CFPB cracks down on Kickback scheme disguised as MSA



This is fantastic! A lot of crooked real estate agencies (which is a frighteningly large percentage of them) lean in on lenders and require that lenders pay into what are known as Marketing Services Agreements (MSAs). Essentially they are supposed to be agreements where the lender and the real estate office split the costs of advertising and marketing. Think of those postcard mailing campaigns that you’ve glanced at and chucked into the recycling bin or open houses with banners, signs and swag. On its face it seems to make sense, two companies or two sales people go in together to generate business. Of course, in real life, things are rarely so easy.

See, there’s a very important law – RESPA, the Real Estate Settlement Procedures Act of 1974. The relevant part of RESPA is Section (a): the prohibition against kickbacks and unearned fees. This covers “referral” fees and “buying the business.” Essentially the law prohibits any one in the real estate industry from paying other parties for referrals or making payment for services rendered contingent on the closing of a real estate transaction (financing, sales, etc). So your real estate agent can’t get paid for sending you to his “preferred” lender. Ever since the law was passed and with every passing update, clarification and revision the real estate industry has tried to find ways to circumvent the law. MSAs and ABAs (affiliated business arrangements) have been the preferred vehicles for these extralegal gymnastics.

So what happens is that instead of obviously well-spirited advertising campaigns and events, companies set up relationships wherein, for example, a lender “leases” a desk at a real estate brokerage’s office. That lender pays well-above market rates for that “privilege,” say $2500/month for a desk and a chair. That lender, of course, expects something for his/her generosity. They want loans that they can close and make money. This isn’t in the spirit of serving the consumer mind you, this is about the $$$. The real estate office is seeking to either defray it’s rental expenses or generate a profit and the lender is seeking an easy path to deals. Now, paying above-market rent for a desk is questionable but not as questionable as the further perversion of these kinds of arrangements: varying the rent each month and making it dependent on how many deals were sent to the lender. Yes, this is very common. It is not what happened in the linked story but this kind of action gladdens me deeply since I am tired of being approached by crooked real estate agents to set up MSAs and hearing about how other, less scrupulous, lenders are “in-house” or “preferred” with a particular real estate office.

Weekly In-depth Market Analysis: 1/9/2017

Mortgage rates holding steady


A better start today after soft prices last Friday. The volatility continues; last Thursday MBS prices ended +29, Friday -36 and early today +20 bps. The 10 yr this morning prior to the stock market open at 9:30 AM EST 2.37% -5 bps from Friday. There is no US economic data today except this afternoon with Nov consumer credit data; and little until Friday. Two Fed officials today; Eric Rosengren (Boston) at 9:00 AM and Dennis Lockhart (Atlanta) at 12:40. The better start this morning on some increase in the dollar, weaker crude prices and stock indexes prior to the open a little lower.

Boston Fed’s Rosengren saying three rate hikes in 2017 seems “reasonable”. Rosengren will not vote again on FOMC decisions until 2019 and he dissented in favor of a hike at the September meeting, meaning that he is in the hawkish third of all the FOMC participants (voters and nonvoters).

SF Fed’s John Williams in an interview with the Financial Times said that strong hiring and higher wage inflation, confirmed in Friday’s jobs figures, showed “the stars are aligning” in the US labor market as he signaled support for forecasts of three quarter-point interest rate increases this year. He doesn’t believe there is a need for big fiscal spending now that the economy is moving ahead more rapidly. He said economic policy would be best helped by federal action that ensures a sustainable budget deficit and boosts long-term productivity. He also warned Congress against impinging on the Fed’s ability to set rates by imposing audit requirements or policy rules, amid fresh Republican attempts to clip the central bank’s wings. “If you were to ask me three years ago, four years ago, when unemployment was still high and the economy was still digging out of a hole, I would have said, sure, fiscal policy would be great to help expedite getting back to full employment — short-term fiscal stimulus,” said Mr. Williams in an interview. “But today I don’t think we need short-term fiscal stimulus. What we need is really better policies and investments in the long-term health of the economy.”

Bonds and mortgage prices, although holding nice gains today, are very quiet compared to recent intraday volatility; but it is early. Stock trading, the dollar and crude oil will be the focus today. Zero economic data until late today with consumer credit; while we don’t get estimates breaking down credit our main interest is in the revolving sector of credit (credit cards).

