Mortgage Procedures and Regulations (MPAR)
Natosha Reid Rice, Ansly Moyer, John Snook and Joe Honeycutt
What is MPAR?
The Mortgage Procedures and Regulations (MPAR) initiative
is a collection of efforts to improve affiliate performance in the
origination and servicing of their mortgage loans.
The MPAR initiative aims to provide affiliates with
 timely and relevant updates on changing mortgage
laws
 best practices for mortgage origination and servicing.
For more information, visit the MPAR homepage on My.Habitat
under Housing Finance Knowledge center
Affiliate Summit 2011
MPAR topics to be covered today:
• Mortgage Laws and Regulations
• Mortgage Fundamentals
• Mortgage Servicing
Affiliate Summit 2011
Mortgage Laws & Regulations
We’re going to discuss:
• Dodd-Frank Act
• State Law Changes
• What do these changes mean on the ground?
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd-Frank Act
The Basics:
• The most comprehensive financial regulatory reform taken
since the great depression.
• Creates the CFPB – Consumer Financial Protection Bureau
• Mortgage regulation is now federal
• Bigger shift may be in mindset
• Much still to come
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd Frank Act
What do affiliates really need to know?
• Much still to come
• Role of the CFPB is still in flux
• Regardless of noise from DC, many changes are here
to stay
• Did not address GSE reform (Fannie/Freddie)
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd-Frank Act
Specifics (SAFE Act)
• The first shot across the bow:
– Created prior to Dodd-Frank, but amended by
and incorporated within CFPB
– Reflects a shift in philosophy  federal
monitoring and licensure is now the standard
rather than exception
– “Bona fide” nonprofit
• Full aspects on MPAR homepage on My.Habitat
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd-Frank Act
New Appraisal Independence Regulations
• Requires appraisers to be independent and to receive
“customary & reasonable” fees
– Treasury & CFPB have ruled that donated appraisals to
Habitat affiliates are permissible
– Board/staff may generally not conduct appraisals for
the affiliate (safe harbor)
– Formalized good practices for appraisals generally
• Other aspects detailed on MPAR homepage on
My.Habitat
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd-Frank Act
Ability to Pay (Qualified Mortgages)
• Requires creditor to make good faith determination,
based on verified and documented information,
consumer has reasonable ability to repay loan.
• QM – may be huge; defense to foreclosure; HFHI
submitted comments
– Record retention; due diligence, underwriting, new
standards
• Final rule expected later in the year
Affiliate Summit 2011
Mortgage Laws & Regulations - Dodd-Frank Act
Qualified Residential Mortgages (the QRM Boogeyman)
• Gives preferential treatment for mortgages meeting certain
requirements;
– Worries this may become the “only” accepted mortgage
– Specific concern for affiliates who sell/securitize mortgages
• 20 percent?!?!
– Coalition for Sensible Housing Policy
(www.sensiblehousingpolicy.org)
• Still being considered, with huge number of comments
received by regulators
Affiliate Summit 2011
Mortgage Laws & Regulations - State Law Changes
Issues and Concerns
• Mortgage laws are traditionally addressed at the
state level
– Foreclosure responses – both easier & harder?
– State mortgage regimes – an additional layer of
complication
• How do you modify a Habitat mortgage???
• Is your affiliate/SSO engaged in the housing
conversation?
Affiliate Summit 2011
Affiliate Summit 2011
Mortgage Laws & Regulations
Other Considerations
• Unclear what and how these rules will impact
new product lines such as NRI
• Much is still in flux; CFPB still without a head
and under attack
• Foreclosure crisis is still a major issue; significant
additional legislation at the state/federal level still
a possibility
Affiliate Summit 2011
Mortgage Fundamentals - topics to be
covered today:
• House Pricing
• Documentation
• Real Estate Settlement Procedures Act
(RESPA) and Truth in Lending Act
(TILA)
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
Habitat Pricing Policy – Key Principles
No Profit: The “repayable” portion of the purchase price (i.e.,
the amount of the first mortgage) may not in any event exceed
the “total development cost” of the house.
Upside Down House: The total of all Habitat mortgages may
not exceed the fair market value of the house at closing.
