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					             The Florida CMB
                    The Newsletter of the
                   CMB Society of Florida
                        Spring /Summer 2011

                                             Sterling Edmunds to Speak
                          The CMB Society of Florida is pleased to announce that its guest
                   speaker for its inaugural breakfast will be Sterling Edmunds, Jr., CMB, EVP
                   National Sales and Production Manager of SunTrust Mortgage, Inc. This
                   appearance by such an esteemed colleague is something to look forward to.
                   If you have never had the pleasure of hearing Mr. Edmunds speak, you’re in
                   for a real treat. Please join us for this special event.

                 IN THIS ISSUE                                      Save These Dates
  Loan Officer Compensation, Risk Retention and           The annual MBAF convention will be
  the Federal Reserve by Ross Bennett, MCMB               held from June 22 to June 24 at the
                                                          Renaissance Vinoy Resort and Golf
  As the Pendulum Swings by Patrick Mansell, CMB          Club, St. Petersburg. This conference
                                                          provides an opportunity to meet
  Reverse Mortgages Options by Tim Allen, CMB             industry leaders from all over the
                                                          country and to hear topics of interest
  Credit Tenant Lease Financing by David Patten,          to all of us in the Mortgage Banking
  CMB                                                     business. You can learn all about it by
                                                          going to www.mbaf.org.

                                          Editor’s Corner
       Because this newsletter is for, by, and about the CMB Society, its focus will be on issues
and concerns of interest to owners and senior managers of mortgage banking firms. A mortgage
professional who has attained the CMB designation has probably also attained a management
position within a mortgage banking firm, and has interests, experiences, and concerns that span a
wide area of topics within the industry. For this reason we believe that the experiences of a CMB
operating in the State of Florida has had, or is having, can be useful when shared with the other
members of the CMB Society. This newsletter is a forum for Society members to share those
experiences and concerns with some of the leading Mortgage Bankers in the state, that is, your
other CMB Society members.
              Contributed articles are welcome and it will be so much better if our members will
speak up and let the others know what’s on their minds. I look forward to hearing from you.

Patrick J. Mansell, CMB       pat@coastalstates.com
             Loan Officer Compensation, Risk Retention and the Federal Reserve
                                           By
                               Ross Bennett, Master CMB

