Scarlet letters: EPD and RESPA

Monday, May 4
Written 12:20 p.m. EDT

DEFINITIVE: The Making Home Affordable plan is for mortgages that were originated before Jan. 2 this year. Here's an e-mail I got from a reader.

What is the definition of "originated" as it applies to Hope for Homeowners program? I locked my loan in December 2008 and closed in mid-January 2009. Now losing job. Am I screwed? As far as I have been able to read about it on the Internet, "origination" as it applies to loans includes all the steps prior to "servicing." The dictionary definition means "from the beginning." Would a loan be originated at the time of application and lock-in?

There are two answers to this question -- the one I gave in my reply to the reader, and another one that arose after I read the question more carefully. Let me dispose of that other answer first. I believe the reader is referring to the Making Home Affordable plan to refinance and modify mortgages, even though he or she mentions the Hope for Homeowners program. These are two separate initiatives with different deadlines and different rules.

Under Hope for Homeowners, people with subprime mortgages can refinance into FHA-insured loans, provided that the lender forgives some of the debt. To be eligible, the loan has to have been originated before Jan. 2, 2008. The reader does not qualify because the loan was originated more than a year after the deadline.

The reader mentioned Hope for Homeowners, but I believe he or she really meant Making Home Affordable, which is available for mortgages that were originated on or before Jan. 1 this year. The reader wants to know if the loan qualifies for help under the Making Home Affordable plan because the application and rate lock happened in December, before the origination deadline, although it was closed this January, after the originated deadline.

I replied:

I'm sad to say that when they say "originated," they mean when the money was disbursed, which is the closing day. For you, in mid-January.

I would hope that the loan servicer would bend over backward to help you, solely for the lender's self-interest. When a brand-new loan goes into default within the first few months, it raises red flags. The investor who bought the loan typically forces the lender to buy it back. That's something that lenders don't like to do. In addition, these "early payment defaults" often trigger fraud investigations, in which the investor tries to find out if the lender did something fraudulent.

In most cases during this recession, an early payment default can be blamed squarely on loss of income. Still, it's a hassle for the servicer to answer a bunch of questions from the investor. With luck, the servicer will work with you -- not to help you, but to make life easier for the servicer.

I hope you find a job quick.

I was sorta shooting my mouth off. I'm not positive that servicers will bend over backward to avoid being stamped with the dreaded "EPD" scarlet letters (for "early payment default"). If I'm wrong, I'm sure my readers in the mortgage industry will set me right.

This reader's letter underscores a deficiency in the response to this mortgage meltdown, which is that there is no concerted effort to help homeowners who lose their incomes temporarily. There's organized help for people who bought more house than they could afford. But what about people who got responsible loans to buy houses but lost their jobs during this nasty recession and whose houses have lost much value?

Individual servicers might occasionally throw lifelines to such borrowers, but those lifelines are separate strands and they aren't woven into a safety net. Yet people are losing jobs (or suffering reductions in hours or salary) at a scary rate, and they are remaining unemployed or underemployed for a long time. Maybe it would be better to help those people before aiding those who used exotic mortgages to overpay for their houses.

RESPA RANT: Now I turn the mic over to Jeff Lazerson, president of Mortgage Grader, an online broker based in SoCal. He is disappointed that Congress is about to gut a pro-consumer reform that was unveiled during the waning days of the Bush administration.

The Bushies proposed some changes in the regulations that implement the Real Estate Settlement Procedures Act, or RESPA. Among other things, the RESPA reform proposal requires lenders to give accurate estimates of closing costs. Under this reform, if the lender says your closing costs are going to be $4,000, they can't spring a surprise on closing day and tell you their estimate was faulty and the closing costs will actually be $9,000.

This change (along with others) is supposed to be implemented next Jan. 1. But a House committee might scrap it. That doesn't sit well with Lazerson, who writes:

"Last November, HUD officials delivered new rules to the mortgage industry putting an end to institutional fleecing of mortgage shoppers. Nothing short of a herculean effort, HUD issued a final rule, updating the Real Estate Settlement Procedures Act (RESPA). Under the new requirements, consumers are empowered through transparency and choice to shop and compare mortgages and their associated settlement costs. Most importantly, it's "game over" for misrepresenting the Good Faith Estimate. Millions and millions of consumers received worse loans terms and higher fees at settlement than they were expecting. The new rule effectively requires loan originators to stand by their estimates. HUD estimated each borrower would save $700 on average per transaction under the new rule.

"America's mortgage industry was ground zero for the Great Recession. America will count 5 million to 10 million families losing their homes to foreclosure by the time this tragedy ends. The foreclosure avalanche resulted because too many lenders financially fleeced borrowers at every opportunity. There was no simplicity or uniformity to consumer information. Enforcement and oversight of weak consumer protection laws in place were minimal to nonexistent. Mortgage originators that provided honest rate and fee quotes often lost business due to consumers naively believing they would obtain the low-ball quotes provided by the predatory lenders. Honest originators would resign themselves to making less money, leave the business because they couldn't bring themselves to lie or go ahead and take advantage of borrowers just like the rest of the pack.

"This crisis is maybe halfway over. Believe it or not, just days ago the House Financial Services Committee chaired by Massachusetts Congressman Barney Frank quietly slipped in an amendment to H.R. 1728, the Mortgage Reform and Predatory Lending Act of 2009. The amendment will serve to void HUD's new RESPA mandate that is due to be effective Jan. 1, 2010. What Mr. Frank and his committee did is beyond chutzpah. It is nothing short of betrayal of our trust. We empower our elected officials to enact laws that best serve and protect all U.S. citizens.

"America's founding fathers are undoubtedly rolling over in their graves as witness to the kind of influence in Congress that industries can legally buy via campaign contributions. Chapter one of Democracy for Dummies should disclose, if it doesn't already, that some members of our Congress love their power more than anything else. They want to maintain that power, regardless of costs to other stakeholders. This is shameless hypocrisy in action.

"We should all have the audacity of hope that President Obama and HUD Secretary Donovan have the conviction to put a spotlight on this tragedy in the making. We should have the audacity of hope that they both have the courage to voice their displeasure with the House Financial Services Committee that wrote this amendment to H.R. 1728. President Obama must tell Congress that he will veto this bill if the lender's license to continue to lie and fleece mortgage shoppers is not removed. We cannot allow Congress to continue this betrayal of 300 million Americans. HUD worked too hard to get it right."


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