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| CAMB Testimony |
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Prepared Testimony of
Ed Smith, Jr., Chair, Government Affairs Committee
Vice President, Board of Directors
California Association of Mortgage Brokers
Good afternoon Chairman Filner and members of the Committee on Veterans Affairs, I am Ed Smith, Jr., Government Affairs Committee Chair and Vice President of the Board of Directors of the California Association of Mortgage Brokers ("CAMB"). Thank you for inviting me to testify today before the Committee and to discuss today's topic, "Effects of Sub-Prime Foreclosures on VA and Veterans' Mortgages". In particular, we appreciate the opportunity to address: (1) CAMB's efforts to help all homeowners, including veterans, avoid foreclosure; (2) the difficulties CAMB has encountered in assisting consumers particularly during the process of loan modification; and, (3) CAMB's recommendations to assist working families trying to remain in their home and opportunities for the future.
Since its inception in 1990, the California Association of Mortgage Brokers has promoted the highest standards of professional and ethical conduct, among which are expert knowledge, accountability, fair dealing, and service to the consumer and our community. The Association provides education, legislative and regulatory representation, and public relations for its 4,000 plus membership of mortgage brokers and affiliated service providers across California, while serving as a forum for the development of common business interests across the industry. CAMB has led the mortgage industry by being the first organization to define predatory lending, as well as creating a best practices handbook that has set the standard for best practices in the industry.
CAMB has also raised the bar for consumer protection by creating the Consumer Protection and Education Worksheet, a document which allows both borrower and broker to sign at the bottom to affirm that they have been educated and fully understand all terms of their loan. CAMB has a proactive legislative agenda which recently passed into law two CAMB sponsored bills, AB 790 and 2890, which outlaw the misrepresentation of training and professional certifications by loan originators in the state of California. In 2007, CAMB supported legislation at the state level intended to achieve financial literacy education at an early age thereby raising consumer awareness, and preventing future abusive lending practices. Also, CAMB supported legislation that aimed to protect California consumer's engaged in mortgage loan transactions from identity theft and various abusive lending practices by supporting efforts banning the unauthorized sale of a consumer's personal information. At the federal level, CAMB and its national partner, the National Association of Mortgage Brokers have taken positions of support for legislation designed to ease the burden currently being placed on homeowners, especially those who may be seniors and on limited income, many of whom are veterans. Likewise, CAMB has been at the forefront on federal legislative issues such as anti-predatory lending practices and FHA modernization efforts.
As you can see, CAMB has aggressively pushed for best practices in the industry and is dedicated to being a solution to curb predatory lending practices, standardize the industry from within, and provide the best products available to our customers, including alternative loan products.
Roughly one quarter of the nation's population - approximately 70 million people - are potentially eligible for benefits and services through the Veteran's Administration. The VA loan program helps eligible veterans gain affordable access to the credit they need to purchase, refinance, and make improvements to their home. In many high cost states like California, many veterans ended up selecting sub-prime loans because their financial considerations limited them to no down payment programs, which is a significant benefit of the VA loan program. However, in states like California where the median sales price is well over $500,000, VA loans that are capped at $417,000 were not able to reach high enough to be helpful to veterans seeking homeownership. For example, a veteran who attempted to buy a median-price home in California in August of 2007 and obtaining a VA loan of $417,000 would have had to come up with an additional $171,970 in cash for a down payment, or in secondary financing to 100% of the purchase price of $588,970 (Median sale price as of 08/2007 per Fleissig).
Even though there are many small fees that veterans are not required to pay, VA loans can and do have high closing costs relative to conventional loans. The combination of home sale prices far in excess of the VA guarantee limit and high closing costs have essentially put veterans into the arms of sub-prime lenders, with all of the difficulties attendant to that segment of the mortgage market.
Currently, we are witnessing the collapse of the mortgage market that has provided no-down-payment financing for veterans for the past several years. Lenders who brought alternative financing to consumers have, in many cases, shut their doors and have gone out of business. Until that segment of the industry is restored - and there are powerful currents that make that impossible - or the VA loan program is adapted to suit today's home financing environment, our armed forces returning home may find themselves locked out of homeownership, at least in states like California.
An additional concern to CAMB and our national partner, the National Association of Mortgage Brokers are the elderly veterans who may be struggling with their current mortgage payments. As a result, the National Association of Mortgage Brokers (NAMB) supports legislation authorizing the Secretary of Veterans Affairs to institute a reverse mortgage program, through which qualified veterans may obtain a reverse mortgage loan guaranteed by the Veterans Administration.
VA guaranteed reverse mortgages will offer veterans more cash out than the current Federal Housing Administration reverse mortgage loan program, and will effectively save veterans approximately 0.5% in interest rate. By expanding the VA Loan program to include reverse mortgages will allow more veterans to remain in their homes longer without having to take on additional monthly bills or face the prospect of losing their home.
With the rate of American homeownership at an all time high, reverse mortgages have become a mainstream and highly successful financial planning tool for elderly homeowners. In the fiscal year ending September 30, 2006, the Federal Housing Administration insured 76,351 reverse mortgage loans. That number is an increase from 43,131 the previous year.
