Mortgage Procedures and Regulations (MPAR)

1. Mortgage Procedures and Regulations (MPAR) • Natosha Reid Rice, Ansly Moyer, John Snook and Joe Honeycutt

2. What is MPAR? The Mortgage Procedures and Regulations (MPAR) initiative is a collection of efforts to improve affiliate performance in the origination and servicing of their mortgage loans. The MPAR initiative aims to provide affiliates with timely and relevant updates on changing mortgage laws best practices for mortgage origination and servicing. For more information, visit the MPAR homepage on My.Habitat under Housing Finance Knowledge center

3. MPAR topics to be covered today: • Mortgage Laws and Regulations • Mortgage Fundamentals • Mortgage Servicing

4. Mortgage Laws & Regulations We’re going to discuss: • Dodd-Frank Act • State Law Changes • What do these changes mean on the ground?

5. Mortgage Laws & Regulations - Dodd-Frank Act The Basics: • The most comprehensive financial regulatory reform taken since the great depression. • Creates the CFPB – Consumer Financial Protection Bureau • Mortgage regulation is now federal • Bigger shift may be in mindset • Much still to come

6. Mortgage Fundamentals - House Pricing

7. Mortgage Laws & Regulations - Dodd Frank Act What do affiliates really need to know? • Much still to come • Role of the CFPB is still in flux • Regardless of noise from DC, many changes are here to stay • Did not address GSE reform (Fannie/Freddie)

8. Mortgage Laws & Regulations - Dodd-Frank Act Specifics (SAFE Act) • The first shot across the bow: • Created prior to Dodd-Frank, but amended by and incorporated within CFPB • Reflects a shift in philosophy  federal monitoring and licensure is now the standard rather than exception • “Bona fide” nonprofit • Full aspects on MPAR homepage on My.Habitat

9. Mortgage Laws & Regulations - Dodd-Frank Act New Appraisal Independence Regulations • Requires appraisers to be independent and to receive “customary & reasonable” fees • Treasury & CFPB have ruled that donated appraisals to Habitat affiliates are permissible • Board/staff may generally not conduct appraisals for the affiliate (safe harbor) • Formalized good practices for appraisals generally • Other aspects detailed on MPAR homepage on My.Habitat

10. Mortgage Laws & Regulations - Dodd-Frank Act Ability to Pay (Qualified Mortgages) • Requires creditor to make good faith determination, based on verified and documented information, consumer has reasonable ability to repay loan. • QM – may be huge; defense to foreclosure; HFHI submitted comments • Record retention; due diligence, underwriting, new standards • Final rule expected later in the year

11. Mortgage Laws & Regulations - Dodd-Frank Act Qualified Residential Mortgages (the QRM Boogeyman) • Gives preferential treatment for mortgages meeting certain requirements; • Worries this may become the “only” accepted mortgage • Specific concern for affiliates who sell/securitize mortgages • 20 percent?!?! • Coalition for Sensible Housing Policy (www.sensiblehousingpolicy.org) • Still being considered, with huge number of comments received by regulators

12. Mortgage Laws & Regulations - State Law Changes Issues and Concerns • Mortgage laws are traditionally addressed at the state level • Foreclosure responses – both easier & harder? • State mortgage regimes – an additional layer of complication • How do you modify a Habitat mortgage??? • Is your affiliate/SSO engaged in the housing conversation?

14. Mortgage Laws & Regulations Other Considerations • Unclear what and how these rules will impact new product lines such as NRI • Much is still in flux; CFPB still without a head and under attack • Foreclosure crisis is still a major issue; significant additional legislation at the state/federal level still a possibility

15. Mortgage Fundamentals -topics to be covered today: • House Pricing • Documentation • Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA)

16. Mortgage Fundamentals - House Pricing Habitat Pricing Policy – Key Principles • No Profit: The “repayable” portion of the purchase price (i.e., the amount of the first mortgage) may not in any event exceed the “total development cost” of the house. • Upside Down House: The total of all Habitat mortgages may not exceed the fair market value of the house at closing. • Affordability: The purchaser’s monthly payments may not exceed 30% of household’s gross income at the time of purchase.

