Industry Stakeholders Hesitate to Adopt eMortgages

Real Estate Online Three BHFederal housing regulators would like the industry to adopt eMortgages—which are mortgages in which critical loan documentation (specifically the promissory note, or eNote) is created, executed, registered, transferred and ultimately stored electronically—as the industry standard.

But according to a joint outreach survey conducted by Fannie Mae and Freddie Mac with industry stakeholders on state of the industry adoption, it may take a while.

The GSEs, under the direction of their regulator, FHFA, as part of the 2016 scorecard, are charged with working together to identify, assess, and implement strategies (where appropriate) to improve the industry’s ability to deliver eMortgages. In the survey, the GSEs asked 130 stakeholders, including lenders, technology solution providers, servicers, title/settlement agents, warehouse banks, and servicers, on perceived obstacles to the industry’s adoption of eMortgages as a standard.

The survey cited several factors that are driving the demand for eMortgages, which include: borrower expectations of faster, better, and more reliable service; a desire for more efficient processes and costs savings during the loan origination process, shorter timeframes from origination to sale into the secondary market resulting in greater liquidity; reducing interest rate risk and hedging costs; potential for reduced costs for warehouse lines; reduced cost for eNote certification and storage due to faster loan funding; and a reduction in the delays of loss mitigation activities.

Despite the demand for eMortgages, which have been around since the 1990s, the industry has been hesitant to adopt them as the standard for a variety of reasons.

“We found that eMortgage adoption continues to gain traction with lenders; however, the adoption has been slow due to various factors,” the GSEs stated in the report. “Ultimately, the survey showed that lenders are willing to spearhead the process while warehouse banks, servicers, and title/settlement partners will adopt when requested by lender partners.”

According to the GSEs, concerns across the industry on the adoption of eMortgages include: acceptance by a limited number of investors; warehouse line availability; lack of readiness on the part of key stakeholders such as servicers, document providers, custodians, title/settlement agents); the complexity of implementation; inadequate return on investment based on industry volumes; lack of uniform adoption of eNotorization and eRecording; resource/financial constraints, and GSE policy alignment.

Among lenders, one of the chief concerns was a lack of warehouse lenders, with one lender commenting that “Only a few warehouse lenders allow eNotes resulting in an added hurdle…the warehouse lenders will delay as long as possible since this changes their revenue model.” A lack of investor outlets was cited as another concern from lenders, with one lender noting, “Lack of other investors and possible execution outlets limit the correspondents. In addition, the fear is what if an investor will not buy the loan. How do you unwind and sell with limited outlets?” A lack of business partners was also a concern for lenders, with the comments ranging from “Custodians are not ready for eNotes” to “Technology required is developing at different paces. Must keep vendors on track with overall initiative.”

Mortgage Electronic Registration Systems (MERS) reported that there are 338,000 eNotes in their eRegistry as of February 2015, and the number continues to grow. According to the survey, there are approximately 50 lenders/investors integrated with the MERS registry and more than 200 companies closing eNotes. Will more lenders and investors get on board as time goes by?

Lenders Increase Spending on Mortgage Technology Platforms

Real Estate Online Three BH

What trends are you currently seeing in your sector of the mortgage industry?

One of the largest trends we are seeing right now is how mortgage companies are really starting to increase their spending on technology. In the last three years, the large banks have doubled their technology cost per loan, according to a study done by the STRATMOR Group. This has really shown that as the digital mortgages are coming out, people are expecting better service and more efficiency.

On the product side, we are seeing a lot more companies trying to get into the purchase and consumer direct world. Most of the large lenders’ initiatives are now consumer direct purchase and that is because the growth in that segment has doubled in volume over the last four years.

What are the challenges that come with developing and implementing technology platforms?

One of the big challenges is financial technology because for a lot of people it is very new and in the infancy of the industry. Most sophisticated systems are all home grown proprietary systems that companies who really got technology and had a team to do it were able to employ. So, I think one of the challenges is that a lot of lenders may not necessarily have the bandwidth and expertise to manage technology themselves or to understand what the best solution is. Lenders need to understand what their business needs are and what the product set is that they are getting from their potential vendor.

Are their opportunities that come with using technology systems?

