Mike Fratantoni, the chief economist and senior vice president of research and industry technology at the Mortgage Bankers Association (MBA), addressed three major challenges in the housing market during testimony before the U.S. House of Representatives‘ Financial Services Subcommittee on Housing and Insurance.
The biggest challenge in today’s housing market is the lack of inventory, Fratantoni said in his written statement on Wednesday.
“While the demographic fundamentals of the market continue to support strong housing demand for the next several years, the market is millions of units short of that needed to support this demand,” he said.
The silver lining, however, is that builders have picked up their pace of construction. New homes now account for roughly one-third of homes on the market, which compares to a more typical historical share of 10%.
As a result, a large delivery of multifamily units is expected over the next few years, but the recent trend in elevated mortgage rates has exacerbated this supply shortfall, Fratantoni explained.
Compounding the lack of supply is the proverbial “lock-in“ effect that has disincentivized homeowners to sell their current properties, thereby giving up a low mortgage rate and taking on a new loan at a much higher rate.
“A homeowner that was able to refinance into a low-3% or high-2% mortgage rate is just much less likely to list their property,” Fratantoni told lawmakers. “It doesn’t mean they’re never going to list … but it’s a friction in the system, so it’s going to keep existing inventory much lower than it otherwise would be.
“That’s been a support to home prices, but for someone trying to get into the market, it’s really an obstacle.”
Concerns over Basel III Endgame
Fratantoni also expressed concern that the recent Basel III Endgame proposal would accelerate the trend of the mortgage market shifting away from depository institutions, particularly large banks, toward non-depositories and independent mortgage banks.
The Basel Endgame proposal — issued by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) in July 2023 – boosted capital requirements for residential mortgage portfolios at large U.S. banks in comparison to international standards.
Under the draft proposal, 40% to 90% risk weights would be assigned for large banks that issue residential mortgages, depending on the loan-to-value ratio, which is 20 basis points above the international standard.
MBA’s comment letter highlighted the overly conservative risk weights on mortgages — particularly for low down payment loans favored by first-time homebuyers — and the lack of benefit for loans with mortgage insurance. It also mentioned the punitive treatment of mortgage servicing rights (MSRs) and the burdensome treatment of warehouse lending as being particularly negative for the mortgage market.
The Basel Endgame proposal would increase capital requirements on all three types of mortgage activities by banks — low down payment loans held on balance sheets, mortgage servicing and warehouse lending.
As a result, the Basel Endgame proposal “poses a significant risk to the stability of the housing finance market if it is not modified across all of these dimensions,” Frantantoni stated.
Rising cost of property insurance
Addressing the increased cost of property insurance for both prospective homebuyers and current homeowners is a priority for the MBA.
“The lack of availability and cost of homeowners insurance … it’s not only impacting the ability of borrowers to qualify for a loan, but increasing payments for existing homeowners to such an extent really puts them on an unstable path, so it really is front and center for us right now,” Fratantoni told lawmakers.
The average cost to insure a $300,000 home surged by 12% in 2023, reaching $1,770 per year, according to an Insurify report.
Certain insurance carriers have also limited their participation in natural disaster-prone states like California and Florida, given the increases in risks and costs.
Over the past 18 months, seven of the 12 largest insurance companies by market share in California have either paused or restricted new policies in the state, highlighted by the departures of State Farm and Allstate in June 2023.
Due to these departures and price hikes, the California FAIR Plan, the state’s insurer of last resort, has seen enrollment double over the past few years.
“Although these increases in premiums and reductions in availability of insurance have been concentrated in certain markets at this point, the concerns regarding property insurance continue to build for our lender members in the residential, multifamily and commercial sectors — and for all their customers,” Fratantoni said.
While the proposed tax credit appears unlikely to get through a Republican-controlled Congress, Biden has the ability to use the CFPB to push his housing policy agenda.
An ‘unwelcome surprise’
A CFPB blog post on Friday states that families closing a mortgage “often get an unwelcome surprise: closing costs that all too often are full of junk fees.”
According to the CFPB, one measure of closing costs is total loan costs, which includes title insurance, credit report, appraisal, and origination. These costs increased by 21.8% from 2021 to 2022, reaching nearly $6,000, per the CFPB post. And, as they are fixed, they have an “outsized impact on borrowers with smaller mortgages,” it added.
The post provoked a strong reaction from the Mortgage Bankers Association (MBA). Its president and CEO, Bob Broeksmit, stated that the use of the term junk fees is “illogical” and contradicts the White House’s definition, which is “lack of disclosure of the fee being charged.”
“The fees mentioned are clearly disclosed to borrowers well before a home purchase on forms developed and prescribed by the Dodd-Frank Act and the CFPB itself,” Broeksmit said in a prepared statement.
Broeksmit added that the Bureau’s “TRID” rule in 2015 and other rules imposed in 2020 reformed mortgage disclosures and customers’ ability to read these documents.
What’s the CFPB monitoring?
The CFPB said it will closely examine three topics: discount points, lenders’ title insurance, and credit reports.
Discount points have surged in recent years as mortgage rates have risen and competition has gotten more fierce. They were used by 50.2% of home purchase borrowers in 2022, compared to 32.1% in 2021. And, despite lenders selling points to reduce rates, it “may not always save borrowers money, however, and may indeed add to borrowers’ costs,” the CFPB said.
In another criticism of housing finance practices, the CFPB said lenders force borrowers pay for their title insurance, and the amount “is often much greater than the risk.”