The market action (technicals) has a very slight bullish bias, maybe a better way of saying it; not bearish but not with much of a bullish sentiment. No scheduled data in the US and not much occurring in Europe today. Traders looking forward to Donald Trump’s first press conference on Wednesday.

This Week’s Calendar:


3:00 pm Nov consumer credit ($18.5B from $16.0B in Oct)


6:00 am Dec NFIB Small Business Optimism Index (99.6 from 98.4 in Nov)

10:00 am Nov wholesale inventories (+0.9%)

1:00 pm $24B 3 yr note auction


7:00 am weekly MBA mortgage applications

10:30 am weekly crude oil inventories

1:00 pm $20B 10 yr. note auction (9yrs, and 10 months)


8:30 am weekly jobless claims (255K +20K after declining 28K the previous week)

  • Charles Evans (Chicago)
  • Harker (Philadelphia Fed)
  • Dec export and import prices (exports +0.2%; imports +0.7%)

1:00 pm $12B 30 yr bond auction (29 yrs and 10 months)

1:15 pm Bullard (St. Louis Fed)

7:00 pm Janet Yellen hosts a town hall meeting with educators in Washington, D.C.


8:30 am Dec PPI (+0.3%, ex food and energy +0.1%, ex food, energy and services +0.2%)

  • Dec retail sales (+0.7% from +0.1% in Nov; excluding auto sales +0.5% from +0.2% in Nov)

10:00 am U. of Michigan md-month consumer sentiment index (98.6 from 98.2)

  • Nov business inventories (+0.6% from -0.2% in Oct)

Source: TBWS




What to Bring to Your Appointment and Why

Here’s what we need to review for a typical loan pre-qualification:

  • The two most recent federal tax returns you’ve filed. Please include any W-2, K-1 and/or 1099 forms and all schedules related to the filing. We do not need your state filings.
  • Most recent month’s paystubs (We need a complete 30 days)
  • Most recent two months of bank statements and retirement statements(if applicable)
  • Copy of driver’s license and Social Security card.
  • Any applicable bankruptcy filings, divorce filings and VA eligibility paperwork.
  • For a refinance we’ll also need your most recent mortgage statement and homeowner’s insurance policy information


Why do we need all this documentation?

The tax returns verify that the income you are showing is being reported to the IRS and on the up and up.  We also look any losses you might be reporting, whether it be unreimbursed employment expenses on Form 2106, rental losses on Schedule E or self-employment losses on Schedule C. It also shows if you currently own a home, which is relevant to both your first time homebuyer status and to your debt-to-income ratios. The tax returns will also show your history of income so that we can determine the consistentcy and stablity of your income.

The paystubs will show how much you are making now, in case you are making more due to a raise or a promotion. They also show you are still employed!

The bank and retirement statements show where the down payment is coming from on a home purchase. On both a purchase and refinance it can help to show “reserves” – money saved up to cover the housing expense in the event of a emergency. One month’s housing expense (mortgage payment, taxes, insurance, HOA) in a savings account is considered one month’s reserve. The more months you have in reserve the stronger of borrower you are. Some programs require reserves, so knowing what is available can help me tailor the loan program to your situation.

The driver’s license allows us to verify your identity in these days of identity theft and corroborate your personal details.

The Social Security card shows us your legal name. When we run a credit report it has to match the Social Security card exactly; nicknames and missing additional surnames can provide incorrect returns on your credit profile.

The bankruptcy (BK) and divorce filings are not always necessary but when they exist we need to see them in order to anticipate any possible underwriting challenges. We need to see how property was disposed in the BK and which debtors were discharged. From divorce decrees we can see if you are responsible for child support or spousal support, both of which are factored into your debt-to-income ratios. If you are a veteran then Veteran’s Administration (VA) paperwork will let us confirm your VA loan eligibility and the terms thereof.

On a refinance we need the mortgage statement to verify your escrow impounds, your address, the current balance of your loan and the terms thereof. Similarly your homeowner’s insurance lets us verify the coverage and the cost of your insurance (which, you guessed it, factors into your debt-to-income ratio).