Affordability: The purchaser’s monthly payments may not
exceed 30% of household’s gross income at the time of
purchase.
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
House prices are based on a three step process:
Step 1 – Calculate Total Development Cost of House
 Includes cash costs or donated value of land and infrastructure, direct
construction costs of labor and materials, in-kind material donations, value of
donated professional labor, legal fees, recording fees, permits, etc. May also
include 10% to cover indirect expenses.
 Excludes unskilled volunteer labor and sweat equity.
Step 2 – Obtain appraised value of house (FMV)
Step 3 – Determine Purchaser’s “Affordable”
Monthly Payment Amount (may not exceed 30% of household’s
gross income at time of closing)
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
Policy 24 of the U.S. Affiliated Organization
Policy provides that affiliates should utilize
some form of equity protection.
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
One of the most common forms of equity protection = “soft”
or “silent” subordinate mortgages
 Silent second fills gap between FMV and first mortgage, and covers the
amount of any “affordability write down.”
 Historically silent seconds require no monthly payments and are forgiven
over a period of time unless homeowner
• defaults
• refinances first mortgage or
• sells the house.
 Sustainability Policy now allows affiliate to require repayment of any
“affordability write down” at the end of term of first mortgage.
Affiliate Summit 2011
Mortgage Fundamentals - House Pricing
Other Equity Protection Models include:
• Shared appreciation agreements;
• Land trust or leasehold mortgages; and
• Deed restrictions and restrictive covenants.
For more information, see U.S. Policy Handbook on My.Habitat: Habitat
House Pricing Policy (No. 23), Mortgage Policy (No. 24), Sustainability
Policy (No. 28), Authorized Financing Options (No. 29).
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Promissory Note and Mortgage - Main Documents
 Promissory Note:
• Signed by homeowner and delivered to affiliate
• Grants affiliate the right to collect monthly mortgage payment
 Mortgage:
• Grants affiliate right to foreclose on house if homeowner fails to
make monthly payments
• May be referred to as a “Deed of Trust” or “Deed to Secure Debt”
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Promissory Note Essentials:
 Keep original Promissory Note to enforce debt in court
Promissory Note should contain:
 Principal amount owed
 Amount of monthly payments (excluding taxes and insurance)
 When and where payments are due
 First and last dates (maturity date) that payments are due
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Promissory Note – Mistakes to Avoid
 Omitting principal amount or monthly payments may mean
note is unenforceable.
 Including taxes and insurance as part of the monthly
principal payment.
These errors can be corrected by an amended and restated note.
• Must be signed by the homeowner
• Check with your attorney for the appropriate form
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Mortgage Essentials:
 Must refer to an existing Promissory Note dated on or before the date
of the Mortgage.
 The Mortgage and Promissory Note should be executed and in place
before the family moves into the home.
 Mortgage should accurately state:
• Borrower’s name
• Principal amount of Promissory Note
• Date of Promissory Note
• Some states may require more terms
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Mortgage Essentials (continued):
 Must have a legally sufficient description of the property
 Must include express foreclosure or power of sale provision
 Depending on state law, may need original Mortgage or proper
replacement to foreclose
 Include declaration that Habitat home must be homeowner’s
primary residence
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Most Common Errors with Mortgage Documents:
 Amounts, names or dates do not match on Promissory Note and Mortgage
 Affiliate name is not correct
 Monthly payment amounts do not add up to Mortgage amount
 Improper execution
• Correct notary acknowledgment and execution (state specific)
• Witnesses
• Other state law requirements
 Incomplete legal description
 Inaccurate description of Promissory Note
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Closing Attorney and Title Company:
 Closing attorney should have experience with closings and be
responsive.
 Attorneys and title companies new to Habitat closings may be
unfamiliar with required provisions (rights to repurchase, second
mortgages, occupancy requirements, etc.).
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Post-Closing Essentials:
 Mortgage must be recorded with proper governmental entity
(usually county)
 Keep a pre- and post closing checklist
 Keep all mortgage documents in one fireproof location
Affiliate Summit 2011
Mortgage Fundamentals - Documentation
Conclusion:
 Proper mortgage documentation is critical to protecting your
affiliate’s rights in its mortgage portfolio.
