Consumer Financial Protection Bureau Opens to Less Than Stellar Review

Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) was created. The real teeth of the CFPB was to centralize mortgage banking oversight and regulation into one agency. Over the last several years, mortgage originator licensing education has focused on the creation of the CFPB and the intended impact on the industry.

The CFPB is in its infancy, so there will be a lot of growing pains as it matures and is able to provide the federal oversight that was envisioned. It is not untypical that legislators have a grand vision when they create agencies like the CFPB, anticipating that the “devil is in the details”, letting the new creation make the real decisions of what needs to be done and how to do it.

I recently received an offer from a company that appeared to blatantly violate mortgage marketing regulations that have been taught to originators. As an experienced loan officer, I was anxious to see how the new “regulatory hammer” might come down on an alleged violator.

I considered whether my grievances were better directed to a State or a Federal agency. Because the mailing came from another State I decided that the Federal level was appropriate. I marked the piece up and looked up the CFPB’s website and found that they had a convenient way to forward complaints. I followed their directions and waited for a response.

Within ten days, I received a call from a person identifying themselves as a representative from the company that the CFPB had forwarded the complaint to, wanting to discuss the matter. Instead of investigating the matter thoroughly, or reviewing the forwarded mailing for violations of mortgage marketing regulations, the CFPB chose to let the “fox explain why it had raided the hen house”. The entire conversation consisted of dodges and excuses, with many of the things said, demonstrating a complete lack of knowledge or understanding about the infractions that I was referring to. I made my position clear that I was not satisfied with the explanation that I was provided.

A few days later I was advised by e-mail that the CFPB had received the response, it was available for my review on their website, and to contact the CFPB if there were any further questions. I followed their directions and after reading the comments called back into the offices of the CFPB to discuss the response and proceeded to get a stereotypical, government agency, run-around.

Apparently the very consumer that the agency was set up to protect is not the highest priority on the CFPB’s list as they start up their operations. It was the kind of offer that I received that caused much of the deception so prevalent prior to the mortgage meltdown. My complaint deserved an independent investigation by someone with knowledge of the new regulations. I would rather have waited for a thorough investigation and response than participate in an effort that was a complete waste of my time. The alleged offending party apparently is allowed to continue to send out its questionable mailings, no more questions asked.

The Federal government’s recent record of new agency start-up has been less than impressive over the last few months. The government grows bigger with every new agency of oversight that legislators create. Unfortunately, the results are smaller than the grand expectations that are set. Hopefully, time will produce better results.


The Perfect Storm

In January of 2014 provisions of Dodd-Frank will go into effect that define the “Quality Mortgage”. These provisions, many of which are still in the process of interpretation by the industry, will further tighten up lending guidelines and reduce the number of buyers that will qualify to purchase a home.

No one will argue that the lending industry has a fiduciary responsibility to prevent unqualified borrowers from being able to purchase beyond their means and ability to repay. New regulations have already tightened lending guidelines and brought about significant changes. Many of the people that caused the mortgage meltdown have left the industry. Those that are left, understand the need to avoid a reoccurrence.

Long before the mortgage meltdown, the Federal Government created several Equal Opportunity laws to protect against discriminatory lending practices. These laws shelter protected classes and closely monitor lending patterns to make sure that redlining does not occur. Redlining is generally defined as the practice of lending on a selective basis avoiding specific neighborhoods. Lenders are required to complete HMDA reports that are analyzed to determine lending patterns.

In the creation of the Quality Mortgage provision of Dodd-Frank, there apparently was little, if any, consideration of the socio-economic impact of those regulations. Without reflection or review of the characteristics of borrowers that fall on either side of the line of qualified and unqualified, the law may very well have created the unintended consequence of moving clients in protected classes, to the unqualified side of the line.

Anyone with experience in the mortgage business can list clients they have worked with that demonstrated an ability to repay but likely would no longer be able to obtain financing once the new regulations go into effect in January. Many of these buyers purchased in neighborhoods where the sales price was more reasonable. The effect was to create viable communities, of similar people, that took pride in their homeownership.

Under the new regulations, will these same communities become investor havens? Without the pride of ownership, will these communities become a blight with the associated problems for local government? Will workforce or blue collar employees (teachers, policemen, firemen, nurses, construction, etc.) be able to live in the communities where they work?

