USDA Changes and Ag Land Value's Impact on Lenders

By rchrisman@robchrisman.com

 

"How's the diet going?"

"Not good. I had eggs for breakfast."

"Scrambled?"

"No, Cadbury's."

 

Wow! Americans have regained most of the wealth lost when the real estate bubble burst. Homeowners' equity has more or less doubled since the lows of 2009. Since 2013, real estate has outperformed the S&P 500 by 16 percentage points. Always good to have a diversified portfolio, right? Let's hope the Millennials are participating in this to some degree...

In other company-specific news, ABA Community Bank Mortgage LLC, a subsidiary of the American Bankers Association, has selected BOK Financial Correspondent Lending as its newest secondary market investor. "With this selection, ABA Community Bank Mortgage LLC owner banks can sell agency-eligible and jumbo loans on a servicing-released basis to BOK Financial and access their full line of fixed rate, ARM and affordable lending products.  In addition, BOK Financial represents and warrants contractually with each client that they will not cross sell their borrowers any bank products and will refer their mortgage customers back to them in the event they contact BOK and wish to engage in a new transaction."

 Plenty of companies offer USDA rural home products to their clients. Given that in this industry nothing ever remains constant for long...

 The USDA has issued an 80-page document with 72 "clarifications", 48 "new" rules and one they deleted for a total of 121 changes. Karen Deis writes, "www.MortgageCurrentcy.com's USDA expert spent almost 25 hours coming up with the list. We have broken it down into bullet points to make it easier to understand, including the "interpretation" of how it will affect borrower qualifications and underwriting of the loan. These changes went into effect on March 9 so if LOs have any files in pre-approval status or have not yet been submitted, we recommend that you make sure the borrowers still qualify. The clarifications are exactly what lenders needed-easier to understand. But they added 48 more rules to the latest version of the handbook. 

 "Here are a couple of examples of just a few of the more significant ones. New - Discount points may be financed for ALL applications (Used to be just for low-income borrowers). New - Military applicants (still in service) are no longer required to provide evidence of discharge within 1 year. They only need to sign and "intent to occupy" form. New - Lump sum payments/deferred payments from Social Security are EXCLUDED from annual income calculations. New - Only two trade lines are required to validate a credit score (Used to be three). Clarification - Business losses are considered "zero" for annual income qualifications. Clarification - Applicant is ineligible for loan is outstanding federal judgments (other than IRS). Deleted - The requirement to recalculate a credit card payment that has been used to charge their application fee has been removed.  And 114 more!

 "A new security role of "Lender Agent" that was created by USDA Rural Development for participating lenders. Once designated as a "Lender Agent" - a User will be authorized to establish applications, order new and re-issue existing credit reports and request preliminary underwriting recommendations on behalf of an approved lender. Although this is a baby-step in the right direction, one glaring difference between FHA & VA loans, with those administered by the USDA, is that RHS-guaranteed loans must ultimately be approved by USDA staff. Under HUD/FHA's Lender Insurance Program (which currently accounts for over 70% of its single-family business), approved Direct Endorsement (DE) lenders can process, underwrite, close and insure FHA loan transactions  - all without prior review by HUD staff.

 In accordance with VA's imposed additional QM requirements for IRRRL transactions, M&T has updated its VA QM requirements, as reflected on the VA IRRRL Product Pages. Effective    immediately for pipeline and new applications, and required compliance no than Wednesday March 9^th. In regard to USDA loans, effective immediately, loans closed with a lender credit or seller concession must include an itemization of the specific fees paid by the credit or concession. Each item must be listed separately, include a description of the fee and the amount paid. Just listing the fee line is not sufficient.

 ditech has begun purchasing United States Department of Agricultural (USDA) Section 502 Guaranteed Rural Housing loans (GRH). Only delegated Correspondent clients who have been approved as lenders by USDA and ditech are eligible to participate in this program.

 Effective immediately, M&T Bank Form 2161 - USDA Addendum to Application is no longer required.  The borrowers are required to list all Household Members on page 3 of the USDA Form RD 3555-21, and their signature on page 2 of RD3555-21 is sufficient acknowledgment that the financial information presented on the form and application is accurate. 

 Plaza Home Mortgage now supports the new GUS Lender Agent security role announced by USDA on Dec. 8, 2015. Brokers who become a Lender Agent will have access to create applications, order new or reissue existing credit reports and complete preliminary GUS submissions. To become a Lender Agent with Plaza, register to gain access to GUS by following these instructions. 