 Always work with your local attorney to make sure your
documents are properly drafted, executed and recorded.
 A mortgage fundamentals checklist and other resources are
available on the MPAR homepage on My.Habitat.
Affiliate Summit 2011
Mortgage Fundamentals – RESPA/TILA
Are Habitat affiliates required to comply?
TILA
 Yes, all affiliates must comply.
RESPA
 Affiliates that originate more than $1,000,000 per year in mortgages
must comply. This includes the face amount of “silent second” or other
subordinate mortgages held by the affiliate.
Reasons to comply:
Servicing standards; Cannot be corrected retroactively; Standard operating
procedure; Subsidies; and Eligibility for leveraging and discounting programs
Affiliate Summit 2011
Mortgage Fundamentals – RESPA/TILA
What does compliance mean to my affiliate?
 Give initial disclosures at the proper time.
 Give required disclosures at closing.
 Follow servicing guidelines.
Resources, including a timeline for giving the disclosures and
example disclosures, are available on the MPAR homepage of
My Habitat.
Affiliate Summit 2011
Mortgage Servicing
We’re going to discuss:
•
•
•
•
•
•
Affiliate Summit 2011
Basic Collection Practices
Escrow Management
Self Servicing vs. Third Parties
Minimizing Delinquencies
Board Governance
Bankruptcies and Foreclosures
Mortgage Servicing: Basic Collection Practices
Subsidy and Sustainability Policy, Section 2.4
Professional Quality Loan Servicing
• Affiliates must use Professional Industry Standards to service mortgage
loans.
• Policies & procedures must include:
• Explicit procedures for the efficient collection and recording of mortgage
payments.
• Written procedures for responding in the event of late or missed payments.
• Establish systems and procedures that are conducive to homeowners
making their payments in full and on-time every month.
• Take corrective action promptly in the event of missed payments or other
violations of the mortgage agreement.
Affiliate Summit 2011
Mortgage Servicing: Basic Collection Practices
Delinquency Defined: when is a mortgage payment delinquent?
If it is due the 1st of the month:
• If not paid, it is delinquent the next day, which is the 1st day of
delinquency
• It is 30 days delinquent if it is not paid before the next due date.
• It is 60 days delinquent, if not paid before the following due date
• It is 90 days delinquent, if not paid before the following due date.
• The first day of delinquency is important:
– To consistently trigger policy collections actions and to comply with12 USC
1701x(c)(5) requiring that before the 45th day, you must provide the delinquent
homeowner information about credit counseling and the HUD toll free number
for finding a certified nonprofit credit counseling agency.
– Not doing this has already been used as a foreclosure defense against a Habitat
affiliate
Affiliate Summit 2011
Mortgage Servicing: Basic Collection Practices
See the “Mortgage Servicing Standards” in the MPAR section of My.Habitat
for tips for success:
• Clearly explain delinquency policies in homeowner education and
FOLLOW YOUR POLICIES
• Send out all notices and make phone calls as early your policy states.
• All contacts with homeowners should be done by the same person
• Keep notes from all communications
• Collections is a finance function, not family services
• See following timeline for collection activities for Nashville HFH, that
has one of the lowest delinquency and foreclosure rates for US affiliates
Affiliate Summit 2011
Time-Line
in Days
0
Collections/Actions Time-Line
Nashville Area Habitat For Humanity
Status
Payment Due First of month
15
Explanation/Action
15 days past Payment considered late. 15 day letter sent. 5% late fee
due
due depending on type of mortgage. Workout possible
through a Repayment Plan
30
30 days past Classified as delinquent.
due
32
75
105
Action
Grace period ends
16
45
NAHFH
Notice of
Default
30 day letter sent. Second mortgage payment due. Type A NAHFH may still talk to
workout thru Repayment Plan is still possible.
homeowner.
Recommendation to Delinquency Committee for attorney Finance Dir is only
to send Notice of Default letter. 30 days to cure.
NAHFH employee who
Delinquency Committee recommends foreclosure to
can talk to homeowner.
Board. Workout requires Delinquency Committee approval. Fin Dir directs to attorney.