Where there is a need, often new financing options appear and that may yet be the case in this situation. But the sad reality is, that no one has evaluated the potential impact or effect of these regulations and that is very disturbing. The quality mortgage rules that go into effect in January are going to put lenders into a box that may make it impossible to comply with Equal Opportunity laws and redlining prohibitions. I could be wrong, but to my knowledge, there is no one with enough hard data to be able to prove that statement incorrect

A perfect storm is brewing in the lending industry. It’s predictable. The potential damage is predictable. No one is preparing. The clouds are on the horizon and closing fast.

The Cash-out Refi – A Grinchmas Carol

I got a call today, the day after Thanksgiving, asking if I was working and whether I had time to meet with a potential client about a refinance. The caller told me that he had been trying for months to refinance and could not find a mortgage company that could close his loan. He sounded almost despondent. He said that he had to find a financing option that would allow him to “cash-out” equity from his property. He wouldn’t go into detail, requesting that I sit down with him so that he could explain what he had been through. It was Friday with much to do, but business had been slow and it was looking bleak for my year end closings, so I agreed to meet him. We set the appointment for 1:00 p.m.
I arrived at my office about thirty minutes early so that I could set up my laptop and get all of the necessary preliminaries taken care of in advance of his arrival. My office faces the parking lot and I was keeping a watchful eye out for his appearance. At 1:00 I looked about the parking lot and saw nothing. I glanced at my phone and saw no in-coming calls from a possible lost client. Startling me, there was a noise on the roof. I walked out of my office and down the hall to the front door to check what had happened on the roof. Seemingly out of nowhere, standing at the front door was an older gentlemen, a little portly, with white hair and beard….nothing remarkable about him to this good little Jewish loan officer. He was dressed in blue jeans and a white shirt under a heavy coat with a Macy’s label still hanging from the sleeve. He was carrying a briefcase with papers sticking out of both sides.
I unlocked the door, extended my hand and asked him in. He made some comment about the unseasonably cold, blustery weather, and how he was hoping for a white Christmas as we made our way back to my office.
The old gentleman sat down, breathed a deep sigh, lifted his briefcase and opened it on my desk. Nervously, he fumbled through his pockets for his wire rimmed glasses. Noticing his anxiousness, I smiled and asked how I could assist.
“Need to refinance”, he replied. “Cash out….and I need to get it done quickly. I have some, uh, um, unexpected repairs to make to some of the important equipment I have in my home that I use for a few months out of the year. With all of the new technologies, there’s a lot that is functionally obsolete in need of replacement”, He continued to fumble through the briefcase. “Do you mean the heating system”, I queried. “Uh…um….okay, yes…….the heating system”, he said as if trying to hide something. I didn’t press him on the matter. It wasn’t too unusual for clients not to be completely forthcoming about the use of funds received from a cash-out refinance.
“You had mentioned that some of the other attempts that you had made to start this process with other mortgage companies had not progressed to closing. Do you know the reasons why……what has been the problem?”
The old man leaned forward and shook his head. “I’m not sure I understand what all of the problems have been. You guys seem to have a very complicated system for determining who has been naughty and who has been nice. I thought I was starting the process far in advance of when I needed to close when I made my initial call in June. It’s just been one thing after another.”

“The first place…..big company…..well, we were proceeding nicely, and then they ordered the appraisal. First, the guy that they assigned to do the appraisal took more than a week to call me to schedule and then when he found that I was not local to his area he increased his fee dramatically and scheduled his inspection for two weeks hence. They sent some fellow from the South Pole to inspect my home. He didn’t seem to be too familiar with the neighborhood or the market in my area. Said something about there being no comps to my 30,000 square foot home that had sold in the last six months. He was concerned when he saw an out building that housed animals….reclassified the property as a “farmette”. He was also concerned about the number of people living on the property. He thought it was too communal. Finally he made notes about the rooms full of toys and assembly lines and said that he was concerned that too much of the home was being used for commercial purposes. He left in a hurry and the next thing I know, I’m being told the property is unacceptable.”

“My next call went to a smaller, correspondent lender…..I think you call them. With a twitch of my nose, I scheduled an immediate appointment!” I looked at him a little peculiarly and laughed to show him I was listening. “We started the application and when we got to the employment section things fell apart. I told him that my job was primarily as a self-employed toy maker and that I had been doing that for…..well…..many decades. He asked me to show him my last two federal tax returns. I told him that my company was a 501C(3) and that my efforts were well rewarded….but the loan officer reviewed the returns and said that my income was as real as Santa Clause and that was the end of that discussion.”