That is one of the most exciting parts right now because these systems and technology that are used to manage these lenders’ leads, give an online loan application, and pricing are now pieces of technology that any lender can go buy and deploy. One of the big advantages in software is the service. For example, our platform was originally built for a lender as a proprietary system was then built into a product to sell to multiple lenders by taking all the learning that these companies have done building their own platforms. Now you are starting to see some of the technology come and be made available to lenders of all sizes. Whether you are a lender with 10 loan officers or 500 you can use the same technology that is relatively inexpensive and serviced. These lenders no longer have to have an IT staff to maintain it or run it or build servers but everything sits up in the cloud. Technology is more accessible now than it’s ever been.

What will mortgage technology platforms look like moving toward 2017?

Technology is increasing exponentially. Over the past three years the amount spent on technology by big banks has doubled so all the other lenders are now trying to catch up. The race is on, if you will, for lenders to understand how to become more efficient. The ones that do become more efficient will be the ones that survive, thrive, and grow market share

Freddie Mac Updates Home Possible Tool for Lenders

FreddieFreddie Mac is offering an updated Home Possible Income & Property Eligibility Tool which allows lenders to determine if a borrower meets the income requirements for a low down payment mortgage on a specific property.

The map-based Home Possible Income & Property Eligibility tool allows lenders to check for borrower eligibility for a high LTV loan for a property by simply entering that property’s address.

Freddie Mac Home Possible mortgages, which allow down payments between 3 and 5 percent, are often attractive solutions for low- and moderate-income borrowers, first-time homebuyers, millennials, and past homeowners who are returning to the market, according to Freddie Mac.

Borrowers can qualify for a Home Possible Mortgage if their income is up to 170 percent of the area’s median income (AMI). If the property is located in an underserved area, there are no income thresholds. The program also features a free online tutorial to meet the education requirement for first-time homebuyers.

Freddie Mac’s Home Possible Mortgage Program offers the following:

  • LTV:Maximum LTV and TLTV of 95 percent.
  • Property Options:1-4 units, condos and planned-unit developments; manufactured homes are eligible with certain restrictions.
  • Mortgage Flexibility:15- to 30-year fixed-rate mortgages, 5/1, 7/1 and 10/1 ARMs.
  • Refinance Options:No cash-out refinancing option is available for borrowers who occupy the property.

Freddie Mac’s Home Possible Advantage Mortgage Program offers the following:

  • LTV:Maximum LTV of 97 percent; TLTV 105 percent.
  • Property Options:1-unit properties, condos and planned unit developments; manufactured homes are not eligible.
  • Stable Mortgages:Fixed-rate mortgages with a term of up to 30 years.
  • Refinance Flexibility:Purchase and no cash-out refinancing options available.
  • Primary Residence Only:All borrowers must occupy the property as their primary residence.

CFPB: Servicers are Using Failed Technology

Tech Sights BHSome mortgage servicers have violated the Consumer Financial Protection Bureau (CFPB)’s new servicing rules by continuing to use failed technology that has harmed consumers, according to a special edition supervision report issued by CFPB on Wednesday.

The Bureau reported violations due to deficient technology and process breakdowns as a result of numerous examinations of mortgage servicers since the CFPB’s new servicing rules went into effect in January 2014. The Bureau’s examiners found specific problems regarding loss mitigation and servicing transfers, according to the CFPB.

“Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules,” said CFPB Director Richard Cordray. “Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally.”

According to the CFPB, mortgage servicers were experiencing problems due to bad practices and sloppy recordkeeping even before the crisis. The problem was exacerbated by the crisis as millions of borrowers fell behind and servicers were unable to keep up, according to the CFPB.

To address this problem, the CFPB enacted new mortgage servicing rules two and a half years ago that require servicers to keep accurate records, allow distressed borrowers access to servicing personnel, credit payments promptly, and to correct errors in the servicing file at the request of the borrower.  The new rules also contain protections for struggling homeowners. A servicer’s ability to comply with the CFPB’s new requirements are largely dependent on the servicer’s policies related to technology.

