years ago in better economic times.

“There is usually no tie between the reason why the loan went into default and the asserted breach of the reps and warrants,” Levy said. “But it’s virtually impossible for the investor to prove that the reason why the loan went bad is the debt ratio of the borrower is 38% and it should have been 35% and, if it had been that, the borrower wouldn’t have gone into default.”

More often than not, such disputes end in protracted negotiations and stalemates.

Overall, buyback requests are increasing dramatically. In a public filing this week, Bank of America Corp., the second-largest residential lender, said it had $11.2 billion of “unresolved” mortgage buyback requests at the end of June, a 50% spike from January.

Both GSEs have reported steadily rising repurchase requests. According to their second-quarter results filed with the Securities and Exchange Commission, sellers repurchased $1.5 billion in loans in the quarter from Fannie and $1.4 billion from Freddie. Both institutions reported far larger repurchase-request volumes outstanding, however — in Freddie’s case, a total of $5.6 billion.

According to conversations with lenders’ representatives and presentations at Mortgage Bankers Association conferences on the subject, common triggers for the buyback demands range from a borrower’s undisclosed debts to inflated appraisals and occupancy misrepresentations.

Though Alt-A loans accounted for only 10% of the GSEs’ volume from 2005 to 2007, they are generating a larger share of repurchase requests. And while low-documentation loans were always considered riskier than their full-doc equivalents, Fannie was happy to guarantee them at the time.

Fannie’s handbook from 2006 states, regarding one type of loan: “Lender is not required to verify the borrower’s income or assets.”

“All that language like that did was create a ‘don’t ask, don’t tell’ environment while giving Fannie Mae plausible deniability,” Pfeifer said. “How would a broker know whether or not the borrower qualified for a fully documented loan unless they actually ran the borrower’s qualifications under the full-doc guidelines? And if the borrower qualified, why go stated-income?”

A copy of the Fannie handbook details the accepted variances from the company’s underwriting and documentation requirements. Among them are stated incomes, which allowed the lender to rely on an oral verification of the borrower’s employment (rather than on pay stubs and tax returns) and determine that the income is “reasonable,” as well as the even more bare-bones no income/no asset, or Nina, loans.

The existence of a no/low-doc channel — and the additional fees that lenders paid to participate in it — convinced many lenders that Fannie was taking on the risk of borrower misrepresentations, said Brian Chappelle of the Washington consulting firm Potomac Partners, especially since buyback requests had been exceedingly rare.

This was not always the case. Regardless of the variances in underwriting standards, and the partial reliance on borrower honesty that stated-income loans required, Fannie Mae never abdicated its right to pass back loans because of borrower dishonesty. As one recent repurchase request to a major lender stated: “The lender’s contractual warranties with Fannie Mae state that the lender represents and warrants that no fraud or material misrepresentation has been committed by any party, including the borrower, and that those warranties are not limited to matters of which the lender had knowledge.”

An interview with the FHFA made it clear that the agency, which is seeking to recoup as much taxpayer money as possible through repurchase requests, would consider a buyback demand on a responsibly underwritten stated-income loan to be a gray area.

“The onus really falls on the lender to demonstrate that they had a robust process to ensure the quality of the loans being delivered,” said Maria Fernandez, the FHFA’s associate director for credit risk. “If there was agreement on that, you wouldn’t expect a repurchase.”

The reasonability of a borrower’s income would be, at the very least, a mitigating factor, Fernandez said. An hourly wage earner applying for a $600,000 mortgage is an example of a loan that should have flagged trouble, she said.

In some repurchase requests examined by American Banker, the trigger for the demand is precisely a lack of such “reasonability.” In others, lenders verified the person’s employment at a company — but not necessarily that the person had reported the correct title and salary.

Those failings are ample justification for a repurchase, Fernandez said, adding that the FHFA is confident that Fannie and Freddie are not issuing frivolous repurchase requests.

But in instances when the lender feels it met the GSE’s guidelines in good faith, Fannie and Freddie are willing to hear the lender’s case.

“What’s difficult here is that it’s not necessarily black and white,” Fernandez said. “There is dialogue. I will tell you that many of these repurchase requests are tough.”

That hasn’t stopped some lenders and their representatives from complaining that the repurchase requests are still too draconian. Lenders contacted for this story declined to speak on the record, citing their continuing business with Fannie and Freddie and the huge volume of outstanding repurchase requests.