Regarding credit reports, HousingWire reported in December that lenders’ prices would jump in 2024. The CFPB said that the “credit reporting industry is highly concentrated” and that “these steep increases in a market that lacks competition and choice warrant further scrutiny.”
“In the coming months, the CFPB will continue working to analyze mortgage closing costs, seek public input, and, as necessary, issue rules and guidance to improve competition, choice, and affordability,” the blog post reads. “We will also continue using our supervision and enforcement tools to make it safer for people to purchase homes and to hold companies accountable.”
Broeksmit has argued for years that it’s the CFPB that has made mortgage lending more expensive for consumers. The agency announces “new legal obligations without formal process or deliberation, enforcing novel and untested legal theories, and making it very difficult for firms to understand their legal obligations,” he said in 2022. A year later he described housing policy coming from Washington, D.C. as “extreme overregulation.”
In response to the CFPB’s latest “baffling” blog post, he noted that the agency has already imposed limits on lenders’ fees. The services covered, such as appraisals and flood hazard certifications, bring efficiency to the mortgage market and benefit consumers. The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Fannie Mae, and Freddie Mac also require these services.
The MBA, according to him, is also concerned “regarding rising costs of the tri-merge credit reports” and shares the “desire to help more Americans become homeowners.”
“MBA is eager to continue working with the Biden administration in these efforts but will vigorously oppose politically motivated proposals that only increase regulatory costs, reduce competition, or otherwise make it more difficult for Americans to get the credit necessary to achieve homeownership,” Broeksmit said.
Secretary of the U.S. Department of Housing and Urban Development (HUD) Marcia Fudge suggested to a congressional committee that the department could consider eliminating life-of-loan premium requirements for mortgages backed by the Federal Housing Administration (FHA), but did not offer any indication about the issue’s priority level at HUD.
Sitting for a HUD oversight hearing conducted by the U.S. House of Representatives Financial Services Committee on Jan. 11, Rep. Brad Sherman (D-Calif.) first brought the issue up by saying it is an important element to address for the kinds of people who most commonly make use of FHA mortgage programs.
“I don’t have to tell you, that’s working people, people of color [and] first-time homebuyers,” Sherman said. “They have to pay the mortgage insurance premiums, [which] raises their costs. Are you willing to look at not requiring them to make these payments through the life of the loan, but rather to eliminate the payments when they get a certain loan to value as the value of the house goes up?”
“Yes, I’m willing to look at it,” Fudge responded.
Nearly an hour after that exchange, Rep. Gregory Meeks (D-N.Y.) brought the topic up again.
“My question would be do you think there could be a scenario where FHA mortgage insurance premiums could follow a model that is similar to the private mortgage insurance [market] where, after a period of time you get equity in the home [that then] drops the monthly cost? Is that something you think we could work on, and that HUD could do?”
“I would love to see it happen,” Fudge responded.
When interviewed in December, leaders at multiple housing advocacy organizations including the Mortgage Bankers Association (MBA) and the National Housing Conference (NHC) cited the life of loan requirement as a key affordability issue in 2024.
“We think that FHA should consider further changes to the mortgage insurance premium, perhaps including the elimination of the life of loan premium requirement,” said Bob Broeksmit president and CEO of MBA to HousingWire in December. “On an FHA loan, you keep paying the mortgage insurance premium until you pay the loan off whereas in a conventional loan, once your equity reaches a certain point, you can get the mortgage insurance dropped.”
When asked about an MIP cut, NHC President and CEO David Dworkin said the “bigger issue” is the life of loan requirement, and that the MIP is currently “at a reasonable level.”
“[Life of loan] makes FHA a much more negative execution for the consumer,” Dworkin said last month. “Let’s say I have more than 20 or 25% equity in my house. I shouldn’t be paying mortgage insurance to FHA; I would not have to be doing it if I had a loan that was bought by Fannie Mae or Freddie Mac. And so I think that I’d like to see that addressed before we talk about another MIP cut.”
It was late 2022 and Mike was feeling the pressure. Mortgage rates had climbed close to the 7% range and he was determined to remain competitive on pricing with rival loan officers in North Carolina.
But there was a problem: pricing exceptions, in which the lender takes the hit, were becoming scarce at his company. So he did what a lot of retail loan officers in the industry were doing — Mike would reclassify a self-generated lead as a corporate-generated lead, thus slashing his compensation from 125 basis points down to as low as 50 bps, giving him a low enough rate to win the client and eventually close the deal. His manager and company bosses knew that he and other LOs were lying about where the lead source came from, he said.
The lower comp rate stung. After Mike paid his loan officer assistant, he was clearing just 40 bps. Still, it was better than nothing. After all, tens of thousands of loan officers had already exited the industry because they couldn’t generate enough business.
“At this time, I didn’t really think of it as an ethical issue,” Mike, whose last name is being withheld for fear of retaliation, told HousingWire in an interview in late November. “But it started to wear on me to where it was like, okay, I’m getting price-shopped left and right. I’m feeling the pressure to cut my pay, because when I do it, and my agent partners, they see that I do that, and then they’ll tell people they refer to me. ‘Hey, he can dig deeper if he really has to.’”
Mike continued: “Well, doesn’t that smack of bad faith if I’m not offering them my best price from jump? I would get people saying to me, ‘I’m not going to go in with you. I don’t feel comfortable with you, because you tried to get me to go for a higher pricing first, and then only offered a better deal once I told you I had another offer.”
