Where to?

Last night I attended a reception for a graduating class of budding female entrepreneurs who are part of the Innovate El Paso program.  The program is designed to identify women with post graduate degrees and dreams of owning and growing their own businesses.  During the course of the reception, I saw an acquaintance who runs her own consulting firm, and she asked me how the mortgage business was going. She was surprised when I told her that the Dodd Frank regulations are shutting down the independent loan originators.  "At the end of this process, people are getting to be getting their mortgage loans through major banks--Wells Fargo, Chase, BofA, and a few others if everything keeps on as it is today," I told her.

She looked a little smug and asked, "Well what about the community bank?" naming one particularly strong local bank where both she and I have relationships. 

"They have already closed their mortgage department because they don't want the liability of all of the new regulations," I responded.

The bank we were referring to is locally-owned in El Paso and has posted on its website that it has just won a 1st place ranking from SNL Financial as the single best-performing community bank in the nation.  There were 764 other bank holding companies competing in the same category, and this was the first time that an El Paso bank had taken the award.  Selection criteria required that the bank be well run, follow sound banking principles, and provide safe and secure loans.  (I might add from personal experience that they also provide excellent customer service.)  And yet, they have decided that they will not be offering any more mortgage loans.

A lot of people in this country are returning to community banks after seeing the major banks feast on TARP money at tax payer expense.  HuffPost Business has set up a web page called Move Your Money which encourages Americans to switch their accounts from the banking giants to the small community banks. The campaign has the support of leftist anti-corporate activists including Michael Moore.  A May 6, 2011 article by Mary Bottari from the Center for Media and Democracy appearing on HuffPost Business recounts how the AFL-CIO is pulling its accounts from M&I Bank in protest of political donations that M&I made to Governor Scott Walker.   Protests are planned in Ohio against JP Morgan Chase CEO Jamie Dimon when he travels to Columbus for the annual shareholders meeting.  Dimon's primary crime in Ohio appears to be his own lavish bonuses and Chase's political support of Republican John Kasich.

The supreme irony of the Move Your Money campaign and all of the harping about the evils of banking giants is that the same leftist leadership that is encouraging Americans to abandon mega banks also stands in support of the Dodd Frank bill which will kill many of the community banks that the activists purport to love.  According to a May 20, 2011, article in "Investor's Business Daily,"  by Paul Sperry,  the American Banker's Association is predicting that the Dodd Frank Act and its enforcement agency, the Consumer Financial Protection Bureau, will drive more than 1000 banks out of business by the end of this decade.  Elizabeth Warren, the de facto head of the agency which officially takes power July 21, 2011, has announced that "Change is coming. We will build a strong enforcement arm.  More than half of our budget will be committed to establishing supervision and meaningful enforcement."  Banks will have approximately 20 new reporting mandates under the Home Mortgage Disclosure Act, and they will also be required to collect and report data to the CFPB on applications for business credit made by minority-owned businesses.  The data received by CFPB will be reviewed with an advisory board which will include inner-city activists who will look for evidence of discrimination.

ABA Chairman Steven Wilson states of the new regulations, that they are "bad news for community banks already collapsing under mountainous regulatory burdens."  The costs of complying with the massive new regulations, examinations, fines and enforcement is simply so great that many small banks will be forced to close their doors.  Since the community banks tend to lend money more aggressively than their larger counterparts, their demise will cut off additional sources of capital to small business owners.

In January, the Wall Street Journal ran a very interesting piece by Todd Zywicki, who is co-editor of the University of Chicago's Supreme Court Economic Review, entitled, "Dodd-Frank and the Return of the Loan Shark." Zywicki's piece details how the credit card rules enacted in the 2009 CARD (Card Accountability Responsibility and Disclosure) Act have restricted the availability of credit cards to many lower-income Americans and forced them to go to payday lenders, pawn shops and loan sharks since they can no longer access credit through more traditional means.  Zywicki quotes the CFO of Advance America, a national pay day chain as saying, "We believe that we're starting to see a benefit of a general reduction in consumer credit, particularly subprime credit cards."  Zywicki also quotes a letter from Chase CEO Jamie Dimon which went out to shareholders in the spring of 2010, "In the future, we will no longer be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client's risk profile changes."