The report released on Wednesday includes supervision work completed by the CFPB’s supervision program between January 2014, when the new servicing rules were put in place, and April 2016. The CFPB’s examiners found that while some investors have made some investments as far as compliance with the new rules, those investments have not been sufficient across the marketplace. Consumers continue to be plagued as a result of this insufficient investment, according to the Bureau.

“Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules.”

Richard Cordray, Director, CFPB

The examiners found that many servicers used outdated or deficient technology that posed risks to consumers—and that many servicers lacked the proper training to properly use their computer systems and software platforms.

The CFPB’s examiners reported that technological breakdowns or malfunctions resulted in servicers sending loan modification notices late, or resulting in those notices containing incorrect or deceptive information; and that the transfer of loans to servicers with incompatible computers systems sometimes resulted in the servicer getting the runaround or the servicer failing to identify and honor a modification that was already in place.

CFPB alerts institutions to concerns and outlines necessary remedial measures where the Bureau’s examiners found violations of the law or other significant violations or weaknesses.

Switching Tracks: Shifting to the Online Auction

 

With REO inventory down, bulk sales at the GSEs have reached the end of their line, and the agencies are shifting over to the far-reaching tracks of the online auction.

When the GSEs began to acquire a large inventory of REO properties as a result of the foreclosure crisis, they looked for new ways to quickly dispose of those properties, and one such method was the bulk sale. Fannie Mae and Freddie Mac began selling packages of REOs to investors and nonprofits in 2012. After relieving some of their inventory, the GSEs have largely abandoned their bulk sales of REO properties—though they do still engage in bulk sales of nonperforming loans. In place of bulk sales, the GSEs have been picking up activity with another platform: the online real estate auction.

The End of the Line for Bulk Sales 

Freddie Mac announced on its website that effective October 27, 2015, HomeSteps was discontinuing its InvestorSelect Bulk Sale program. However, the announcement did state, “Buyers are still encouraged to register as one of our Bulk Investors as we anticipate offering bulk sale opportunities for investors in the future.”

The announcement went on to direct interested investors to four auction companies HomeSteps uses to sell “select portions of our inventory.” Those companies include Auction.com, Hudson & Marshall, RealtyBid, and XOME.

The bulk sale seems to have gone somewhat quietly into the night without making many headlines—much in contrast to the way it debuted, with heavy anticipation and some resistance from some community groups.

When asked about the shift in strategy and whether auctions deliver diminished listing cycles and increased net proceeds on sales, a spokesperson for Freddie Mac said matter-of-factly, “Sales channels and sales options change from time to time based on our inventory and what is the best way to minimize losses and maximize returns for Freddie Mac.”

A Fannie Mae spokesperson was more direct in explaining that the current REO inventory at Fannie Mae is not ideal for bulk sales. “Declining REO volumes and lack of geographical concentration have diminished the need for bulk REO sales as a disposition channel,” Fannie Mae’s spokesperson said.

About 95 percent of Freddie Mac’s REOs are “sold through traditional channels with agents and brokers,” Freddie Mac’s spokesperson said. However, he explained that when a property has been on the market for a while, Freddie Mac will begin to “look for other disposition methods.”

One of those “other disposition methods” is the online real estate auction.

Like Freddie Mac, “Fannie Mae uses REO Auctions to market and sell some of our more challenging properties that appeal predominately to investor purchasers,” stated the spokesperson for Fannie Mae.

Exchanging Tracks

A recovering housing market with declining REO inventory, rising prices, and rising demand makes individual REO sales a more attractive disposition strategy. With fewer REO properties, there is not as much opportunity currently to pool properties based on geography. At the same time, online auctions simplify and often expedite the sales process with the potential to deliver better returns.

“In the past, many servicers offered REO assets within a pool structure based upon geographic location, condition, asset-type, etc. With a decline in supply and an increase in demand, the auction process has been proven to yield higher returns versus a traditional bulk/pool offering,” said Shawn Miller, director of business development at Hudson & Marshall.

“Offering assets on an individual basis versus a pool structure is proven to yield higher returns within an auction environment,” Miller said.

REO Sales Fueled by Auctions

Just as the market has changed over the past several years, the face of real estate auctions has also changed drastically, namely in that many auctions are not always taking place face-to-face.

