When Reform Attacks by Frank & Brian

Think of all the reform we have just undergone in the wonderful world of mortgage lending.  Really, I am sick of talking about change, but I just find the conclusions of said change very perplexing.  If it were a TV show it would be called “When Government Regulation Attacks!”  That feels about right.  You can picture our regulators and congressional representatives discussing the coming unintended consequences of their actions very much like a pit bull owner talks about his animal after he tears someone apart. Question: “What the hell happened?” Answer: “Nothing like this has ever happened before.  I can’t believe this happened.  I’m so sorry.”   So, are we talking about the owner of a vicious dog or a legislature of House Financial Services Committee?  Really, it feels about the same.  

I find it unfathomable that not a single person in a position to influence the MBS market can see what has happened or what is coming.   The simple answer is:  the opposite of what they intended.  I think the goal was, and is, to bring transparency to the market, bring the costs and rates down for the consumer, and get rid of loans that will leave people in dire straits.  So let’s look at these points individually.

 Transparency.  The goal is for a home buyer understands the money that is changing hands in their transaction.  Personally, I love the idea of complete transparency.  Let’s face it; if you are embarrassed about what you are charging, it is too much.  Transparency would create a helpful “check and balance” that would effectively reign in wayward originators; sounds good.  So where does the problem lie?  Congress and the Federal Reserve tried to accomplish this goal and completely screwed up.  “When Animals/Regulators Attack!”  Through the Federal Reserve’s final Rule to Regulation Z, they outlined a variety of ways a loan officer can, and now must, be compensated. This will forever be off the borrowers closing statement.  These ways include, but are not limited to, loan volume bonuses, long term performance, hourly compensation, fixed advanced fees for delivering borrowers, loan quality, over head and so much more.  Further, the Federal Reserve says the rules regarding compensation disclosure does not cover payments received by lenders when selling loans in the secondary market.   All these referenced compensation opportunities are the brain child of the Federal Reserve and will never end up on a settlement statement.  Prior to the change, yield spread was on the final settlement statement.   In other words, the Federal Reserve completely “screwed the pooch” when it comes to mortgage lending transparency.

Borrower Affordability.  The Federal rule to compensation stated goal is to preclude loan originators from having any financial interest in the terms or conditions of the loan.  The reason they want the originator out of the conditions is because the Federal Reserve believes the loan officer will screw their borrower.  Never mind the fact that screwing your borrower hurts the loan officer’s chance at future referrals; the lifeline of a successful business.  So, keeping the loan officer out of the terms should effectively keep costs down to the borrower.   Home Valuation Code of Conduct (HVCC) created Appraisal Management Companies (AMC) regulation, which increased the cost of appraisals.  HVCC has also increased the need for second appraisals, field reviews, and appraisal audits, which all come at a cost to the Consumer.  I just saw a scenario where a potential buyer spent $900 on appraisals only to see the deal fall apart.  Additional, more paper, disclosures and means of tracking and selling mortgages has come at increased doc preparation, administrative costs, and a variety of other junk fees.  In fact, I think an argument can easily be made for the lack of transparency on loans, and the fact that Loan Officers will not be able to compete through a process of lowering rates. Rates will actually increase in the coming years, becoming another attack on the consumer through unintended consequences.  “…. but he seemed like such a nice dog.”

Getting rid of loans that leave people in dire straits.  Ok, they accomplished this goal, but they approached it like chemo therapy approaches cancer treatment.  Sure it kills the cancer but it also kills everything else.  Sure we eliminated the 100 percent stated negative amortization loan, but we also eliminated the 20 percent down stated negative amortization deal for the self employed person.  That was a good loan.  In this scenario, they threw the baby out with the bathwater. In this case, we got rid of a bad product and the cost was a good product for investors and entrepreneurs.   OK, we do not have subprime loans, but how many good loan shops and originators were taken out in the process.  You need not look any further than NMLS.   In some states, originators have been reduced by 75 percent.  Since I do not prescribe to the notion that 75 percent of originators are bad, I think those numbers are not healthy for our industry.  Furtherwhen we develop a national appetite for “recovery,” who will originate loans?  The process of qualifying for a loan is so difficult now, more than ever, we need quality originators, and they simply do not exist in the quantity required to support a recovery.  

I would like to see change in the mortgage lending industry, but it needs to be change for the positive.  At this point, I would be ok with “two steps forward and one step back.”  The problem is, it feels like a constant movement backwards.  I fear that we will not have positive change until we are well into the second major downturn.  The effects of the Dodd Frank Bill, NMLS, GFE 2010, and so much more are truly felt. 

If I could ask one thing of every originator, it would be to tune into what is taking place and voice your opinion in written and video form to those in positions of authority and consequence.  Chances are, you already feel and know what is happening.  Chances are, you could write an article outlining your personal scenarios that will feeble very similar to my appraisal story.  I would say, put it in writing and put it in video and send it up the food chain.  Your industry needs you now more than ever.  Now for a shameless plug, you can do it by signing up and receive your own free blog and profile at www.realestatemarbles.com, the site where we host the www.tbwsdaily.com show. 

Thinkbigworksmall.com (TBWS) was founded in 2007 by a group of highly successful real estate and mortgage industry entrepreneurs. Born in the most battered market in the real estate and mortgage industry history, Thinkbigworksmall.com was conceived after decades of observing how the most successful professionals always seem to work smarter not harder. Frank & Brian can be reached at tbwsdaily@gmail.com

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Posted by TheNicheReport magazine on Jul 11 2011. Filed under Articles. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry