HUD Turns its Attention To Warehouse Lending

Last Wednesday, while most of us were closing our offices to go home and prepare our turkey and dressing, HUD was busy publishing a notice in the Federal Register which could have a huge impact on wholesale mortgage lending.  On November 24, HUD published a Notice that is it considering issuing new guidelines regarding RESPA compliance with regard to warehouse lending and other financing mechanisms.  You can read the Notice at:

HUD is asking for comments to 10 questions, some of which contain multiple subquestions.  All deal with the structure of current warehouse lending arrangements including buy back provisions, ownership of loans, whether the warehouse lender is involved in the credit or underwriting decisions, and whether the warehouse lender scrutinizes individual files.   HUD wants to know whether the size or credit worthiness of the lender determines the extent to which their files are scrutinized.  HUD also asks, "what characteristics indicate a bona fide transfer of the loan obligation, such that the transaction would be a secondary market transaction that is not covered by HUD's RESPA regulations?"

The fact that HUD has posted this Notice is extremely significant, and the timing is not a coincidence. When the new good faith estimate went into effect last January, the mortgage broker industry cried foul because the new rule discriminates against the smaller broker in the way that interest rate spreads are disclosed. Stronger, more credit worthy brokers with cash got warehouse lines so that they could continue to do business as they had done before.  Since only those brokers with more cash and experience were able to qualify to receive warehouse lines, these stronger players were able to escape to higher ground.

Now, however, HUD is demanding an explanation of the inner workings of warehouse lending and that does not bode well for the future of these mortgage brokers turned correspondents.  Remember that in January of 2011, the Treasury is supposed to present to Congress a new blueprint for housing finance in the United States, which according to indications we see in statements made by Barney Frank last year, will probably include a complete disbanding of Fannie Mae and Freddie Mac.  Presumably these two mortgage giants who have bled hundreds of millions of dollars in taxpayer money since they went into conservatorship in 2008, are going to be replaced by a completely government-owned, government backed system.  HUD's demand for information regarding warehouse lending right now is in anticipation of these larger changes that we expect to see early next year.

My own belief is that when the review process is finished, HUD will develop its own guidelines for what the agency will accept as a "bona fide, legitimate" warehousing relationship.  To qualify, a lender will have to have a fairly substantial amount of his money in the loan, a high net worth, and a good amount of experience with operating a warehouse line.  Lenders who do not meet the HUD standards will have to be treated as brokers rather than as correspondent lenders.  This will mean that when the new Federal Reserve rule takes effect in April, the lenders whose warehouse lines do not qualify under whatever standards HUD sets will not be able to receive yield spread premium or service release premium when they sell the loans.  (Under the new rule, neither a loan officer nor a mortgage broker company can receive yield spread premium or service release premium if they are compensated in any way by the consumer.  However, a correspondent lender closing loans through a warehouse line can receive the service release premium even though it cannot be paid to the loan originator.)  If I am correct about this, we will see many lenders who have invested in warehouse lines who are now going to be told that they do not qualify in HUD's eyes.  Once again, the federal government is picking the winners and the losers in the housing finance market.

The comment period for this notice ends December 27, 2010.  Instructions for making comments are included in the link I have included in this post.

Thousands face extra bills as court ruling hits property sales

The Herald reports that "A landmark ruling on repossessions is resulting in the suspension of property sales at the last minute and thousands of Scots facing large bills from banks on top of losing their homes. Almost a week after the decision by the UK Supreme Court effectively ground all Scottish repossession cases to a halt, there are concerns that hundreds of property deals could be halted as a result.

There are also warnings of the impact of the judgment on the cash-strapped courts service, with thousands of cases scrapped and having to come back into the system.  Last night, the Law Society of Scotland called on solicitors to put the brakes on all purchases of repossessed homes until it can be proven it is compliant with last week’s “earthquake” judgment.

Bruce Ritchie, director of professional practice at the Law Society of Scotland, said: “The society’s conveyancing and civil justice committee will be looking at this in detail but our preliminary view on current transactions that have not yet settled is that buyers’ solicitors should be firm about declining to settle the transaction until selling creditors can produce evidence of having followed correct procedure.”

Mike Dailly, of the Govan Law Centre, said he would pursue legal action against the lenders for putting the bill for dealing with the judgment on to his clients. He said: “The question that no-one has asked is ‘who’s going to pay for all this?’ I have no doubt UK banks will do what they always do and pass these costs onto consumers by adding them to their mortgage – which they can do if the costs are reasonable.  “We could be looking at up to £40 million or more. “It’s not reasonable to expect vulnerable Scots facing repossession to pay banks and their lawyers twice for what is essentially their solicitors’ responsibility and failure.” "

Update: unfair bank charges on BBC 1's Rip-off Britain

Unfair bank charges, including clients of Govan Law Centre, were featured on BBC 1's Rip-off Britain at 9.15am on Monday, 29 November 2010.