Mike said he left that lender in early 2023 as a result of the ‘bucket game’ and refuses to manipulate where lead sources are coming from at his current shop.
“It’s a race to the bottom,” he said of the practice.
Over the past two months, HousingWire has interviewed more than a dozen loan officers, mortgage executives, attorneys and also reviewed several companies’ loan officer contracts and text messages between recruiters and prospects to shed light on the growing issue of pricing bucket manipulation, which critics say distorts market pricing and could represent a violation of fair lending laws.
It’s unknown how many retail lenders are engaged in the practice of falsifying lead sources to lower loan officer pay, but industry practitioners say it’s widespread, and in most cases, reclassifying leads into different pricing buckets before they lock is not permitted by the Consumer Financial Protection Bureau’s rules under Regulation Z.
It’s also unclear whether the CFPB is policing the practice; HousingWire could find no record of enforcement actions taken, and the agency’s audits are not public record.
Evolution of the LO Comp rule
In the wake of the housing crash in 2008, the CFPB created new rules that reshaped how loan officers were compensated. The architects of the new rules wanted to prevent loan officers from taking advantage of borrowers, which was a common occurrence in the days leading up to the Great Recession.
Under an updated Regulation Z, lenders could no longer pay loan officers differently based on terms of loans other than the amount of credit extended. In theory, this means loan officers provide the same service and pricing on loans, reducing the risk of steering.
“LOs also can’t get paid on proxies, and they define proxies to be pretty straightforward: some factor that correlates to terms over a significant number of transactions, and the LOs have the ability to change that factor,” said Troy Garris, co-managing partner at Garris Horn LLP.
But the CFPB did allow loan officers to be compensated differently based on lead sources, which do not fall under the category of terms or proxies and are neither a right or an obligation.
For example, when an existing customer calls the lender’s call center for a new mortgage or refinance, and the lender redirects the loan to the LO, “the LO gets paid less because it was sourced from the company, and it is less work for the LO,” said Colgate Selden, a founding member of the CFPB and an attorney at SeldenLindeke LLP. When it’s an outside lead, “the LOs generated the lead themselves; they are spending time marketing to new borrowers, so they get paid more.”
Attorneys told HousingWire that in the current marketplace, violations of LO Comp rules can arise when lenders and LOs alter compensation by changing the lead source after the initial contact with the borrower to lower their rate and secure the deals. Regulation Z generally does not allow LOs to change which lead source was used.
But, in today’s competitive market, “I do think there’s an incentive, especially on the LO side, to find ways to do something different – and probably also for companies to decide to take more risk,” said Garris. “We believe this is happening because people are frequently asking if there’s a rule change.”
How the ‘bucket game’ works
LOs who spoke to HousingWire said managers often told them they wouldn’t get pricing exceptions on deals, so if they wanted to gain an edge it would have to come out of their pay. Three loan officers at three different retail lenders described it as a feature of their lender’s business model.
“You feel out a prospective client during the initial conversation, get a sense of whether they know how everything works, if they’ve spoken to another lender, if they’re going to shop you, right? And you quote them the best possible rate you could give them that day, knowing that you’ll put them in a bucket just before lock,” said one Wisconsin-based LO. “It doesn’t really matter what you quote them in the initial conversation as long as you can get it below competitors around lock time…either through a pricing exception or the bucket [manipulation].”
One top-producing California-based loan officer said she was excited when a top 35 mortgage lender tried to recruit her with the promise of multiple pricing buckets. Having the buckets would provide her flexibility that her current lender didn’t offer, she thought at the time.
“What the [recruiting] company told me explicitly was the loan originator, when they go to lock the loan, they check a box – is it self, branch or corp gen? And you only get to check one box, but it’s the loan officer’s choosing, not the branch,” she said. “So the loan originator is choosing, not the branch that says I’m going to give you a lead and this is the comp for it. Not the corporate advertisement or online group that says you’re getting this lead from us and here’s documentation that it occurred and now you’re going to get less comp. It’s the ultimate in legalized fraud. Because it’s not true.”
These days, many lenders have pricing buckets for corporate-generated leads, branch leads, builder leads, marketing service agreement (MSAs) leads, internet leads from aggregators and more. In and of itself, it’s legal, provided the lead really did come from the source and it’s diligently tracked by the lender.
Loan officers and mortgage executives interviewed by HousingWire said some lenders justify the practice of manipulating the buckets by telling LOs it’s legal and they’ve been audited by the CFPB, which has not found any wrongdoing. Several executives accused of the practice declined to comment on the record about pricing bucket manipulation, though they all said they track leads as required and are in full compliance with the law.
Selden, the former CFPB attorney, said that LOs are telling borrowers who complain about high mortgage rates that companies are “running a special offer.” Borrowers are directed to the company’s website, where, by indicating the LO name, they supposedly qualify for a special deal with a lower rate. In reality, at lenders without adequate controls to prevent lead source manipulation, this shifts the source from self-generated to an in-house lead.
LOs interviewed by HousingWire said that in some cases they would be able to change the lead referral source themselves, and in other cases they’d need a manager to alter the lead source in the loan origination system.
While many instances of price bucket manipulation were directed by managers, LOs would also self-select, said Mike.
“Most of the time you don’t have a loan estimate from a competitor, you’re just afraid that you’re going to lose it because you’re so embarrassed about the rate. And that’s why a lot of my comrades… were going to the corporate-generated lead bucket before they even confirmed that they had to. Partly because you wanted to lead with your best price.”
