Fannie & Freddie Updates From The Conference

By rchrisman@robchrisman.com

After a young couple brought their new baby home, the wife suggested that her husband should try his hand at changing diapers.

"I'm busy," he said, "I'll do the next one."

The next time came around and she asked again. The husband looked puzzled. "Oh! I didn't mean the next diaper. I meant the next baby."

The annual mortgage conference is in full swing, and I am sure that reports of "10 vendors for every 1 residential lender" are exaggerated. Well, maybe not. That aside, for tens of thousands of years, homo sapiens involved in residential lending have used acronyms. What would we do without the ability to abbreviate something? Throw in regulatory reform and its alphabet soup of acronyms and terms, and our heads are swimming. Occasionally I am asked about a list of acronyms of frequently used terms. Here's the latest: Financial Services Glossary. And plural acronyms don't have apostrophes, so it is "LOs" not "LO's"!

Residential folks attending the MBA's conference in are talking about the validation service powered by Desktop Underwriter (DU). The introduction of the Fannie Mae's DU validation service announced earlier this week will redefine how lenders verify income, assets and employment of borrowers. And if the level of conversation at this year's MBA Annual Convention & Expo is any indicator, the ripple effect of these new standards - which are expected to result in fewer borrower documentation requirements and reduce underwriting times - will reverberate throughout the industry for quite some time. Along with this, the updates have the potential to enhance credit risk assessment for lenders, while adding certainty to the information lenders are submitting to DU.

 The changes result from a newly announced data and technology integration with FormFree and The Work Number, an Equifax database that enables instant verification of employment and income (VOE/VOI) via payroll record information from thousands of employers nationwide. Equifax also provides a manual verification solution and a 4506-T tax transcript service that are also being included in Fannie Mae's new service. The FormFree AccountChek integration will support the automation of verification of assets (VOA).

 Fannie Mae has released its timeline for the DU validation service and announced Oct. 24 for income validation and Dec. 10 for the employment and asset validation. This push to add certainty around the data input into DU10 is already driving some leading companies in our industry to collaborate in establishing a "gold standard," if you will, for verifications as part of Desktop Underwriter's validation service.

 Also in conjunction with MBA Annual, following the announcement that its employment and income verifications tools will be integrated with Fannie Mae's Desktop Underwriter DU Validation Service, Equifax also announced that it is working with automated mortgage transaction technology provider, Roostify, to incorporate instant employment and income verification data into Roostify's loan decisioning platform; and that leading income calculation solution provider, LoanBeam, will incorporate Equifax' 4506-T IRS tax transcript service from Equifax tool into its solution by the end of 2016. To further streamline the origination process for borrowers and lenders alike, Equifax also announced from MBA Annual that it will begin a strategic alliance with FormFree's AccountChek web-based platform to provide verification of assets alongside employment and income verification data. This, in effect, will provide lenders with the ability to order, analyze and certify a borrower's financial data within minutes via a secure, web-based platform. Equifax also announced a partnership with SmartZip to enable lenders to better score their databases or to source a list of homeowners likely to sell or move within the next six months. With this level of insight, lenders can further extend the value of their marketing and sales efforts.

 Based on the news coming out, a big theme of this year's annual MBA meeting is automation around the mortgage decisioning and underwriting process. It seems that Equifax, FormFree, and a few other innovative companies have been quick to recognize this and are leveraging some of its unique data sets through products like The Work Number, to bring it to market. That is good news for the industry and consumers.

 Freddie Mac announced a series of enhancements to its 1-year old Loan Advisor Suite designed to cut mortgage origination costs for lenders. These enhancements, which will be available in spring 2017, will reduce costs for lenders and provide greater certainty and valuable insights throughout the loan production process. What's on tap? A no-cost automated appraisal alternative, automated borrower income verification, automated borrower asset verification, and automated assessment of borrowers without credit scores. Freddie Mac said that it also expects that Loan Advisor Suite will "broadly offer" collateral representation and warranty relief in early 2017, which is intended to "significantly relieve" mortgage lenders from the risk of loan repurchase due to appraisal defects.

 Fannie Mae said it has launched a program to streamline its underwriting on mortgages for some borrowers that uses electronic data instead of physical proof of their income, assets and employment. The "Day 1 Certainty" program would also offer relief from representation and warranty for the appraised value of a home and a waiver of its property inspection requirement for many mortgage refinancings. These program features will be available on Dec. 10, Fannie Mae said.

 Certainly "electronic mortgages" are in the future, and a big step recently happened. Last week, the Warehouse Lending group of Santander Bank, NA, funded the first eNote in its warehouse program. Reports indicate that everything went flawlessly, and the note went from closing table to purchase by Fannie Mae in two days.

 In that deal, "radius financial group inc., closed and funded of one of the industry's first 'eClosings.'" The loan was originated, disclosed and closed 100% digitally.

 "When working with radius, consumers can now complete an entirely digitized mortgage. A borrower will initiate the process electronically through the digital application and digital consumer disclosures, and radius then electronically underwrites and approves the loan. Until now, that was the end of the 'electronic' part of the process...radius' new eClosing replaces the current archaic process that requires a borrower to hand sign hundreds of pages. Now, radius will electronically generate the package and securely send it to the closing partner. The consumer will receive an electronic review copy so they can address any questions or concerns in advance.