 While I am droning on about rural loans, values in those areas are changing. We've seen a rapid rise of the value of agricultural land to record levels over the past few years but those values have not only begun to flatten, but have already decreased in many cases. Meanwhile, with commodity prices having fallen between 40% and 50% since hitting their peak in 2013, the income that farmers rely on to repay agricultural loans has declined and is expected to fall even further. That is one reason why regulators are increasing their focus here as community banks continue to take action.

 Rural community banks in particular have significant exposure to agricultural loans. Of the 5,412 community banks with assets under $10 billion, as of the end of Q2, about 1,889 had a proportion of agricultural loans well above the national average of 17.4%, according to a recent Fed study. The study also found the median assets of these banks was $104 million, with the largest number located in IA, followed by IL, KS, NE and MN.

 The research also found the value of farmland (which serves as collateral for the majority of the loans held by community banks with high agricultural concentrations), soared between 2004 and 2014 - averaging YOY gains of 8.4% during that time. In fact, in real terms, land for crops in the Midwest became more expensive during that period than at any other point within the past 50 years, including the period before the Farm Crisis in the 1980s. If history is an indication of what declining values of commodities could mean for banks, community banks may need to take further action and regulators will certainly be taking a closer look on the next exam cycle.

 Steve Brown from PCBB notes that, "The research points out that like the recent escalation in the value of agricultural land, a similar rise occurred in the mid-to-late 1970s. Back then, such properties saw strong YOY growth that occasionally climbed above 10%. But when the value of that same land dropped 27% (40% in real terms) by 1987, the fallout for community banks was significant. Between 1982 and 1988, roughly 200 community banks with significant agricultural exposure even failed.

 "Still, on the whole, the researchers conclude that there would not be a material change to the capitalization of the majority of banks specializing in agricultural lending even after all of this and only a subset of banks would experience significant losses. Expect regulators to continue to monitor this closely so community bankers should be prepared."

 

Upcoming events?

 

The California MBA is conducting a March 17^th webinar, "Life After MSA's".Hear from expert observers what others are doing, and find new strategies that can strengthen your brand. Additionally, hear about a brand-new technology just days away from launch. Free registration is available now.

 Check out Sierra Pacific Mortgage's Market Power Series hosted by Kelli Brookman.   On Friday, March 18th. from 11-12 PST Brian Traichel will expand your thoughts regarding LinkedIn. The class will show how to find leads, expand your network and think about using LinkedIn as a lead generation tool rather than just a recruiting tool. Whether you are a social media beginner, intermediate or expert this informational webinar offers valuable resources and tools to help you navigate and build relationship using LinkedIn as a functional day-to-day sales strategy platform. This session is open to all and you can save your seat by registering here.

 FHA underwriting and appraisal review trainings are available for registration now. Space is limited and based on first come first serve. FHA Underwriting, March 23^rd on-site at HUD Detroit Field Office. Register here. FHA Underwriting, April 6^th on-site in San Antonio. Register here. FHA Appraisals, April 7^th on-site in San Antonio. Register here. FHA Underwriting, April 12^th on-site in Oklahoma City. Register here. FHA Appraisals, April 13^th on-site in Oklahoma City. Register here.

 Beginning March 22^nd, MBA will be providing a 2-part webinar series on Warehouse Lending. For details and registration information, click here.

 Even though MBS traders don't really use the 10-year T-note as an exact proxy for mortgage rates, it is still easy to do. And we're up near 2.00% again. Last week began well but then prices sank and rates moved higher after Tuesday. Most of the news came from overseas: the European Central Bank gave investors plenty to digest on Thursday when it outdid markets' expectations for further monetary stimulus. Next Wednesday's FOMC rate decision is virtually guaranteed to be no change to Fed funds, but investors will eye the accompanying statement closely for clues regarding the future path of policy normalization.

 For news this week there's a decent chunk - whether or not it outweighs whatever happens in Europe, China, or the price of oil remains to be seen. We have zip today. Tuesday includes February Retail Sales, February Producer Price Index, March Empire Manufacturing, and the March NAHB Housing Market Index. Wednesday, after the MBA's application numbers, we'll have February CPI, February Housing Starts and Building Permits, February Industrial Production and Capacity Utilization, and the March FOMC Rate Decision - look for no change. Thursday has Initial Jobless Claims, March Philadelphia Fed, and the Q4 Current Account Balance - whatever that is. Friday we wind down with the March Michigan Sentiment number.

 We wrapped up last week with the 10-year sitting at 1.98%.