TRID! And other ingredients of Alphabet Soup…

This week we are closing our first loans under the new disclosure rule known as TRID. It became effective October 3rd of this year. TRID is the result of the Dodd-Frank Act of 2008 and the creation of the Consumer Financial Protection Bureau (CFPB). It is a result of rule making that called for there to be an integrated disclosure that addressed the regulatory requirements of the Truth-in-Lending Act (TIL , TILA or TILDA) and the Real Estate Settlement Practices Act (aka RESPA). In fact that is what TRID stands for, TILA-REPSA Integrated Disclosure. Gone are Good Faith Estimate (GFE, we sure do love our acronyms in the mortgage industry) and the Truth-in-Lending disclosure. Those are not things any more. The information contained in both those forms has been cleaned up, condensed and polished into the new Loan Estimate (LE) form. A sample of which can be found here.

Dodd-Frankly (see what I did there?), I like the new form. It addresses many of the issues I had with the GFE form. I believe the LE to be cleaner, more concise and, most importantly, clearer to the consumer (I also like alliteration). It deemphasizes the hogwash metric of APR which can be manipulated and lacks transparency to the average consumer and focuses on the questions most likely to be asked: Rate, Term, Payment and Cash-to-close. It clearly states the lock status of the loan and breaks down fees in reasonable manner. In fact I only really have three qualms about the form:

  1. It introduces another hogwash metric: Total Interest Percentage (TIP, see what I mean about acronyms?) which shows “The total amount of interest that you will pay over the loan term as a percentage of your loan amount.” This will generally be a very large percentage on a 30 year loan, something in the neighborhood of 60%-80%. While I do believe it is important for a home buyer to understand the cost of financing over a long term I believe that this percentage is somewhat misleading as it makes some very broad and unrealistic assumptions; e.g. that not a single dollar of additional principal is paid, ever, and that the loan is carried to term (that is, never paid off early due to refinance or sale). I’m just guessing here but I don’t believe that those two conditions apply to more than 1/10th of a percent of home buyers nationwide.
  2. In section G it refers to the funding of the escrow (aka impound) account as “Initial Escrow Payment at Closing” which is a seemingly cumbersome manner of labeling it. I believe that the term “Payment” should not be included there as it could be mistaken with the actual “Payment” on the loan. Perhaps, Initial Deposit into Escrow Account would have been clearer.
  3. It highlights whether a given loan has a Prepayment Penalty or a Balloon Payment (both of which are important to know) without allowing for a Negative Amortization feature or an Interest Only feature. In a world of Qualified Mortgages (QM, more on that in a latter post) I know that it is unlikely that we will see those for primary residences (which I have decidedly mixed feelings about) but I think that we might see some variations on those products for Investment Properties but the LE is simply not equipped to deal with such products. This speaks of the narrow mind-set by the rule makers and the general nanny mentality that seems to be prevalent at the CFPB and in legislature. But enough of my opinions…\

TRID also brings us a new closing form, the Closing Disclosure (CD). I will be discussing that in my next post.

If you have any TRID or LE questions, please comment below or on Facebook (see sidebar), otherwise; thanks for reading!

How are credit scores calculated?

Credit Score words on a report card with stamp and number 760 to illustrate creditworthiness of an applicant hoping to borrow money in a loan or mortgage

How credit scores are calculated

FICO® Scores are calculated from many different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your scores are calculated.

Your score considers both positive and negative information in your credit report. Late payments will lower your scores, but establishing or re-establishing a good track record of making payments on time will raise your score. Credit scores also take into account public records such as bankruptcies, judgements and tax liens.

How a credit score breaks down

Calculate credit score pie chart, how it is calculated.

  • 30% – Amounts Owed
    • Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low score. This look at the proportion of your available credit versus your open credit. Are your credit cards maxed out? Using more than 50% of your available credit suggests a higher risk as borrower and therefore a lower score. Try to keep your usage under 10% or 30% for higher scores.
  • 35% – Payment History
    • The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a credit score.
  • 10% – New Credit
    • Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.
  • 15% – Length of Credit History
    • In general, a longer credit history will increase your score. However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks. It takes into account how long your accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all accounts. It also looks at how long it has been you used certain accounts and how long specific accounts have been open.
  • 10% – Credit Mix
    • FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.