        If you stopped and interviewed 100 people on the street and asked them who owns the
Federal Reserve, most would likely say that the Fed is a branch of the Federal Government. As a
Certified Mortgage Banker, you know this incorrect. So exactly what is the Federal Reserve, who
owns it, and how does it have the singular power to regulate private compensation contracts
between Mortgage Loan Originators and creditors, dictate mortgage underwriting guidelines, and
set capital requirements for non-bank entities?
First a little history:
        Central banking was tried twice before in this country, first with the creation of The First
Bank of the United States. It operated from 1791 to 1811, until it failed. In 1816, legislation creating
the Second Bank of the United States was signed into law by President James Madison ostensibly
to end runaway inflation. It was dissolved in 1836 when then President Andrew Jackson refused to
renew its charter. In 1863, the National Banking Act was enacted, implementing a system of
national banks. The Office of the Comptroller of the Currency was created to supervise these
banks, and oversee a national currency. Banks were allowed to issue script, but were required to
hold silver and gold to back up the bank notes. This system lasted until the early 20th century, when
a third central bank was created.
        The model for the third, and current, central bank, finds its roots in a series of private banker
meetings at Jekyll Island, Georgia in 1910. Following the Banking Panic of 1907, and despite the
two previous US central bank failures, it was decided that a strong central bank was again necessary
to regulate the creation of currency and control the supply of the monetary base. In attendance at
the privately-owned Jekyll Island Club were Henry Davidson, Sr. of JP Morgan Co, Charles Norton,
president of JP Morgan's First National Bank of NY, Nelson Aldrich, a US Senator from Rhode
Island, (and father in law of John D Rockefeller, Jr.), Frank Vanderlip, President of National City
Bank of NY, and Paul Warburg, a partner in Kuhn, Loeb and Co. They travelled by private railway
car from New York to this remote coastal Georgia island to deliberate and draft their plan in secret.
Closely mirroring a model created by these bankers at the Jekyll Island Club meetings, Congress
passed the Federal Reserve Act of 1913, creating the current Federal Reserve System, with its 12
member banks.
        The Federal Reserve banking system is privately owned, and its employees are not employees
of the Federal Government. The President can recommend candidates to the FRB, but the Fed is
completely independent of any government oversight. Ownership of the Fed by member banks is
evidenced by the fact that these banks are required to hold 3 percent of their capital as stock in the
Federal Reserve Bank System. This stock cannot be sold or traded, nor may it be used as collateral
for a loan. Shareholder banks receive dividends of 6% per annum on their invested capital.
        My point? Since the Fed is a privately owned corporation, the question on the minds of
many is how does a private central bank have the Constitutional authority to regulate private
contracts especially between non-bank entities and their employees , none of whom are members
of the FRB system? From where does the FRB derive their power to insert themselves into the
private sector? What non-depository industry shall they regulate next? The Federal Reserve Board
is currently drafting mortgage underwriting guidelines which will decide who is, and is not, eligible
for a mortgage loan. The Federal Reserve Board has requested public comment on a proposed
amendment to Regulation Z. Under this new Fed rule, this amendment will require bank and non
-bank lenders alike to determine a borrower's financial ability to repay the mortgage. On the sur-
face who could disagree with this?
        Seasoned mortgage bankers will recall the Fannie Mae Time Saver Plus program. These
stated-income loans required excellent credit, a 25% cash down payment, and a common sense
approach by real underwriters. Time Saver Plus loans were available only to bona-fide
self-employed individuals. Those loans performed well, and they allowed small business owners,
who did not qualify using standard underwriting guidelines, to access the mortgage capital
markets and participate in real estate ownership using a "reasonableness test". While the Federal
Reserve has proposed these restrictive mortgage underwriting rules to TILA, it will punt when it
comes to implementation. The comment period expires one day after the Fed hands off regula-
tory authority to the Consumer Finance Protection Bureau, or CFPB on July 22nd, 2011.
        The CFPB, a new federal bureaucracy, as designed by Dodd-Frank, will be headed by a
single political appointee, with unlimited powers of enforcement. Yet, the agency will be funded
by a direct allocation of capital from the Federal Reserve. One possible appointee to head the
DFPB is Sheila Bair , who personally took out two mortgages for more than $1 million from
Bank of America, while she was negotiating with that bank in an official capacity regarding the
bailout and repayment of TARP funds. The other possible appointee is Elizabeth Warren, who
according to Bloomberg News, pocketed $90,000 in fees to serve as an expert witness in a class
action lawsuit against several major banks, while concurrently sitting as head of a congressional
panel overseeing TARP. A cozy arrangement to be sure.
        Dodd-Frank implementation will mandate a percentage of capital required to be retained
on a lender's books against originated mortgages, unless those particular mortgages fall under
QRM, or "Qualifying Residential Mortgage" guidelines. Congress left the door open for
interpretation of what constitutes a Qualifying Residential Mortgage to non-elected bureaucrats,
banking regulators, HUD and the Federal Housing Finance Agency. Those in academia who argue
that lenders have no vested interest in a mortgage loan sold without a risk retention piece have
ignored the reality of loan repurchases. Lenders have always been liable for repurchase of fraudu-
lent and non-performing loans.
        For a year now, the MBA has been asking regulators to issue a consensus of what
constitutes a QRM. Section 941 of Dodd-Frank regarding risk retention is at odds with Section
1412 of Title XIV, dealing with repayment ability. Under these QRM rules, mortgage banks and
other lenders will be incented to make loans only to borrowers with high credit scores, the ability
to pay 20% down, and having DTI ratios of less than 28/36%. Lenders will be required to hold
5% of their mortgage origination volume as capital against those loans not meeting all these
criteria. GSE and FHA loans may be exempt from a QRM, but what happens when those entities
are phased out or see their role reduced as planned? In addition, there are certain proposed
special "protections from liability" for originating QRM loans which do not extend to non-QRM
loans under the proposed TILA amendment. Borrowers will have up to 3 years to sue for
monetary damages/or rescind certain loans for violations of TILA, and it will be up to the
creditor to prove any violations were not material. Making loans to borrowers who do not fit
QRM guideline will open up a creditor to frivolous, and possibly class actions law suits.
       Consider the plight of a small mortgage banker with $5 million in capital: After just $100
million in non-QRM originations to higher LTV, LMI, first time buyers, or borrowers with
average credit, the mortgage bank will be required to partition off their entire $5 million of
tangible capital, unable to fund additional loans. As a result, mortgage originations will be driven
towards large, too-big-to-fail lenders. Conversely, the mortgage banker could simply decide to
lend to QRM borrowers only, ignoring "riskier" consumers, and avoid impairing any capital. In
either event, the net result will likely be higher borrowing costs, and credit rationing for non-
QRM borrowers, and possible re-gentrification of homeownership. According to the latest
information received from JP Morgan/Chase, less than 20% of all home loans originated since
2001 were QRM compliant.
       At a time when there is an oversupply of housing, with prices and interest rates at historic
lows, one must wonder why we would exclude and under-serve many potential homebuyers. It's
clear that the market has eliminated lending practices that in hindsight were unwise. Recent data
from Fannie Mae indicates mortgage lending guidelines are still very tight. On current FHA
buckets, the average credit score is over 700. This is up substantially from 630 from 4 years ago.
On conventional loan buckets, the average credit score is in the 760 range, up from the low 720s
in 2007.
Further government interference in private sector compensation, risk retention and loan
underwriting criteria will certainly have a net-negative effect on the fragile real estate recovery,
and mortgage lending will be increasingly controlled by too-big-to-fail lenders.