And Zywicki says that as the Durbin Amendment takes effect, the situation will only worsen for low income Americans who will not qualify for free checking. "Financial products that cater to unbanked consumers--check cashers, pawn shops, purveyors of nonbank prepaid credit cards--can expect to benefit from the Durbin Amendment, just as payday lenders have prospered as a result of credit-card regulations."

All of this begs the question, what will happen to these people who are making a mass exodus to community banks if their banks are forced to close down because of regulations imposed by Dodd Frank and the CFPB?  Remember that banks do not have to offer accounts to customers and credit history is a factor that is considered when opening a bank account.  If the customer has suffered a job loss or had some major credit problems between moving their accounts from the banking giants to the smaller bank and the closure of their new bank, will they be able to simply turn around and reopen an account with a major bank?  Will the major banks become more selective about whom they accept as depositors?  Granted, Dodd Frank contains some legislation to force banks to accept currently non-banked consumers, but those efforts will be extremely targeted.  That means that the next consumer exodus may utlimately be to the mattress store for a tried and true money storage system.

For related posts visit http://www.frontier2000.net/

TCF National Bank v. Bernanke

According to Bloomberg, Minnesota based TCF National Bank has filed an appeal with the U.S. 8th Circuit Court of Appeals asking the court to declare the Durbin Amendment unconstitutional.

TCF's suit is the latest in a series of attacks on the Dodd Frank bill's attempt to cap debit card fees. The Durbin Amendment has powerful enemies (Jamie Dimon, CEO of JP Morgan Chase has referred to the Durbin Amendment as price fixing.) Both the House and the Senate have versions of bills to delay implementation of the Durbin Amendment and reportedly Barney Frank had agreed to support HR 1081 which would delay implementation of the Durbin Amendment for two years pending more studies of its consequences.

The issue here will sound very familiar to those of us who have just suffered through the loan originator compensation rules. The Federal Reserve Rule on debit card interchange fees will cap the interchange fee per debit card transaction at 12 cents, regardless of the size of the transaction. As a result, small banks are likely to limit the size of debit card transactions or cut off access to free checking.

TCF had filed a suit against Fed Chair Ben Bernanke in an attempt to stop implementation of the bill, but on April 4, U.S. District Judge Lawrence Piersol ruled against TCF and denied the bank's motion to delay implementation of the rule.  At the same time, Piersol also denied the government's motion to dismiss the suit completely.

On Monday, May 2, TCF was back in court appealing Piersol's decision.  The TCF attorneys argued in their brief, "We are talking about the establishment of a confiscatory rate regime fully 15 years after banks began their debit businesses."  TCF is asking the court to rule the Durbin Amendment unconstitutional.

If TCF were to prevail in this case, the precedent would be amazing.  Banks are upset about the Durbin amendment because it caps the fees that they as private businesses can charge for debit cards.  If that is found to be unconstitutional, couldn't the same legal logic be applied to the Merkley amendment which caps loan origination fees at 3%?  If the government does not have the constitutional right to dictate what a private business can charge for its services, couldn't this impact also on the loan origination compensation rules forced on all of us by the Federal Reserve last month?  Maybe the FDIC does not have a constitutional right to set up underwriting standards, or to dictate what types of mortgage products individual businesses can access and sell. 

Most importantly, if one part of the massive Dodd Frank bill is ruled unconstitutional, the ripple effect might actually bring down the entire bill.  Although there are both House and Senate bills to repeal Dodd Frank, a ruling from a court striking down at least parts of the bill would impact greatly on the future of the law as a whole.

We will be watching to see what happens.

For related posts visit http://www.frontier2000.net/.