Elderly veterans represent a large and growing market for reverse mortgages. Elderly veterans should be offered a product which allows them to cash-out the equity that they have built up in their homes over 20, 30 or 40 years so that they may continue to meet the demands of increasing health, housing, and sustenance costs, without the risk of losing their home.
A Veterans Administration reverse mortgage loan program would provide elderly veteran homeowners with:
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- A higher available loan limit than the FHA reverse mortgage loan program which means more available cash to the veteran
- An effective savings of roughly 0.5% in interest rate, because monthly mortgage insurance premiums are not required with VA guaranteed loans
- Greater access to reverse mortgage loans, since the VA does not impose burdensome audit and net worth requirements on originators wishing to participate in the program
- An opportunity to remain in their homes longer, without incurring additional monthly expenses
- An opportunity to choose in-home care as opposed to the often more costly option of long-term care at a VA Hospital or other facility and,
- Zero chance of default
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In May 2007, the Veteran Home Equity Conversion Mortgage Act of 2007 (H.R. 2475) was introduced by Representative Michael Michaud (D-ME) and co-sponsored by Representative Ginny Brown-Waite (R-FL). H.R. 2475 would authorize the Veterans Administration to guarantee reverse mortgages for elderly veteran homeowners. H.R. 2475 was referred to the House Financial Services Committee and the House Veterans' Affairs Committee.
Our Association has pledged to work with the Veterans Administration to ensure that a reverse mortgage loan program instituted by the VA adequately meets the needs of elderly veteran homeowners and works to further the mission of the Veterans Administration. We will also continue to advocate for participation by veterans and mortgage originators in all Veterans Administration loan programs.
Due to the great uncertainty in today's housing market and, recent public awareness of the potential pitfalls in the complex mortgage market, CAMB members have been reaching out to community leaders in an effort to provide assistance to homeowners who are struggling to remain in their homes. CAMB believes that the greatest method for preventing mortgage fraud and abusive lending practices is to create a well-informed consumer. With this goal in mind, CAMB has created the Preserving Home Ownership Initiative (PHOI) in order to provide free, community based forums that allow existing mortgage consumers a one-on-one counseling session with a CAMB member broker that can provide consumer education about the individual terms, rates, and other important data contained within their individual mortgage loan note.
Specifically, the Preserving Home Ownership Initiative is a program initiated by the Community Services Committee of CAMB that is designed to help educate consumers directly in the community by holding educational events where CAMB member brokers interact directly with current homeowners in helping them understand their particular mortgage through one-on-one sessions. The program will also feature general information regarding different loan programs and maintaining credit.
The Preserving Home Ownership Initiative targets all homeowners, including service members, who lack the understanding of their current loan program or those homeowners who have been misinformed or have been misled about their current loan program. With the diversity of mortgage products on the market, especially nontraditional mortgage products such as payment option ARMs, many consumers, as seen in numerous press reports, are confused or have been mislead about their current loan program. This program is designed to combat those threats to maintaining homeownership, an issue that must be addressed with same intensity as first-time homeownership.
The community events feature one-on-one sessions with member brokers and consumers to educate them on their current loan program. The events take place at community locations and often in partnership with other community organizations or elected officials. The program is designed to be an educational event for the consumer and not for participating members to generate leads or business. With that in mind, rules of conduct for members will be established and strictly enforced.
The Preserving Home Ownership Initiative was initially piloted in September 2006 in conjunction with Congresswoman Loretta Sanchez's office and the Orange County Chapter of the National Association of Hispanic Real Estate Professionals. Since that initial pilot in Orange County, CAMB has hosted a number of forums throughout 2007 and has plans to hold events well into 2008.
The California Association of Mortgage Brokers (CAMB) places the highest emphasis on professionalism and consumer protection. The financial well-being of Californians seeking to achieve the American Dream of homeownership is our top priority.
For many working families like service members, the purchase or refinance of a home is the most complex transaction they will ever make. The California Association of Mortgage Brokers supports full disclosure of all loan terms and conditions before consumers sign final loan documents. The Association condemns real estate fraud of any kind and supports full prosecution of those who commit fraud.
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| Subprime Loans |
- Subprime loans were created to help borrowers with less than perfect credit, income that cannot be documented by traditional methods, and to provide low or no down payment options enabling the consumer to qualify for a home loan. They generally have a higher interest rate than conventional loans because of the greater risk taken by investors. Given California's high housing prices, these loans have been the only option for some consumers to own a home, especially veterans and active duty members of the armed forces.
- Some higher cost adjustable rate mortgages, interest only and payment option loans are subprime loans. These loans are viable products for some, but they are not appropriate for everyone. They must be fitted properly to the unique characteristics of the borrower and the borrower must understand all terms and conditions, including any future payment fluctuations.
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| What consumers can do |
- Consumers who have subprime loans and are struggling to make their mortgage payments should immediately contact their lender or a broker. It is estimated that 80 percent of foreclosures could be avoided if borrowers seek an alternative solution early before mortgage payments are missed. Most lenders want to work with borrowers so that foreclosure can be avoided.
- Consumers shopping for a home loan should start by discussing their situation and goals with a qualified, experienced mortgage broker who will help them select the mortgage plan that best meets their needs. The Association recommends that borrowers interview several professionals prior to applying for a loan.