Ross G. Bennett is a Master Certified Mortgage Banker. He is with Sierra Pacific Mortgage, where he has served
in a variety of Correspondent and Wholesale Lending positions. Ross is a past-President of the Mortgage
Bankers Association of Florida, and currently serves on the Eastern Regional Secondary Market Conference
Committee.

Bennett was previously named the Willis Bryant Scholar Award Recipient at the School of Mortgage Banking,
Northwestern University and is on the faculty of CampusMBA's SOMB.
                                    As the Pendulum Swings
                                               By
                                    Patrick J. Mansell, CMB

        The swinging pendulum in residential loan underwriting has reached some interesting
extremes in the course of the last five years. Between 2000 and 2007, the number of participants
in the residential mortgage lending field reached unimaginable proportions. Everyone from the
Kmart clerk who had a mortgage license (just in case a relative decided to borrow some money
that would permit that clerk/broker to collect a piece of the fee) to sovereign funds of the largest
nations on the planet with insatiable appetites for those “high-quality, triple-A” mortgage backed
securities; everyone was getting a piece of the action. And benefitting from it was the realtor who
could sell yesterday’s $100,000 house for $200,000, the new real estate investor who could put
down a $15,000 deposit on a condo to-be-built, and double his money by flipping his contract
before the closing, and the builder who could sell his units two years faster than he could deliver
them. Fueling this phenomenal bubble was a set of underwriting rules that made no sense at all.
The no-qual loans were being offered to anybody with a pulse, and the secondary market couldn’t
get enough. It was a time when the underwriting pendulum had swung to the extreme favor of
the borrower, the builder, and the broker.
        When it all hit the fan in 2006-2008, you could hear the swish of air as the pendulum made
its way to the extreme opposite. There were no more liar loans, no more cash out 90s, no more
95% Florida condo loans, no loans to foreign nationals, no loans from banks, no jumbos, no
private label mortgage-backed securities, no warehouse lines, and Florida’s supply of mortgage
brokers licenses dropped by 85%. It was a perfect storm in residential real estate finance. No
market for loans, no buyers, no lending . . . crash! Slowly and ever so deliberately the GSEs made
an effort to keep the markets alive. FHA market share went from 2% to 35% in about a year. You
wouldn’t exactly say Fannie and Freddie stepped up, they had troubles of their own, but they did
stay open for business and offered some limited liquidity to the markets.
        Where there is conflict and turmoil, there is opportunity. And this has never been more
true than it is today. Congress stepped in and passed Dodd-Frank. RESPA has been “reformed”.
NMLS is the law of the land. “Broker compensation” has become an oxymoron. It all sounds so
negative, but it doesn’t have to. Yes, the cost of borrowing has gone up substantially. Loan level
price adjustments are as much a part of the loan package as SRPs and YSPs used to be. But on
the positive side, we are probably through the worst of the default and foreclosure crisis with a
swing toward stability sometime in the next year or so. Interest rates and home prices are low,
affordability is very high, the professional mortgage originator, the one who is good at what he
does and has been able to survive, has no competition. The field is wide open. And loans, while
more expensive going forward, will be solidly underwritten and provide for greater stability in the
future.
        In 2007 and 2008 there was no relief on the horizon. There was no horizon. But now it
has been five years since the beginning of the crash. We knew it would take time and it has. We
are three years into reform and recovery. It has been slow and painful, but that horizon we could
not see in five years ago is closer. Many states are well under way to a full recovery; some never
really crashed, and others came back. Two of the four hardest hit states, California, Florida,
Arizona and Nevada, the “Sand States” (these are the states that have been skewing the numbers
for the entire country) are showing signs of real progress. In spite of a lack of liquidity for
residential mortgages, the average listing time for a property in California has been reduced from
16 months to 4 months. Perhaps one of the biggest perceived problems in Florida, the
overbuilding in the condo market, has also seen signs of life. While we believed in 2007 that there
was a nine year inventory of condos, three years later it looks more like a two to three year
inventory, shaving as much as three years off the original estimate.