You Die Today; I'll Wait Until Tomorrow

During the Stalin years of the Soviet Union, the nation became so destitute that eye witnesses reported that the bare earth appeared to actually be moving because the mice, rats, and other vermin were frantically searching for anything to eat.  Two men who escaped from the Soviet Union in that period knew that they had crossed the border when they found a discarded paper bag with a few crumbs left from a meal and a couple of used paper items.  Surely no one in Mother Russia would ever toss away such wealth, so they must be have made it to a neighboring country.  Neighbors betrayed neighbors as traitors to the government in order to get their government-issued apartments, since that was often the only way a young couple could hope to get their own place.  And the Soviet people coined saying in Russia which became something of a national motto, "You die today; I'll wait until tomorrow."

The small business community in the United States might want to adopt a similar mantra, considering the overall attack on small businesses taking place right now.  In fact, one of the single biggest attacks ever launched on a single industry happened April 1, and much of the non-real estate world does not even understand the implications.

We have spent weeks talking about the NAMB and NAIHP lawsuits against the Federal Reserve and the negative consequences to the housing industry and to consumers and small business owners involved in real estate. Two weeks ago,  Mike Anderson, government affairs chair of the National Association of Mortgage Brokers, put out a video warning of the potential consequences to all businesses of the Federal Reserve Rule.  I am attaching a link to Mike's video here so that you can see it for yourself.   What Mike is saying here may appear alarmist, but the truth is that the Federal Reserve has set a precedent right now which will reverberate through our entire country. 

First of all, under the guise of protecting consumers from "unfair and deceptive practices" the Federal Reserve and its legislative partner, the Dodd Frank bill, regulate the amount of money that independent self-employed business owners can charge for their services.  Our compensation is not controlled by market conditions, or consumer willingness to pay; it is actually written into law.  Second, the way in which we can be compensated is also regulated.  Dodd Frank is setting specific guidelines determining who can pay us, how we can be compensated and who cannot pay us.  We are not government contractors; we do not receive tax payer funds; we are independent small business owners who took risks and started our own companies with our own overhead and our own expenses, but our ability to set our wages is now being dictated by the government.

Another troublesome point in the Federal Reserve Board's interpretation of Dodd Frank in its new ruling is the animosity towards profitability that is being openly displayed.  In its various "clarifications" of the new Fed Rule, the Federal Reserve board keeps telling us that "profits are problematic."  Branch managers cannot be paid based on the profitability of their branches because "profits are problematic."  Prior to implementation of the Fed Rule, the Federal Reserve Board hosted a webinar which I did not participate in. According to those who did, one of the issues raised during the webinar was the matter of a mortgage broker selling his or her business for a profit.  Apparently the Federal Reserve Board attorneys believe that making a profit from the sale of a small business involved in loan originations is also a deceptive practice.

What is interesting about the FRB's problem with profit is that it is in direct conflict with IRS guidelines for small businesses.  The IRS uses profit to differentiate a business from a hobby.  So while a new business starting out is expected to have tax deductible losses in the beginning, at some point that business is expected to become profitable and that profitability generates taxable revenue.  An enterprise which never shows a profit is classified as a "hobby" and the expenses connected with it are not tax deductible.

The IRS's position is a sensible one--in this matter anyway--because the tax code is written to allow business owners to start their businesses and grow them with the expectation that they will become money-making enterprises which will contribute jobs, and revenue.  In a capitalist society, profit is both good and necessary.

But now, suddenly, profit is problematic, and fees earned by the small business owners are "unfair and deceptive practices."  This is scary language which could, and may, spread to every industry. Someday business owners in every profession may have a government agency telling them how much they are allowed to earn, how much they are allowed to pay their employees and whether they can sell their companies and for how much.  In the meantime, the rest of the country is watching us die today, and waiting for their turn to come tomorrow.

For related posts go to http://www.frontier2000.net/



Defenseless

Last week I wrote a post about the letter that Senators Vitter and Tester wrote to Ben Bernanke, chairman of the Federal Reserve, asking him to delay implementation of the Fed Rule.  The reason they cited is that under Section 1413 of the Dodd Frank rule, the "defense to foreclosure" provisions, which become effective July 21, 2011, a violation of loan originator compensation can become a defense to foreclosure for the life of the loan.  "If a borrower prevails in such an action, the borrower is awarded 'enhanced penalties' under TILA and every loan originated under that compensation plan would become a liability.":

I was curious, so I decided to look up the provisions of section 1413.  Since the provisions of 1413 are actually an amendment to the existing Truth in Lending Act, the changes as written in the Dodd Frank Bill text are difficult to follow without actually having a copy TILA to go through as well.  For that reason, I am using a sixteen-page bill summary which appears on the MBAA website.

Here is how the summary defines Defense to Foreclosure:  Section 1413:  "Permits borrower to assert a defense to foreclosure against creditor or assignee or other holder of mortgage loan in judicial or non judicial foreclosure or any other action to collect debt in connection with mortgage loan when there is a violation of anti-steering and ability to repay provisions.  Claim can lead to actual damages, statutory damages and enhanced damages including return of finance charges."

Notice, that the claim can be against "creditor or assignee," which means that a current servicer of a closed, sold loan can be forced to pay "enhanced damages" if either the ability to repay or loan officer compensation statutes are violated.  Of course, the "qualified residential mortgages" which are now being developed create a "safe harbor" for lenders, but that safe harbor can be rebutted in a legal argument.

What many in our industry are ignoring today is that the major part of the Fed Rule's loan originator compensation rule is straight out of Dodd Frank.  The safe harbor provisions of Dodd Frank require a 3% limit on points and fees for qualified mortgages.  The borrower may pay up to 2% in bona fide discount points, providing that the interest rate being discounted is not more than 1% higher than the prime rate.  Government and private mortgage insurance premiums are also excluded from the 3% cap if a refund of such premiums can be prorated and monthly MI premiums paid after closing are excluded. 

Dodd Frank establishes prohibitions on "steering" by prohibiting payments to loan originators based on the terms of the loan and it prohibits the loan originator from receiving compensation from both the consumer and the lender. (Sound familiar?)  While the Federal Reserve Board has added some enhancements of their own, such as their ruling on affiliated business arrangements, for the most part, their rule comes straight out of the Dodd Frank bill which is the law of the land.

The Dodd Frank bill puts the penalty for violations of the compensation rules and "duty of care" on the shoulders of the loan originators as well as the servicers.  Not only can violations be used as "defense to foreclosure" for the life of the loan, but the individual loan originator can be held liable for penalties of the greater of actual damages or an amount equal to 3 times the total amount of compensation or "gain" received by the loan originator plus costs and reasonable attorney fees.

In other words, if a consumer stops paying his mortgage, for whatever reason, and the lender starts the foreclosure process, if the attorney can argue successfully that the loan originator compensation rules were violated in any way or that loan originator did not meet the "duty of care" requirements, the loan originator is required to pay back the greater of whatever damages the court awards to the consumer or 3 times his compensation plus attorney fees and closing costs.  

So let's see how this might look:  John originates a loan for Sally for a $300,000 home.  He knows that the new compensation rules do not allow him to collect money from both Sally and the lender, so he chooses consumer paid compensation of 1% or $3000.00.  Sally is receives a base salary from the office machines company where she works plus bonus.  Since she has been receiving the bonus for the last two years, John uses the bonus as part of her income.  Sally gets the loan.  One year later, the office equipment company files bankruptcy and Sally loses her job.  Since she is not able to find a job right away, she cannot make her payments on the house, and soon her current servicer begins foreclosure proceedings.