Steve vonBerg, an attorney at law firm Orrick in Washington, D.C., worked as a loan officer and underwriter for seven years. He emphasized the potential trouble for lenders and LOs inaccurately classifying the lead source.
“Often, a [CFPB] examiner would see if the lead channel changed later in the process. That could be legitimate: the borrower starts working with an LO, and it’s a self-sourced lead for that LO, but then decides to buy a home in a different state in the middle of the process; the second LO that it has to be transferred to has now an internal-company referral, and so the lead source would legitimately change,” vonBerg said. “But, if there isn’t a legitimate reason for the lead source changing midstream, that would be fairly easy for an examiner to identify.”
“It’s wrong”
Victor Ciardelli is frustrated by the bucket game. Deeply frustrated. The Guaranteed Rate founder and CEO says he is losing money and loan officers to rivals because of a business practice that he says is flagrantly illegal, pervasive, and does not appear to be slowing down anytime soon.
Some rival retail lenders, he says, are creating up to a dozen pricing buckets for their loan officers. The tiered nature of the bucket comp structure in many cases — self generated being the highest at up to 150 bps, 100 bps for another ‘bucket,’ 80 bps for another, down to 60 bps, 40 bps and sometimes all the way to zero — proves that it is a deliberate business strategy, he said.
“It wasn’t intended that the loan officer at the time that they’re talking to the consumer and quoting them a rate, that the loan officer can put the consumer in any bucket they want,” he said in an interview with HousingWire. “But that is exactly what’s happening. What’s exactly happening is the fact that there’s all these different pricing buckets for a lot of these different companies out there. And that the loan officer is allowed to go in and offer the consumer whatever rate based on what the loan officer wants.”
He argued that LOs are maximizing their personal income per borrower.
“It’s no different than what happened prior to Dodd-Frank, where it was the wild, wild West and people were playing games with customers on rates and fees,” said Ciardelli. “It’s the same thing today. There’s no difference except the fact that there’s a law in place that tells the mortgage company and the individual loan officer. And the loan officers know that they’re violating the law. It’s greed.”
Ciardelli says the rival CEOs — he declined to name individuals and said it’s an industry-wide problem — are establishing these buckets and know “full well that the bucket is put in place in order to lie about where the lead source is coming from.”
They have an obligation to know where the leads are coming from, that the loan officers are putting them in the appropriate bucket and that they are being tracked, he said.
“The loan officer may take a hit on that loan, and may make less on that loan, but the company themselves doesn’t take the hit, their margin stays the same. So the company CEO is happy, because they’re like, ‘I’m giving my loan officers all this flexibility to go out and be competitive and win deals. And they’re going to win more deals than anybody else out there, because they’re going to be able to slot the individual borrower into these different lead channels. So the individual CEO is making all the money. They’re the ones killing it.”
Ciardelli says he asked about the bucket pricing game and attorneys all told him no, it’s not legal, he said.
“I’ll play by whatever the law is…But when the rules are set up to be a certain way and people are not following the rules, then that’s a problem.”
Two other executives at large retail lenders also said they’ve lost loan officers to competitors who are sanctioning, if not directing, the manipulation of pricing buckets.
“The LOs get told this is legal, it’s just pricing flexibility so they can compete, and they have a compliance team that monitors it,” said one executive at a regional lender in the South. “Obviously that’s not true… What’s happening is they [the lenders] are pricing high and basically forcing the LOs to cut from say 150 [basis points down to 50 [basis points] on some loans because otherwise they just won’t do enough business. It’s a feature, not a bug, as they say. We asked our attorneys if we could do this and they told us absolutely not.”
The Mortgage Bankers Association (MBA) is aware of the issue. The organization asked an outside attorney from Orrick Herrington & Sutcliffe LLP to study the permissibility of the practice. In a letter sent to members in February 2023, Orrick advised MBA members that changing the lead source of a loan after beginning work on the application in order to make a competitive pricing concession “is not permissible.”
The letter has had little meaningful impact, sources told HousingWire. If anything, the practice has increased over the last year.
Fair lending concerns
Another repercussion in the market is that savvy borrowers gain access to lower rates when lead sources are manipulated. Less educated applicants could be quoted higher rates for the same loan, raising concerns about fair lending practices.
But this argument prompts a broader discussion on the efficacy of the LO comp rule, with divergent opinions on the matter.
“I used to be an MLO for seven years. I was in the industry in the 2000s until it melted down, and then I ended up going to law school because I had lost my job. I originated hundreds of loans myself, and personally, I think overall the rule is a good rule,” vonBerg said.
vonBerg elaborated: “Under the old regime, LOs were not incentivized to offer their consumers the best loan and best pricing for them. They were incentivized to give them the loans and pricing where they would make more money. Although it has some issues that should be corrected, I think the LO comp rule makes a lot of sense, in that it removes a gigantic conflict of interest.”
Not everyone shares this viewpoint.
“The LO comp rulewas designed to prevent steering to high-cost loans. And really, those things don’t exist anymore. We can’t put borrowers in homes that they can’t afford,” said Brian Levy, Of Counsel at Katten and Temple, LLP.
According to Levy, the rule creates “a tremendous amount of anxiety for the mortgage lending industry that doesn’t benefit consumers in any meaningful way.”
“The industry is frustrated. They’re unable to easily reduce prices. For example, in the past, before the rule was around, LOs were able to take less as a commission, just like any other salesperson – a car salesperson – to make the deal work. That’s illegal now for loan officers. The mortgage company can make that decision [of lowering their margins and reducing rate], but the loan officer cannot.”
