Residential Mortgages – A lesson from Canada

Thanks to the recent economic meltdown, the U.S. mortgage industry – and its lax standards in residential lending – has been the subject of intense scrutiny. The debate has led to the question: where do we go from here?

It might be helpful to look north, given that our Canadian neighbor’s residential mortgage lending industry didn’t get out of whack like ours did here in the U.S.

According to an article in the Financial Times on January 19, 2011, Canada’s home-finance system is more conservative than the one in the U.S. For starters, most residential mortgage lending is handled by large domestic banks. When loans are made in purchase and sale transactions, the banks are required to buy government insurance if less than 20% of the purchase price is put down. The result? Subprime and other high-risk mortgages amounted to a small part of the Canadian housing market.

Also, the impetus for Canadian homeowners to borrow as much as possible isn’t as great as in the U.S. because interest paid on residential mortgages in Canada is not tax deductible. Although suggesting that kind of revamp in the U.S. might cause an outcry in several quarters, some members of the U.S. Congress have suggested taking away the interest deduction would be a welcome double-whammy by curbing U.S. borrowers’ appetite for debt and reducing the U.S. deficit.

Because during the downturn Canada’s economy remained much more robust than the U.S.’s, housing prices have continued to rise despite Canada’s mortgage lending controls. But as of January 17, 2011, the controls were deemed not tight enough. So the Canadian government imposed even stricter lending standards, reducing the maximum amortization term to 30 years.

As a further protection to homeowners, home equity loans (which typically have variable interest rates that can spiral upwards) are now capped at 85% of loan-to-value (down from 90%). What’s more, the Canadian government will no longer insure home equity loans, meaning banks are now on their own if they expect to be repaid by borrowers.

And that lack of insurance protection, according to the Canadian finance minister, will place risk evaluation squarely on the shoulders of lenders instead of taxpayers.

Food for thought.

- Morrie Erickson

RREAL IN – The form only title agents see

As most people involved in real estate are aware, the past few years have seen the State of Indiana and the federal government focus on mortgage fraud.

As a part of those efforts, since January 1, 2010, Indiana has required closing agents to fill out an electronic form for every closing involving single-family residential first lien mortgage loans whether purchases or refinances (practically all mortgages). The form was developed through the Indiana Department of Insurance (IDOI) which regulates and licenses title insurance and closing agents and is known as RREAL IN, which stands for Residential Real Estate Acquisition of Licensee Information and Numbers Database for Indiana, and is mandated by Indiana Code 27-7-3-15.5. The purpose is to develop an electronic system for collection and storage of information about persons participating in or assisting with applicable transactions.

Some of the information the RREAL IN form calls for must be provided by persons or companies closing agents don’t deal with, which makes filling out the form problematic. For example, closers rarely see appraisals but must report the appraiser’s name and license number, the appraisal company’s name and license number, the amount the property appraised for, and the appraisal completion date.

Here’s a list of other information the closer must enter:

1. Name & license number of each:
a. salesperson or broker;
b. principal broker;
c. mortgage loan originator;
d. mortgage brokerage company;
e. mortgage loan originator company;
f. title agent (closer); and,
g. title agency;
2. Name of each seller;
3. Name of each buyer;
4. Purchase price;
5. Property description by tax parcel number & street address;
6. Date closing instructions received; and
7. Date of closing.

As mentioned previously, the RREAL IN form is electronic. It’s accessible only online. Unfortunately, it can’t be filled out partially and saved. Long pauses between entries void the form, meaning closers have to start over again if, say, they take a phone call during data entry. Closers chuckle when IDOI says it takes only 2 or 3 minutes to fill out the form; in reality 20 minutes is more likely. Much of the information on RREAL IN is already on the Sales Disclosure Form (another “simple” form title agents have been required to fill out for years), which leads me to wonder whether anyone at state-level considered combining the forms into one. My cynical side says probably not. Of course, double entry adds to the workload and drives up costs. Maybe no one thought of that either.

While we title agents and closers are doing our part in exposing mortgage fraud (we have strict rules on funding, disbursing, anti-flipping, etc.), we hope agencies tasked with combating the problem are looking at data we’re submitting. But if the targets of RREAL IN are fraudsters, why is House Bill 1273 making its way through the 2011 Indiana General Assembly? Curiously, HB 1273 makes RREAL IN applicable to cash transactions. Which raises the question: What is the actual purpose of RREAL IN?

- Morrie Erickson