Sadly, the programme decided to take a soft approach and focus on peripheral issues around charges (e.g. communication concerns) as opposed to the tough question of whether the UK bank charging model was unfair in law, whether it was morally acceptable to exploit vulnerable consumers to subsidise better off customers,  as well as overlooking the plight of thousands of UK consumers still trying to seek refunds of unfair charges.

GLC predicts major shockwaves for Scottish repossession law following RBS v. Wilson and others

A judgment of the UK Supreme Court today looks set to have profound implications for the law and practice of repossessions in Scotland. According to GLC's Principal Solicitor, Mike Dailly, the case of RBS plc v Wilson and others "may be to Scottish repossession proceedings what Cadder has been to criminal proceedings in Scotland". 

The UK Supreme Court upheld the appeal of two sets of Scottish homeowners in the case of Royal Bank of Scotland plc v. Wilson and others [2010] UKSC 50, where a lender's certificate of default did not amount to a 'requisition' for the purposes of section 5 of the Heritable Securities (Scotland) Act 1894, and where the court held that in the circumstances of the case, a 'calling-up notice' should have been served. 

 The standard practice of most lenders in Scotland in reposession proceedings has been to raise a writ founding upon a 'default' in terms of standard condition 9(1)(b) (of sch 3 of the 1970 Act) and seek recovery in terms of section 24 of the Conveyancing and Fedual Reform (Scotland) Act 1970.  In essence, lenders would not bother with a default or calling-up notice and would simply raise repossession proceeding based upon the mortgage arrears (lodging a 'certificate of default' setting out the amount of arrears). 

And that was that for many years in Scotland - defenders could use the Mortgage Rights Act (Scotland) 2001 and now the Home Owners & Debtor Protection (Scotland) Act 2010 to obtain a chance to pay, re-mortgage or restructure, sell, or apply to the Mortgage to Rent Scheme.  But no-one challenged the orthodoxy of the lender's right to use standard condition 9(1)(b) for a repossession based upon mortgage arrears; until now.

The UK Supreme Court's ruling makes it clear that standard condition 9(1)(b) cannot be used for a failure to comply with mortgage payments, and instead a calling-up notice is necessary in an arrears case. At para 74 Lord Hope says "As standard condition 9(1)(b) refers to a failure to comply with any other requirement arising out of the security, this section must be taken to refer to defaults other than in respect of the debt secured by the standard security. Content for its application is to be found in the requirements that are set out in standard condition 1 (maintenance and repair), standard condition 2 (completion of buildings), standard condition 3 (observance of conditions in title) and standard condition 5 (insurance) and any other similar conditions that may have been included by way of variation to maintain the value of the security subjects".

GLC's Principal Solicitor said: "The fact the UK Supreme Court has stated that standard condition 9(1)(b) cannot be used for a failure to pay ones mortgage, and that in such cases a calling-up notice and standard condition 9(1)(a) should be used instead, will send shock waves to lenders and their solicitors in Scotland.  More than that it could mean thousands of cases might have been raised incompetently, with defenders entitled to seek dismissal with expenses in principle.  GLC would recommend that all homeowners in Scotland currently subject to repossession proceedings seek advice from a law centre solicitor or local firm of solicitors in light of this decision".

Give Thanks

Every Thanksgiving for as many years as I can remember, my mother had a tradition at Thanksgiving dinner.  After my father prayed over the food, my mother asked each of us to name one thing that had happened in the last year that we were thankful for.  As I got older, knowing that I would have to state what I was grateful for, I started thinking about the year a couple of weeks in advance of the holiday, and I found that even in difficult years, I had a lot to be thankful for.  My mother's tradition, which she continues to this day, has helped me to really think about the meaning of Thanksgiving each year.

This year has seen so many negative changes and so much bad news that those of us who work in real estate and mortgage lending might feel stumped at my mother's dinner table the day after tomorrow.  So in the spirit of Thanksgiving week, I have compiled a list of 5 things that all of us in our industry can give thanks for on November 25.

1.  We still have low interest rates.  For all of the problems we have had with rule changes, underwriting changes and guideline changes, 2010 has seen record low interest rates.  When I started in this industry in 1998, I would have never believed it possible that I would be financing people at fixed interest rates in the 3's.  Those low interest rates have allowed those of us in lending to weather tough times and perform a real service for borrowers who now have fixed rates lower than we ever imagined.

2.  We are seeing lower housing prices.  Yes, I know that this is a mixed blessing at best, but think about it.  With underwriting standards so tight, many borrowers could not qualify at all if housing prices had not dropped.  Lower prices mean that many home buyers who had been priced out of an accelerating market can actually afford a home.

3. We have access to great programs.  We have seen a huge number of products go away, but there are still some great loan programs that allow borrowers to qualify for financing.  Programs like Fannie Mae's Home Path give borrowers an opportunity to buy a home with conventional financing, a reduced down payment and no mortgage insurance.  I just finished quoting a borrower for Home Path investment loan with 10% down and no mortgage insurance and a 5.25% fixed rate for 30 years.  Although we mourn the loss of some of our past programs, great financing still exists for qualified buyers.