Levy noted that some consider the LO comp rule to be a de facto fair lending rule.
“But we already have fair lending rules. The idea that if the loan officer is discounting their fees, they would end up discounting on a discriminatory basis would already be problematic under existing law, so you don’t need the LO comp rule to make that illegal. It’s already illegal to discriminate in pricing. That said, it’s not illegal for people to negotiate just like you can negotiate a car price.”
The CFPB has also taken issue with other forms of pricing concessions over the last year. In the summer of 2022, the agency reported that pricing exceptions, in which the lender offers a discount, had harmed protected classes, who were less likely to be offered discounts.
Where’s the CFPB?
Multiple sources said the CFPB audits about 20% of mortgage lenders per year, and because of the prevalence of this practice, would undoubtedly have come across lead bucket pricing manipulation by now.
Why there hasn’t been any enforcement to date or whether there’s a future enforcement action is just on the horizon is hard to know.
The CFPB, which is undertaking a broad review of the LO Comp rule, declined to make anyone available to speak on the issue.
“We cannot comment on any ongoing enforcement or supervision matters,” said Raul Cisneros, a Bureau spokesperson. “Those who witness potential industry misconduct should consider reporting it by going here. Additionally, we always welcome stakeholder feedback on any of our rules, including the loan officer compensation rules.”
In early 2023, the CFPB initiated a review of Regulation Z‘s mortgage loan originator rules, which include certain provisions regarding compensation. However, industry experts do not foresee substantial changes or anticipate the CFPB addressing the issue of lead source manipulation.
“In fact, there haven’t been a lot of public enforcement actions by the CFPB in several years [on the LO comp rule]. But having said that, we used to complain that the CFPB was participating in regulation by enforcement, and now they seem to be regulating by supervisory highlights,” Kris Kully, a law firm Mayer Brown partner, said.
The CFPB’s latest move regarding the LO Comp Rule was to issue a supervisory highlight in the summer stating that compensating an LO differently based on whether a loan product was originated in-house or brokered to an outside lender is prohibited.
Industry practitioners said the lack of enforcement from regulators has allowed the pricing bucket manipulation practice to flourish, creating an uneven playing field.
“You have all these companies that all of a sudden are starting to get a free pass,” Ciardelli said. “They’re like, ‘I’m not having any audits. I’m not having anybody come and say anything to me. I mean, nothing’s really happening. I’m pretty much unscathed here.’ And year after year goes by, there’s no auditors, there’s no issues. And then they start to move the needle on how they’re running their business and decisions they’re making. And they have less fear of the government, less fear of the existing rules that are in place, because the rules that were set up are not being enforced.”
Another mortgage executive speculated that the pricing bucket games will come to an end not because of CFPB enforcement, but because loan officers and executives will battle it out in court.
“I’ve got calls from loan officers who feel like they’ve been pushed into a lower commission scale than they thought they were going to get to start with,” he said. “I hired somebody from a well-known lender. When they hired her, they told her, ‘Hey, these are what the rates are and this is what the commission is.’ When she got over there, the rates they were quoting were the lead-based rates, not the hundred-based points they were promising her… I don’t think the enforcement will come from the CFPB. I think it’ll come from some type of lawsuit like that.”
The lasting impact of LOs cutting their comp to win clients and close deals won’t be clear until mortgage rates meaningfully fall for a sustained period.
But many fear that the genie can’t be put back in the bottle.
“We’ve done this so much that they’ve built it into their pricing,” said Mike, the loan officer in North Carolina. “They are pricing things higher, assuming that we’re going to cut our pay, and protect their margins. So to me that’s the bigger issue for us selfishly, is we start doing that, and it’s going to become the norm. The pricing system and everything is going to assume that we’ll do that.”
He mused that RESPA guidelines prohibit an LO from buying a Realtor partner a Big Mac after a closing but lying about a lead source is not policed.
“Personally being an LO, the biggest issue to me is, they’re screwing with us and just… That’s how all these shops are finding a lifeline to keep their doors open. ‘We don’t have to pay them 100 bps, we can just pay them 50, and they’ll take it on the chin.’ And it’s like, yeah, we’ll take it on the chin. Many of us are using the heck out of our credit cards right now to survive. It’s not cool.”
A coalition of bipartisan lawmakers in the U.S. Senate on Wednesday introduced legislation targeting the practice of mortgage trigger leads.
The bill, designated “S.3502,” is designed to “amend the Fair Credit Reporting Act (FCRA) to prevent consumer reporting agencies from furnishing consumer reports under certain circumstances,” according to the bill’s language. Sen. Jack Reed (D-R.I.) is the bill’s sponsor, with Sen. Bill Haggerty (R-Tenn.) serving as co-sponsor.
A trigger lead is where consumer credit reporting agencies share with other lenders that a “hard credit report” was pulled for a mortgage application. This can lead to an onslaught of calls to that consumer vying for their lending business.
The senators introduced the bill into the Senate on Wednesday, which then referred it to its Committee on Banking, Housing and Urban Affairs. That committee will need to approve the measure before it can come to the Senate floor.
The Mortgage Bankers Association (MBA) chimed in on the renewed effort, saying it is in support of the newly introduced bill.
“MBA and its members have led the industry in advocating for legislative reforms to stop the unwanted harassment of consumers resulting from trigger lead abuses,” said Bob Broeksmit, president and CEO of MBA. “We commend Senators Jack Reed (D-RI) and Bill Hagerty (R-TN) for introducing the Homebuyers Privacy Protection Act to protect consumers while preserving the legitimate use of trigger leads in appropriately narrow circumstances during a real estate transaction.”