Five or six years ago, it was common for auction companies to gather a couple hundred people in an auditorium over a weekend and sell a couple hundred REO properties—largely to investors—in live auction, according to Rick Sharga, chief marketing officer at Ten-X, formerly Auction.com.

Auction.com debuted its online real estate auction in 2008, and today many properties are sold through an e-Bay style auction with the entire transaction taking place online, according to Sharga.

“REO Auctions, especially online auctions, provide Fannie Mae with a platform to showcase our properties in front of a larger audience. The more competitive the auction, the better the outcome for Fannie Mae and the taxpayer,” Fannie Mae’s spokesperson told us.

In part, this is due to the fact that online auctions draw multiple offers and reach buyers across the globe. Sharga said Ten-X has had buyers from more than 100 countries bid on properties on its platform. About 50 percent of properties sold through Ten-X sell to buyers outside the state where the property is located. Ten-X had bidders from more than 100 properties bidding on its platform in the past year, according to Sharga.

“At least in theory, when doing an auction, you’re always going to get the best market price,” Sharga explained. “With multiple people bidding on the same property, you’re going to get the best available price, the price the market would really bare.”

Another benefit is that there is “date certainty” for the sale, both Sharga and Miller explained. There is no question about when the property will go to sale.

“If the auction is set for Tuesday, that’s when it will go for sale,” Sharga said. “Negotiation takes place live, in real time, online,” and 98 percent of the time the winning bid closes the deal.

Keeping the Door Open to Investors

With investors playing a major role in the REO market, it is important to note how any change in REO disposition might impact availability to investor buyers. Nonprofits aimed at helping communities and diminishing neighborhood blight are another important part of the REO market.

According to Fannie Mae’s spokesperson, “REO Auctions do not limit our ability to work with nonprofits or investor buyers on bulk sales. In fact, Fannie Mae has run both programs simultaneously for many years. While the number of investor bulk sales have diminished significantly over the last year, we continue to work closely with non-profits in a number of targeted areas.”

Of course, auction companies also understand the importance of working closely with investors in the REO market.

“Hudson & Marshall has a dedicated Investor Relations team which works with local, regional and national investor buyers to streamline the process from due diligence to closing,” Miller said.

Individual Buyers on Board

While investors have purchased large volumes of REOs since the foreclosure crisis, individual buyers also play a role in the REO market, and auction companies market to them as well.

“Our strategies leverage multiple marketing channels, including the retail residential brokerage model, to ensure that the seller’s assets have been exposed to all viable buyer demographics,” Miller said.

Ten-X has found success in partnering with agents and brokers to bring REOs to market.

In fact, Ten-X launched a short-term pilot program called Auction.com Select, which was aimed at allowing agents to bid on properties for their clients. The pilot offered a few hundred REO properties and experienced 100 percent sell through rate with 88 percent of the properties selling in three weeks at 96 percent of their list prices. Furthermore, two-thirds of the homes sold to traditional buyers and not investors.

“This is remarkable because historically, these types of properties sold at auction to investors,” Sharga explained.

Full Speed Ahead 

As the REO market continues to evolve, with auctions playing a bigger role, agents have opportunities to work alongside auctions and profit by aiding their clients in the auction process.

“Over the past couple years there has been more of a movement to working with auction companies for REOs, by themselves and alongside agents,” Sharga said.

Bank of America in particular offers a Dual Path program aimed at combining the efforts of agents and auction companies in REO sales. Often, an agent is assigned a property and is tasked with listing it on MLS and with an auction company. The auction company can make that property available to buyers across the globe, while the agent can leverage his or her local market expertise to stage the property, host open houses, and market the home to local owner-occupants.

Sharga said the dual path approach works well because “both entities are doing what they do best.”

Miller explained that Hudson & Marshall also often collaborates with real estate agents, and the outcomes are favorable. “A majority of our properties have engaged a listing agent for the entire duration of the auction process as well as compensation to participating selling brokers,” Miller said. “This is a win-win for all involved as it provides an additional marketing channel for the property, local buyers can visit the property on-site, the listing broker can leverage the auction process, and we can all work together to achieve the seller’s goals.”