- Borrowers should look for the CAMB logo when choosing a broker. CAMB members adhere to a strict Code of Ethics and standards of professional conduct. To ensure borrowers understand how their loan works, the California Association of Mortgage Brokers has created a Consumer Protection and Education Worksheet for its membership. This worksheet provides a detailed, comprehensible roadmap of the loan process, including a consideration of several potential loan options and why one option might be better than another. The consumer signs the worksheet to affirm they have been educated on the various loans available to them and that they understand the terms and conditions of the loan they have chosen. The Broker/Originator signs the worksheet to affirm they have completed the educational process and feel confident that the consumer understands. The worksheet is completed prior to the loan application being submitted to a lender.
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As the mortgage crisis in California and the nation continues, CAMB is ardently pursuing public policy strategies to address the current needs of homeowners as well as, working with policymakers at the state and federal level to ensure that such calamities do not occur in the future. CAMB is in support of necessary reforms designed to protect consumers while ensuring access to a wide range of sound financing options for homebuyers and homeowners in our own State of California and across the Nation. As such, CAMB has developed a series of recommendations for consideration by policymakers at all levels of government as they pursue viable and reasonable solutions to this crisis.
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| CAMB Recommendations |
- Flexible repayment strategies for borrowers facing default and foreclosure: CAMB is urging loan servicers and secondary market investors to work with homeowners who are struggling to make their mortgage payments and facing the terrible prospect of loan default and foreclosure, similar to federal FHA loan mitigation programs
- Declare California a "high cost" state so borrowers can have equal access to federally backed loans: In order for taxpaying California borrowers to have the same access to sound, low-interest, federally backed loans as other Americans, CAMB strongly supports the following regulatory changes:
- CAMB calls upon Congress to declare California a ‘high cost" state (just like Alaska and Hawaii) in order for the conforming loan limit to keep pace with California's median housing price. Housing prices remain at considerably higher levels than the current conforming loan limit of $417,000 which puts homeownership out of reach for many hard working California families. (A policy change that CAMB has called for since 2004).
- FHA (Federal Housing Administration) guidelines must be reformed and updated to increase consumer access to these prudently underwritten, safe, insured home financing products.
- FHA loan limits must mirror conforming loan limits to increase loan opportunities for borrowers with less than perfect credit and/or unique employment circumstances. CAMB believes that the lack of FHA program accessibility was a major determinant in the decision by so many Californians to choose sub-prime loans to achieve homeownership.
- Wall Street must be encouraged to work with lenders to develop lending programs and products that will remain attractive for capital investors and remain accessible to borrowers: Viable, time-tested loan programs that provide borrowers with options to achieve and sustain homeownership must be restored to the mortgage market
- A collaborative effort to ensure high standards of professionalism within the industry while protecting homeownership opportunities for consumers: CAMB is ready to work with and offer its expertise to legislators, regulators and government agencies in a cooperative effort to address the challenges of the current lending crisis.
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Members of the Committee should also be aware that CAMB is currently engaged in a number of initiatives designed to protect consumers and preserve homeownership. CAMB believes strongly that our Association must lead by example to demonstrate to our consumers, regulators and elected officials that we share a common goal to make sure that every borrower who receives a loan has the means and the understanding to repay the mortgage. CAMB remains focused on assisting consumers during this time through consumer information, self-policing the industry, working with regulators at the federal and state levels to provide solutions, and continuing to fight against fraud in all of its forms.
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| Initiatives Include: |
- Helping to design California's strong predatory lending prevention law as well as being the first mortgage broker association in America to provide a clear definition of predatory lending practices as a crucial first step in their elimination
- Producing the CAMB Best Practices Handbook reflecting the highest standards of professional conduct and consumer protection in the mortgage industry, adopted by a number of other states to guide loan originators in their mortgage broker associations
- Creating and distributing CAMB's proprietary Consumer Education and Protection Worksheet giving loan originators and borrowers a comprehensive and custom education about loan programs available and the lending process
- Designing and facilitating the Preserving Home Ownership Initiative community education and consumer protection forums with elected officials, local organizations and industry stakeholders
- Distributing statewide a broadcast Public Service Announcement on alternative loan products with online and toll-free options for consumers to speak with a CAMB expert in their community to receive one-on-one education about their specific loans Providing consumer friendly resources and consumer protections tips on the CAMB Web site so that consumers have an additional opportunity to educate themselves on the importance of understanding the mortgage marketplace
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It is clear that California's and the Nation's home financing infrastructure is experiencing a period of tremendous uncertainty and all stakeholders must work together to protect the American Dream of homeownership. CAMB's number one priority has been and shall remain the consumer. As such, this Association will continue to be a champion for industry professionalism and consumer education and will continue to fight to protect homeownership. CAMB members and mortgage professionals who adhere to a strict code of ethics will continue to call upon our colleagues within the industry to join CAMB in providing safe, viable and reliable pathways to homeownership.
On behalf of the California Association of Mortgage Brokers, thank you for this tremendous opportunity to express our concerns with the current housing climate and to share with you our strategies for preserving homeownership in California and the Nation. I am happy to answer any questions you may have.
