OMBA Letter to OHFA: Mortgage Loan Purchase & Sale Agreement

The letter below was sent to Doug Garver of OHFA on behalf of the OMBA Board of Trustees and the OMBA membership.

October 8, 2008

Douglas A. Garver
Executive Director
Ohio Housing Finance Agency
57 East Main St.
Columbus, Ohio 43215

Re: Mortgage Loan Purchase & Sale Agreement

Dear Douglas,

This letter is written on behalf of the membership of the Ohio Mortgage Bankers Association in regard to the Mortgage Loan Purchase & Sale Agreement distributed by your agency to Participating Lenders in June 2009. Our Board of Trustees and Executive Committee are appreciative of the opportunity to have worked closely with your staff over the course of the past year in the development of contract language that will ensure maximum lender participation and greater home ownership opportunities for all Ohioans. In particular, Cindy Flaherty, Pete Simpson, and Tom Walker have continually demonstrated an open-door policy toward our membership and a willingness to discuss any and all aspects of the contracts. We believe that those discussions resulted in a document that is generally in line with industry practice and consistent with advancing OHFA’s goal of creating clearer separate terms for individual products through the additional development of Product Guidelines and Term Sheets.

However, our membership remains concerned about most of the language contained in Article V, particularly Section 5.02, items b, c, g and h. This repurchase language creates an undue burden of risk for the originating lender that far exceeds current industry standards. The additional risk is created because of the unique characteristics of the first time home buyer, the limited compensation earned by the originating lender, and the unavailability of marketplace resale options for a loan if it is repurchased. Furthermore, many Participating Lenders have no means by which to provide the loan servicing functions for the consumer in the event they did repurchase a loan. Also, the provisions in Section 5.02 (b) are extremely broad and do not appear to relate directly to a specific loan sold to OHFA. These broad repurchase provisions may also impact a Participating Lender’s ability to use sale treatment when accounting for sales to OHFA.

The contract comes close to placing 100% of the risk of default on the originating lender. In light of the joint relationship between OHFA, the Master Servicer, and the Participating Lender, we propose a different approach to risk management on these loans. A loan loss reserve could be created through the implementation of a surcharge on either all loans, or only those loans with credit scores below 620. This form of “self-insuring” would create a fund maintained and managed by OHFA that would be used to offset costs incurred by the Master Servicer in the event of default. If the Originating Lender was truly at fault for negligence or fraud, normal penalties would and should apply. If, however, the default occurred for reasons outside of the lender’s control (like the subsequent events referred to in the contract or attempts to challenge appraisals years later, etc.), the fund would be used to offset the losses incurred.

The program as it exists today requires no minimum credit score on originated loans. The practice of originating loans with no minimum credit score in today’s environment is highly risky. In some cases, the origination of such loans could also be inconsistent with the spirit and intent of Senate Bill 185, which the OMBA supports, that encourages prudent lending and a thorough review of the borrowers’ ability and capacity to repay the loan. Furthermore, borrowers with a credit score of less than 580 are far more likely to default than those with a credit score of 620 or greater.

Of those members that have decided to continue to support the OHFA programs, many have implemented various credit overlays to the origination of this product in order to insulate themselves from the potential risk of repurchase. This is creating confusion in the marketplace for all parties concerned - originators, realtors, and consumers. Having a situation where one company is offering the program with no minimum credit score, another at 660, and another somewhere in between is not good for the program or the marketplace. Furthermore, OHFA will likely be adversely selected by lenders for borrowers with lower credit scores as market forces (private sector investors) have already pushed up minimum credit scores on FHA loans to the 620 to 660 range.

The OMBA proposes the following recommendations for consideration:

  1. modify the contract language to reflect a reasonable sharing of risk among the three parties involved in each loan transaction,
  2. create a loan loss reserve to help offset the costs of default, and
  3. issue a minimum credit score for the program

If a loan loss reserve fund cannot be implemented, the OMBA strongly encourages OHFA to make changes to the repurchase language in Section 5.02 in an effort to encourage greater lender support of the program and to adopt a minimum credit score of 620 for all applicants in order to improve the long-term chances of successful home ownership for all borrowers.

Our members want to be able to participate in OHFA’s programs and see those programs remain viable for the long term so that all Ohioans can benefit. We hope that you will give these recommendations on contract terms and program structure your careful consideration.

Sincerely,

Ohio Mortgage Bankers Association
Board of Trustees

Jeff Steed Jeff Brader
OMBA President OMBA Vice President

cc:
Cynthia Flaherty, Head of Single Family
Charles Ruma, Chair, OHFA Residential
James Coreno, US Bank