Chappelle said the perception that the GSEs are not playing fairly could have a major impact on the mortgage market.

If lenders perceive the GSEs as fickle in their standards — whether or not that perception is accurate — they are going to be more cautious with the new loans they make, he argued.

Already, “lenders are adding their own credit overlays to GSE loans because the GSEs are using buybacks to lay off the credit risk,” Chappelle said, citing a sharp drop in the number of loans made to borrowers with credit scores below 700.

“While I am sure there is not a lot of sympathy for mortgage lenders on the buyback issue,” he said, “a consequence of what lenders believe is an overzealous GSE buyback policy is that it is having an adverse impact on the housing recovery.”

Saturday, August 7, 2010; E01

Can you name a housing controversy that pulls Iraq and Afghanistan veterans, consumer advocates, labor unions representing transport workers and government employees, the title insurance industry, the National Council of La Raza, libertarian and property rights groups, and the National Association of Realtors together into a protest coalition demanding quick action from the Obama administration?

A more unlikely collection of real estate bedfellows is hard to imagine. Yet at the end of last month, 11 groups with widely divergent agendas and memberships formed the Coalition to Stop Wall Street Home Resale Fees.

The target of their protest: Private transfer fees being attached as liens on homes and requiring successions of property owners to pay a fee every time the house or lot resells during the coming 99 years. Although proponents say the concept helps real estate developers raise capital for projects by bringing in Wall Street investors, critics contend the liens amount to a perpetual money machine that lowers equity values for unsuspecting consumers and complicates real estate sales.

Here’s how the plan works: Say you buy a $300,000 house in a subdivision where the developer is participating in a private transfer-fee program and has recorded liens on every lot. What the developer might not have disclosed to you, however, is that when you sell the property, you will be required to pay 1 percent of the price you receive. The money must be disbursed out of the closing proceeds and sent to a trustee representing investors. Those investors fronted cash to the developer in exchange for the right to receive streams of payments for decades as individual houses sell and resell.

To illustrate: If you buy a house this year for $300,000 and resell it for $325,000 a few years from now, you will owe $3,250 at closing. Even if the house drops in value, you will still owe the 1 percent fee. And if you refuse to pay it, the deal will not close because a lien has been recorded that runs with the title to the property and mandates that every seller pay.

Your purchaser might not like the fee requirement, either, and might demand a lower price as compensation. When your purchaser later goes to sell, the same rules will kick in. And so on, through successions of sales until 2109, when the covenant recorded in 2010 disappears. Along the way, assuming modest appreciation in real estate values, investors and their estates stand to reap huge amounts of cash.

“It’s a pretty slick way to make money, but it’s bad public policy and bad for consumers,” says Kurt Pfotenhauer, chief executive of the American Land Title Association. Pfotenhauer’s group and the National Association of Realtors have spearheaded drives directed at state legislatures to ban or restrict private transfer fees. But now the focus has shifted to the federal level, where the 11-member coalition wants the Obama administration to prohibit transfer fees on all mortgages purchased or backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

The FHA has indicated that the fees violate its rules, said the coalition in a July 29 letter to Treasury Secretary Timothy F. Geithner. If Fannie Mae and Freddie Mac, which operate under federal conservatorship, follow suit, the mortgage-financing fuel powering transfer-fee programs will effectively be shut off. With the FHA, Fannie and Freddie account for about 95 percent of mortgage financings.

The principal advocate for the private transfer fee concept, Freehold Capital Partners of New York, did not respond to repeated requests to comment for this column. In an e-mail sent to me this year, Curtis Campbell, a spokesman for Freehold, said that “private transfer fees represent an adaptation in how to pay for development costs” incurred by builders “at a time when funding is not available” to them on “reasonable terms.”

On its Web site, Freehold says that major real estate development firms controlling “hundreds of billions of dollars in real estate projects nationwide,” including some of the “largest, most well respected,” have participated in the program. However, the company has declined to identify any of them.

Members of the anti-fee coalition said they have specific reasons for joining. For example, Jon Soltz, co-founder and chairman of VoteVets.org, said military families generally move every three years and have been disproportionately hard hit by the real estate bust. Because of their frequent moves, “these fees hurt the military more than anyone,” he said, and “take advantage of unsuspecting home owners and buyers.”