4. We have greater FHA availability.  This is huge.  Back in the early part of the decade, the broker industry lobbied repeatedly for HUD to open up FHA to brokers, totally without success.  Now that the market is FHA dependent, HUD has opened up access to brokers.  This means more competition and better pricing options for consumers.

5. We are still alive, and we are not alone! "Don't worry about things--food, drink and clothes. For you already have life and a body--and they are more important than what to eat and what to wear. Look at the birds!  They don't worry about what to eat--they don't need to sow or reap or store up food--for your heavenly Father feeds them...And why worry about your clothes? Look at the field lilies! They don't worry  about theirs. Yet King Solomon in all his glory was not clothed as beautifully as they.  And if God cares so wonderfully for flowers that are here today and gone tomorrow, won't he more surely care for you....So don't be anxious about tomorrow. God will take care of your tomorrow too.  Live one day at a time."  (Matthew 6: 25-34 TLB)

Now that's something we can be thankful for every day!  Happy Thanksgiving.

Good Credit Is No Longer Enough

A couple of months ago, I took a refinance application for a doctor and his wife.  They were refinancing their home valued at about a half a million dollars, which was well in line with his annual income of over one million dollars a year.   After I had the basic information, I went into my office to pull their credit reports.  The wife looked a little worried when she asked me about their scores.  I assured her that their scores, which were over 750, were excellent and they would have no trouble securing the interest rate they wanted.  Worry then turned to confusion, as the wife explained to me that she had just had her credit line decreased by Wells Fargo to just slightly more than she owed on the card.  When she called Wells Fargo to ask why they had taken this action, they had told her that her credit was not very good and that she was a poor risk.  Although she protested their decision, they were adamant that this couple, who have more than 20 years of good credit, no late payments on any accounts, and a seven figure income, with very little debt in proportion to that income, were not a good enough risk for Wells.

I was not able to explain to the couple what Wells Fargo's motivation might be for cutting their credit limit at the time, but an article in the today sheds some light on why banks are deciding, for no apparent reason, that some clients are more creditworthy than others.  For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives.  But today banks are using new tools in addition to credit scores to determine whether borrowers are creditworthy. 

For example, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--has a new system marketed to banks to track depositor behavior.  They assign each bank client a score based on deposit and withdrawal activity.  Presumably, checks for non-sufficient funds and returned checks will count against the borrower's score.  The scoring system can alert the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job.  Using up the savings may also signal financial difficulties.  And that can be the bank's cue to cut off credit.

In addition to tracking bank information, credit bureaus are also using income estimates to determine  potential debt to income ratio.  Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines.  Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is.  His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.

The banks are also tracking the consumer's home's value.  The WSJ article tells of Ken Lin, who had a very good credit score but was denied for a credit card.  He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage.  As property values continue to decline nationwide, more borrowers may find that they cannot receive credit because they have lost the equity in their homes even if they have paid all of their bills on time. 

The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income.  Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.

All of this just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, job loss, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history.  It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.

More Foreclosure Problems on the Horizon

The Congressional Oversight Panel released new findings yesterday that the mess we are facing with foreclosures may have more far reaching implications for the economy than we had initially believed.  While the Treasury Department asserts that the issues with foreclosure filings do not pose a systemic threat to the overall financial system, the COP believes that such a finding is premature.  Their report states, "Clear and uncontested property rights are the foundation of the housing market.  If these rights fall into question, that foundation could collapse."

The COP's main concerns appear to be:  1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot.  For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own.  The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid.  Additionally, foreclosures they have initiated may be nullified.

To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."

In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom.  Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.

It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points.  1.  The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice.  To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place.  2.  We have Americans living in homes they have not paid a penny on for over 400 days.  To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford. 

The other issue here is the proposal of another stress test.  When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship.  By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks.  But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants?  Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.

Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold.  By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.

Local Government & Communities Committee backs Property Factors Bill

The Stage 1 Report of the Scottish Parliament's Local Government and Communities Committee has supported the general principles of the Property Factors (Scotland) Bill, which will help pave the way for the Bill's forthcoming Stage 1 debate before the Chamber next month. 

The Committee's report is available here; it makes a number of recommendations to amend the Bill to take on board practical issues which arose during evidence; some of the key conclusions are reproduced below:

"45. The Committee believes that there is clear evidence testifying to the problems encountered by members of the public with property factors and that there is therefore a need to proceed with a statutory framework to regulate property factors. It concurs with those witnesses who stated that a voluntary accreditation scheme would not address the problem of factors that provide a poor service to consumers. While the Committee acknowledges the work already conducted by the Scottish Government’s working group in developing a national voluntary accreditation scheme, it does not consider that there is evidence to suggest that this will be ultimately successful in addressing inadequate factoring services. It therefore supports the approach taken by the Member in Charge of the Bill in proposing a statutory framework for the regulation of property factors.

