LenderNews by Rob Chrisman
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Dec. 17: Appraisal news & appraiser training; the impact of higher rates on HELOCs, HFAs, and business – there’s opportunity!

December 17, 2016

Lenders, and their loan officers, do some form of marketing every day. In 1975 the Pet Rock conquered the gag gift category. It was a brilliant marketing idea 41 years ago. Who would ever buy one of those? Well, Nordstrom’s brought it back, and is claiming that it is sold out. Saying that you’re “sold out of rocks” is another brilliant marketing idea. Thanks to John B. who sent that one, and observed, “Something is wrong when this is a gift idea while at the same time parents are pulling money out of 401(k) retirement accounts to pay for holiday gifts.” Agreed.
 
Yes, the Fed increased their target Fed Funds rate, and many banks have raised their Prime Rates from 3.50 to 3.75%. Some lenders are wringing their hands, others view it as an opportunity. Why? With an expanding economy comes more qualified borrowers. One can pick all the statistics apart, but it is certainly a different economy than it was a few years ago. And some CEOs of successful companies are viewing a contraction in lending as an opportunity to “hunt/gather” skilled personnel from weaker companies.
 
Looking ahead to 2017, Nadlan Valuation’s Sam Heskel sees many reasons to be optimistic about the housing market and the mortgage business. Among other things, Sam notes that despite recent increases, interest rates are still near their historic lows, which bodes well for the purchase market. He also points out that employment numbers have improved, consumers are more confident and Millennials are expected to enter the housing market in a big way in 2017. And, there will be a “mortgage guy’ at Treasury with Trump’s Secretary-designate Steven Mnuchin. All good reasons to believe the industry is in for a good year in 2017.
 
Regarding the increase in Fed Funds and the HELOC biz, Mike Kinane, Senior Vice President, Home Equity, TD Bank, believes, “It will impact the housing market as lenders will adjust the interest rates they offer. Many homeowners with adjustable rate HELOCs will be affected but may be unaware of the implications. can discuss best practices for HELOC borrowers to be aware of during a shift interest rates. It’s essential for homeowners with a HELOC to review their loan terms to gain a better understanding of how their payments will be affected by an interest rate hike. It’s best for consumers to look at their contract to see how exactly the rate will affect their payment.
 
“Given that rates are still historically low, homeowners should use this as an opportunity to check up on their finances. It’s important to understand what a raise in rates means for homeowners’ monthly payments and consider if refinancing makes sense. The Fed Fund changes won’t break the bank for a HELOC borrower. For example, a rate increase of 25 basis points would cause borrowers with a $50,000 HELOC to see a $10-$11 increase in their monthly payment.”
 
Moody’s notes the Federal Reserve’s short-term interest rate hike of 25 basis points is credit positive for housing finance agencies (HFAs). While the rate hike is small, higher interest rates boost HFA investment earnings, drive profit margins, and present opportunities to grow loan portfolios and rebuild balance sheets.
 
“As of fiscal year-end 2015, roughly 7.2% of HFAs’ assets were held in cash and cash equivalents, which will immediately benefit from the rate increase and boost investment earnings. Between 2007 and 2009, the steep drop in interest rates led to a decline in HFA profitability. Since then, low interest rates have curtailed profits, although HFA earnings have recovered owing to selling mortgage-backed securities in the secondary market and savings from bond refundings. Now, profit margins should expand with the higher interest rates boosting investment earnings. We project that HFA sector-wide profit margins will increase by 5% if investment income doubles from 2015 levels and by 9% if investment income triples.
 
“As interest rates rise, HFAs will be challenged by higher interest expense on both their hedged and unhedged variable-rate debt. However, increased investment earnings on cash held by HFAs combined with the interest rate swaps on the hedged variable rate debt will alleviate the effect of the higher interest costs. HFAs can also use cash to redeem unhedged variable-rate bonds if interest rates become too high.”
 
“An increase in mortgage rates (close to 6% or higher) would also allow HFAs to grow their loan portfolios. Although mortgage rates are not immediately affected by short-term interest rates, changes affect long-term mortgage rates. Demand for HFA mortgages is driven by the attractiveness of rates on HFA loans relative to those on conventional mortgages. With rates on conventional mortgages so low, HFAs have found it difficult to originate loans over the past seven years. With an increase in interest rates, fewer borrowers could obtain a mortgage from a conventional lender at a lower rate than from an HFA. Higher loan originations, coupled with issuance of tax-exempt bonds, would rebuild HFA balance sheets.”
 
I saw one reporter’s story that noted, “Higher mortgage rates since the election of Donald Trump have hurt refinancing activity, but researchers expect home prices to be largely unaffected. The increase in the fed funds rate is unlikely to change the landscape.” It prompted one industry vet to respond with, “There are some scary numbers about the drop off in refinance volume. Not one lender has started to act or are waiting until the first of the year. January will be brutal. Folks are already cutting margins to maintain volume (that never works), and recruiting gets desperate: offering huge sums to replace lost refi volume and then folks figure out that it not an easy fix.
 
“Residential lending changes could be drastic with the combination of the winter and higher rates. The MBA came out with some revised volume forecasts recently that you mentioned in your commentary. There are plenty of small guys that will do just fine if the big banks continue to lose market share.
 
“Some shops just went all in on the refinance business and did not hire purchase LOs. This will be tough for them unless they can quickly shift their business model. The refi shops will feel it immediately and need to start making cuts. This was a rich market for refis since the values rebounded, employment was more stable and many folks refinanced 3 or more times. It is a double whammy when repeat, repeat business disappears.”
 