Foreclosure Foreclosure process begins if Board has approved.
Workout requires Delinquency Committee approval.
Foreclosure Attorney bids for NAHFH at foreclosure sale. NAHFH takes
Sale
title to house.
Affiliate Summit 2011
NAHFH to talk with
homeowner
Mortgage Servicing: Escrow Management
Your affiliate and/or your servicer must comply with all laws
pertaining to mortgage servicing, collections, and escrow
management:
• Escrow accounts must be separate from all other accounts that are
fully insured by the FDIC
• Escrowed funds cannot be comingled with operating funds
• You may not “borrow” from the escrow account
• Must comply with RESPA for doing escrow analysis
“Escrow Management” conference call on My.Habitat (11/15/11)
Affiliate Summit 2011
Mortgage Servicing: Self vs. Third Party Servicing
At a minimum, Full Servicing includes:
• Receipt and processing of homeowner payments
• Establishment of, allocation to, and payment from FDIC insured escrow
accounts.
• Annual escrow analyses
• Delinquency letters/phone calls, determination of causes of delinquency
• Recommendations for resolution of delinquency problems
• Daily updating of account status with online capability for reporting and
review of actions and notes from communications
• Reporting to the credit depositories
Affiliate Summit 2011
Mortgage Servicing: Self vs. Third Party Servicing
In general (based on limited data):
• Affiliates using professional third party servicers for “full servicing” have
lower delinquency rates
• The cost of third party servicing is often less than the cost of an affiliate
self servicing.
– (See MPAR document “Cost Comparison Mortgage Servicing”)
• Few affiliates can stay on top of the constantly changing legal and
banking compliance issues, thus facing risk.
• Doing self servicing well requires professional servicing software and
ongoing updates and support.
Affiliate Summit 2011
Mortgage Servicing: Controlling Delinquencies
Prevention of delinquency issues begin with
family selection:
• Need for adequate housing
• Ability to pay
• Willingness to partner
Delinquency issues are linked to homebuyer
financial training, which should include:
• Importance of a good credit score
• Reporting to the credit depositories
Affiliate Summit 2011
Mortgage Servicing: Controlling Delinquencies
 The affiliate’s role in serious delinquency usually result from
a lack of policies and consistent processes
 Delinquencies are more correlated to credit history than to
income
 Inadequate second mortgages can lead to more delinquencies
 Delinquencies can become viral, for better or for worse
 Most affiliates that use third party full servicing do better
than affiliates that service their own
Affiliate Summit 2011
Mortgage Servicing: Controlling Delinquencies
Reporting to credit depositories is important for:




Controlling delinquency rates
Lowering other costs of housing
Building lasting wealth
Rewarding faithful homeowners
The importance of good credit must be:
 established in your underwriting and application processes,
 reinforced through your homeowner preparation classes, and
 rewarded by reporting payments to the credit depositories
Affiliate Summit 2011
Mortgage Servicing: Controlling Delinquencies
Resolving Serious Delinquencies Requires:
• Clear policies and procedures applied consistently
• Homebuyer education, ongoing communications, collections
processes, and actions aligned with the policies
• Recognition as an important issue by the staff and board
• A special committee with external expertise
• Single Point of Contact (SPOC) or any communications with
delinquent homeowners.
• Use of PRONTO/Repayment Plan, but coordinated with State
mandated pre-foreclosure (mitigation) process
• Foreclose when appropriate
Affiliate Summit 2011
Mortgage Servicing: Board Governance
“Lessons Learned” about effects of delinquencies:
• Financial: cash flow shortages, inability to get credit lines, limit on
FlexCAP and other mortgage financing, risk with audits, risk of
swaps and buybacks
• Capacity: Staff reductions and loss of morale, loss of credibility
with community and prospective partners, loss of board members,
difficulty in recruiting skilled board members, inability to build
homes, risk of negative press
• Fundraising: Loss of sponsors, barrier to board fundraising,
problems with financial information and outcomes data. It can be
faster and easier to clean up delinquencies and arrearage than it
might be to ramp up fundraising.