58. The Committee therefore considers that it is appropriate for housing associations and local authorities to be included within the meaning of “property factor” contained in the Bill.

62. The Committee welcomes the meaning given to “property factors” in the Bill. It considers that it is important for the definition to include the ownership and management or maintenance of land that is available for use by the owners of any adjoining or neighbouring residential properties. The Committee considers that consumers should be entitled to a quality service and that a company should not be able to avoid the provision of this service as a land-owning maintenance company ...

110. The Committee recognises that complaints against property factors can often be very technical and concurs that a homeowner housing panel will provide an effective structure for dealing with such complaints.

 122. The Committee considers that difficulties faced by homeowners in switching property factor represents a major issue, particularly in relation to land-owning maintenance companies. While it recognises that there may be less need for homeowners to switch once the provisions in the Bill raise standards in the sector, it nevertheless believes that a simplification of the process would be of benefit to the consumer. The Committee believes this is an important issue that might require legislation. However, the Committee also recognises it is a very complex issue and therefore calls on the Scottish Government to undertake further research".

Two Sets of Rules

In ancient times, kings and government officials cast die or used sorcery or astrology to try to determine the dates for an important action to take place.  Using this method, they decided when wars should be declared and when new laws should go into effect.

In the twenty-first century we are supposed to be more sophisticated, so I wonder what method the government is using to determine the implementation date for its new policies. For instance, who decided that April should be the month to cut pay for everyone working in the various aspects of financial services? Not only will residential loan officers see their compensation change in April of 2011, but the Securities and Exchange Commission is expected to release new compensation rules for investment advisers that same month.

Just as the Federal Reserve wants to change/slash loan officer compensation to make sure that loan officer pay is not tied to interest rates or credit scores, so the SEC wants to change investment adviser compensation to limit incentive-based pay that "rewards risk taking."  The SEC wants to determine whether officers and employees of investment firms are receiving "excessive compensation or benefits" which may endanger the financial institution.  Mary Schapiro, chairman of the SEC,  has stated that the SEC is going to focus on compensation plans that reward risk taking.  She wants to implement TARP-like rules which will limit executive compensation and bonuses.  According to Schapiro, sign-on bonuses and compensation tied to risky behaviors such as "higher levels of compensation for higher levels of turnover in the portfolio...are things that absolutely have to change."  The SEC under Schapiro's watch is committed to writing new rules that will create "compensation programs that incentivize the right kinds of behavior."

The supreme irony of Schapiro's SEC writing rules limiting how executives can be paid is that she herself has been the subject of heavy criticism for receiving $9 million in payouts and bonuses from the Financial Industry Regulatory Authority Inc (FINRA) when she left her post as the chief executive last year to become the chairman of the SEC. (Included in that $8.98 million figure was $7.6 million in vested retirement benefits).  According to an October 10 article in Investment News Daily, FINRA paid Schapiro and other managers $35 million in salaries and bonuses in 2008 even though the non profit suffered $567 million in investment losses. The payout to Ms. Schapiro became public when Amerivet Securities Inc. asked that FINRA be investigated for excessive pay to its board members, legal advisers and consultants.  According to the article, Amerivet brought action against FINRA because FINRA paid lavish salaries and bonuses to board members who had failed to provide adequate supervision to uncover Bernie Madoff's Ponzi scheme, or to prevent the failures of Bear Stearns or Lehman Brothers.

Fortunately for Ms. Schapiro, the investigation concluded that she and her fellow officials did not do anything wrong in taking the bonuses since the pay levels of FINRA needed to be comparable with those of brokerage firms, investment banks and insurance companies.  This compensation was necessary since, according to the report, FINRA "competed primarily with the financial services industry for talent."

In Schapiro's new capacity as the chairman of the SEC she earns about $165,300 per year, which is a major pay cut from her 2008 FINRA compensation which included $937,961 in salary, bonuses and incentives worth $1.75 million, and "additional compensation" totaling $565,995.00.  Having taken a major cut in pay herself, she is now prepared to make sure that she gives the rest of the financial services world a pay cut as well.

The bonuses paid by FINRA are symptomatic of what is wrong with the entire financial regulatory system.   There are two sets of rules--one for the chosen and the other for everybody else.  If the bonuses and severance packages are being paid to officers and executives of non-profit regulatory agencies who failed to guard the financial system, no wrongdoing has taken place because these agencies have to compete with Wall Street Firms for talent.  But it is perfectly okay for Schapiro in her new role as SEC chair to impose limits on pay for executives of private firms who have not taken bail out money from the taxpayers to insure that they are not being compensated for risky behaviors.  Schapiro conveniently forgets that one of the ideals of capitalism is that risk determines reward--without risk takers we have no growth and no innovation.