Opportunities Looking Forward
        We’re CMBs. That means we have been tested and we know the business pretty well. It also
means our talents will be recognized as the industry transitions. Today the opportunities lie in a
few of the traditional areas and perhaps a few new ones as well.
        Loan production - In spite of the fact that volumes are low, as fewer participants care to
step up to the plate with respect to NMLS licensing, the lower volume of loans will be spread
around a much smaller number of originators. Those shops that scaled back over the past few
years are going to need to staff up in the area of loan officers, processors (no longer required to
be NMLS licensed) and underwriting. Warehouse lines are coming back and, as long as you’re
originating Qualified Residential Mortgages, the secondary market remains available. (Hint - don’t
ignore the role of FHA in this area. The guidelines tend to make sense and the premiums can be
very attractive.)
        Servicing - lenders continue to staff up in the collections/loss mitigation areas. Investors,
including the GSAs, offer incentives for speedy handling of foreclosures, loan modifications,
deeds-in-lieu and short sales. Being good in this area means having experience in the legal work
surrounding default management, loan workouts, investor reporting, and timely referral of
delinquent loans. A successful strategy would be to have in-depth knowledge of HAMP, standard
modification programs, D-I-L and short sale guidelines, and to minimize the compensatory
penalties surrounding defaults and maximize the incentives that are offered.
        Repurchase defense - We all know about loan put-backs and the controversy that subject
has created. Fannie Mae alone has demanded repurchase of $21 billion in mortgages from its
servicers. Countrywide (vis-a-vis B of A) has been hit with billions of dollars of losses from
repurchase demands. The biggest names in the world of the investors who have been purchasing
whole loans and MBS from the aggregators have demanded repurchases on hundreds of
thousands of loans. Those entities faced with defending against those repurchase demands are
hiring staffs and consultants in the repurchase defense areas to rebut the claims of the investors.
It’s an industry that did not exist 5 years ago but now employs thousands of top notch
underwriters to defend against these demands.
        It all looks so much better in 2011 than it did a few year ago. Not that we're completely out
of the woods with respect to loan liquidity, mortgage defaults, and home values, but the view
from this year looking forward appears a lot rosier than the view was five years ago looking
toward today.
Patrick Mansell, CMB, is Executive Vice President of Coastal States Mortgage Corporation, Fort Lauderdale,
FL, a company that he co-founded 33 years ago. He is a graduate of the University of Miami and has been active
in the Mortgage Banking business since 1969. He lives in Boca Raton, FL.
           YOU MAY BE SURPRISED BY ALL THE REVERSE MORTGAGE
                    OPTIONS NOW AVAILABLE FROM FHA
                                    BY
                             Tim D. Allen, CMB

When Pat Mansell, CMB, asked me to write an article for the First CMB Society of Florida
Newsletter I asked him, “What do you want me to write about? Pat’s response was, “Write about
something you know….write about reverse mortgages.” Thanks Pat here’s my article!