MBA also committed to supporting a similar piece of legislation introduced in the U.S. House of Representatives earlier this year, which also targets the trigger lead practice.
“We will advocate for this important bipartisan Senate bill, along with the Protecting Consumers from Abusive Mortgage Leads Act (H.R. 4198) introduced earlier this year and led in the House by Reps. John Rose (R-Tenn.) and Ritchie Torres (D-N.Y.), to be passed into law as soon as possible.”
Late in the day on Thursday, both the Independent Community Bankers of America (ICBA) and the National Association of Mortgage Brokers (NAMB) released their own public statements of support for the bill, with NAMB saying it has advocated for action on this issue for “the past three Congresses.”
ICBA added that the privacy concerns of customers need to be prioritized.
“ICBA and the nation’s community banks thank Sens. Reed and Hagerty for introducing the Homebuyers Privacy Protection Act to restrict the sale of trigger leads and give consumers more control over their private financial information and shield them from unwanted solicitations,” said Rebeca Romero Rainey, president and CEO of ICBA.
Sen. Reed spearheaded a different effort to crack down on the mortgage trigger lead practice in April but it didn’t get much traction. That bill had one other Democratic co-sponsor, Sen. Chris Van Hollen (D-Md.), whereas this new effort has bipartisan support.
In a Senate hearing earlier this month featuring Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, Reed took the opportunity to ask about the practice of mortgage trigger leads. Chopra agreed with Reed’s characterizations of the practice as confusing for consumers, but described the Bureau’s authority to act on the matter as “limited.”
Editor’s note: This story has been updated with comments from ICBA and NAMB.
L. Scott Bruggemann, senior vice president and general counsel at Summit, wrote in an emailed response to HousingWire that, at this time, the company “does not have anything to add to its prior comments.”
In response to the first lawsuit filed by Movement in November, Bruggemann wrote that the company continues to compete for talented individuals “fairly” and according to “legal and regulatory requirements.”
Scrima did not immediately respond to a request for comments.
Movement’s attorney Ari Karen, partner at Mitchell Sandler, said in a call with HousingWire that the lawsuit was filed separately from the first in North Carolina in November due to Scrima’s location in California. Scrima, according to him, orchestrated a “premeditated theft of information” scheme.
“Things do happen in the recruiting process. There are a lot of balls in the air; people can make mistakes, and some are innocent, some are not. But I think what distinguishes this case is the outright orchestration, the level of intent,” Karen said. “They literally went out and said: ‘We’re going to go steal Movement’s staff and their secrets. I rarely see that level of premeditation.”
According to Karen, about 50 employees left Movement to join Summit – and it’s unclear at this point whether Summit is still using the information it allegedly stole, he said.
Founded in 2008, Movement says it has over 4,500 employees across 775 locations in all 50 states. The company claims Summit, founded in 1995 by Scrima, “had fewer than 200 loan officers until Scrima engaged in a desperate and unlawful scheme to copy Movement’s successful business model.”
Specifically, Movement accuses Scrima of initiating a corporate raid of Movement’s employees using the company’s former high-level managers. It included stealing trade secrets and computer systems.
The lawsuit names nine of Movement’s former employees who allegedly transitioned to Summit as part of the scheme and had confidentiality and non-solicitation agreements. Scrima, according to the lawsuit, knew about these agreements.
The document brings an alleged text message sent on May 24 at 1:08 p.m. by Scrima to a group of executives at Summit saying he had a “great call” with Deran “working on the first 90-day plan” and providing a contact of a Movement employee.
After that, the lawsuit states the Movement employee mentioned by Scrima began accessing the company’s database, which contains “highly proprietary information regarding its financials, employees, compensation, borrowers and loan products.”
The company claims the data was later shared with Summit executives, and the employee transitioned from Movement to Summit.
On another occasion, the lawsuit states that Scrima texted Summit’s chief growth officer, Brian Mitchell, asking for Movement’s profit and loss information (P&L). In response, Mitchell asked if Scrima was sure he wanted Movement’s “proprietary/confidential information on Summit servers.”
Scrima replied, “Not on our servers. Can you maybe set up misc WhatsApp account and have them texted there?” According to the lawsuit, Scrima got the information and told executives to “dissect” them.
Per the lawsuit, Mitchell was fired from Summit in November after bringing his complaints about these actions to the company’s legal counsel. In a call with Movement representatives that he agreed to record, Mitchell said Summit had data on Movement’s employees and their wages and some 9,000 borrowers’ information. A transcript of the call is attached to the lawsuit.
“At all times, Scrima knew that his conduct was wrongful. Indeed, the mere fact that he instructed staff to hide Movement files through a WhatsApp account rather than maintain them on Summit’s servers speaks to the conscious nature of his activities,” the lawsuit states.
Movement also accuses Scrima of creating a scheme to divert its customers to Summit through its “resigning loan officers.”
The lawsuit cites an email from an LO sent in October to a borrower asking to hold off on locking and wait to close the loan with a “sister company” when rates drop. He indicated the name of a Summit employee for the new loan application. The LO who sent the email later resigned to join Summit, the lawsuit states.
“Scrima established a supposed Portfolio Retention Department at his company to facilitate this transfer of information” of potential borrowers from one company to another, according to the lawsuit.
Movement requests the court $5 million in actual damages and not less than $25 million in punitive damages, among other things. It demands a jury trial.
