Pandora's box opened in March 2020. In California, a borrower pulled out $400K in cash on a new $600K loan. His property was worth $1.5M.

“I’ll never forget this story,” recalled the mortgage executive, who requested anonymity to speak candidly. “He flat out said, ‘I’m not gonna pay the mortgage.’ We're like, ‘Why?’ He goes, ‘Well, all these other deadbeats are getting to skip payments. Why can't I throw it on the back? Fuck it. I'll have more fun 😎.’”

For the stunned executive, that conversation illustrated the broader troubles in mortgage servicing now bubbling to the surface. Because of flaws in Dodd-Frank, restrictive COVID-era loss mitigation policies, & HUD’s antiquated default monitoring process, servicing is becoming a bloodsport if you’re working w/ lower-end borrowers, he said.

PITI (principal interest taxes & insurance) has exploded between 200-400% in some MSAs. Then factor in declared natural disasters ⛈️, which give borrowers 90 days to make any payments, & you quickly run into nonpayment issues. First payment defaults are way up (borrowers typically have 60 days to pay). Often, the borrowers missing payments have high DTIs & used gift funds & DPA to obtain the loan. 

[See our piece last week on rising defaults]

To monitor risk, HUD looks at what are called compare ratios, a lender’s rate of serious delinquency & claims on FHA loans vs the national average for all FHA lenders. As of July 31, more than 70 servicers had ratios above 150% & 19 were north of 200% 😦(ideally, you’re below 100%). The executive said external factors like PITI & weather events distort performance ratios. His shop works w/ higher-need populations but is compared to companies mostly issuing “A paper,” which he believes is unfair. HUD under the Trump administration is increasingly inflexible in working with originator/servicers with high compare ratios, he added, though Ginnie is better in default monitoring. 

More than 20 FHA servicers have received letters from HUD saying they’ll soon be restricting capital on the assumption of credit losses in some MSAs, sources said.

FHA loans now account for 52% of serious delinquencies nationwide, per ICE, & are likely to accelerate as job losses mount. Few borrowers will likely ever get foreclosed on. Instead, they’ll perform the loss-mit tango with the servicer, who will negotiate workouts & tack missed payments onto the loan. 💃

“Nobody wants to ever say consumers are abusing it,” said the exec, whose shop does a good deal of govvie business. “They want to blame all these lenders. Some of the borrowers just play the game. If I told you you won’t get foreclosed on and you’ll probably get a lower interest rate and we’ll throw the payments at the back…for that amount of money you can go to Cabo San Lucas 🍹and give your kids the Christmas of a lifetime. ‘Yeah, fuck it, I don't care about my credit. I'm not moving, housing's too expensive, I'm in the school district I want.’ If people heard these calls [with borrowers], they'd be floored."

In some cases, the borrower has been coached on how to avoid payments & the “coach” will take a cut of the savings, multiple sources said. Many defaults then, are strategic, rather than hardship-driven. 

“Medical or job loss is the first excuse,” he said. “But most of them are like, ‘Last time I got 90 days.’”

Fannie & Freddie aren’t especially keen on supporting DPA & have already ended special purpose credit programs. But America’s largest mortgage lender, UWM, is still game. The company offers what’s called the BorrowerSmart & Conventional 1% Down programs. The borrower puts down 1% & UWM contributes an additional 2% ($4K-$7K depending on the version of the program) so they qualify for a conventional minimum. But there’s a catch—not just any broker partner can utilize the program. 

As revealed at the weekly Wednesday sales huddle, they must now have Pro Elite status, UWM’s top-tier designation, earned by meeting certain performance standards. One broker said you can get to Pro Elite if you send UWM deals & “watch some videos, order closings, gifts, etc.”

UWM AEs told brokers that Fannie & Freddie don't have the appetite for DPA loans like they used to. “Many lenders have pulled out completely,” one said. “We are not pulling out of the programs, but are pulling back by only offering to those partners that were PRO Elite 100+ in July and/or August."

Despite the Trump administration cutting federal funding, DPA programs are growing, not shrinking. Inventory in many markets is still limited & some programs have adjusted their eligibility criteria to better address the issue, said Veronica Khandelwal of Downpayment Resource. “We are also hearing some concerns from our agency contacts about the future availability of funding sources like HOME & CDBG. However, I've heard there have been unsuccessful attempts at eliminating HOME funding in the past so it would be surprising if it went away completely.”

A Fannie & Freddie public stock offering “could well be a this-year thing,” Commerce Secretary Howard Lutnick said on Thursday. “Do we want to sell a lot?” he said. “No. What we want to do is show a mark-to-market, right? The president shows that these are assets that we, the American taxpayers, own, & look how much they’re worth.” He said they’d do what they need to keep the price of a mortgage “as low as mathematically possible.”

Lutnick insisted that the GSEs belong to the American public, which suggests the funds raised wouldn't contribute to the net worth of the GSEs, right?

Speaking of the GSEs, the FT reported earlier this week that the FHFA is bringing back a number of employees it let go earlier this year. The FHFA had about 750 employees at the start of the year but slashed about 250 roles through a mix of voluntary redundancies & job cuts, the people said. They want them back in anticipation of a stock offering. One source said morale 😿 at Fannie was “very low.”

For his part, the MBA's Bob Broeksmit said he doesn't want the twins to merge. It would "diminish innovation and degrade service to market participants," he wrote in a blog post.

Despite being the fastest-growing demographic in the U.S., Hispanic homebuyers often face barriers in the mortgage process. There’s language gaps, non-traditional documentation & a lack of Spanish-speaking LOs. In July, the Trump administration required English-only services, which will make lending to Hispanic communities even harder.

But maybe technology can fill the gap? The Hispanic Organization of Mortgage Experts (HOME) is rolling out a bilingual AI platform, “Wholesale Search,” built on ChatGPT, to help loan officers instantly match borrowers w/ TPO lenders.

The platform also includes a “Home Certified” training program on credit analysis, compliance & intercultural communication. It’s designed to handle complex cases such as borrowers w/o Social Security numbers, thin credit files or visa-based residency. Loan officers told the AP that the tool slashes the time it takes to find lenders, provides clearer guidance to clients & boosts confidence among first-time Hispanic buyers.

“I do think AI has the capacity to close gaps & collapse timeframes for Hispanics across the board,” NAHREP head honcho Gary Acosta told The Scoop.

Others are adopting similar tech as well. Tidalwave's SOLO platform also has a Spanish language integration & Better’s Tinman will soon have a Spanish-language component.

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