 "Then the eNotary will launch the DigiSign software at the closing to begin the streamlined process. Consumers can sign the digital pad once, then tap the screen each time they want to add their signature to the official document. The notary also signs once, and his or her signature and seal are automatically noted throughout the document and in the log book. Altogether the eClosing will eliminate hundreds of labor-intensive signatures.

 "With an eClosing, the note/collateral was automatically registered with MERS and then securely sent to partner DocMagic's eVault, where the permanent electronic copy of the asset will be stored, where it can be securely accessed and shared as need. Within minutes rather than days, Fannie Mae had the full collateral package."

 Looking back to loans closed "the old-fashioned way," plenty of borrowers have great (3.75% and below) 30-year mortgages, and a certain percentage have 15-year loans in the 2% range? But if a borrower needs cash, who the heck wants to give up those rates by refinancing? Some do, but most opt for a 2^nd mortgage, or line of credit. And there are certainly older lines that adjust after a certain period. And this has some wondering if the resetting of millions of home equity lines of credit (HELOCs) over the next couple of years result in a wave of defaults? Or will it vanish - remember the feared "tidal wave of foreclosures" that was going to swamp the market but disappeared?

 Just like the "excess properties" were soaked up by buyers and investors due to optimism about the market, what happens with the HELOC situation is based on continued appreciation and low unemployment. But although it is mostly hinged on the overall health of the economy, a new report from TD Bank shows that the threat of big wave of HELOC defaults is real.

 After surveying 800 borrowers with HELOCs (is that statistically significant?), TD Bank produced a "HELOC Reset Measure" that calculates about 43% of U.S. homeowners with HELOCs will be affected when these loans reset. And of these homeowners, about 23% are unprepared for the resulting increases in their monthly payments. But 23% of 43% isn't an overwhelming number (about 12%), and obviously those without HELOCs aren't a concern. But for those who do not have a plan for handling the increase, about 60% say they will not reach out to their servicers or lenders for help.

 The survey shows that some HELOC borrowers don't even know the reset date (often after the 10-year period of interest-only payments) described in their contracts despite communications from lenders. TD tells us that only 19% of respondents understand that a HELOC reset will increase their monthly payments, and more than half (53%) don't know the impact the reset will have on their monthly payments.

 With many HELOCs, when the draw period ends borrowers are required to pay principal and interest, which may increase their monthly payments. But consumers in North America lack an understanding of the basic features and benefits of home equity loan products, according to a new report by Accenture, titled "Unlocking home equity lending through a digitally empowered consumer." Fifty-nine percent did not know that that home equity loans can be used to refinance debt, and nearly half (46 percent) did not know they can be used for non-home purposes.

 Well over half of the respondents were unfamiliar with various options for accessing the funds - 79 percent did not know they can be accessed via credit card, and 59 percent did not know they can be accessed online or via mobile phone. Nearly four in ten (39 percent) did not know they can borrow to the limit of the loan, and 28 percent didn't expect to pay closing costs. 

 This lack of awareness is particularly significant at a time when consumers are tapping into the steadily growing equity in their homes at a rate not seen since the credit crisis nearly a decade ago. Per the Federal Reserve, Americans have more than $13 trillion in equity in their homes, more than double the amount in 2011 of which an estimated $4.5 trillion can potentially be accessed. In the first quarter of 2016, home equity installment loans increased 23.5% year over year (an 8-year high) and home equity lines of credit were up 10%, per Equifax.

 Signaling renewed consumer confidence in the future, the survey also found that borrowers increasingly view home equity loans as a means of making home improvements, less so as a potential source of cash for unseen challenges.

 Respondents who anticipate applying for a home equity loan in the next two years expect to use the funds for home improvements (61 percent), to pay off consumer debt (24 percent), and to invest (22 percent). In comparison, respondents who applied for home equity loans in the past two years used the funds for home improvements (43 percent), paying off consumer debt (31 percent) and to invest (18 percent).

 Accenture's report also found that most customers - 60 percent - who applied for a home equity loan in the past two years did so at their bank branch. However, the use of digital channels will become increasingly important. More than one-fourth (26 percent) of borrowers applied online, and nearly all (93 percent) of those who used a digital capability during the home equity loan process were highly satisfied. Additionally, 81 percent of home equity borrowers conducted research via digital and peer-to-peer sites, representing an opportunity for lenders that become digital leaders.

 The bond market pales in comparison to all of this. Nonetheless, folks watch it, and yesterday rates edged slightly higher on no real news. Put another way, there were more sellers than buyers. And the focus was, and probably will be today, more on the convention than on bond market movements. Monday the 10-year ended the day at 1.76%, and both the 5-year and agency MBS worsened a tick or two.

 Today for excitement we'll have a lot of 2^nd tier numbers: the October Philadelphia Fed Non-manufacturing, August Case-Shiller 20-city Index, August FHFA Housing Price Index, and October Consumer Confidence. The 10-year is yielding 1.78% to start the day and agency MBS prices are a shade worse than Monday afternoon.