Bruce Norris is joined this week by David Kittle. David is the senior director of industry relations for IMARC, a fraud investigation company located in Santa Ana. He manages IMARC’s Washington D.C. office. He is the past chairman of MBA’s political action committee and former vice-chairman of MBA’s residential board of governors. He also served on MBA’s board of directors from 2004 through 2010. David is the past chairman of Mortgage Bankers Association in Washington D.C, completing his term in October 2009.
At an event at the Nixon Library, David raised the bar. Bruce thought they were among the most honest and forthright panelist they had ever had, and this was an exciting night. This was the highlight of David’s year as chairman. Going back to this day, it was very engaging.
Bruce and David discussed the problem of fraud. Bruce thought it would be more prevalent during an upswing where people were really anxious to get in on the potential profit. David mentioned that with just the nature of how hard it is to get a loan, fraud is apparently still alive and well. The more paperwork or regulation you create, as has been done with Dodd-Frank and the CFPB, the harder it is to get a loan. This is even for people with good credit. As far as housing goes right now, this particular environment is on the increase. We find most of the fraud being created in the employment and income space.
Bruce wondered where the idea to do something other than what is right comes from since he does not know if very many occupant owners dream of this. David said it is predicated by an unscrupulous lender or loan officer. It could also be an appraiser or title agent closing fraud at the table and manipulating part one. This happens way too often, and the marketplace is developing some very good checks for those right now. Not only does IMARC do the fraud investigation, but they pivoted at the end of 2011 and do quality control and compliance for lenders and banks. They are in all aspects of it right now.
Bruce asked if when they find fraud it is on a fairly large scale and done by a company many times over rather than a one-off situation. Speaking from a personal experience, David said 3 ½ years ago his family relocated to Pennsylvania. They bought a house in a 21-home community. They were not told that three of the houses were in foreclosure. One was by the builder/administer who had built it. David tells this story in his January monthly edition of MBA magazine when speaking on personal responsibility. His wife and he actually lost 100% of their equity when they sold their house. They did not walk away from it but rather wrote a check closed to move back to their home in Kentucky in May. Mortgage fraud is still prevalent today, and it happened in his sub-division. 25% of the homes had fraud committed on them on one street alone.
There was in a way a ringleader who got people he knew to cooperate with what they thought was a profitable venture who were not truly aware they were committing fraud. It was part of this man’s flock, and they were promised a certain amount of money if they signed certain documents and the houses would be flipped. They rolled into the mortgage meltdown when this started, and he was caught and went to prison recently.
There is a bad phrase that people use when they are trying to induce you to do something that does not feel right. This phrase is, “Everyone’s doing it.” Bruce remembers buying his first residence when he was 23 years old. He had a chance to buy a rental; and as he was signing the loan documents with FHA, he noticed a box checked that said he was going to occupy the home. He told the agent he was going to use it as a rental, and she told him they checked the wrong box and to go ahead and sign it. About three months later, his wife called him at work saying the FBI came to their door and read them their rights. This was stemming from him signing something saying he would live in the house when he didn’t. However, this stemmed from someone who had this as an MO and told him it was okay. They did not even have the discussion that everyone was doing it, it was that it was a mistake. Years later when he was leaving California with some equity and going to other states to pay cash for properties, there was a mortgage lender who was helping people. He had one transaction where he was actually going to get a loan, and the loan took a long time. When the documents finally came, Bruce looked at the application that showed things that were not even his. Bruce called the person on it, and she said his was too confusing and they simplified it. This still takes place today.
When a title insurance company gives the insured closing letter to cover the closing agent, they are basically saying they will do the right thing. However, with fraud occurring by the closing agent, a misrepresented HUD 1, a switched HUD-1, or the borrower was encouraged to sign something that would be fixed later, this still happens all the time and we still pay for it. Bruce wondered how we end up paying for it, whether it is in the disappearance of potential financing programs or in actual losses we all share in. David said we are paying for it overall by Dodd-Frank. There are 1,000 pages of regulations on top of regulations that they did not go through to see what worked and what did not work. The Consumer Financial Protection Bureau, which has come out of Dodd-Frank, and lenders are terrified. David Kittle is happy to say he does not own his own mortgage company anymore right now because he would not want to be in the lending business today. He is glad he is on the other side of it.
