CDFIs in the Mortgage Market Place WHY WE ARE IN THE BEST PLACE AT THE RIGHT TIME!
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1 CDFIs in the Mortgage Market Place WHY WE ARE IN THE BEST PLACE AT THE RIGHT TIME!
2 NHSSF Mission Statement Neighborhood Housing Services of South Florida (NHSSF) collaborates with residents and other stakeholders to stabilize neighborhoods and develop sustainable housing. NHSSF Outcomes Residents who are educated consumers in their housing choices. Residents who have access to appropriate financial products for aoaining, maintaining and retaining their homes. Housing that is environmentally safe, decent, financially affordable and sustainable for homeowners and renters. Stakeholder and resident driven revitalized neighborhoods where residents, businesses and local government choose to invest Sme, money and energy.
3 NHSSF Lines of Business NHSSF provides a full spectrum of homeownership services in English and Spanish to assist potensal buyers in reaching their homeownership goal and assissng current owners to preserve their homes. Home Ownership PromoSon Home Ownership PreservaSon Mortgage Lending Real Estate Sales Housing Development Community Building
4 NHSSF Licenses and Cer8fica8ons Chartered member of the NeighborWorks Network CerSfied NeighborWorks Homeownership Center HUD approved housing counseling agency and secondary financing provider NaSonal Industry Standards for Homeownership EducaSon & Counseling adopter Licensed Real Estate Brokerage Community Development Financial InsStuSon (CDFI) NMLS licensed mortgage lender in Florida
5 The Mortgage Lending Changes On January 10, 2014, the mortgage world as we knew it changed. Our alphabet for mortgage lending changed. The Terms QM or Qualified Mortgage and ATR or Ability to Repay were added to our vocabulary and have become part of our daily lives. The Consumer Financial ProtecSon Bureau has basically given lenders the guidelines for making mortgage loans which, if followed, provide protecson for the lender from gebng sued by the borrower for making a BAD LOAN. The interpretason of the guidelines has not yet been tested. Fear about being sued for not complying with the rules became a big part of every credit officer s life! Many lenders are erring on the side of causon making mortgage credit even harder to access.
6 What is the ATR/QM rule about? The ATR/QM rule requires that the lender make a reasonable, good- faith determinason before or when consummasng a mortgage loan that the consumer has a reasonable ability to repay the loan, considering such factors as the consumer s income or assets and employment status (if relied on) against: The mortgage loan payment Ongoing expenses related to the mortgage loan or the property that secures it, such as property taxes and insurance the lender requires the consumer to buy Payments on simultaneous loans that are secured by the same property Other debt obligasons, alimony, and child- support payments The rule requires the lender to consider and verify the consumer s credit history.
7 QM Qualified Mortgage Mandatory product feature requirements for all QMs Points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed) No risky features like negasve amorszason, interest- only, or balloon loans (BUT NOTE: balloon loans originated unsl January 10, 2016 that meet the other product features are QMs if originated and held in pormolio by small creditors) Maximum loan term is less than or equal to 30 years Subject to a maximum Debt RaSo of 43%
8 Three Main Categories of QM 1. General defini8on category of QMs Any loan that meets the product feature requirements with a debt- to- income raso of 43% or less is a QM. 2. GSE- eligible category of QMs Any loan that meets the product feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA, or USDA is QM regardless of the debt- to- income raso (this QM category applies for GSE loans as long as the GSEs are in FHFA conservatorship and for federal agency loans unsl an agency issues its own QM rules, or January 10, 2021, whichever occurs first). 3. Small creditor category of QMs If the lender has less than $2B in assets and originates 500 or fewer first mortgages per year, loans the lender makes and holds in pormolio for at least 3 years are QMs as long as the lender has considered and verified a borrower s debt- to- income raso (though no specific DTI limit applies).
9 ATR Ability to Repay A reasonable, good- faith ATR evaluason must include eight ATR underwrisng factors: 1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 2. Current employment status (if you rely on employment income when assessing the consumer s ability to repay) 3. Monthly mortgage payment for this loan. You calculate this using the introductory or fully- indexed rate, whichever is higher, and monthly, fully- amorszing payments that are substansally equal 4. Monthly payment on any simultaneous loans secured by the same property
10 ATR Ability to Repay (con8nued) 5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners associason fees or ground rent 6. Debts, alimony, and child- support obligasons 7. Monthly debt- to- income raso or residual income, that you calculated using the total of all of the mortgage and non- mortgage obligasons listed above, as a raso of gross monthly income 8. Credit history The rule does not preclude a lender from considering addisonal factors, but the lender must consider at least these eight factors.
11 More informa8on on QM/ATR The Consumer Financial ProtecSon Bureau has great publicasons at hop:// to- repay- and- qualified- mortgage- standards- under- the- truth- in- lending- act- regulason- z/#doccontents. Pay parscular aoenson to the Small EnSty Compliance Guide in the middle of the page. It has the best summary of the rules and their applicasons. It even has some TIPS on implementason.
12 Current Lending Climate According to KrisSn Caliendo at CNN in an arscle dated December 6, 2013, these changes Might mean fewer choices for Borrowers. Why is that? Because while the CFPB has provided these guidelines for lenders to say that if you follow these guidelines, a borrower can t sue you for making a BAD LOAN, the interpretason of these guidelines is untested. Credit officers are living in fear of making a mistake. If a borrower s income can not be verified through tradisonal methods, it won t be used because it will not meet the ATR test.