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Prepared Testimony of
Ed Smith, Jr., Chair, Government Affairs Committee
Vice President, Board of Directors
California Association of Mortgage Brokers
Good morning Chairwoman Waters and members of the subcommittee, I am Ed Smith, Jr., Government Affairs Committee Chair and Vice President of the Board of Directors of the California Association of Mortgage Brokers ("CAMB"). Thank you for inviting me to testify today on the Federal Housing Administration Modernization legislation, H.R. 1852. In particular, we appreciate the opportunity to address the need to: (1) increase Federal Housing Administration (FHA) loan amounts for high-cost areas, (2) develop risk-based pricing for mortgage insurance on FHA loans, and (3) reform the FHA program to reduce the barriers to mortgage broker participation.
Since its inception in 1990, the California Association of Mortgage Brokers has promoted the highest standards of professional and ethical conduct, among which are expert knowledge, accountability, fair dealing, and service to the consumer and our community. The Association provides education, legislative and regulatory representation, and public relations for its 4,000 plus membership of mortgage brokers and affiliated service providers across California, while serving as a forum for the development of common business interests across the industry. CAMB has led the mortgage industry by being the first organization to define predatory lending, as well as creating a best practices handbook that has set the standard for best practices in the industry.
CAMB has also raised the bar for consumer protection by creating the Consumer Protection and Education Worksheet, a document which allows both borrower and broker to sign at the bottom to affirm that they have been educated and fully understand all terms of their loan. CAMB has a proactive legislative agenda which recently passed into law two CAMB sponsored bills, AB 790 and 2890, which outlaw the misrepresentation of training and professional certifications by loan originators in the state of California. As you can see, CAMB has aggressively pushed for best practices in the industry and is dedicated to being a solution to curb predatory lending practices, standardize the industry from within, and provide the best products available to our customers, including alternative loan products.
The utilization of non-prime mortgage products rose exponentially, especially in high-cost areas such as California, as FHA programs became less and less accessible to the public. CAMB believes that the proposed reforms to the FHA program in H.R. 1852 are critical to expanding homeownership opportunities for prospective first-time, minority, and low to moderate-income homebuyers, and vital to solving the liquidity crisis in the marketplace caused by the recent turmoil in the non-prime marketplace.
CAMB strongly believes the formula used to calculate FHA maximum loan amounts should be revised to make the FHA program accessible to those homebuyers living in high-cost areas. The benefits of the FHA program should belong equally to all taxpayers; especially those residing in high-cost areas that often are most in need of affordable mortgage financing options.
For example, in California, twenty-nine of the fifty-eight counties are currently at the FHA ceiling of $362,790, with another six counties approaching the ceiling when one factors in the latest escalation in home prices. These twenty-nine counties represent approximately eighty-five percent of California's population, many of whom are struggling to become or remain homeowners in an area where the median house price is currently $535,470. California is not alone. High-cost areas exist in many states across the country. Maryland, for example, has five of twenty-four counties currently at the $362,790 FHA maximum with another seven counties within $1,885 of the limit. Again, these counties represent a great majority of the population for Maryland. Additional states that currently feature counties at or approaching the maximum FHA loan limit include Pennsylvania, Connecticut, New York, and New Jersey among others.
Recognizing high-cost areas with regard to FHA loan limits is not new to this legislative body. Congress already recognizes high-cost areas for FHA loan limits in Hawaii, Alaska and various United States Territories. These areas feature an exception that takes their available loan limit to one hundred and fifty percent of the current FHA loan limit.
We must not forget that the FHA program was created by the National Housing Act of 1934 with the intent of increasing homeownership and assisting the home building industry. Since its inception, FHA has insured over 33 million loans and is the largest insurer of mortgages in the world. FHA insured loans are the staple for first-time homebuyers. FHA insured loans are more accommodating to first-time homebuyers than other types of loan programs. The program is designed to incorporate flexibility for debt-ratios, income and credit history items not included in the government sponsored enterprise (i.e., Fannie Mae and Freddie Mac) guidelines.
The ability to match borrower characteristics with an appropriate mortgage insurance premium has been recognized as essential by every private mortgage insurer ("PMI"). PMI companies have established levels of credit quality, loan-to-value and protection coverage to aid in this matching process. They also offer various programs that allow for upfront mortgage insurance premiums, monthly premiums or combinations of both. This program flexibility has enabled lenders to make conventional loans in the private marketplace that either are not allowable under FHA or that present a risk level that is currently unacceptable to FHA.
Unfortunately, where FHA is not available as a viable competitor, PMI premiums are quite expensive. Should FHA decide to enter this market, it will increase competition for these programs and ultimately, drive down costs for borrowers.
For example, many mortgage products that require minimal or no down payment or equity do not use PMI insurance. Rather, these loans are split into two—a first mortgage, which is offered at a lower interest rate, and then a second mortgage offered at a considerably higher interest rate. This "combo" or "80/20" type of mortgage product is commonly offered to borrowers with less than perfect credit. Borrowers who are unable to adequately prove their income also commonly utilize "combo" mortgages. In this market, PMI may not be offered or is offered at a prohibitively high premium. Again, FHA could act as a competitor to drive down costs for these types of products.
PMIs have demonstrated the ability to balance risk with the premiums charged and the FHA program should be afforded the same opportunity. If the risks are assessed appropriately, the premiums charged should ensure that the Mutual Mortgage Insurance Fund ("MMIF") will not be adversely affected. FHA is not required to make a suitable profit or demonstrate market growth to shareholders; therefore, it is likely that FHA can afford to assume even greater risk levels than PMIs can currently absorb. This increased capacity to assume and manage risk will allow FHA to serve even those borrowers who presently do not have PMI available as a choice.