Mortgage and lending expert, Bill Dallas, co-founder and CEO of cloudvirga, has some insights into the market outlook in 2017. “Trump’s campaign advocated the benefits of employees, he proposed to raise the federal minimum wage by $2.75 per hour. Improvement in wage growth along with a strong job market will give support to consumer spending, GDP is then expected to increase to 2.1 percent in 2017 and 2.0 percent in 2018, which in turn would cast an upward pressure on rates.
 
“The 30-year fixed mortgage rate is expected to remain at low 4 in early 2017, but increase to 4.2 percent for the full year 2017 and 4.6 percent in 2018. More households will be discouraged to refinance.”
 
And Bill opined on the potential rise in purchase originations for 2017. “Economic growth and strong job market would encourage household formation, boosting household demands. Purchase originations in 2017 and 2018 are expected to grow to $1.08 trillion in 2017 and $1.14 trillion in 2018. While fewer households will find low enough rates to justify a refinance, refinance originations would decrease to $455 billion in 2017.”
 
Shifting to the topic of appraisals, certainly the drop in volumes will free up appraisers in certain parts of the nation and cut appraisal times. But there continues to be changes in the industry worth noting.
 
Anyone doing appraisals in North Carolina knows about the law taking affect January 1. “For appraisal assignments of property secured by the principal dwelling of the consumer, an appraisal management company shall compensate appraisers in compliance with section 129E(i) of the federal Truth in Lending Act (15 U.S.C. § 1601 et seq.) and regulations promulgated thereunder. The Board shall adopt rules necessary to enforce this subsection. Rules establishing customary and reasonable rates shall be based on objective third‑party information, such as academic studies and independent private sector surveys." The North Carolina Appraiser Board weighed in.
 
On the appraiser training situation SS sent, “I tried to get "into" the appraisal industry. It made sense 2 years ago. I took the required course work online first and passed the exam for each course gaining a state certificate for each. I was required to take an in-person course for appraiser trainees and appraisers who wanted to be a supervisor for trainees. During that session, the instructor announced, ‘You need to have the right DNA to be an appraiser.’ I didn’t understand at first why he said that. Then he explained you had to be related to someone in the appraisal business to find some who would be willing to train you for the required two years. Undeterred, I started my search and found one nice person who considered training me, but quickly realized how much of his time it would take to train me, go to every site with me, and review my report to sign off on my report. Time is money and he quickly did the calculation. I don’t blame him – he was busy. During one of my conversations with him he mentioned he had a trainee offer to pay for the training, which he did not accept.
 
“For the younger generation to get into the business they must have a college education, pay for the online courses or travel to the courses, which took me a year to complete taking one at a time back to back, and pay for 2 years of training/internship. I don’t know many people who can afford to do this. I have 10 plus years mortgage/banking experience and thought it made sense to choose the appraisal industry as my next career choice. I decided this was not a path I wanted to continue to pursue.”
 
The note wrapped up with, “I gladly decided to take a job working for a great company where I receive compensation for work and as a plus I have benefits and paid time off. Something the nice appraiser who considered training me does not always receive.”
 
Recently AXIS Appraisal Management Services Chief Appraiser William Waltenbaugh addressed best practices at the Appraisal Summit and Expo in Las Vegas, answering the question, “What does an AMC exercising best practices do?”
 
“They spend a considerable amount of resources developing, vetting, and maintaining a nationwide panel. This includes monitoring and keeping up-to-date appraiser credentials and errors and omissions (E&O), while scrubbing appraisers against lender approval or do-not-use lists to ensure only those lender-approved appraisers are utilized.
 
“Other considerations include accounting services, QC review, performance rating, and carrying out audits to assess qualifications and competency to complete different assignment types (SFR, 2-4 family, reviews, etc.). In addition, all communication between the client and appraiser needs to be filtered and managed to ensure appraiser independence every step of the way.
 
“AMCs should create a distinct and compliant firewall between the appraiser and a client’s loan production personnel by having dedicated staff and departments available to resolve value disputes factually and professionally, without pressuring or coercing the appraiser. AMCs who follow best practices do not have a dog in the value fight; rather, they are compensated for their service, not for the closing of a loan.
 
“Communication is key in sorting out disagreements without coercion and within the confines of appraiser independence. A reviewer can’t change the value conclusion in the original appraisal. When an institution cannot resolve deficiencies with the appraiser, the institution must order an appraisal review performed by a competent state certified or licensed appraiser with a second opinion of market value, or obtain a second appraisal and adhere to a policy of selecting the most credible appraiser, rather than the appraisal that states the highest value.”
 
“Per TILA, the definition of appraiser independence states, ‘in conjunction with a covered transaction, no covered person shall or shall attempt to directly or indirectly cause the value assigned to the consumer’s principal dwelling to be based on any factor other than the judgement of a person that prepares valuations, through coercion, extortion, inducement, bribery, or intimidation of, compensation or instruction to, or collusion with a person that prepares valuations or performs valuation management functions.’
 
“Appraiser independence always has been a requirement and expectation in the appraisal process. But the mortgage meltdown of 2008 brought new light to the importance of appraiser independence, with the Home Valuation Code of Conduct (HVCC) the first response over appraiser independence. HVCC was an agreement between then-New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac that required the Government Sponsored Enterprises (GSEs) to institute new appraisal independence policies.
 
“For many lenders, the use of an AMC was the easiest, quickest, and most cost-effective solution to comply with these new requirements. To ensure appraiser independence, an institution must establish reporting lines independent of loan production for staff who administer the institution’s collateral valuation program. This includes appraiser selection, performance monitoring, and quality assessment as outlined by the Interagency Appraisal and Evaluation Guidelines.”
 
 
A couple in a bar are people watching.
“Now that looks like a happily married couple,” remarked the husband.
“Don’t be too sure, dear," began the wife. "They’re probably saying the same thing about us.”
 
 
If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Election Day 2016 is Over – Now What?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)