Bruce asked if the people are terrified because of what they don’t know or what they do know. He wondered if there is uncertainty about what Dodd-Frank in its final form is. David said they do not know yet because they have not been written. Bruce is spot on in that there is the uncertainty and unknowing of what is a qualified mortgage as well as loan compensation since these things have not been decided. You have Basel III, which is from servicing issues. What can you do with loan officer comp? David had been on a call with one of his clients, and they were concerned about whether to do a lender-funded loan where they give you assist on the lending. The question is if you get to the closing and the dollars don’t match exactly, what happens? Do they have to write down the principal? If they apply the money to the principal, then the loan value may be different from the investor to whom they are selling. It used to be where you could make these adjustments where 99% of the people were all credible in doing the right thing. Now, CFPB or HUD could come in and absolutely shut your doors because of some unintended mistake.
Bruce listened to a radio show where Citibank was laying off people from the lending side of their business. Bruce wondered if they thought business was not going to be there or if they do not want the business that is there. David said if we want to solve for what is going on in the country, we need to consider unemployment. We have to solve for jobs, and today we are looking at it in the first quarter where we are at 7.8-7.9% unemployment rate. The MBA’s forecast is through the third quarter of 2014, it will not be any lower than 7.1%. This is way too high and unacceptable for any market recovery to take place. Regarding this, MBA statistics are pretty spot-on year-to-year and do their due diligence very well. Last year they did $1.75 trillion in originations. The forecast for 2013 is for that to fall to right under $1.4 trillion. They hope by 2014 it will fall to just under $1 trillion in originations. The numbers inside of this that are the good news for realtors and for builders is that where you had $500 billion in purchases in 2012, this is forecast to increase to $709 billion in 2014. Where the number drops is in the refinance since rates are predicted and will rise. They predict the interest rates to go all the way up to 4 ½%. Increasing industry rates will now turn off the refinance faucet.
When David first went into the business back in the late 70s, he remembered feeding his family at 17 ½% on FHA loans. When you compare that to 4 ½%, it is pretty good. Bruce actually got one of these loans at this exact interest rate. He refied his house to become an investor in 1981, and that happened to be the rate. It then went up after that. The highest it ever got was 18 ½%. This was not the best timing for a refi. When he refied it at 12% about a year a half later, he thought it was a great deal.
MBA’s forecasts show unemployment will remain higher than it should, above 7%. At the same time, originations are expected to fall by $700 billion from 2012 to 2014. This is not a good forecast. Originations in this case includes the family of refies. In this case we are talking about a short-term trend; but if we go on a direction for a long period of time when interest rates gradually climb back up, then it will not be unusual for people to keep their 3 ½ year mortgage versus a 4 ½ or 5 ½. In other words, this could become more normal than what we have enjoyed since 1981, this being a gradual decline over a long period of time. It has to go up high and then come back down in order to have improvement in rates. As long as people remain employed, the servicing values for people that service these loans will likely stay on the books longer since they have a more attractive interest rate. This is why refinances have been so high. People are refinancing, staying in their homes, and doing some remodeling work.
There are pros and cons to all this. There is a lot of cash to it where people are saving, but people are still worried and scared since the job market and economy out there is just not getting any better. There were positive numbers for existing home sales and new home sales that were up 15.6%. However, the question is from what they are up 15%. The answer is from being down a lot. It is good that it is up, but it is still not where it should be. The Riverside market does not really heal until the construction starts. The optimism of the person who creates the subdivision is not there since the subdivisions are down 95% from normal. This is because they cannot get a development loan as well as it does not pencil since prices were damaged so bad. It is almost a two-stage thing.
Right now David is in Kentucky, so Bruce wondered what is happening as far as inflation of prices where he is. The market for Kentucky, especially in the Midwest, never goes straight up and down. It is really pretty calm; so they have not had the big market fluctuations in places like Kentucky, Missouri, and Tennessee. You find the big swings in Pennsylvania, California, and especially Florida, Nevada, and Arizona. This is where all the mortgage fraud took place. However, the Midwest is pretty good right now. North Carolina is a wonderful market right now, so the geographic areas are coming back rather strong.