The Department of Veterans Affairs (VA) is pausing foreclosures on homes financed with VA loans for six months to help military borrowers in danger of losing their homes, a department spokesperson said in a statement to HousingWire on Monday.
The Veterans Assistance Partial Claim Payment program — which began July 2021 — allowed military borrowers to skip six or 12 mortgage payments during the COVID-19 pandemic if they had a financial hardship. VA borrowers would resume making the regular payments when they were back on their feet and the missed payments would be moved to the end of the loan term.
The VA, however, ended the program in October 2022 despite the mortgage industry urging the department to delay its expiration, forcing borrowers to pay back payments quickly or refinance at higher interest rates.
The department said it will push all mortgage servicers to pause foreclosures of VA-guaranteed loans through May 31, 2024, according to the statement.
The VA’s decision to reverse course comes on the heels of an investigative NPR article reporting that thousands of VA loan borrowers risk losing their homes after the VA ended the assistance program.
About 6,000 borrowers with VA loans who had COVID-19-related forbearances are in the foreclosure process and 34,000 more are delinquent, according to NPR’s article citing data from ICE Mortgage Technology.
The COVID-19 Refund Modification program – intended for borrowers who have not been able to financially recover from the pandemic back to their previous income level – was set to expire at the end of 2023, but is now extended through May 31.
The modification program allows military borrowers to obtain a zero-interest, deferred-payment loan from the VA to cover missed payments and modify their existing VA loan to achieve affordable monthly payments for the duration of the extension, the statement said.
The department plans to launch a new VA Servicing Purchase (VASP) program to allow the VA to purchase defaulted VA loans from mortgage servicers. This will allow federal officials to modify the loans and place them in the VA-owned portfolio as direct loans.
The National Consumer Law Center applauded the VA’s decision saying the foreclosure pause will give VA borrowers a much-needed opportunity to access the VASP program.
“The foreclosure pause is badly needed as veteran borrowers have had no meaningful alternatives to foreclosure for over a year,” said Steve Sharpe, senior attorney at the National Consumer Law Center.
Last week, a group of Democrat U.S. Senators – Sherrod Brown of Ohio, Jon Tester of Montana, Jack Reed of Rhode Island and Tim Kaine of Virginia – wrote a letter urging VA Secretary Denis McDonough to protect military borrowers from foreclosure.
“VA previously offered solutions to help borrowers exit forbearance and get back on track with their payments. But for more than a year, veterans have not had a viable option to bring their mortgages current, leaving them vulnerable to losing their homes,” the letter read.
“In the meantime, tens of thousands of veterans and service members are left with no viable options to get back on track with payments and save their homes. Stories from across the country show that this is already having severe consequences for veterans and their families.”
Over the past year, the department said it helped more than 145,000 military borrowers and their families keep their homes and avoid foreclosure.
A spokesperson for Movement said the company had no comment.
L. Scott Bruggemann, senior vice president and general counsel at Summit, said the company continues to compete for talented individuals “fairly” and according to “legal and regulatory requirements.”
“The company supports the free mobility of originators to change employers without overbearing restrictions,” Bruggemann wrote in an emailed response to HousingWire.
Pennington and Schoolfield did not immediately return to a request for comments. Shelton declined to comment.
According to the lawsuit, Pennington joined Movement in May 2008 and became the lender’s national sales director until he moved to Summit as a divisional leader in Charlotte in July. However, Movement alleges Pennington began engaging with Summit before that, signing a confidentiality agreement in March.
Movement claims that Pennington continued to receive compensation and had access to trade secrets and confidential information for four months. During this period, he also began to “surreptitiously solicit” Shelton and Schoolfield and asked them to help recruit other Movement employees, the lawsuit states.
In court documents, Summit and Pennington admitted they signed a confidentiality agreement in March but denied other accusations, including that Pennington used information from Movement to target its loan officers matching characteristics that would fit Summit’s business.
Increasing the tone of the legal battle, Pennington filed a counterclaim against Movement requesting about $9.8 million in unpaid compensation.
Movement also claims Schoolfield and Shelton signed an agreement that prohibited them from soliciting or recruiting its employees for 12 months after leaving the company.
Still, they allegedly did it via social media and phone apps, hiring at least five loan officers and market leaders and soliciting dozens of employees, the company claims.
The lawsuit states that to facilitate the eventual solicitation of employees, Schoolfield said in a call with regional leaders that the company would cut loan officer compensation by 50% to 60% effective Aug. 1, 2023.
The company admits that, at one point, its leadership privately discussed that as an option for addressing the declining real estate market, but no decision was made.
To help in the purported poaching scheme, Movement accuses Shelton’s assistant, Linda Plymale, of “systematically accessing and copying Movement’s confidential and proprietary information and trade secrets,” mainly related to DOMO, the company’s loan officer performance system.
According to the document, from January through April, Plymale accessed DOMO only five times. Meanwhile, in May and June, Plymale accessed the system 14 times.
“Plymale downloaded a number of specific reports that she rarely examined and a combination of reports that she had never previously accessed, demonstrating an intent to evaluate loan officer performance from a variety of perspectives,” the lawsuit states.
Plymale, listed as a defendant, did not immediately respond to a comment request.
Defendants include Heather Frye and Josh Covett, two market leaders who also transitioned to Summit. At Movement, they were responsible for overseeing, recruiting and maintaining loan officers, the lawsuit states. They did not immediately reply to a request for comment.