       If you haven't been paying attention to reverse mortgages lately I'll bet you will be
surprised by all the reverse mortgage options now available from FHA.
       Since the vast majority of reverse mortgages are FHA Home Equity Conversion
Mortgages (HECM) programs this article will focus exclusively on HECM and will use the term
HECM and reverse mortgage interchangeably. The two relatively new products are the Reverse
Purchase and the HECM Saver.
       OK, let’s start with the basics that almost everyone knows. A reverse mortgage is a loan
available to homeowners age 62 or older that allows senior borrowers to tap into the equity
they’ve built up in their home. When you take out a reverse mortgage, instead of making monthly
payments as with a forward mortgage, you receive cash for things you may need. The loan is not
due until the last borrower leaves the home permanently.
       The basic difference between a reverse mortgage and a home equity loan is with a reverse
mortgage, there are no income or credit qualifications. What’s more, with a home equity loan or
line of credit, you have to make monthly payments—with a reverse mortgage, you do not.
Homeowners remain responsible for their property taxes, homeowner’s insurance, association
dues and maintaining the property.
        The amount that can be borrowed depends on several factors, including the youngest
borrower’s age (minimum 62), the type of reverse mortgage selected, current interest rates, the
appraised value of the home and the Federal Housing Administration’s (FHA’s) lending limit for
the area in which you live, which is currently $625,500 for the entire USA. One of the most often
asked questions about reverse mortgages is: Can they be refinanced? The answer is yes. And in
fact, refinancing can be a useful option if the borrower’s home increases in value.
        What about the interest rate and fees? Interest rates for most reverse mortgages are tied to
a financial index and will vary according to market conditions. Interest is charged only on the
money the borrower receives. Additional costs typically include an origination fee, closing costs
and a mortgage insurance premium. These up-front costs can be rolled into the reverse mortgage
and paid (with interest) when the loan becomes due.
        Now onto specific reverse mortgage programs including the two new programs I promised
to tell you about at the beginning of this article. The descriptions are written so you can easily
explain them to any borrower.
FHA Home Equity Conversion Mortgage (HECM) programs include:
Fixed-Rate Home Equity Conversion Mortgage
Lock in an interest rate for the entire life of your loan and take 100% of your funds at closing
with a fixed-rate Home Equity Conversion Mortgage (HECM). With this government-insured
loan, you will always know exactly how much interest is accruing on your reverse mortgage -- and
eliminate any worry that the rate may increase.
Adjustable-Rate Home Equity Conversion Mortgage
The adjustable-rate Home Equity Conversion Mortgage (HECM) is also government insured --
but may provide you with greater flexibility, because it generally provides more options for you to
receive your reverse mortgage proceeds (e.g., as a line of credit, monthly payment, lump sum, or a
combination of these). And the adjustable-rate HECM may be offered at lower interest rates.
(New) HECM Saver Reverse Mortgage
This lower-cost reverse mortgage requires significantly less in up-front costs as compared to the
HECM Standard reverse mortgage. As a result, HECM Saver can save the average homeowner
age 62 and older thousands of dollars. The amount of money that can be borrowed is less than
with the HECM Standard, but the lower up-front costs may make it an attractive option.
(New) Home Equity Conversion Mortgage for Purchase
A Home Equity Conversion Mortgage (HECM) for Purchase helps you purchase a home by
taking out a reverse mortgage on that home. It's applicable for the purchase of a one- to
four-family dwelling unit, to be occupied as a principal residence only. It could help you move to a
home that will better fit your future needs.
       Congratulations, you now have the basic information on reverse mortgage programs that I
believe every CMB should know. I hope you as a fellow CMB will follow this example and write
an article you believe other CMBs should know about your specialty or area of interest in our
industry. After all you wouldn’t have become a CMB if you did not possess a passion to learn
more about our industry than just the part you were actively involved with. I am looking forward
to reading your articles in future CMB Society of Florida Newsletters. You don’t have to wait for
our Communications Director (and talented author) Pat Mansell, CMB to call you, you can
email your article to Pat at pat@coastalstates.com