“My next stop was with a mortgage broker. The first thing he did was to pull my credit report. He said that none of the suppositories”……”repositories”, I corrected him…..”okay, repositories…..suppositories, there really is no difference in my opinion…..they both are a pain in the butt. I had no active accounts show up, had no credit score, and the report advised that my social security number was fictitious and the date of birth I had given would have made me centuries old. The broker accused me of fraud…..can you imagine that?……A mortgage broker…..accused ME of fraud” I thought the old man said something about a lump of coal but I wasn’t sure I understood his mumblings.

“The last guy I tried to talk to wanted to know about my assets. Since when does livestock and inventory not count as assets?”

“You’re my last hope”, the old guy pleaded. “If I am not able to close on this loan and quick so that I can make the repairs I need to make to my property……well the result could be a worldwide calamity.” I laughed and told the old fellow that everyone that came into my office thought their loan was the beginning and end of life as they knew it.

“Have you heard of Dodd-Frank?” I asked. I dropped my pen and reached under my desk to retrieve it, continuing as I did so, “I’m afraid they’ve made it impossible to finance someone with your financial circumstances. Now, if you have a vehicle that’s paid for I might be able to hook you up with a friend that can”….… the time I looked up again the old guy was gone… a flash, and strangely enough, so were the holiday cookies out on the front desk. The earlier noise on the roof repeated itself……”strange” I thought.

I stood at my desk, lost in thought, in a trance
The old guy had gotten quite a song and a dance,
He needed a loan, with a small cash advance,
And then it struck me…..could he be…. just perchance,
I ran to the door, gave the lot one last glance,
There was no one around in the blacktop expanse,
As I walked to my car I heard far-away rants,
No Christmas this year, I can’t refinance!!!

Just When You Thought It Was Safe

The beginning of the mortgage meltdown began over six years ago. The regulatory changes have continued as the federal government tries to make sure that there are better controls and oversight in place that help to avoid a repeat. In January 2014 a new set of rules that define a qualified mortgage will go into effect.

Conventional mortgages will be classified into three categories. There is the qualified mortgage, the temporary qualified mortgage and the ability to repay mortgage.

The qualified mortgage will be the cream-puffs. These are the loans with a debt to income ratio of 43% or less. This is not the largest class of mortgages that most companies process.

The second category, or the temporary qualified mortgage, is where the greater number of loans in the market come from. This category includes all loans that receive approve/eligible underwriting findings through either Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Processor. The maximum debt to income will likely not exceed 45% when the loan to values are at the maximum allowable level. It is important to note that Fannie and Freddie continue to modify and tighten guidelines. The overall evaluation of the combined risk factors that generate “approve/eligible” findings have become a moving target. If you currently have a transaction that is in process it is important that it be through the underwriting process prior to January 10th and ready for closing. If it is not, a transaction in process with approve/eligible findings might not continue to be approvable after that date. New construction transactions are especially vulnerable.

The final category is the ability to repay. These are loans that in the past have received “ineligible” findings that might have been able to proceed through a comprehensive underwriting and evaluation of combined risk. As of this date, no investors have stepped forward to purchase loans in this class. Until this happens, these loans will not move forward after January 10, 2014. There is hope in the industry that in time, investors will enter the market to fill an important gap and need. The cost for these loans (interest rate offered to the consumer) will likely be higher, if and when a market appears.

Federal agencies such as FHA and the USDA have the right under Dodd/Frank to create their own version of the qualified mortgage. It is likely that most of the mortgages that move forward will fall into the temporary qualified mortgage category. It is likely that the maximum debt to income (DTI) will not exceed 45% for these mortgages. Much of the market that, up until now, has exceeded a 45% DTI and has been less than a 50% DTI will no longer exist.

There is still much unknown. Investors are uneasy about interpretations of the qualified and temporary qualified mortgage categories. It makes it very difficult to be able to provide guidance to the parties to a transaction. There does need to be an awareness of the changes and communication will be imperative.

There will also be a 3% cap on fees that the buyer is charged that goes into effect in January 2014. The 3% applies to any fees that go back to the lender as income. It is important to understand what comprises the 3% and what does not. There are many situations that are currently in application that will no longer conform.

It will be interesting to see how these new rules affect who gets a mortgage and who does not. Lenders are required to demonstrate that they do not discriminate against protected classes when they make lending decisions. It may only be a matter of time before these more restrictive lending rules clash with the intent of Equal Housing regulations and laws. An unintended storm may be brewing on the horizon.

Are You Tax Prepared?

It’s hard to believe that it is almost time to start thinking about gathering all of the receipts and supportive information required to complete Federal tax returns again. If there is a housing decision in your immediate future make sure you carefully plan in advance of preparation.