17. Mortgage Fundamentals - House Pricing House prices are based on a three step process: • Step 1 – Calculate Total Development Cost of House • Includes cash costs or donated value of land and infrastructure, direct construction costs of labor and materials, in-kind material donations, value of donated professional labor, legal fees, recording fees, permits, etc. May also include 10% to cover indirect expenses. • Excludes unskilled volunteer labor and sweat equity. • Step 2 – Obtain appraised value of house (FMV) • Step 3 – Determine Purchaser’s “Affordable” Monthly Payment Amount (may not exceed 30% of household’s gross income at time of closing)

18. Mortgage Fundamentals - House Pricing Policy 24 of the U.S. Affiliated Organization Policy provides that affiliates should utilize some form of equity protection.

19. Mortgage Fundamentals - House Pricing One of the most common forms of equity protection = “soft” or “silent” subordinate mortgages • Silent second fills gap between FMV and first mortgage, and covers the amount of any “affordability write down.” • Historically silent seconds require no monthly payments and are forgiven over a period of time unless homeowner • defaults • refinances first mortgage or • sells the house. • Sustainability Policy now allows affiliate to require repayment of any “affordability write down” at the end of term of first mortgage.

20. Mortgage Fundamentals - House Pricing Other Equity Protection Models include: • Shared appreciation agreements; • Land trust or leasehold mortgages; and • Deed restrictions and restrictive covenants. For more information, see U.S. Policy Handbook on My.Habitat: Habitat House Pricing Policy (No. 23), Mortgage Policy (No. 24), Sustainability Policy (No. 28), Authorized Financing Options (No. 29).

21. Mortgage Fundamentals - Documentation Promissory Note andMortgage - Main Documents • Promissory Note: • Signed by homeowner and delivered to affiliate • Grants affiliate the right to collect monthly mortgage payment • Mortgage: • Grants affiliate right to foreclose on house if homeowner fails to make monthly payments • May be referred to as a “Deed of Trust” or “Deed to Secure Debt”

22. Mortgage Fundamentals - Documentation Promissory Note Essentials: • Keep original Promissory Note to enforce debt in court Promissory Note should contain: • Principal amount owed • Amount of monthly payments (excluding taxes and insurance) • When and where payments are due • First and last dates (maturity date) that payments are due

23. Mortgage Fundamentals - Documentation Promissory Note – Mistakes to Avoid • Omitting principal amount or monthly payments may mean note is unenforceable. • Including taxes and insurance as part of the monthly principal payment. These errors can be corrected by an amended and restated note. • Must be signed by the homeowner • Check with your attorney for the appropriate form

24. Mortgage Fundamentals - Documentation Mortgage Essentials: • Must refer to an existing Promissory Note dated on or before the date of the Mortgage. • The Mortgage and Promissory Note should be executed and in place before the family moves into the home. • Mortgage should accurately state: • Borrower’s name • Principal amount of Promissory Note • Date of Promissory Note • Some states may require more terms

25. Mortgage Fundamentals - Documentation Mortgage Essentials (continued): • Must have a legally sufficient description of the property • Must include express foreclosure or power of sale provision • Depending on state law, may need original Mortgage or proper replacement to foreclose • Include declaration that Habitat home must be homeowner’s primary residence

26. Mortgage Fundamentals - Documentation Most Common Errors with Mortgage Documents: • Amounts, names or dates do not match on Promissory Note and Mortgage • Affiliate name is not correct • Monthly payment amounts do not add up to Mortgage amount • Improper execution • Correct notary acknowledgment and execution (state specific) • Witnesses • Other state law requirements • Incomplete legal description • Inaccurate description of Promissory Note

27. Mortgage Fundamentals - Documentation Closing Attorney and Title Company: • Closing attorney should have experience with closings and be responsive. • Attorneys and title companies new to Habitat closings may be unfamiliar with required provisions (rights to repurchase, second mortgages, occupancy requirements, etc.).

28. Mortgage Fundamentals - Documentation Post-Closing Essentials: • Mortgage must be recorded with proper governmental entity (usually county) • Keep a pre- and post closing checklist • Keep all mortgage documents in one fireproof location

29. Mortgage Fundamentals - Documentation Conclusion: • Proper mortgage documentation is critical to protecting your affiliate’s rights in its mortgage portfolio. • Always work with your local attorney to make sure your documents are properly drafted, executed and recorded. • A mortgage fundamentals checklist and other resources are available on the MPAR homepage on My.Habitat.