If you have any questions about reverse mortgages feel free to give me a call at 800-607-0366 or
e-mail me at tallen@metlife.com

Tim Allen is a past president of the MBAF, presently Chairs MBAF’s CMB Committee and is a fulltime Met-
Life Reverse Mortgage Consultant
                             Credit Tenant Lease (CTL) Financing
                                              By
                                      David Patten, CMB

        Long term CTL financing is abundantly available throughout the US for a multitude of
property types that have either Moody’s (Baa3) or Standard & Poor’s (BBB-) Investment Grade
credit ratings or higher. Compared to all of the multi-tenant commercial real estate property
types, CTL financing is by far the easiest to accomplish in the shortest period of time because of
its single credit tenant structure.
        This article will give you a brief description of what’s involved with the financing of these
type properties, such as Publix, Walgreen’s, CVS, Home Depot, Blue Cross & Blue Shield and
thousands of others that qualify because of their investment grade credit rating. Click here for
Investment Grade Credit Ratings. The borrowing entity has to be set up as a Single Asset En-
tity, the principals of which do not have to be personally liable on the debt. These type of loans
are referred to as Non-Recourse to the borrower, except for (what are referred to as) carve outs.
Carve outs include such items as fraud, mismanagement, laying waste to the property, intentional
contamination, etc, known in the industry as the “Bad Boy” clauses.
        In the residential world of underwriting, it’s the borrower that has to meet the permanent
lender’s loan criteria, but in the CTL financing arena, it’s the tenant that has to meet the lender’s
criteria, as the loans are non-recourse to the borrower. The CTL financing example used here will
be an existing investment grade tenant occupied building, like the ones mentioned above to
explain how the financing is structured. Since the loan approval is based upon the credit of the
tenant, the CTL would preferably be triple net (NNN) to the landlord, so that the tenant is totally
responsible for the payment of all the taxes, insurance and other expenses. For maximum
financing, the Loan to Value (LTV) can be as high as 97% which the MAI appraisal must concur
with. The term and amortization (without any balloon payment) of the loan will be the same as
the term of the lease in order to fully amortize the loan to zero at maturity. With an Investment
Grade Rated tenant, the lender will allow the annual Debt Coverage Ratio (DCR) to be as low as
1.01 to 1.00. Once the lender has approved the CTL, they will determine what the fixed interest
rate will be for the term of the loan. Interest rates for these type loans are determined by using a
spread over the interpolated 10 year Treasury bond, which is currently in the 3.15% range (as of
5/5/11); so the interest rate would probably be in the 5.5% range. This rate over a 25 year term
loan would have an annual constant of .074%. Click here for the Constant Chart. In addition to
the maximum LTV requirement of 97%, the annual loan payment cannot have a DCR less than
1.01 to 1.00. So the loan amount is determined by CTL lender’s loan formula as follows: The an-
nual NNN operating income (NOI) from the lease, divided by the DCR of 1.01, divided by the
annual loan constant equals the loan amount. Using an NOI of $650,000, the DCR of 1.01, with
an annual constant of .074%, the loan amount would be $8,696,815. (NOI/DCR/
Constant=Loan Amount) Click here for the CTL Financing Brief and for a broader explana-
tion the CTL Financing Summary. Examples of the CTL’s that have been funded by various
CTL lenders are on pages 9, 10 and 11.
Assuming a market capitalization rate of 7.25%, the MAI appraised value would most likely be
around $8,965,517, which indicates a 97% LTV. Any upward movement in the cap rate would
require the loan amount to be lowered, unless the interest rate could be lowered to achieve a
lower constant. As they say “the devil is in the details.”
       CTL loans for proposed properties can also be funded in advance of construction by the
permanent lender. The permanent loan is funded in full into an acceptable FDIC approved bank,
with the bank issuing the permanent lender an irrevocable Letter of Credit using the funds as
collateral. The developer draws against these funds until the project is complete, the certificate of
occupancy issued and the tenant is in occupancy paying rent. The Letter of Credit is cancelled
and the loan amortization begins.

Click here for CMA-Patten profile and Florida Real Estate Journal-CMB article

				
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