Income is a major factor when a mortgage company qualifies you to purchase a home. First, I want to make it very clear that the IRS states that any income received in a calendar year is to be reported. However, anyone reading this knows that there is a lot of money that exchanges hands that never gets properly reported. The importance in this discussion, is that if you don’t report the income, do not expect to be able to include it as qualifying income. Understand the “two edged sword” consequence of your decision.

Self-employed buyers that are sole proprietors typically complete a Schedule C that reflects revenues and expenses. In an attempt to reduce taxable income, it is not unusual that many self-employed individuals write off as much expense as possible. Revenues of $50,000, become net income of $15,000. The mortgage company will only be able to use the net income of $15,000 in this example and only be able to add back depreciation expense if there is any. It is with frequency that a self-employed client will tell me that he made $50,000 in the above example.

If you are self-employed, learn to understand the difference between revenue and income and plan appropriately. You are going to pay more to the IRS but will be in a better position to buy a home if you are careful about reducing revenue too much!

Self-employed buyers are not the only ones that need to give careful consideration to what income they intend to report to the IRS. If you are in a profession that involves significant tip income, how much you declare is something for you to give careful consideration to. Waiters, bartenders, and beauticians receive regular tip income. If you want it to be considered as income, this becomes part of a two year plan as a two year average of this income is calculated for qualifying purposes.

If you itemize and complete a Schedule A, understand that unreimbursed business expenses can reduce your taxable and qualifying income. If the total of unreimbursed business expenses exceed 2% of your adjusted gross income, the amount in excess of 2% reduces taxable income with certain limitations depending on the amount of your income. Sales professionals frequently complete a Schedule 2106 (unreimbursed expenses). If you reduce your income watch out for the “two edged sword” effect.

One of my biggest pet peeves, is the individual that provides the tax preparer with a list, or a box of receipts of unreimbursed expenses that DO NOT EXCEED 2% of adjusted income. Most preparers reflect the total anyway on the Schedule A without understanding that the amount that is reflected, providing you no tax relief, has just reduced your income for mortgage qualifying purposes! Let’s make this clearer. If you earn $70,000 annually (let’s assume that amount is also your line 38 adjusted gross) and your unreimbursed expenses total $1,375.00, you receive no deduction. HOWEVER, your friendly mortgage underwriter is going to reduce your annual income that year by $1,375.00. Sound innocent? Not enough to make a difference? There are many cases where an additional $114.58 monthly might affect an investor’s decision. Make sure you tell your tax preparer, if there is no benefit from the calculation, remove it from the Schedule A.

This just scratches the surface of planning for tax preparation. If any of this is confusing, e-mail me at

The Cart Before the Horse

It’s opening night for a Broadway show and you have the lead role. It’s the opportunity of a lifetime. But wait…’ve never been to a rehearsal. How will you perform? Perhaps it’s the end of the semester and time to take final exams. The results will determine whether or not you will be accepted into Law School…….but you never attended class and didn’t read the assigned materials. Here is even a scarier scenario. You’re about to go out to buy a home, but you have not taken any steps to find out anything about what you are getting yourself into. As ridiculous as it sounds, this is how the largest percentage of potential home buyers enter the market.

There is much to learn prior to entering the market. Primarily, prospective buyers need to understand what their buying power will be. Most real estate agents won’t begin to show property to a candidate prior to a pre-qualification being completed. To be in the best position to negotiate the best deal, buyers should call a lender as step one.

There are many elements that affect credit scores. Disputes, past payment tribulations, and reporting errors are just a few of the items that can affect a credit score, influence the type of loan programs offered, and possibly even the cost of credit extended. With enough advance time, some of these issues can be modified or eliminated. Available loan programs and pricing can potentially improve. There are many misconceptions and misunderstandings about credit. Buyers need to educate themselves.

Income is another critical area that needs to be evaluated. The self employed, hourly employees, and asset based income, may need documentation, analysis, and verification prior to a determination of available, qualifying income being made. Many sole proprietors do not understand the difference between revenue and income. Income affects qualifying ratios, thereby being a critical element in determining loan programs and potentially, the cost of credit.

How much money do you need  to buy a home? What do you have available? Do your bank statements show deposits that are not payroll related that may need to be documented? Has a family member recently given you money that may need to be documented as a gift?

Do you own a home? Will you be selling it? What are your options if the house doesn’t sell? Is renting a possibility? Do you have military service that you didn’t think to disclose?

These are some of the most important issues that need to be explored. Each buyer has an individual story that is unique. If you don’t do your homework to check out how your background affects your ability to buy, you may be in for unnecessary disappointment.