It will be interesting to see what Schapiro defines as the "right types of behavior," since she is dedicated to creating compensation rules that incentivize "good behavior" and punish risk taking.  We won't have that long to find out--if the SEC has its way, April of 2011 will see a whole new set of rules.

The President's New Score Card

No, this is not a score card for the economy or taxes or job growth.  This is the new Home Energy Score Program announced by Vice President Joe Biden on Tuesday at a Middle Class Task Force event.  The new program will be test piloted in 10 communities nationwide. 

The Score Program will allow homeowners to voluntarily register their homes for energy audits.  The audits will be performed by trained, certified contractors using new energy software tools to assign each property a home energy score, to estimate of how much money the homeowner could save through "energy retrofits" and to create a personalized set of recommended improvements complete with the annual savings and estimated payback period. The limited review audits under the Home Energy Score pilot program are expected to cost participating homeowners $400 to $500, which is roughly a $200.00 savings over the cost of a full audit. 

Allegheny County, Pennsylvania is one of the 10 test pilot communities selected by the federal government.  At least 12 local homes from each community are expected to be selected for participation.  Homeowners in the Allegheny area can register their homes by signing up at EfficiencyPa. com.  Selected homes will be rated from 1 to 10, with 10 being awarded to a home with excellent energy efficiency and 1 being awarded to a home needing major upgrades.

Contractors who perform the audits must be certified and registered through the Department of Energy.  The Department of Energy and the Department of Labor are working with the Departments of Education, Health and Human Services and the Environmental Protection Agency to identify the skills and qualifications required for a contractor to become certified in the "home energy retrofit" industry.  The Small Business Administration is also on board with a new on-line course, Green Business Opportunities: a Small Business Guide, to help small business owners who want to enter the home energy retrofit market.

To finance the cost of the improvement's, HUD is offering the new FHA PowerSaver loans.  The PowerSaver program provides federally insured loans of up $25,000 to homeowners who make the recommended improvements after their energy audit.  With loan terms of up to 20 years, the PowerSaver program makes improvements including new windows and doors, new heating and cooling, water heaters, insulation, solar panels, duct sealing and geothermal systems attainable for homeowners who qualify for the financing.

Certainly, making a home more energy efficient and helping the homeowner save money on heating and cooling bills is a good goal.  Efficiency PA's program manager John Horchner, who is heading up the pilot program for Allegheny County, estimates that a home with a score card of 10 could save the homeowner $2000 to $3000 compared to a house with a 5 rating.  My primary concern is that while initial participation the program is voluntary, over time participation may become mandatory.  One of the goals of Chris Dodd's Livable Communities Act is to assess private homes for energy efficiency and to require that the homeowners bring their homes up to government-mandated energy efficient standards.  Homeowners who voluntarily want to take the initiative to retrofit their homes with energy efficient features should certainly be encouraged to do so, but no homeowner should be forced by an agency to make their private home energy efficient.  The danger of a potentially far reaching initiative such as the Score Program is that once the system is in place and the auditors are trained and certified in each community, homeowners may be told that they now are required to pay for the audits and to pay the costs of the upgrades whether they desire to do so or not.  That is too much government regulation for me.


GLC criticises 'pot shots' from Justice spokesman

Scottish Conservative Party criticism of legal aid payments for asylum seekers and medical negligence claims in Scotland are ‘reckless, unjust, and ill-founded’ according to Govan Law Centre.

On Tuesday, Conservative justice spokesman John Lamont MSP attacked Scottish legal aid payments for asylum seekers cases, which totalled £3.8m in 2010/11. Mr Lamont said: "These are astonishing sums of money and every penny spent from the justice budget on legal aid is money not available for policing the streets and preventing crime".

Mr Lamont added that "The UK government is having a fundamental look at the legal aid system, to innovate and provide a value for money scheme built on sound foundations. The SNP Scottish Government needs to do the same."

Today, Mr Lamont launched an attack on legal aid paid to victims of medical negligence, which totalled £1.27m in the last six months, claiming: “There has been a shocking rise in the amount of taxpayers’ money being used to fund negligence cases against the NHS over the past few years”.

GLC’s Mike Dailly said: “Much of the legal aid ‘paid’ for reparation claims is judicial expenses recovered from opponents as the rules require awards of expenses to be routed through the Scottish Legal Aid Board; so while it may all look like legal aid it isn’t. Accordingly, Mr Lamont’s figures for medical negligence cases are significantly overstated. It’s also reckless to criticise any apparent rise without knowing if, and why, there have been more cases, or more expensive cases”.

“Attacking money paid for asylum seeker cases or blaming the Scottish Government is ridiculous when you consider that the success rate of immigration petitions for judicial review in Scotland have been running at around 80%. In other words, Mr Lamont might wish to direct his outrage at the quality of decision-making by the UK Border Agency. Or he might consider refraining from taking ill-informed pot shots”.