30. Mortgage Fundamentals – RESPA/TILA Are Habitat affiliates required to comply? TILA • Yes, all affiliates must comply. RESPA • Affiliates that originate more than $1,000,000 per year in mortgages must comply. This includes the face amount of “silent second” or other subordinate mortgages held by the affiliate. Reasons to comply: Servicing standards; Cannot be corrected retroactively; Standard operating procedure; Subsidies; and Eligibility for leveraging and discounting programs

31. Mortgage Fundamentals – RESPA/TILA What does compliance mean to my affiliate? • Give initial disclosures at the proper time. • Give required disclosures at closing. • Follow servicing guidelines. Resources, including a timeline for giving the disclosures and example disclosures, are available on the MPAR homepage of My Habitat.

32. Mortgage ServicingWe’re going to discuss: • Basic Collection Practices • Escrow Management • Self Servicing vs. Third Parties • Minimizing Delinquencies • Board Governance • Bankruptcies and Foreclosures

33. Mortgage Servicing: Basic Collection Practices Subsidy and Sustainability Policy, Section 2.4 Professional Quality Loan Servicing • Affiliates must use Professional Industry Standards to service mortgage loans. • Policies & procedures must include: • Explicit procedures for the efficient collection and recording of mortgage payments. • Written procedures for responding in the event of late or missed payments. • Establish systems and procedures that are conducive to homeowners making their payments in full and on-time every month. • Take corrective action promptly in the event of missed payments or other violations of the mortgage agreement.

34. Mortgage Servicing: Basic Collection Practices Delinquency Defined: when is a mortgage payment delinquent? If it is due the 1st of the month: • If not paid, it is delinquent the next day, which is the 1st day of delinquency • It is 30 days delinquent if it is not paid before the next due date. • It is 60 days delinquent, if not paid before the following due date • It is 90 days delinquent, if not paid before the following due date. • The first day of delinquency is important: • To consistently trigger policy collections actions and to comply with12 USC 1701x(c)(5) requiring that beforethe 45th day, you must provide the delinquent homeowner information about credit counseling andthe HUD toll free number for finding a certified nonprofit credit counseling agency. • Not doing this has already been used as a foreclosure defense against a Habitat affiliate

35. Mortgage Servicing: Basic Collection Practices See the “Mortgage Servicing Standards” in the MPAR section of My.Habitat for tips for success: • Clearly explain delinquency policies in homeowner education and FOLLOW YOUR POLICIES • Send out all notices and make phone calls as early your policy states. • All contacts with homeowners should be done by the same person • Keep notes from all communications • Collections is a finance function, not family services • See following timeline for collection activities for Nashville HFH, that has one of the lowest delinquency and foreclosure rates for US affiliates

37. Mortgage Servicing: Escrow Management Your affiliate and/or your servicer must comply with all laws pertaining to mortgage servicing, collections, and escrow management: • Escrow accounts must be separate from all other accounts that are fully insured by the FDIC • Escrowed funds cannot be comingled with operating funds • You may not “borrow” from the escrow account • Must comply with RESPA for doing escrow analysis “Escrow Management” conference call on My.Habitat (11/15/11)

38. Mortgage Servicing: Self vs. Third Party Servicing At a minimum, Full Servicing includes: • Receipt and processing of homeowner payments • Establishment of, allocation to, and payment from FDIC insured escrow accounts. • Annual escrow analyses • Delinquency letters/phone calls, determination of causes of delinquency • Recommendations for resolution of delinquency problems • Daily updating of account status with online capability for reporting and review of actions and notes from communications • Reporting to the credit depositories

39. Mortgage Servicing: Self vs. Third Party Servicing In general (based on limited data): • Affiliates using professional third party servicers for “full servicing” have lower delinquency rates • The cost of third party servicing is often less than the cost of an affiliate self servicing. • (See MPAR document “Cost Comparison Mortgage Servicing”) • Few affiliates can stay on top of the constantly changing legal and banking compliance issues, thus facing risk. • Doing self servicing well requires professional servicing software and ongoing updates and support.