H.R 1852 allows FHA to offer lower premiums to lower credit risk homebuyers, which will have the net effect of reducing the overall default rates at FHA. Recent changes made by HUD such as permitting formerly non-allowable fees to be charged and utilizing Fannie Mae appraisal guidelines have had the effect of modernizing the FHA program. These advances make the FHA program easier to use, which in turn attracts more borrowers who would not otherwise tolerate the red-tape long-associated with origination of FHA loans. Real estate agents, sellers and mortgage companies who have not viewed FHA financing as a viable alternative to the private marketplace would also return to the program, bringing with them suitable borrowers that would make FHA's default rate comparable to that of conventional loans.
This legislation is not intended to be a change to the FHA program that will create losses. Rather, it is designed to avoid losses to the MMIF. The legislation contains needed reforms that will help FHA meet its chartered mandate of increasing homeownership opportunities for first-time, minority and low to moderate-income homebuyers, and which may actually have the side effect of improving the solvency of the MMIF.
All insurance constructs involve assumption of risk. When an insurer can use sound actuarial data and price in a manner that is responsive to trends revealed by such data, the risk is spread over a sufficiently large base to minimize the chance of loss. Because FHA's share of the market is approaching marginal levels, the risks to the program are likely to be greater under the status quo than with the legislation proposed in H.R. 1852.
Lenders and insurers tend to demand a higher proportional return when they enter a riskier market. It has been demonstrated that the return demanded is considerably higher for sub-prime loan products than for prime loans because of the inherent risks presented by the sub-prime market. At the same time, consumer advocates have claimed that fees and rates for many sub-prime borrowers are too high. FHA has the ability to enter into the sub-prime market safely and still offer significant savings to prospective borrowers. The benefits received by expanded FHA entry into the sub-prime market would be particularly useful for first-time, minority and low to moderate-income homebuyers who could receive prime interest rates on their loans by using FHA insurance.
The FHA program also possesses many attributes that are particularly friendly to prospective borrowers who may have less money available for closing costs, temporary income, or a limited credit history. For example, FHA Direct Endorsement Underwriters are given considerable latitude to make loans that they believe should be made, but may not have all of the requisite attributes conventional guidelines require. FHA servicing is far less likely to quickly send a loan to foreclosure and must follow borrower-friendly practices whereas some conventional lenders have been cited for questionable loan servicing practices. FHA loans usually offer fixed interest rates compared to the adjustable rates offered on most sub-prime mortgages.
As discussed earlier, America is built on the concept that competition is healthy for the market. It improves efficiency and quality while offering more competitively-priced products to consumers. Making FHA more competitive will improve the services and products provided by other lenders and insurers in the industry. Consumers will be offered FHA programs that serve a similar purpose but are certainly not identical to conventional programs now available. This healthy level of competition should drive down the cost of programs that serve those with minimal down payments or who need flexible underwriting to obtain home financing.
Borrowers who can afford larger down payments or who have reasonable equity levels do not find the FHA program to be a reasonable alternative to conventional financing. Nearly all FHA borrowers have a loan-to-value ratio in excess of ninety percent. Since 1980, FHA has never served more than fifteen percent of the total housing market but, at times, it insured nearly fifty percent of urban mortgages. Clearly, this legislation will not make the FHA program a threat to the overall mortgage market. At most, H.R. 1852 will help to restore FHA loan product origination to levels of previous years.
Nevertheless, the possibility that FHA could supplant certain conventional loans does exist. Such a result is inevitable if FHA regains market share. However, the conventional loans most likely to be supplanted are those made to borrowers who fall just short of receiving A-grade conventional loans. Many first-time, minority and low to moderate-income homebuyers find themselves in this situation but are forced to turn to the sub-prime market to achieve homeownership. This legislation makes FHA loan products a viable alternative for these prospective borrowers.
CAMB supports the proposed reforms to the FHA program outlined in H.R. 1852, but believes that the FHA program must first be a viable option for prospective borrowers. Regardless of how beneficial a loan product may be, it requires an effective distribution channel to deliver it to the marketplace. Unfortunately, many prospective borrowers are denied the benefits offered by the FHA program because mortgage brokers—the most widely used distribution channel in the mortgage industry—are limited in offering FHA loan products.
According to Wholesale Access, mortgage brokers originated 38.6 percent of all FHA loans for a total of $110 billion in 2003. Mortgage brokers want to further increase origination of FHA loan products for first-time, minority and low to moderate-income homebuyers. However, current financial audit and net worth requirements create a formidable barrier to mortgage broker participation in the FHA program. This barrier makes it difficult for mortgage brokers to offer FHA loan products to those borrowers that could clearly benefit by participating in the FHA program.
CAMB supports increased access to FHA loans so that prospective borrowers who may have blemished or almost non-existent credit histories, or who can afford only minimal down payments, have increased choice of affordable loan products and are not forced by default to the sub-prime loan market. In this spirit, CAMB believes the audit and net worth requirements should be eliminated for mortgage brokers that want to offer FHA loan products to consumers.