Death by A Thousand Cuts

My brother, Stefan, who works here in my office, came in today telling me about the SAW VI movie that he rented this weekend.  He wanted to see it in advance of seeing the final SAW movie--as a young single man in his twenties he still has the stomach for the kind of blood and gore that have made the SAW franchise a hit.  He tells me that in each movie the psychotic--and yet oddly self-righteous--serial killer Jigsaw tortures and punishes a particularly evil segment of society who preys upon the weak.  Stefan tells me that SAW VI opens with a man and a woman trapped by the killer who is about to extract vengeance for their crimes against society.  This time, however, they are not violent criminals, or drug dealers; instead they are mortgage brokers who put people into houses they could not afford and then foreclosed on them when they did not make their payments.  It seems that Jigsaw turned all of his attentions to the business community in SAW VI--he also hunts down and tortures an insurance agent whose "crime" was that he denied a claim because the claimant had lied on his application for insurance. (I would be willing to bet that there will never be a SAW movie in which the killer traps and murders preachy movie producers and overpayed actors for making millions turning out low quality slasher movies, but that is another subject for another blog.)

In real life, Jigsaw would not need to waste his efforts murdering mortgage brokers--Barney Frank beat him to it.  Frank had famously promised death panels for non depository lenders, but instead he and all of his cohorts sentenced the whole industry to death by a thousand cuts, and even though the GOP won the House of Representatives last week, there is no reason to believe that the sentence will be commuted.

Cut # 1 came in the form of the Safe Act (Secure and Fair Enforcement) which required licensing and testing for mortgage brokers and loan officers working for institutions that did not take deposits. In my office we had finished all of the requirements except the credit report ordering process, which became available last week.  As I went on line to order and pay for the individual credit reports, I was once again confronted with the fundamental unfairness of the SAFE act.  Registrants (employees of banks, credit unions and other institutions which receive deposits) do not have to have a credit check, just as they did not have to take a state test and a federal test or complete 20 hours of CE.  The sad irony of the law is that many of the small business people who are left in the industry have had a lot of credit problems resulting from the steady drop in income we have all experienced the last three years.  So if a broker has filed bankruptcy, or had his credit cards charged off, he may not be able to get a license, but if an employee at a bank has had the same experience no one will ever know.

Cut # 2 was the new RESPA rule which is designed to favor banking institutions in the way that fees are disclosed.  A former client of mine came to see me last week to ask me about refinancing his house.  He had brought with him his estimate from his current servicer, along with the estimate that I had emailed him.  The bank's interest rate was .375% higher than I had quoted and the fees were almost exactly the same.  But he was confused about which was the best deal because the bank had told him that they were giving him a special "discount" for being an existing customer.  Not being in the industry, he did not understand that "discount" is just bank speak for "I am charging you a 1% fee to give you an interest rate which was too high to begin with."    The three page good faith estimate was designed to make it hard for brokers to win deals, but fortunately it is so confusing that very few borrowers can actually understand what it says, so we have a chance to defend our numbers in person.

The other 998 cuts are going to come in the form of the Federal Reserve's new rule which was published August 16 and which will become effective April 1, 2011 regarding broker compensation.  I believed from the beginning, and wrote in my post entitled "The Broker," that this rule was going to be the final death blow for what is left of our industry.  After attending a webinar last week, however, I find that this is not just one solid blow, but a series of cuts which will drain the last of the life out of the brokers who are left.

As explained to us by the law firm of Black, Mann and Graham last week, the new rule is going to effectively require that brokers have written compensation agreements with their wholesale lenders.  These agreements can be renegotiated with the consent of both parties, but they cannot vary from loan to loan.  Further, the rule absolutely prohibits the loan officers from collecting fees from both the consumer and the lender.  (The exception would be that a salaried employee of a bank could collect a commission from the consumer as well as his salary.)  In the world of the broker, the lender is ultimately responsible for whether the loan is compliant with federal laws and regulations, so if the broker sneaks out and collects a processing fee from the consumer without properly disclosing that information and then collects a fee from the lender also, the lender has funded an illegal loan.  For this reason, I believe that starting April 1, few or no wholesalers will pay the brokers any compensation for their loans.  By requiring brokers to receive all of their compensation directly from the consumers, the lenders will protect themselves, but they will also put the brokers at a significant competitive disadvantage against the large banks who can offer lower upfront closing costs since their loan officers are salaried.

