Scotsman Guide - May 2010 Residential Edition

QA &

with professor of economics ne w york university Andrew Caplin

by david robinson

The Federal Housing Administration (FHA) has experienced substantial losses to its Mutual Mortgage Insurance Fund (MMIF) and faces a likely government bailout, according to Andrew Caplin, professor of economics and co-director of the Center for Experimental Social Science at New York University. He and several co-authors noted as much in a recent study using Los Angeles County data ( sctsm.in/w15802), and he said so in testimony ( sctsm.in/Caplin0310) to a House Financial Services Subcommittee this past March. He tells us more.

What is your primary concern with FHA?

FHA’s actuarial report [for fiscal year 2009], stating that government support won’t be needed, is extraordinarily compromised. The losses to the MMIF are much higher than the FHA states. Why [FHA hasn’t] apologized and redone the numbers is beyond me. At some point, FHA will have to go to Congress for money.

How has the FHA responded to your study and testimony?

[FHA officials] say our study is flawed. They state that other studies have been done and that it can’t be confirmed that FHA is going to go bankrupt.

In your House-subcommittee testimony, you stated that FHA must change the
way it determines potential losses. How?

To build a better loss model, the FHA needs to correctly identify streamline refinances, get the initial [loan-to-value ratio] correct on these refinances, use less-biased measures of home value, and incorporate delinquency and modifications that are ongoing — which are early warnings on future losses. When all four modeling changes are made, we will have a legitimate loss estimate.

Do you consider the FHA’s recent actions, including the addition of a chief risk
officer and changing some key underwriting guidelines, to be partial solutions?

[FHA must] show that the particular measures are important. As yet, [FHA has] no demonstration of their quantitative significance. Indeed, [FHA] cannot do this at present, given [FHA’s] limited knowledge of the trajectory of losses.

How do we avoid an FHA bailout?

FHA has to ensure that the existing mess is sorted out. The large mass of at-risk mortgages will be defaulting in large numbers in the coming years unless there is a very shocking turnaround in the economy and the housing market. [FHA has] to get modern regarding risk assessment and evaluation. Be more innovative, for example, in the form of shared-equity finance.

We’re looking to make sure that when the problem occurs — the need to use taxpayer funds for a bailout — FHA can’t say it was “shocked” [or] that [the bailout] was unpredictable. A bailout is inevitable. The question is how to demonstrate better control so that this will not be needed in the future.

David Robinson, former editor of Mortgage Originator magazine, is a California-based writer and editor. For questions or comments about this article, e-mail articles@scotsmanguide.com.

NEXT MONTH

… in June’s Scotsman Guide

What your clients should know •
before buying a former meth lab
How to embrace the latest •
industry rules and regulations
Leveraging the new •
good-faith estimate
Spotlight looks southwest to •
Arizona

… and much more.

Online? Check out current and past editions of Scotsman Guide at scotsmanguide.com.

TIP OF THE MONTH

Know REOs’ loan limits

When helping clients finance distressed-and real estate owned (REO)-property purchases, remember that government agencies often are more willing to finance these purchases when they meet con-forming-loan limits. Also, although many banks attempt to sell their REO portfolios of single-family residences at 90 percent to 95 percent of the loan principal, REO properties often sell more quickly when they are anywhere from 40 percent to 65 percent of the quick-sale value, depending on the region.

— HUGH LARRAT T-SMI TH, TRIMINGHAM INC.

Whether or not you deliver loans to Fannie Mae yourself, you should be aware of Fannie’s new appraisal-related initiative called the Collateral Data Delivery (CDD) program ( sctsm.in/FanCDD). In essence, Fannie Mae is signaling the end of the paper-based loan file, starting with the appraisal.

Under CDD, appraisals must be delivered to Fannie in electronic form at least 24 hours before delivery of the loan. This requirement is set to start mid-year — though no sooner than July 1 — if all things remain on schedule.

Freddie Mac is said to be planning a similar system, though no timeline has been announced for it.

The CDD system generates a unique identifier for each appraisal file. This will allow Fannie to correlate the electronic appraisal with the loan file instantly upon its delivery. The CDD creates a data warehouse for this essential valuation information and makes it available on demand before the loan is purchased. This means Fannie can refuse the loan if it doesn’t like the appraisal for some reason — and you can bet Fannie will be checking thoroughly for patterns, trends and red flags.

Although this new system could complicate life for mortgage brokers, it’s not a bad thing for the industry as a whole, in terms of instilling transparency and investor confidence. It also means Fannie will be more interested in digital files and less interested in seller or servicer assurances regarding loan quality.

It seems only a matter of time before all loans are submitted this way in their entirety. After all, appraisals are almost always created electronically with a loan-origination system (LOS) and then copied, costing them their digital integrity.

But with the CDD, each data element can be sliced, diced and compared to other fields in the loan file via automated analysis. And discrepancies in that analysis could bring problems.

Because your lenders will be delivering files to Fannie electronically, they will expect the files to be flawless when they receive them from you. How often does the information in the closing package match the data in your LOS file?

Meanwhile, the CDD means investors likely will be more satisfied with data integrity in loan files. This will eventually bring back a number of them, which is a good thing.

Griff Straw is president of Solidifi U.S., a leading technology-enabled appraisal-management company and provider of col-lateral-risk-management and data-analytic services. He writes a monthly column on valuation issues for Scotsman Guide. Straw is a 30-year mortgage banker, a former Freddie Mac technology executive and a Mortgage Bankers Association Master Faculty member. Reach him at gstraw@solidifi.com or (703) 496-7579.