First, current FHA requirements impose cost prohibitive and time consuming annual audit and net worth requirements on mortgage brokers that want to originate FHA loans. These requirements place serious impediments in the origination process that functionally bar mortgage brokers from distributing FHA loans to the marketplace, leaving sub-prime loan products as the only other option for many borrowers.
Most small businesses find the cost to produce audited financial statements a significant burden. An audit must meet government accounting standards and only a small percentage of certified public accountants ("CPAs") are qualified to do these audits. Moreover, because many auditors do not find it feasible to audit such small entities to government standards, even qualified CPA firms are reluctant to audit mortgage brokers. Cost is not the only factor. A mortgage broker can also lose valuable time—up to several weeks—preparing for and assisting in the audit. Between the cost of hiring an accountant who meets government auditing standards and is willing to conduct the audit and the hours needed to compile and report the needed data, it is simply impractical for a small business to conduct this type of financial audit.
The net worth requirement for mortgage brokers is also limited to liquid assets because equipment and fixtures depreciate rapidly and loans to officers and goodwill are not permitted assets. To compound this, a broker who greatly exceeds the net worth requirement is forced to keep cash or equivalents of 20% of net worth up to $100,000. There has been no evidence presented by FHA that loans originated by high net worth originators perform better than those with a lower net worth.
Moreover, annual audit and net worth requirements are unnecessary. Originators are already governed by contract agreements with their respective FHA-approved lenders, affording HUD adequate protection against loss. FHA-approved lenders already submit to audits, thereby ensuring that customers are protected and can seek relief from dishonest originators.
In sum, the audit and net worth requirements are prohibitively expensive for a large majority of mortgage brokers and as a direct result, many brokers have been left with little choice but to originate loans other than FHA. As a result, the audit and net worth requirements actually limit the utility and effectiveness of the FHA program and seriously restrict the range of choice available for prospective borrowers who can afford only a minimal down payment. At a minimum, CAMB believes annual bonding requirements offer a better way to ensure the safety and soundness of the FHA program than requiring originators to submit audited financial statements.
A stated objective of the FHA program is to increase origination of FHA loan products and expand homeownership opportunities for first-time, minority, and low to moderate-income families. CAMB believes the solution to increase FHA loan production is simple—allow more avenues, such as mortgage brokers, to offer FHA loan products directly to consumers. As stated previously, mortgage brokers originate the majority of all residential loans and therefore, would provide HUD with the most viable and efficient distribution channel to bring FHA loan products to the marketplace.
Congress must ensure that FHA insured loan programs continue to serve as a permanent backstop for all first-time homebuyer programs. For this reason, we believe that Congress should create the ability for FHA loan limits to be adjusted up to 100% of the median home price, thereby providing a logical loan limit that will benefit both the housing industry and the consumer. Tying the FHA loan limit to the median home price for an individual county, and letting it float with the housing market, allows the FHA loan limits to respond to changes in home prices instead of some esoteric number computed through a complicated formula. In this fashion, the FHA loan limit will reflect a true home market economy. Rather than restrict purchases of new homes through a legislatively mandated ceiling, the FHA loan limit can automatically adjust under current guidelines established for increasing the FHA loan limit on a county-by-county basis.
The proposed changes outlined in H.R. 1852 are needed to the FHA program to meet its chartered mandate, which is to help the underserved and underprivileged obtain the dream of sustainable homeownership. PMI will dominate the low and zero down payment market with little competition among the few players in that industry. The sub-prime mortgage market will fulfill the needs of those unable to obtain PMI insurance. Foreclosure rates could escalate. Minority families and first-time homebuyers may be underserved or even shut out of the housing market entirely. It is possible that FHA will have a pool of loans too small to effectively manage risk. Ultimately, FHA could be removed as a helping hand to those who need it the most. The ripple effect of negative consequences could easily extend to the homebuilding industry and to the general economy as well.
On the other hand, Congress has the opportunity to revitalize the FHA program with this legislation. Borrowers will receive better loan programs at lower interest rates. We strongly urge this committee to support H.R. 1852.
CAMB appreciates the opportunity to offer our views on the FHA program and the legislation before us, H.R. 1852. I am happy to answer any questions.
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Prepared Testimony of
Ed Smith, Jr., Chair, Government Affairs Committee
Vice President, Board of Directors
California Association of Mortgage Brokers
Good morning Chairwoman Waters and members of the Subcommittee, I am Ed Smith, Jr., Government Affairs Committee Chair and Vice President of the Board of Directors of the California Association of Mortgage Brokers (CAMB). Thank you for inviting me to testify today before the Subcommittee on Housing and Community Opportunity to discuss ways to help families avoid foreclosure and remain in their homes. In my testimony today, I will share with you: (1) CAMB's efforts to help homeowners avoid foreclosure, (2) the difficulties CAMB has encountered in assisting consumers particularly during the process of loan modification, and (3) CAMB's recommendations to assist families trying to remain in their homes.
Since its inception in 1990, the California Association of Mortgage Brokers has promoted the highest standards of professional and ethical conduct. The Association provides education, legislative and regulatory representation, and public relations for its more than 4,000 members, which include mortgage brokers and affiliated service providers across California. CAMB also serves as a forum for the development of common business interests across the industry. CAMB is dedicated to helping to curb predatory lending practices, standardize the industry from within, and provide the best products available to our customers, including alternative loan products.