The broker industry has only two real advantages over the retail banking industry--the ability to offer overall better pricing and the ability to transfer loans between lenders in the case that one lender does not accept a loan application package for a consumer.  But the new rule requires that the broker guarantee the lowest rate and lowest costs to the consumer by offering loan options containing  1. the lowest rate, 2. the lowest fees and costs.  If the broker has three lenders, he needs to present pricing options from lender A, lender B, and lender C.  If lender A has the lowest interest rate, and the lowest over all costs, and the borrower chooses that option, then presumably the broker would prepare a good faith estimate, which is now a binding contract, and send it to the borrower within three days of loan application.  But what if lender A denies the loan?  In the old days, if lender A denied the loan because the underwriter did not like it, the broker could send it to lender B, who would probably like the loan package.  If the interest rate were the same, the borrower was usually fine with the switch.  But what about under the new rules?  Under RESPA reform, changing wholesale lenders is not an acceptable reason to issue a revised good faith estimate, so if the broker cannot honor the lowest rates and or lowest fees he has guaranteed the borrower, he is going to have to deny the loan.  Now both competitive advantages--pricing and flexibility--have been wiped out.  Add to that the reputational damage that the industry has suffered, and death is soon to follow.

I researched "death by a thousand cuts" this afternoon.  Used in Imperial China from about 900 A.D. until 1905 A.D. this form of torture and execution appears to have been administered primarily to enemies of the state.  While the victim died long before the cuts reached thousands, the dismemberment of the prisoners meant that they could not be resurrected in the afterlife.  As a form of execution it symbolized permanent death and extinction--both in this world and in the next.   Even Jigsaw could not do better than that.

Don't Start Celebrating Just Yet

As we put away our confetti and noisemakers from election night, most of us in financial services are wondering what Tuesday's election means for us in real terms.  In the wake of three years of massive regulatory change, we are all wondering whether the new landscape in Washington is going to relieve any of our immediate problems in the housing market.

An article in aptly titled, "Reprieve for Wall Street is Expected to be Limited," confirms what many of us already suspected--there is a long road ahead and we should not expect any meaningful change any time soon.  WSJ quotes Brian Gardner of investment banking firm Keefe Bruyette & Woods as saying, "The chances of significant changes to Dodd Frank are very, very low."

Aside from the obvious fact that Dodd Frank was a key Obama-Reid-Pelosi initiative and only one third of that team has been replaced, WSJ cites another factor which I found fascinating.  The newly elected tea party lawmakers tend to be hostile to Wall Street.

If you think about it, this is really an interesting twist.  While I wrote yesterday that I don't trust politicians, the reverse is also true--politicians do not trust people working in financial services.  After all, we have been vilified and blamed for every major problem in the last two years.  The outrage over TARP and stimulus funds and images of Wall Streeters living high on tax dollars helped give birth to the tea party movement.  So will these new representatives really understand the dangers posed to business and consumers by Dodd Frank and the other cumbersome regulations that we have today?  Will they even be willing to discuss legislative changes which they may perceive will benefit industries that they blame for all of the economic woes of the world?  It is going to be interesting to see.

Where the new Congress can make real inroads is in issues such as federal oversight.  For example, with a new Senate, Elizabeth Warren, the interim director of the Consumer Financial Protection Bureau, may not be able to pass confirmation.  However, we can be certain that even if her nomination to the position is shot down, the White House is going to look for another equally left-leaning individual to take her place.  Bloomberg Business week speculated in an article today entitled, "Firms that Fought Dodd-Frank May Gain Under the New House." that the new Senate may compromise by confirming Warren as director of the CFPB in exchange for moving funding of the Bureau from the Federal Reserve to Congress.   Right now the CFPB is autonomous, so giving Congress funding authority would give them some oversight over the agency.

Neither Wall Street nor the U.S. Chamber of Commerce appears to be advocating for a genuine dismantling of Dodd Frank.   According to the WSJ article,  David Hirschmann, President of the Chamber's Center for Capital Markets Competitiveness, says, "We don't advocate for starving the regulators of funding,; that doesn't help business."

The problem with chaining up a huge beast like the Consumer Financial Protection Bureau is that 1: Even a chained monster is hard to control--(think King Kong) and 2:  Subsequent administrations can just break the shackles and turn it loose.  Dodd Frank gives the federal government unprecedented authority to regulate and seize control of private businesses if the regulators decide that they are a potential threat to the economy.  Any attempt to muzzle that kind of authority can only short term at best.

I understand that attempting to repeal Dodd Frank is a wasted exercise at this moment.  But just because it is not possible today, or for the next two years, does not mean that it should not be the goal.  The progressives who got this legislation passed worked for years with singleness of purpose toward the day when their vision of the U.S. would be encoded into law.  We should do no less than devote ourselves with the same single mindedness to seeing this assault on business and individual freedom completely dismantled.  Any other goal is an unacceptable compromise which all of us will pay for eventually.

The Day After Yesterday

I went to the polls early yesterday morning to cast my vote for our representation for the state of New Mexico  I vote at an elementary school surrounded by cotton fields.  I think I was voter number 7; the poll watcher told me that there are only 200 registered voters in the small farming community district where I am registered to vote, but that turnout had been good. "We are busy--for us" she smiled.  As I sat watching the returns last night, I was not disappointed--I was proud to watch Susana Martinez win her race and become the first female governor in the history of the state of New Mexico and the first Latina governor in the history of the U.S.  I was even prouder to have been able to support with my vote a woman who has worked hard for her community and who ran on a platform of reducing the size of government and creating a business-friendly climate in my home state. 