No Relief for Tight Housing Supply Quite Yet

If those in the industry were hoping that theNational Association of Realtors’ November 2016 Existing-Home Sales report would bring good news as far as housing inventory, it did not happen.

NAR reported that the number of existing-homes for sale fell over-the-month in November by 8 percent down to 1.85 million. Over-the-year, inventory is down by 9.3 percent (from 2.04 million in November 2015), and has declined for 18 consecutive months.

Not only that, but unsold inventory declined from a 4.3 month supply in October down to a 4.0 month supply in November, according to NAR.

“Existing housing supply at the beginning of the year was inadequate and is now even worse heading into 2017,” NAR Chief Economist Lawrence Yun said. “Rental units are also seeing this shortage. As a result, both home prices and rents continue to far outstrip incomes in much of the country.”

Realtor.com Chief Economist Jonathan Smoke stated, “Consumers should be aware that the overall supply of homes for sale remains very low, and pent up demand is leading to large jumps in price acceleration. The number of homes for sale is down 11 percent compared to a year ago, and median prices are up 7 percent. On top of that, December is tracking to an even bigger decline.”

Smoke continued, “Buyers planning to purchase in 2017 will contend with even more limited supply, while they also race against the prospect of mortgage rates reaching levels we have not seen since 2010. The good news is that rates are rising because of continued economic growth, and many households should see income gains in 2017. However, those gains are not likely to be higher than the combined effect of higher prices and higher mortgage rates.”

The news of the even shorter supply of housing did not dampen the headline numbers for existing-home sales, which in November had their best month in nearly 10 years. Existing homes sold at an annual pace of 5.61 million in November, the highest rate since they sold at a 5.79 million clip in February 2007. November’s pace was also an increase of more than 15 percent from the previous November, when existing homes sold at an annual rate of 4.86 million.

Further, distressed sales including foreclosures and short sales rose to 6 percent in November from the month prior, but this was still a decrease from 9 percent a year ago. Additionally, NAR found that foreclosures sold for an average discount of 17 percent below market value in November, while short sales were discounted 16 percent.

“The healthiest job market since the Great Recession and the anticipation of some buyers to close on a home before mortgage rates accurately rose from their historically low level have combined to drive sales higher in recent months,” Yun said. “Furthermore, it’s no coincidence that home shoppers in the Northeast—where price growth has been tame all year—had the most success last month.”

Non-banks May Quickly Be Dominating the Servicing Industry

It seems the torch is being passing in the U.S. mortgage servicing industry as portfolios among smaller companies quickly increase, according to Fitch’s latest quarterly U.S. RMBS Servicer Handbook and US RMBS Servicer Roundtable Takeaways.

Fitch says that portfolios among special servicers with loan counts less than 400,000 are increasing quicker than the servicing industry as a whole with an average year-over-year growth of almost 20 percent. This is compared to the weighted average portfolio growth for all Fitch-rated servicers (approximately 2 percent).

“While special servicers continue to maintain robust capabilities in handling distressed loans, many have expanded into performing servicing in order offset portfolio runoff. Primary serviced loans increased by 52 percent on average across their portfolios,” adds the report. “This trend is in line with takeaways from Fitch’s recent U.S. RMBS Servicer Roundtable event, in which many servicing executives noted that non-bank special servicers could seek out new origination volume to offset declining delinquent loan volume.”

Further, Fitch reports that according to industry experts during a recent U.S. RMBS servicer roundtable responsibility for servicing loans will rest more with non-banks, with the overwhelming consensus of 89 percent of panelists agreeing that nonbank servicers will continue to take market share from banks in 2017.

“Whereas MSR sales and subservicing had in the past driven servicing growth among non-banks, future activity will be driven by new loan origination activity by competitive non-banks who also service loans,” says Managing Director Roelof Slump. “Servicing sales from banks who want to reduce the associated regulatory impact on capital will also drive growth.”

Increased regulation has become a significant operational burden across the industry and has driven servicing costs higher, according to Fitch, but the report adds that most roundtable attendees believe that regulation has led to improved servicing quality.

“Regulation has made servicing transfers cleaner due to better data quality on in-flight loan modifications and loss mitigation efforts already undertaken by the prior servicer,” says Slump.