As you hear the numerous stories of unscrupulous actors in the mortgage industry, I want you to know that CAMB has led the nation in establishing and promoting industry standards and ethics. All CAMB brokers must adhere to a code of ethics, which sets us apart from other loan originators. CAMB aggressively supports the principle that the first line of protection for consumers is to work with professionals who hold a license, and thus are accountable to regulatory agencies, legislative bodies and the public for their actions. In addition, CAMB members stand for consumer choice in product selection and consumer knowledge and education.
As you are well aware, California has been heavily impacted by the mortgage crisis, with many families in our state facing payment resets and even foreclosures. There are many reasons for the dramatic increase in foreclosures and I commend you for your work in Washington, D.C. to identify and, where appropriate, legislate federal intervention to ensure such deficiencies in the mortgage marketplace are not allowed to continue. In addition to correcting these problems for future homebuyers, I am pleased that you are today focusing on ways to help those families who are currently facing the loss of their home.
CAMB is currently engaged in a number of initiatives designed to protect consumers and preserve homeownership. CAMB believes strongly that our Association must lead by example to demonstrate to our consumers, regulators and elected officials that we share a common goal to make sure that every borrower who receives a loan has the means and the understanding to repay the mortgage. CAMB remains focused on assisting consumers during this time through consumer information, self-policing the industry, working with regulators at the federal and state levels to provide solutions, and continuing to fight against fraud in all of its forms.
CAMB members have been reaching out to community leaders in an effort to provide assistance to homeowners who are facing foreclosure. CAMB has created the Preserving Home Ownership Initiative Program (PHOI) to provide free, community based forums that allow existing homeowners a one-on-one counseling session with a CAMB member broker that can educate the consumer about the terms, rate, and other important data contained within their mortgage note. Initially piloted in September 2006 in Santa Ana, California, CAMB has hosted six PHOI forums, including four town hall meetings with the California State Department of Consumer Affairs.
PHOI events feature one-on-one sessions with member brokers to educate homeowners on their current loan program. The events take place at community locations and often in partnership with other local organizations and elected officials. This program is designed to enhance the consumers' awareness of the loan process so that they know how to protect themselves. PHOI is an educational event for consumers and is absolutely not a forum for participating member brokers to generate leads or business. With that in mind, rules of conduct for members are strictly enforced. All broker counselors sign an agreement stating that they understand they are providing a free service and that self promotion is prohibited.
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| Other CAMB Consumer Protection Initiatives |
- Locate all loan documents.
- Make a list of all monthly expenses, including food, utilities, medication, child care, etc.
- Compile all pay stubs or income documentation for the last 2 months.
- Be prepared to explain the reason for financial difficulty, including the expectation that this financial situation will be short term (i.e. less than 90 days) or long term (i.e. more than 90 days).
- Helping to design California's strong predatory lending prevention law as well as being the first mortgage broker association in America to provide a clear definition of predatory lending practices as a crucial first step in their elimination.
- Producing the CAMB Best Practices Handbook reflecting the highest standards of professional conduct and consumer protection in the mortgage industry, adopted by a number of other states to guide loan originators in their mortgage broker associations.
- Creating and distributing CAMB's Consumer Education and Protection Worksheet, giving loan originators and borrowers a comprehensive and custom education about loan programs available and the lending process.
- Distributing a statewide broadcast Public Service Announcement on alternative loan products with online and toll-free options for consumers to speak with a CAMB expert in their community to receive one-on-one education about their specific loans.
- Providing consumer friendly resources and consumer protections tips on the CAMB Web site so that consumers have an additional opportunity to educate themselves on the importance of understanding the mortgage marketplace.
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I would like to call your attention to a problem that a number of our CAMB brokers have identified in their efforts to assist homeowners in danger of foreclosure. There is great frustration among mortgage professionals that have tried to help consumers navigate the process and communicate with servicers about modifying their loans. Based on the stories I have heard from our members, I can only imagine what the consumer is going through when attempting to address their mortgage situation on their own.
CAMB brokers have experienced difficulty in finding the right person at a loan servicer to help with a loan modification. Customer service agents are turning people away immediately by saying they cannot help or that the homeowner is not qualified for help. In some cases, instead of offering the option of loan modification, customer service representatives have said that the person should just sell the house. CAMB members know this is misinformation by the customer service representatives, but they also know to be persistent and ask to speak to a person who handles loss mitigation or loan modification. Our concern is that consumers will likely not know to do this.
In spite of the misinformation provided by the initial customer service agent, CAMB brokers have found that once they persist and speak to someone with the authority to deal with loan modifications, the workouts can be completed. The problem is navigating the loan servicers' customer service maze to get to someone who can help. Consumers are being turned away before being given a chance to fill out a financial history form to process a modification request. Mortgage brokers can help navigate this process, but even they are having trouble: having their calls forwarded multiple times without anyone willing to help, being placed on hold for enormous amounts of time, leaving numerous messages without a call back. The bottom line is that loan servicers must improve customer service responsiveness to consumers in trouble, including better education and training of customer service representatives.