Too many of the federal regulations that exist in lending today are the result of buyers that presumably weren’t informed properly or misled before they went to settlement. Is it possible that some of the meltdown could have been avoided had buyers educated themselves prior to buying? 

If you wouldn’t get married without dating and finding out more about your spouse-to-be before you take that leap, why would you purchase a home without doing the same due diligence?





Finding “The One”

Buyers look through listings online or those provided by realtors like they look through personal ads, looking for “The One”. The one that will look good when you arrive to meet it. The one that dear old mom or dad will like the most. The one that you have lived your entire life to find. The one that makes you feel like all of the planets in the solar system have aligned.

The chances of finding the exact right home from a listing picture, is about as good as finding the right person to settle down with when looking at a picture on a service. How often do people search endlessly, pick a few to check out, make the wrong decision, end up changing their mind when their needs aren’t fully met, resulting in an unhappy split? Oh, and I’m referring to their home buying decision.

There are all kinds of stories about women dating men (and vice versa) that are not perfect for them, with hopes of changing them. Unfortunately, the end of the story is that most of the time those efforts fail. Most homebuyers however, never understand that they might have overlooked their chance to find their McDreamy and McSteamy house, all rolled into one wonderful home. (Guaranteed mom and dad will approve). It might not be exactly what they are looking for as is, but the chance to make it perfect, is within their grasp.

One of the most popular loan programs available for purchasing and renovating any home is FHA’s 203K renovation loan. Notice I have emphasized “any”. The program has been promoted primarily as a renovation loan for people that want to fix-up the homes they live in. It also has had a lot of recent attention as a tool to purchase and fix the problems associated with foreclosed homes. Truth-be-known, if you can find a home in the desired location, you can turn it into exactly what you want. (a whole lot easier than changing the person you might be buying it with)

There are two types of FHA 203K loans. The first is a streamline edition. The streamline loan lets you make minor modifications up to $35,000. You cannot make structural changes, it’s designed for cosmetic alterations. You don’t have quite as much of a process with the streamline and it usually is faster to process. 

The consultant 203K is for the home in need of more extensive changes. Keep in mind, that the program allows for major re-construction. As long as certain structural elements of the existing home are left intact, changes are only limited by local building restrictions, FHA loan limitations, your individual borrowing capacity, or your imagination. Of course there are numerous factors to consider and you should find an expert to discuss the 203K loan program with.

If you’re willing to open your eyes, you may find that the homes you found to be undesirable, suddenly are exactly what you have been looking for. I can’t help you turn the person you are purchasing with into a perfect match, but I can help you to discover that the perfect home has been right in front of your eyes all along!

Call me at 301 788-8700, e-mail me at, or visit my website at to contact me or to arrange a time where we can discuss whether the FHA 203K loan is right for you.

Real Estate Nuclear Winter in Frederick County, MD.

It seems like a huge percentage of homebuyers have disappeared from the face of the Frederick County real estate market. It’s possible that it is just a seasonal aberration. Schools are back in session, holidays are upon us, its football season, and there are multitudes of fall festivals. While all of this affects activity in the real estate market, in my opinion, we might be seeing fall-out from the budget debacle on Capitol Hill.

Thousands of Federal workers received an unscheduled vacation a couple of weeks ago. The budget show-down, leading to the shut-down left many in the surrounding communities, concerned about their long-term prospects for employment. Even though there was a resolution, it was a short term resolution, and confidence about a repeat after the first of the year, is high, especially with the continued rhetoric being bantered about by the same legislators that contributed to the original shut-down. Frederick County, Maryland is one of the bedroom communities for Federal employees and so this area is part of ground zero for the disaster brought on by the Executive and Legislative branches of government. We are in a home buying nuclear winter after taking a direct hit.

The trickle-down effect of the bickering on Capitol Hill continues to run off. It has the potential for disastrous retail sales as well as Federal employees hunker down in preparation for the next round of more of the same.

Capitol Hill did not learn its lesson in October. They have returned to business as usual. The rest of us are left to scrounge to survive, wondering if it is safe to go back outside into the fallout they caused.

New housing is not an option that many will consider when they are hunkered down in protective mode. This should not be surprising. What will be surprising will be the reaction of economists and other financial gurus once this seeps into statistical data. Housing is a key factor, directing the nation out of bad times, and leading us back to less desirable fortunes.

Rosanna, Rosanna, Danna used to say “it’s always something” and that’s true, until there is nothing to make something out of and it appears, that is what everyone is expecting.