Sally gets an attorney who argues that she was not qualified properly with regard to her income because her bonus was used to qualify her and everyone knows that bonuses are discretionary.  Without the bonus, she would not have qualified.  Under the "defense to foreclosure" rules, Sally's home is now safe and she does not have to worry about making the payments.  In the course of the attorney's investigation, he finds out that John's company is structured as a corporation rather than a sole proprietorship.  Although he was self employed, the judge rules that he does not meet the "salaried" requirements of the Federal Reserve interpretation of the loan originator compensation rule.  So the judge rules that two violations have occurred.

Because of these violations, Sally's lender cannot foreclose on her even though she is not making the payments and in fact cannot afford to. And since the "defense of foreclosre" applies to the life of the loan, even when she gets a job and is able to make the payment, she can still live in her home without making hte payment and without fear of foreclosure.  John, on the other hand, is now liable for $9000.00 plus attorney fees and court costs for originating a loan that he worked hard on and believed was perfectly fine.  If he is like most loan originators today, John won't have the money, so the judgment will actually cost him his business.

Sound far fetched?  It isn't.  We are rapidly creating a world where consumers have no responsibility for their choices or actions.  Even though no one coerced Sally to purchase a $300,000 home and in fact when she bought the house she would have been insulted at the implication that she could not afford the house, as soon as she starts having financial difficulties, the purchase of the home and the loan that made it possible is everyone's fault but her own.  Meanwhile, John who has worked hard and survived three years of real estate drought, is out of business because of regulations he did not even understand he was disregarding.

Remember, this is part of Dodd Frank, not just the Fed Rule.  If we want to create a climate where originators will be able to do their jobs, we have to return to standards of personal responsibility and free enterprise.  A basic fact of lending is that the only incentive that lenders have to make large personal loans in the form of residential mortgages is the collateral of the home and the lender's right to foreclose on it.  As we make foreclosure impossible, we also make mortgage lending impossible.  And by punishing the delivery system for mortgages, which is the loan originator, we create a system where no housing loans exist at all.

For related posts go to http://www.frontier2000.net/.

NAIHP vs. The Fed Rule

We end this week on the big industry news item of the week, which is the lawsuit that Mark Savitt and the National Association of Independent Housing Professionals have filed against the Federal Reserve to prevent the Fed Rule on Loan Originator Compensation from being enacted.  There have been rumors this week that the lawsuit was really a hoax, but "Housing Wire" has a link to the court documents on its website.  "Housing Wire" is also reporting that the National Association of Mortgage Brokers has filed a similar suit, and a press release issued by NAMB today confirms it.

First, let me say that I was a member of the National Association of Mortgage Brokers from 1998 to the end of 2007, when market conditions became too bad for me to justify the expense of involvement.  I helped to found the El Paso Association of Mortgage Brokers chapter in 1999, and I served as the President of the chapter from October 2001 to October 2002.  I participated in six national legislative conferences and attended state conventions up until 2005 when I began attending the Western Regional Conference in Las Vegas.  So I am very familiar with the organization.

While I do not know Mark Savitt personally, I have met and had conversations with him.  I have always believed him to be a good representative for our industry.

Having said all of that, if you are counting on these lawsuits to actually stop or even delay implementation of this bill, you need a new plan--immediately. The NAIHP lawsuit alleges that the new rule is "arbitrary and capricious" and "in excess of statutory jurisdiction and authority."  NAIHP wants the Federal Reserve to withdraw the rule and wait for the Consumer Financial Protection Bureau to implement its own regulations. (I have not seen a copy of the complaint filed by NAMB, although I did watch a video from the legislative chair who says that they are using an entirely different argument.  Since they did not clarify what that argument was, I will comment only on the NAIHP argument.)

One problem--the Consumer Financial Protection Bureau, when it is finally up and running, will be housed within the Federal Reserve.  So although the CFPB is autonomous, we can expect its thinking and its actions to pretty much mirror the thinking and actions of the Federal Reserve Board.