CAMB offers the following suggestions for troubled homeowners in order to aid them in requesting a note modification. These tips apply not only to the consumer who is presently in financial difficulty but also to the consumer whose payment may be increasing in the near future. Clearly, servicers could make this process much easier for homeowners facing late payments or foreclosures.
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| Prior to Contacting the Lender/Servicer |
- Locate all loan documents.
- Make a list of all monthly expenses, including food, utilities, medication, child care, etc.
- Compile all pay stubs or income documentation for the last 2 months.
- Be prepared to explain the reason for financial difficulty, including the expectation that this financial situation will be short term (i.e. less than 90 days) or long term (i.e. more than 90 days).
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When you contact the lender/servicer, you will most likely be talking to a Customer Service Representative. It is very important to understand that the Customer Service Representative will probably not be able to help. Explain that is very important to be transferred to the Loan Mitigation Department in order to receive the proper assistance with a workout program for your mortgage payment.
If you are behind on your mortgage payments, you may have to first talk to someone in the Collection Department.
The key here is to have patience and not get discouraged. This can be a very frustrating experience and if you are having difficulty getting transferred or not getting the cooperation of the Customer Service Representative, simply ask to talk to their supervisor. Don't take no for an answer.
Once you have contacted the Loss Mitigation Department and explained your situation, there are a variety of items they will ask you to send in:
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- Financial worksheet (this will be mailed to you).
- A letter explaining the financial hardship.
- Copies of complete tax returns for the last two years, including W-2 forms.
- Copies of bank statements (all pages) for previous two to three months.
- Copies of two most recent pay stubs.
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The review process can take from two to four weeks, sometimes longer. Once the review process is over, the lender/servicer will contact you and explain what they propose for the note modification. Do not be afraid to tell them what you feel is the best situation for you. No agreement can be reached without the consent of both parties.
As the mortgage crisis in California and the nation continues, CAMB is working to address the current needs of homeowners as well as working with policymakers at the state and federal levels to ensure that problems in the mortgage marketplace are corrected.
CAMB supports necessary reforms designed to protect consumers while ensuring access to a wide range of sound financing options for homebuyers and homeowners. As such, CAMB has developed a series of recommendations for Congress as you pursue viable and reasonable solutions to this crisis.
CAMB urges loan servicers and secondary market investors to work with homeowners who are struggling to make their mortgage payments and facing the prospect of loan default and foreclosure. As discussed above, servicers must reform their customer service processes so that homeowners facing financial hardship are provided accurate information about their options.
In order for California borrowers to have the same access to sound, low-interest, federally backed loans as other Americans, CAMB strongly supports:
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- Increasing FHA and Conforming Loan Limits
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Increasing the FHA and conforming loan limits is critical to any effective effort to ease the mortgage crisis in high cost areas, such as California. Much of the turmoil we are experiencing in California will continue to get worse unless federal mortgage products are made available for the purchase or refinance of entry level homes in high cost areas. This is because the median home price of $550,000 in California greatly exceeds lending limits for FHA and conforming loan products. Congress must increase the maximum loan amounts for FHA and GSE mortgage products in high cost housing markets, so that people living in high cost areas of the country will be able to refinance their current mortgage with stable, affordable mortgage products.
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- Reforming and updating FHA guidelines to increase access to these federally-insured home financing products.
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CAMB believes that the lack of FHA program accessibility was a major determinant in the decision by so many Californians to choose sub-prime loans to achieve homeownership. Today, mortgage brokers originate the majority of loans and therefore, provide HUD with the most viable and efficient distribution channel to bring FHA loan products to the marketplace. However, many mortgage brokers are not able to offer FHA products. This is because FHA requires cost-prohibitive and time consuming financial audit and net worth requirements for mortgage brokers in order to originate FHA loans. This effectively bars mortgage brokers from originating FHA loans, leaving sub-prime loan products as the only option offered to many borrowers. Replacing FHA net worth and audit requirements with a surety bond will allow more mortgage brokers to offer FHA products while affording HUD superior protection against loss to the FHA program. Surety bonds will provide the FHA program with more financial protection than audits or net worth requirements, which are snapshots in financial time holding no real value in the event of actual FHA losses. Congress should allow mortgage brokers to purchase a surety bond in order to offer FHA products, so that more borrowers will have the option of an FHA mortgage.
CAMB believes that loan programs must provide borrowers with options to achieve and sustain homeownership. Viable, time-tested loan programs must be restored to the mortgage market.
CAMB urges Congress to ensure any new legislative provisions to combat predatory lending, such as licensing requirements and compensation disclosures, apply equally to all mortgage originators. By doing this, consumers will be able to make informed decisions about the loan products available to them, no matter the distribution channel.
It is clear that all stakeholders must work together to protect the American dream of homeownership during this period of uncertainty in our nation's mortgage marketplace. CAMB's number one priority has always been, and shall remain, the consumer. As such, this Association will continue to be a champion for industry professionalism and consumer education and will continue to fight to protect homeownership opportunities for all Americans. CAMB members and mortgage professionals who adhere to a strict code of ethics will continue to call upon our colleagues within the industry to join CAMB in providing safe, viable and reliable pathways to homeownership.
On behalf of the California Association of Mortgage Brokers, thank you for this opportunity to share our recommendations and strategies for preserving homeownership in California during this difficult time. I am happy to answer any questions you may have.
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Members Please 