Last night's election brought in sweeping changes for the House of Representatives with the largest pick up of seats by the GOP since the 1930's and the largest pick up by any party since the 1940's.   And as the final Senate Races are tallied and the winners and losers are identified, pundits will argue over what this change will mean for the country.  In the final days leading up to the election, many experts were using words like "stalemate" and  "gridlock" to describe what we can expect to see--in other words a whole lot of inaction for two years.  As far as I am concerned, inactivity on future bills would be an improvement over what we have seen in terms of spending and government intrusion.

I have always voted since I was eighteen.  My parents taught me that voting was my civic duty and responsibility as an American.  But I did not approach this election with the hope and enthusiasm that many people I know had.  My skepticism was not because I did not expect a victory for "our side."  It was rather a skepticism that is born out of a basic distrust of all politicians of all colors and stripes.  That skepticism comes largely from having worked on grassroots lobbies with the National Association of Mortgage Brokers for many years.  My six years of going to Washington D.C. to plead my case to my representatives taught me mainly that our representatives don't care much about us or our issues--regardless of what they tell us during the campaigns.  So I tend to take a very cynical approach to politics.

However, I do believe that there are lessons even for the cynic from last night's election.  We as a people have the unique ability to choose our own form of government, and to steer that government by voting out the people who pass laws we find unacceptable.  And at the end of the day, having the power to hire and fire our representatives is no small thing.  I recently heard a quote by Sam Walton that the customer is the most important person in the organization because he can fire everyone from the CEO on down simply by choosing to shop elsewhere.  If we apply that logic to politics, then the voting citizen becomes the most important person in the Republic.  Alone, we may not be able to do much, but together we can make changes which can reverberate from a small farming community in southern New Mexico all the way to the ornate walls of the Capitol.  That is heady stuff--and real responsibility. 

That responsibility does not end when the final votes are counted and the last of the races are called.  Yesterday's race saw huge turnout for an off year election.  The voting citizens got out and voted because they are concerned about the direction of the country.  But merely voting in different people won't change the direction of the country unless we as the citizens stay informed and involved.  We need to let every politician on every level know what we expect from him or her, and we need to hold each one accountable.  No failure; no excuses.   Government by the people, of the people, for the people works only when the people stay involved and engaged.

We also need to understand our role as the private citizen.  It is not the government's place to take care of us and solve all of our problems.  Our responsibility is to vote in qualified individuals who will protect our rights so that we can take care of ourselves and solve our own problems.  The government cannot give us jobs or make our businesses prosper, but it can create a framework of regulations and taxation which will allow us to create jobs and grow our businesses.  We can demand fiscal responsibility from our leaders so that we as a nation can reduce our national debt, but reducing our own personal debt is going to require fiscal responsibility from each of us personally. 

Lt. Col. Allen West  (R. Fl). got it exactly right in his acceptance speech last night, "I go to protect your life, to protect your liberty, to protect your pursuit of happiness, because the only people who can guarantee your happiness are each and every one of you."  We should expect no more, and no less, of every person in government.

GLC calls for widescale 'FOI' extension in Scotland

GLC has responded to the Scottish Government's consultation on 'Extending the coverage of the Freedom of Information (Scotland) Act 2002', which closed this week, by calling for the Act to be extended to cover the Glasgow Housing Association Ltd, and its factoring company, as well as asserting the general principle that the Act should be extended to a comprehensive range of private, third sector, and other bodies who are in receipt of substantial public funds, subject to 'proportionality criteria'.  GLC has argued that:

"As a matter of general principle, we believe there is a strong case for arguing that any body – whether private, third sector or public – should be subject to the 2002 Act in relation to the public money which they receive (and how it is spent) or public services which they provide subject to fair and reasonable proportionality criteria. Such proportionality criteria could be based around (a) the value of the contract or award and/or (b) the number of employees in the entity".

"We fully support proposals to extend coverage of the Act to GHA. We agree that GHA is a RSL unique in terms of size and public profile. In March 2003, Glasgow City Council transferred its housing stock to GHA with the result that GHA carries out functions which were previously carried out by the local authority. This means that people in Glasgow, who were formerly council tenants and are now tenants of GHA are unable to access information other tenants in other parts of Scotland would be able to access through Freedom of Information Act requests. Extending the coverage of the Act to include GHA will help address this inequity".

"We strongly believe that coverage of the Act should also include GHA’s factoring service, ‘Your Place’. As well as taking on responsibility for Glasgow City Council’s rented properties, GHA took over the council’s factoring responsibilities when the stock was transferred. GHA are now the factors of many ex-council properties. They are in a unique position as a factor in that they are the majority owner in many of the common closes they factor. This means that they often have to balance their role as owner and factor. We feel that it would be in the public interest to be able to obtain information regarding GHA’s factoring service through Freedom of Information requests".