In early November, Movement had a partial win in the case when Judge Robert J. Conrad issued an order stipulating that Pennington, Shelton, Schoolfield and Plymale identify to Movement all devices in their possession, custody or control as of the complaint’s filing date.
The parties “shall work to remove and return confidential or proprietary Movement data” and, in addition, the defendants “shall not directly or indirectly solicit any Movement employee to leave to join Summit,” according to the judge’s order.
Movement, founded in 2008, has more than 4,500 employees across 755 locations in the country, with licenses in 50 states, per the lawsuit.
The distributed retail lender was the 19th-largest U.S. mortgage lender in the first nine months of 2023, per Inside Mortgage Finance (IMF) estimates. It originated $15.46 billion from January to September, down 19.4% year over year.
Summit is a far smaller player, originating $1.6 billion in the same period, according to mortgage data platform Modex.
Top advocates for the wholesale channel criticized the increased volume of loan buybacks from government-sponsored enterprises (GSEs) Fannie Maeand Freddie Mac amid a shrinking mortgage market.
In a session about brokers’ influence on national policy during AIME Fuse 2023 in Las Vegas on Friday, trade group representatives and wholesale executives said that loan repurchases can be “catastrophic” for some lenders, which will ultimately affect brokers.
This is a “survivability conversation,” said Katie Sweeney, chairman and CEO of the Association of Independent Mortgage Experts (AIME).
According to Sweeney, small, midsize and large lenders have all been affected by the uptick in loan buybacks. Even large IMBs “are being put in a position where they may not make it in the next six months because of this increase,” she said.
And it directly affects brokers as fewer lenders in the market means fewer options to offer to borrowers, Sweeney added.
To illustrate the problem, Brendan McKay, president of advocacy at AIME, said loan buybacks were up 759% in the first quarter of 2023 compared to the same period of 2020.
“From the lenders’ perspective, loans are 60 basis points more expensive to originate in the first quarter of this year compared to 2020 [correlated to loan repurchases]. That’s not sustainable. It’s a major problem.”
As HousingWire previously reported, in 2020, Fannie Mae reported $1.1 billion in repurchases on $1.4 trillion in single-family loan-acquisition volume, resulting in an eight basis-point repurchase rate. In Q1 2023, the GSE had $459 million in repurchases on about $68 billion in loan-acquisition volume, or a 68 basis-point repurchase rate, according to research from Sterling Point Advisors.
Phil Shoemaker, CEO of The Loan Store, said the problem “doesn’t hit everyone at the same time,” but can be “financially catastrophic.”
Another wholesale executive, Mat Ishbia, CEO at United Wholesale Mortgage, in early September echoed the industry frustration with the loan buybacks in a recorded video.
“They [GSEs] are making billions, and lenders are barely scraping by, but they continue to make them buy back loans for small reasons here, little things that happened on a loan that maybe are not impacting the borrower’s success in that loan,” Ishbia said.
With 30-year fixed mortgage rates climbing to a 23-year high, the Mortgage Bankers Association (MBA) called on the Federal Reserve to bring some certainty to financial markets.
“It is time, and very important for the Fed to make clear two statements — the Fed is at the end of its rate hikes; the Fed will not consider selling its mortgage-backed securities (MBS) holdings until and unless the housing finance market has stabilized and mortgage-to-Treasury spreads have normalized,” MBA president and CEO Bob Broeksmit said in a letter sent to MBA members on Friday.
These measures will provide the market with greater certainty about the future path of mortgage rates and the Fed’s plans for its MBS portfolio and reduce volatility for traders and investors, Broeksmit noted.
The central bank currently holds about $2.6 trillion of MBSs as part of its roughly $8 trillion securities portfolio.
In efforts to reduce its balance sheet as part of the plan to tighten monetary policy, the Fed is allowing up to $60 billion a month in Treasury securities and $35 billion in MBSs to mature and roll off from its holdings.
The MBA and other housing trade associations will ask the Fed in the coming days to communicate its plans, according to the letter.
While the Fed’s policy mandate is on macroeconomic conditions rather than secular factors, MBA has made clear the negative impact that the Fed’s policy choices are having on both the mortgage market and the dream of affordable homeownership, particularly for low- and moderate-income homebuyers and minority borrowers, the letter read.
Since the central bank started its campaign to fight inflation, the Fed raised interest rates to a range of 5.25 to 5% – the highest level since 2001.
Mortgage rates, which loosely follow the movement of the 10-year Treasury yield, are at their highest level in more than two decades. The 10-year yield was at 4.72% on Oct. 5, 2023, up from 3.76% during the same period in 2022.
Some economists forecast that the 10-year Treasury could hit 5% and an 8% mortgage rate does not seem unlikely. Some loan originators told HousingWire that mortgage rates for conventional loans for borrowers with lower credit scores were in the 8% range.
This week’s 30-year fixed mortgage rate averaged 7.49%, up from the previous week’s 7.31%, according to Freddie Mac’s data. HousingWire’s Mortgage Rates Center showed the 30-year fixed rate higher at 7.549% on Friday.
With U.S. employers adding a surprisingly strong 336,000 jobs in September, the likelihood for the Fed to raise its key rate again before year-end has become higher.
Fiscal policy and political dysfunction also played a role in the recent rate instability, Broeksmit highlighted.
“Congress must take steps to restore budget discipline and effective policymaking (…) Ongoing gridlock on Capitol Hill, including a “near miss” government shutdown last week, continues to be a concern for financial markets, further driving up the price of government debt,” Broeksmit said.