13 If the borrower s back raso is over 43%, no maoer what the jussficason, the ability to qualify for a mortgage is decreased dramascally. If a borrower works part Sme, has over Sme or any irregular earnings lenders will be less likely to count these toward the qualifying income. This has a huge impact in lower income families. Smaller lenders and brokers are quessoning their ability to compete due to the cost of the regulatory compliance one CNN arscle quoted a mortgage banker as saying they now have 3 full Sme aoorneys just to keep up with the regulatory compliance changes. Regulators have not examined any bank s compliance under the guidelines, and both banks and regulators are causous about the rule interpretason
14 WHY IS ALL OF THIS SUCH GREAT NEWS FOR CDFI S? CDFI S are EXEMPT from having to meet ATR guidelines. If we qualify as a "SMALL CREDITOR (having less than $2billion in assets and making less than 500 QM eligible loans in the last 12 months) we have more liberal QM guidelines. These exempsons and protecsons CAN be passed along to investors who meet the small creditor guidelines (Community Banks).
15 Why is the exemp8on important? Legal protecson we can t be sued by the borrower for any loan documentason issues or borrower s ability to repay. Value of loans for sale if we sell our loans to Small Creditor (Generally Community Bank) the exempsons carry through to the new owner. Value of pormolio due to the regulatory exempsons the value of residensal loans being serviced should be higher over Sme. Interest from Capital Investors our exempsons should enable us to make more loans to low income buyers without the ATR and some of the QM restraints. Investors making CRA investments will get more return for their investment.
16 HOW NHSSF USES THIS TO OUR ADVANTAGE Loan Origina8on According to the Mortgage Bankers AssociaSon, the current cost to originate a residensal mortgage loan is $5,603. Because NHSSF provides housing counseling as part of our CDFI development service, our cost is significantly lower because our counselor gathers the borrowers documents and provides a full package of documents which reduces our Sme in processing the file. If the referral comes from another counseling agency, we pay the agency $500 for providing us the same set of documents. So our cost to produce the loan is less. We then offer the loan for sale to a community bank for three points or 3%. They buy the loan for MUCH LESS than it would cost for them to make the loan.
17 Sources of Capital We invite local banks to provide capital to NHSSF, as a CDFI, that will meet CRA Investment criteria because we will use the funds to make CRA eligible loans. We obtain lines of credit from community banks who have an opportunity to purchase the loan ayer closing this reduces our cost of capital because the funds are out for a very short period and gives us potensal buyers. Because our work is CRA oriented, we have been able to aoract more PRI related investments into the CDFI. We have applied to the CDFI fund for $2 million to be used for both loan loss reserves and lending capital.
18 NHSSF Loan Product Our main lending product is a 30 year fixed rate mortgage. Our borrowers are generally low income (80% or less AMI) or otherwise CRA qualified (census tract or NSP funds). Unless we have a specific commitment for a higher LTV, our loans are generally 80% LTV with a second mortgage provided by the local municipality or from NSP or other grant funds. CDFI loan loss reserve and investment capital will be used to make 2 nd mortgages where other funds are not available. We are creasng a 2 nd mortgage for 17-20% of the purchase price so that no loan we sell in the open market will be higher than 80% LTV.
19 Lending Revenue At closing, we charge the borrower 1% of the loan amount plus actual costs. At the loan sale we are now able to command at least 3% of the loan amount for the first mortgage as a premium REGARDLESS OF THE NOTE RATE. We will sell the second mortgage at a par price (no premium) and hold a 10% loan loss reserve based on invested capital. We make a spread on the line of credit used for funding the loan line interest generally around 2% and interest rate to borrower generally 4.5% or higher. We charge more for servicing than the typical servicer we charge % instead of 0.25%.
20 Produc8on Volume We solicit veoed housing counseling agencies for their mortgage- ready clients. We pay them a $500 fee for their counseling services when the buyer closes. All borrowers MUST aoend an 8 hour Homebuyer EducaSon Class and a receive a minimum of 2 hours of one- on- one counseling including signing a budget with the proposed new payment. We will make excepsons to ATR guidelines based on wrioen criteria in our guidelines (for example accepsng six months of bank statements and wrioen leoer from employer for borrowers who are paid under the table). We will make excepsons to the 43% back raso based on certain compensasng factors (for example, previous rental payment being comparable to new house payment).
21 Opportuni8es In many areas, banks are cash rich and need CRA producson. CDFI s can give them the mortgage loans they need and make money on the deal. Community Banks are parscularly easy to deal with because they generally don t want to invest in the infrastructure to produce a volume of CRA- eligible mortgage loans. A Community Bank (less than $2 billion in assets and closing less than 500 QM eligible loans/year) can receive your exempsons to ATR and reduced QM requirements they can t be sued by the borrower for making a BAD LOAN that they buy from you! Banks can purchase a loan from you at a cost less than their $5603 cost to produce the loan, while you are ssll earning income from the transacson. Lines of credit used to make CRA- eligible loans qualify as a CRA Investment.
22 WHAT NOW? Doug Smith, the author of Making Success Measurable and the designer of S.M.A.R.T. Goals, said recently in the Achieving Excellence class at Harvard that non- profits are in the best place to fill the gap of products and services where the for- profit industry is not paying aoenson than ever in our history. We believe that mortgage lending for lower income clients is such a place. For more informason please contact: Arden Shank President/CEO Neighborhood Housing Services of South Florida ArdenS@nhssf.org (305) x 1123
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