40. Mortgage Servicing: Controlling Delinquencies Prevention of delinquency issues begin with family selection: • Need for adequate housing • Ability to pay • Willingness to partner Delinquency issues are linked to homebuyer financial training, which should include: • Importance of a good credit score • Reporting to the credit depositories

41. Mortgage Servicing: Controlling Delinquencies • The affiliate’s role in serious delinquency usually result from a lack of policies and consistent processes • Delinquencies are more correlated to credit history than to income • Inadequate second mortgages can lead to more delinquencies • Delinquencies can become viral, for better or for worse • Most affiliates that use third party full servicing do better than affiliates that service their own

42. Mortgage Servicing: Controlling Delinquencies Reporting to credit depositories is important for: • Controlling delinquency rates • Lowering other costs of housing • Building lasting wealth • Rewarding faithful homeowners The importance of good credit must be: • establishedin your underwriting and application processes, • reinforcedthrough your homeowner preparation classes, and • rewardedby reporting payments to the credit depositories

43. Mortgage Servicing: Controlling Delinquencies Resolving Serious Delinquencies Requires: • Clear policies and procedures applied consistently • Homebuyer education, ongoing communications, collections processes, and actions aligned with the policies • Recognition as an important issue by the staff and board • A special committee with external expertise • Single Point of Contact (SPOC) or any communications with delinquent homeowners. • Use of PRONTO/Repayment Plan, but coordinated with State mandated pre-foreclosure (mitigation) process • Foreclose when appropriate

44. Mortgage Servicing: Board Governance “Lessons Learned” about effects of delinquencies: • Financial: cash flow shortages, inability to get credit lines, limit on FlexCAPand other mortgage financing, risk with audits, risk of swaps and buybacks • Capacity: Staff reductions and loss of morale, loss of credibility with community and prospective partners, loss of board members, difficulty in recruiting skilled board members, inability to build homes, risk of negative press • Fundraising: Loss of sponsors, barrier to board fundraising, problems with financial information and outcomes data. It can be faster and easier to clean up delinquencies and arrearage than it might be to ramp up fundraising.

45. Mortgage Servicing: Board Governance An affiliate’s board of directors has a fiduciary role: • An affiliate’s delinquency rate can be a metric for everything you do • It can be impossible to discern a delinquency issue in normal financial statements • The board of directors should be reviewing a monthly mortgage status report showing delinquency categories and arrearage amounts with historic trends and know how you compare to other affiliates “Whoever controls the largest asset of a non-profit essentially controls the organization” Streetsmart Financial Basics for Nonprofit Managers, by Thomas McLaughlin

46. Mortgage Servicing: Board Governance Sample Monthly Board Report 46

47. Mortgage Servicing: Board Governance How does your affiliate compare to others? Comments for 2011-2: Affiliate has the 8th lowest total delinquency rate of 23 affiliates in the state Affiliate has the 16th lowest total delinquency rate of 126 US affiliates with 100 or more mortgages 47

48. Mortgage Servicing: Bankruptcies /Foreclosures We strongly recommend that the Affiliate work closely with a local attorney that is experienced with bankruptcy law and the foreclosure law and procedures of their respective state. • This attorney should also review your policies and procedures prior your needing them. • Bankruptcy attorneys have far more resources and options than previously. • Dodd Frank has already strengthened foreclosure defenses • Pending CFPB rules for “Qualified Mortgages” (QM) could have significant affect on family selection and documentation.

49. Judicial foreclosures Lender files a lawsuit to obtain a judgment, by which the court will order the property sold. Advantage – timeliness for possession with “waste” Disadvantage – cost and timeliness to sale Non-judicial foreclosures The trustee on the deed of trust conducts the sale without the involvement of the court. Advantage – generally swifter resolution and less cost Summary of State Foreclosure Laws: http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/survey-foreclosure-card.pdf Foreclosure Mediation Programs by State: http://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html Mortgage Servicing: Bankruptcies /Foreclosures 49 HfHI US Office: Finance and Sustainability Series

50. Alternatives to Foreclosure Pre-foreclosure / short sales Top dollar for FMV Potential tax implications Deed in lieu of foreclosure Less costly to Affiliate in legal fees Less damage to home and NIMBY issues Potential issues with liens on the title “Cash for Keys” – with enough incentive for homeowner Mortgage Servicing: Bankruptcies /Foreclosures 50 HfHI US Office: Finance and Sustainability Series