Affiliate Summit 2011
Mortgage Servicing: Board Governance
An affiliate’s board of directors has a fiduciary role:
• An affiliate’s delinquency rate can be a metric for everything you do
• It can be impossible to discern a delinquency issue in normal financial
statements
• The board of directors should be reviewing a monthly mortgage status
report showing delinquency categories and arrearage amounts with
historic trends and know how you compare to other affiliates
“Whoever controls the largest asset of a non-profit essentially controls
the organization”
Streetsmart Financial Basics for Nonprofit Managers, by Thomas McLaughlin
Affiliate Summit 2011
Mortgage Servicing: Board Governance
Sample Monthly Board Report
Reporting Period: 12/31/10
Delinquent
30-59 days
Total Mortgages: 175
# Mortgages
Delinquent
12
Arrearage
% Delinquent
$2400
6.9%
60-89 days
5
$2000
2.9%
90 plus days
8
$10,000
4.6%
Total This Month
25
$14,400
14.3%
Total Last Month
(173 mortgages)
Total Same Month
Pr. Yr. (163 mortgages)
23
$12,900
13.3%
30
$18,500
18.4%
46
Affiliate Summit 2011
Mortgage Servicing: Board Governance
How does your affiliate compare to others?
HFH AnyTown Historic Delinquency Rates
12.00%
10.00%
30day%
8.00%
60day%
6.00%
90day%
4.00%
total%
2.00%
60+90%
0.00%
Comments for 2011-2:
1. Affiliate has the 8th lowest total delinquency rate of 23 affiliates in the state
2. Affiliate has the 16th lowest total delinquency rate of 126 US affiliates with 100 or
more mortgages
47
Affiliate Summit 2011
Mortgage Servicing: Bankruptcies /Foreclosures
We strongly recommend that the Affiliate work closely with a local
attorney that is experienced with bankruptcy law and the foreclosure law
and procedures of their respective state.
• This attorney should also review your policies and procedures prior
your needing them.
• Bankruptcy attorneys have far more resources and options than
previously.
• Dodd Frank has already strengthened foreclosure defenses
• Pending CFPB rules for “Qualified Mortgages” (QM) could have
significant affect on family selection and documentation.
Affiliate Summit 2011
Mortgage Servicing: Bankruptcies /Foreclosures
Judicial foreclosures
• Lender files a lawsuit to obtain a judgment, by which the court will order the
property sold.
• Advantage – timeliness for possession with “waste”
• Disadvantage – cost and timeliness to sale
Non-judicial foreclosures
• The trustee on the deed of trust conducts the sale without the involvement of the
court.
• Advantage – generally swifter resolution and less cost
Summary of State Foreclosure Laws:
• http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/surveyforeclosure-card.pdf
Foreclosure Mediation Programs by State:
• http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html
HfHI
US Office:
Finance
Affiliate
Summit
2011 and Sustainability Series
49
Mortgage Servicing: Bankruptcies /Foreclosures
Alternatives to Foreclosure
Pre-foreclosure / short sales
•
•
Top dollar for FMV
Potential tax implications
Deed in lieu of foreclosure
•
•
•
•
Less costly to Affiliate in legal fees
Less damage to home and NIMBY issues
Potential issues with liens on the title
“Cash for Keys” – with enough incentive for homeowner
HfHI
US Office:
Finance
Affiliate
Summit
2011 and Sustainability Series
50
Mortgage Servicing: Bankruptcies /Foreclosures
Chapter 7 and Chapter 13 bankruptcy:
Chapter 7 Bankruptcy relief is available to individuals regardless of the
amount of their debt and whether or not they are solvent or insolvent.
It is not available to partnerships or corporations. It does not require the
debtor to enter into payment arrangements with the Bankruptcy Trustee’s
office. However, it may require the debtor to turn over property to the
Trustee’s office.
Chapter 13 Bankruptcy is a repayment plan that a debtor submits to the
bankruptcy court. It describes how the debtor intends to repay the debt.
The plan can usually be anywhere from a 3 to 5 year period. Once the
Chapter 13 plan is completed and the borrower has made payments
according the plan, the account will be current.
HfHI
US Office:
Finance
Affiliate
Summit
2011 and Sustainability Series
51