Importance of categories varies per person

Your credit scores are calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO® Scores.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the scores chart are for the general population, and will be different for different credit profiles. When I run someone’s credit I have access to a credit simulator that can approximate the effect on your score made by particular actions but it is only an estimate.


Your scores only look at information in your credit report

Your credit score is calculated from your credit report. May accounts you might pay on time every month do not report to the credit bureaus. Things like rent, cell phone and insurance are not counted when calculating your credit score. However, lenders look at many things when making a credit decision such as your income, how long you have worked at your present job and the kind of credit you are requesting.



Do you have a question about what you can do to improve your credit? Give me a call and make an appointment for a no-cost consultation!

What’s this LTV thing?

Mortgage percentage changes concept with house and loan percentage symbol. Illustration isolated on white.

LTV, three letters that mean so much when it comes to applying for a mortgage. What do they mean? Loan-To-Value.

The LTV is the ratio of your loan amount to the value of your property. That means that that if your home is worth $300,000 then a 80% LTV would mean a loan amount of $240,000. Seems straight forward enough, right? Well it is and it isn’t. The math is easy. You simply take your loan amount and divide it by your value and convert the result to a percentage (by moving the decimal two spaces to the right and slapping a % on it). The complicated part is figuring out what LTV limits apply to you. Here the rules get a little more conditional and circumstantial. Quick disclaimer here, by the way: Everything I’m saying here is a broad generality and subject to change.

If the loan is a “Purchase” loan for a home buyer then LTV rules depend on the type of loan product. For the sake of simplicity and time I will limit the discussion to Conventional and FHA financing (these are the most common loan products used to purchase a home). Please note that on a home purchase, LTV is based on the lower of the sales price or the value.

If someone is buying a home with an FHA loan then the maximum LTV is 96.5% (meaning the balance of the purchase price, 3.5%, is the minimum down payment). Buyers can always put more down if they choose. There is a small break on the monthly mortgage insurance (more on that in a latter post) at 95% LTV (5% down). FHA loans are generally limited to properties you occupy as your primary residence.

If someone is buying a home with Conventional financing then things become a little more complicated. 97% LTV is possible but not all buyers are eligible for just 3% down. 95% LTV (5% down) is the general rule for a maximum loan-to-value ratio. If a buyer would to go with an 80% LTV (20% down) then mortgage insurance would be eliminated. These LTVs go down if the property has multiple units and/or it is not a primary residence.

Now if the loan is a “Refinance” for a current homeowner looking for new financing the rules can be a little different. There are two different kinds of refinance (refi) loans: Cash-Out refinances where some of the equity in the property is converted to debt and Rate & Term refinances where the rate and/or the term of the loan are changed.

On an FHA Rate & Term refinance one can generally go up to the original 96.5% max. That can be based on the current value or, if you do a streamline refinance, it can be based on the original purchase price and the borrower saves on the cost of the appraisal. If it is a Cash-Out then the max LTV is limited to 95% LTV. Unless your loan amount is over $417,000. Then the Cash-out limit is 85%.

With a Conventional refinance then you can do a Rate & Term refi up to 95% on a single unit property that you occupy as a primary residence and 80% for a rental property. A Conventional Cash-Out would be limited to 80% LTV for a primary residence and 75% for a rental property.

Is that clear enough?

But wait, there’s more! There’s break points to consider, especially as it pertains to pricing out an interest rate for a given loan. As the LTV increases, the risk that the loan will default increases (this is borne out by statistics). A 90% LTV loan is more likely to go into foreclosure than a 70% LTV loan, all other variables being equal. So, with that in mind banks generally assign higher pricing to higher LTV loans. Here’s where break points come into play. The industry, by and large, puts things into buckets (and not just LTVs). LTVs tend to be seen in buckets that span a 5% range.  So LTVs between 90.01% and 95% all fall into the same 95% bucket. An 83% loan is priced the same as a 81% or 85% loan. That means for every 5% you put down you’ll likely get a pricing improvement. Exactly how much changes from day to day and situation to situation. This general rule holds until about 60%, everything lower tends to fall into the same, <60%, bucket.

This important for borrowers to know so that they can gauge the magnitude of the effect of additional down payment when buying a home or how much of their equity then can borrower against when refinance.

Confused? Have questions? Please post a comment or on my Facebook page (see right sidebar) and I will answer to the best of my ability.