Mortgage – HousingWire

FHA gives borrowers flexibility to combat “unnecessary” effects of COVID-19 pandemic
Opinion: Can tech de-risk the mortgage servicing space?
Ex-workers sue Sprout Mortgage over unpaid salaries

FHA gives borrowers flexibility to combat “unnecessary” effects of COVID-19 pandemic

Posted: 08 Jul 2022 02:09 PM PDT

The Federal Housing Administration (FHA) is making it easier for homebuyers financially affected by COVID-19 to qualify for a loan.

The administration told lenders Thursday it will grant underwriting flexibility in cases in which a borrower experienced a gap in employment or a reduction of income as a result of the pandemic — but has since financially recovered.

The flexibilities, which can be immediately implemented by lenders, mainly are expected to help hourly wage-earners, as well as self-employed borrowers.

Julia Gordon, commissioner of the FHA, in a Thursday statement said the changes will, "further efforts to facilitate recovery from COVID-19 and support access to homeownership."

"The pandemic affected the livelihoods of tens of millions of workers in this country, particularly workers of color and those at the lower end of the wage scale," Gordon said. "Limiting these families' homeownership opportunities because of the unavoidable impacts of an unprecedented global health crisis, when they are otherwise well-qualified for a mortgage, is unnecessary."

The FHA has outlined exceptions in how a borrowers effective income is calculated if they were impacted by the pandemic and the documentation required for gaps in a borrowers employment history.

In cases where a borrower has an hourly income and whose hours do not vary, the FHA said lenders should use a borrowers current hourly rate to calculate effective income.

For employees whose hours vary, FHA representatives said lenders should calculate income by using the lesser of a borrower's average income prior to the pandemic, or the average of the income earned since the pandemic began.

Self-employed borrowers must submit an aggregate self-employment history before and after the pandemic-related event totaling two years, the administration said. A lender may only consider the income as effective if the borrower has remained in the same line of work.

To address gaps in employment during the under underwriting process, lenders must provide written verification from a borrower identifying the time period when a homebuyer lost their job and the loss of income as a result.

According to the FHA, for self-employed borrowers whose income was impacted by the pandemic, lenders must upload a letter of explanation for the time period of income loss and the borrower’s business tax returns for the most recent two years.

The FHA said the announced flexibilities are expected to “mitigate” or “offset potential risk of default”, while maintaining the administration’s countercyclical role in the market.

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Opinion: Can tech de-risk the mortgage servicing space?

Posted: 08 Jul 2022 01:52 PM PDT

There is unquestionably a need for regulatory innovation across the broader mortgage industry, but none more pressing than de-risking the mortgage servicing space. Broad lessons were learned on how to curb predatory lending practices following the subprime mortgage crisis. Yet, financial stress exacerbated by COVID-19 put millions of households on uneasy footing, again.

Policymakers took bold steps to prop up the consumer economy, but the end of foreclosure moratoriums left many homeowners progressing toward default. Compounding matters, the sudden jump in mortgage rates has caused a 15-year-low on affordability.

Declining mortgage credit availability is bringing us to the brink of another crisis with potential to cause deep market distress. This time, though, if mortgage servicing relies on the tech sector to work together with regulators – instead of viewing them as obstacles to overcome – it can ensure a more stable future for the mortgage ecosystem and yield better results for us all.

The true benefit of quantitative easing

One of the loudest criticisms of late is that mortgage servicers never passed onto borrowers the true benefit of quantitative easing, and instead built in fees to cover costs. This might be true, but the causality can be directly traced to market inefficiencies participants have long known need to be addressed.

It's especially important to focus on it now that Millennials, the largest population cohort in the U.S., have signaled an unwillingness to foray into homeownership in the near term. Stagnant wages, high levels of unemployment, inflation, and the sharp increase in long-term rates have created dual problems: high barriers to entry for first time homeowners and entirely unaffordable loan modifications for current borrowers. A looming recession has only served to weaken what little resolve 30-somethings have to aspire for homeownership, which will greatly diminish access to future generational wealth.

Understandably, the CFPB has been active lately, and rightfully so, considering the increased number of homeowners requiring loss mitigation strategies for their loans. Servicing supervision is essential to maintain public confidence in a market that has understandably garnered a large degree of skepticism, if not outright American distrust.

Without the transparency and uniform standards the regulatory agencies provide, competition declines and overall health of the market suffers as more Americans find themselves drowning in debt and looming foreclosures.

Have we prioritized the needs of investors over consumers?

Industry operations have historically prioritized the needs of investors — not consumers — and antiquated methods of loan servicing makes keeping pace with the increased need for assistance impossible. Direct costs of servicing rises rapidly as delinquency status becomes increasingly severe–the largest cost types being workforce and technology.

