LMI Mortgage Lending: Road Less Traveled

The Federal Deposit Insurance Corporation's (FDIC's) Advisory Committee on Economic Inclusion (given the catchy name "ComE-IN") will meet on Wednesday, March 2, 2011 to discuss principles for low and moderate income (LMI) mortgage lending (as well as supporting financial education).

Committee members will discuss "responsible ways to restore LMI mortgage lending and sustainable homeownership in the wake of the mortgage and housing crisis." Observing the obvious, the FDIC's announcement states that "borrowers' opportunities for homeownership have diminished as the availability of mortgage credit has contracted" and "market disruptions have been particularly difficult for lower-income borrowers, who have been disproportionately affected."

LMI has not quite been in the forefront of community lending for awhile. The subsidies associated with LMI are responsive to the Community Reinvestment Act (CRA) requirements designed to promote home ownership. Chase, for instance, currently provides an LMI program for 1 - 4 Units, Condo, PUDs or New York Co-ops, loan amounts up to $400,000, primary/purchases only, and a maximum subsidy that is the lesser of $1,500 or .75% of the loan amount. Chase also offers a Correspondent LMI Subsidy Eligibility tool.

Of course, geographic locations matter in CRA loans, so banks determine eligibility using the property location as an eligibility factor.

LMI and CRA – Controversy

The CRA was designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory ("redlining") credit practices against low-income neighborhoods. In recent years, CRA lending has been accused of contributing to the mortgage meltdown in 2008, the assertion being that such loans were inherently unsafe.

In point of fact, the FRB has examined the statistical evidence and concluded that their empirical research did not validate any relationship between the CRA and the 2008 financial crisis.

In 2008 the FDIC's Chair Sheila Bair - who is also addressing the forthcoming meeting - noted that the majority of subprime loans originated from lenders were not regulated by the CRA. She asserted that CRA was a "scapegoat," and stated: "I want to give you my verdict on CRA: NOT guilty."

Whatever your thoughts - whether you think CRA encouraged a loosening of lending standards or dispute that CRA was a significant cause of the subprime crisis - LMI did not go away, and the FDIC now clearly wants to explore its strengths and weaknesses in an effort to "restore LMI mortgage lending and sustainable homeownership."

Meeting

• FDIC: Advisory Committee on Economic Inclusion (ComE-IN) 

• Conference: "Principles for LMI Mortgage Lending, Teaching Financial Education, and Policy and Projects Updates"

• Agenda: Speakers and Documents

• Date: March 2, 2011

• Location: FDIC Headquarters, 550 17th Street N.W., Washington, DC
  
• Webcast: Presentation
  
  

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FDIC: Advisory Committee to Discuss Principles for Low- and Moderate-Income Mortgage Lending and Supporting Financial Education
Press Release
February 24, 2011

FHA: Only Quality Loans Need Apply

On July 19, 2010, FHA Commissioner David H. Stevens issued a Special Edition statement about lenders "exuberance in the marketplace to find ways to increase loan origination revenues."

While not singling out "opportunistic lenders" or acknowledging a more widespread trend, Commissioner Stevens wants to be "very clear on FHA's position as it relates to underwriting, lender accountability and affordable programs."

In this carefully worded notice, Commissioner Stevens states unequivocally that:

• Quality underwriting is not only essential - it is expected, and

• Affordable products are core to FHA serving its mission.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

I. Quality underwriting is not only essential - it is expected.

• Every lender engaging in business with FHA is expected to perform and maintain quality underwriting standards.

• Mortgagees are expect to have the right people and processes in place to make quality underwriting decisions, perform thoughtful analysis of a borrower's ability to repay the loan, and adhere to realistic underwriting ratios.

• Processes and staff must be well-equipped to assess the overall quality of the loan, determine a realistic income level and analyze the borrower's true ability to repay the loan. It is imperative we look at income levels, credit history, and qualifying ratios realistically and make decisions responsibly.

FHA Implementing Loan Level Review Tools

• FHA has refined and re-tooled its loan level review processes to more effectively spot unsatisfactory underwriting performance.

• Utilizing updated risk targeting criteria and a collaborative approach, FHA is executing an enhanced strategy to identify underwriting deficiencies and take action to protect FHA from unwarranted risks and losses.

• Comprehensive and calculated risk management will permit FHA to single out those lenders that are needlessly endangering FHA and the continued availability of its programs.

Tools

• Loan Level Reviews: FHA's loan level review processes have been enhanced to more effectively manage risks and minimize losses arising from poorly underwritten or fraudulent loans.

• Loan Evaluation: processes have been modified and aligned across all Single Family offices to achieve a collaborative and comprehensive approach to evaluating loans throughout the loan life cycle.

• Post-Endorsement Technical Reviews: case selection criteria have been revised and review procedures enhanced and standardized.

• Lenders and Servicer Reviews: the targeting tools and methodology have been strengthened to better target lenders and loans that pose the greatest risks to FHA.

• Quality Control: methodologies to areas where some originators may try to take unique advantage of the flexibility of FHA without the appropriate focus on quality (i.e., loans originated for non-FHA to FHA refinanced loans).

• Streamline Refinances: risk can now be identified simply by looking at the original loan quality before it was refinanced into an FHA loan.

II. Affordable products are core to FHA serving its mission.

• Avoiding Overcharges and Adverse Selection: FHA expects lenders to maintain the spirit and intention of these programs by providing close control over how these programs are implemented and how compensation on these loans is paid to an originator's staff.

• Compensation: Lenders must keep very close control over compensation programs to ensure borrowers are not paying more than they should to have access to FHA's affordable programs.

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Special Edition
FHA Commissioner David H. Stevens
7/19/10