Interest rates in general are a national picture. Bruce is looking at a report about GDP growth that is projected. It is not a very good picture, and this is why you are not solving the unemployment. However, it would probably also keep interest rates down. In California, we have markets now that are accelerating 3-4% a month in price. In a way, there are pockets of California that really don’t need a 3 ½% mortgage rate, but we have one. How long we have it is more of a national decision than it is our local market. The MBA forecasts that in the first quarter of 2013, it will be at 1.9%. In the second quarter, it will be down to 1.8%. Then, in the third quarter it will be up to 2.4%. Finally, in the fourth quarter it will be at 2.3% and remain no higher than 2.6% through the entire year of 2014. This is okay growth, although it is not spectacular and not the type of growth that brings you out of a recession or helps you feel comfortable enough to raise interest rates. This is why rates are going to remain low. You also still have Bernanke out there who is going to continue to fund the marketplace.
There is no private capital in the market right now. You have the Federal Reserve buying mortgage-backed securities. If they ever turn off the faucet, then we would be in deep trouble. Bruce asked if this is an eventuality that has to occur. David said it is, and there are a couple of Fed governors who in their last month’s report were getting to a point where they wanted to see things start shutting down. If Bernanke continues to buy MBS and there is not private capital coming back in, then the question is where the liquidity comes. This is the real problem. You have a couple mortgage-backed securities being done out there by a California company called Redwood Trust. The problem with their security for the total market is that they are jumbo loans, very low LTVs, and very high credit scores. It is good they got the security out there, but that is not prevalent where the market is and a very small percentage of the market. The rest of the loans, including for people with low to moderate credit scores and higher LTVs, will have no liquidity if Ben Bernanke turns off the faucet.
Bruce asked about the percentage of the body of loans from Fannie or Freddie and FHA and if they had ever been this high in years past. Not only are they buying the loans, but the Federal Reserve has never stepped in and had to purchase mortgage-backed securities. They have bought well over $1 trillion of loans, which is unprecedented. This is not what the Federal Reserve was set up to do. This was a decision made by the Administration and Ben Bernanke.
The first year David testified in front of Congress was in 2007. He testified a total of 14 times between 2008 and 2009. During that stretch, everybody was very concerned about what was going to happen. Bruce watched a few testimonies from people in the industry, and he got the feeling that the audience was either incapable of grasping much of what was being said, or they were really not interested because they already had pre-determined ideas about how they were going to feel anyway. David enjoyed delivering the message for the members and being there representing the members and fighting for certain issues.
Every MBA chairman has an issue that confronts. David’s happened to be the year bankruptcy forced lenders to cram down the interest rates and give away the principal. They are back dooring this right now through other government programs. There were a couple at the hearing who were very contentious, and David’s opinion was things were broad brush. Most of the Congressmen and Senators who were asking you questions had a question to ask you from their aid five minutes before it was asked. They probably had not done a lot of research on the question itself, and when they got the answer they did not understand it. These are the same people who are voting on Dodd and Frank. Chris Dodd retired from the Senate because he was not going to win the re-election, and he is now president and CEO of the Motion Picture Association of America and making a very healthy 7-figure salary. Barney Frank is also retired, but we will probably see him come back and be appointed to some spot in the Administration. These are the two people who did not do it right and did not always tell it like it was. They got caught up in their own web, and then most onerous piece of legislation ever is named after them.
People don’t realize that Barney Frank was the pied piper for everything aggressive to get home ownership increased. He was the spokesman for Fannie Mae all this time, and then he would later deny he ever was even though it was all on tape.
Bruce asked what decisions are yet to be made regarding Dodd-Frank. David said they have not yet ruled on what a qualified mortgage is as well as loan-officer compensation. Overage has gone away, as it should have. Pricing up alone to help a borrower should stay. You also have the servicing requirements out there, and servicers still do not know what the rules are going to be regarding servicing and how they have to inform their borrowers, how often, and what has to be in that information when a loan is sold. There is still a lot of uncertainty, and David thinks MBA and president David Stephens is doing a fabulous job of representing the association and members. The Board is attuned to what is happening, and there is no finer voice for the lenders out there today than the Mortgage Bankers Association.
It is at times like this you realize how important representation really is because there were a lot of issue that crossed over to other parts of the real estate industry, including the Appraisal Institute, National Association of Realtors, and forgiven debt not being taxed. All these things were items that were important wins. If we did not come down on the right side of these, we would not have much of an inventory to loan on or a buyer base that would have survived. Involvement in one’s industry is the key to success. This was something David’s father told him 30 years ago that he still remembers today.
MBA is representing them on Capitol Hill and fighting them against all the bad onerous legislation. When it is representing the members, it is actually representing the consumer at the same time. They are protecting the consumer as well who is getting hit very hard because of all these regulations. There was a lot of blame to go around, but the one group that never gets blamed is Congress.
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