In the current model, lenders are left with two options: slow demand by adjusting the pricing higher via fees or hire more skilled workers (already a major challenge) to deal with the influx. Layering on more employees to keep pace with demand isn't a sustainable solution and assessing borrowers already in financial hardship with excess fees to recoup costs is a violation of state laws, UDAAP practices and only serves to exacerbate the problem.

This is where fintech players can make a huge difference. According to Fannie Mae, only 1% of mortgage servicers consider their back offices to be fully digitized. That number is, quite frankly, generous. The ability to integrate consumer-protection regulations into digitally connected platforms will be what finally relieves the pressure on the servicing community and brings portfolios into re-performance. The most successful tech-focused servicers are the ones that are reimagining the front-to-back operating model and are doing so with regulatory body compliance by design.

Furthermore, regulatory scrutiny and enforcement must apply to the tech stack, itself. Technology solutions put in place during times of crisis ought to be subject to periodic evaluations. Reviews of data usage and the underlying technology should be required by regulators. And that's something that we should all want.

There's no doubt we're in a challenging crisis of affordability. Policy makers have taken some bold steps in order to help prop up the consumers and the economy in the post-pandemic era, but there's a lot more still to be done. We're going to need smart, practical partnerships to guide us through the expected onslaught of operational rationalizations to survive in a contracting market. Embracing both regulatory guardrails and emerging servicing capabilities is the best way to land the industry on stronger, more efficient footing than ever before.

Nicholas Corpuz is the Head of Compliance at Brace.

This column does not necessarily reflect the opinion of HousingWire's editorial department and its owners.

To contact the authors of this story:
Nicholas Corpuz at nick@brace.ai
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com

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Ex-workers sue Sprout Mortgage over unpaid salaries

Posted: 08 Jul 2022 11:13 AM PDT

Just two days after it abruptly shut down its operations, non-QM lender Sprout Mortgage became the target of a class-action-seeking lawsuit.

Two former employees are suing the Long Island-based Sprout, its affiliated company Recovco Mortgage Management LLC and chief executive officer Michael Strauss, alleging they laid off around 100 employees at the New York office on Wednesday without giving legally required written notice and failed to pay their paychecks due the following day.

Plaintiffs Nathaniel Agudelo and Helen Owens – both closing disclosure specialists who worked for Sprout from the fourth quarter of 2020 through July 6, 2022 – filed the lawsuit on their behalf and others in the same situation in the Eastern District of New York U.S. District Court on Friday.

A spokesperson for the company and Strauss did not immediately respond to a request for comment.

HousingWire reported on Wednesday that Shea Pallante, the president of Sprout, informed more than 300 workers across the company of the shutdown in a conference call at 4:30 pm on Wednesday. A deal for financing fell through and Strauss made the decision to pull the plug on Wednesday, sources said.

According to former employees, they were quickly locked out of their systems after news of the layoff. Pallante said employees would receive benefits through the end of the month, but the company did not offer severance payments, and, as of Friday around 1 p.m., Sprout failed to pay their last paychecks.

The class-action-seeking lawsuit seeks to recover alleged unpaid minimum wages and withheld regular salaries owed to employees.

Plaintiffs believe that Strauss instructed other individuals not to issue the paychecks due on Thursday, covering the period from June 16 to June 30. They say they don’t have information about the payment covering July 1 to July 6, due on July 22.

The plaintiffs also want compensation for damages caused by the company’s failure to provide 60 days' notice under the WARN Act and 90 days’ notice under the NY WARN Act.

Sprout is the second major non-QM lender to shut down operations recently. First Guaranty Mortgage Corp. (FGMC) and its affiliate Maverick II Holdings filed for Chapter 11 bankruptcy protection in late June after suddenly cutting hundreds of jobs.

Three former employees are suing the lender and financial backer, Pacific Investment Management Company (PIMCO), alleging they were discriminated against on the basis of their gender and then retaliated against for complaining.

Former employees of Sprout said loans in the pipeline are still pending, and it's highly doubtful they will be funded. At least one employee even has their own personal mortgage in the Sprout pipeline and has not received an update on the loan's status, former workers told HousingWire.

One former capital markets staffer, who requested anonymity, said Sprout had been dealing with liquidity and funding problems for months. Unlike some of its peers, Sprout wasn't backed by a major asset management firm, and it was particularly vulnerable to a lack of liquidity from investors. It couldn't handle the widening spreads and began taking losses on loans originated in the beginning of the year, he said.

What happens to the loans on hand is unclear – various former employees said Sprout had been doing north of $350 million in loans a month.

"They’re not going to be able to make much money selling these loans," said one industry capital markets veteran who did not work at Sprout. "They can hold it and wait for the market to recover. And warehouses are probably making a margin call based on the mark down of those loans."

James Kleimann contributed reporting.

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Friday, July 8, 2022