My second problem with this is the statement that the FRB rule is "in excess of statutory jurisdiction and authority."  Actually, its not.  The Dodd Frank bill opens the door for agencies like the FRB to exercise rule-making authority on many levels.  Really, Dodd Frank is just an enormous framework against which to write new legislation and to enact new rules.  While the bill itself does clearly set into law some new regulations--for example the Merkley amendment which caps loan originator compensation at 3% from all sources--much of the bill opens the door for the completion of a lot of studies, the creation of a number of powerful new governing entities, and the development and implementation of new statutory rules by those entities.  It is really just a huge backdrop for writing legislation without having to go back through Congress.

Anyone who reads the Dodd Frank bill is going to be struck by the amount of power that the bill gives to the various agencies--including power for the Federal Reserve to annihilate the independent loan originator.  And I believe that a judge is going to see this the same way--as long as Dodd Frank is the law of the land, the FRB and the other agencies now existing and soon to be created pretty much have the power to do whatever they want.

The final problem with the lawsuit is the last minute nature of the filing.  The Final Rule was released last August.  The industry has had over six months to react to it.  Filing a lawsuit now in March, three weeks before implementation, is a little bit like locking the barn door after the horse has not only gotten out but has run into the street and been hit by a car.  It's just simply too little too late.

Having worked on grass roots letter-writing campaigns and grass roots lobbies when NAMB worked against the RESPA reform rule, successfully from 2002 to 2004 and unsuccessfully in 2008 and 2009, I know that no amount of effort on the part of a trade group can guarantee results.  But if NAMB and NAIHP want to make a meaningful contribution to the financial services industry, they need to focus their next efforts on a public awareness campaign to get Dodd Frank repealed and to stop massive government takeovers of small business.  They would have better luck with that than they will arguing to a federal judge about why the Federal Reserve needs to be reigned in.  And, in the end, if successful, they would actually have made a huge contribution to the small business community and the future of housing finance in the U.S.

For related posts go to http://www.frontier2000.net/

If You Think it's Hard to Get Loans Closed Now...

On October 4, 2010, the SEC published notice of a proposed rule for comment regarding requiring new reviews for asset backed securities.  According to the summary, the SEC is "proposing new requirements in order to implement Section 945 and a portion of Section 932 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010...First we are proposing a new rule under the Securities Act of 1933 to require any issuer registering the offer and sale of an asset-backed security (ABS) to perform a review of the underlying ABS...We are also proposing amendments to Item 1111 of Regulation AB that would require an ABS issuer to disclose the nature of its review of the assets and the findings and conclusions of the issuer's review of the assets.  If the issuer has engaged a third party for the purposes of reviewing the assets, we propose to require that the issuer disclose the third-party's findings and conclusions."  The asset backed securities covered by the SEC's request specifically include credit cards, commercial real loans and residential real estate loans.  The comment period ended November 15, 2010.

The request for comments is a 58 page document which asks for input on a number of issues, including whether the issuer of the securities should be able to rely on the underwriter's decisioning as part of the review.  If they do rely on the underwriter's decisioning, should the underwriter be subject to "expert liability'? (Would you want to be underwriting residential loans these days and suddenly find yourself subject to "expert liability" if your decision to approve John and Mary Smith's loan turns out to be a mistake after John has a massive heart attack, Mary gets laid off, and the house goes into foreclosure?  I don't think so.)  If the underwriter's decision cannot be relied upon, what sort of review process should be in place?  Can it be outsourced to third parties?

A specific area of comment was in section 4 regarding real estate appraisals.  The SEC requested comments on whether specific types of appraisal reviews should be conducted for real estate transactions and whether the SEC should establish standards for those reviews to determine whether the property values stated by loan originators are indeed accurate.  The SEC also asked for comments about whether these reviews should be required for both commercial and residential loans and what types of reviews would be appropriate.

In response to the SECs call for information, the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers responded with a letter to the SEC containing its recommendations with regard to reviews.  This letter is dated November 15, 2010.    "In an ideal world, every appraisal would receive an appraisal review in accordance with Standard 3 of USPAP and completed by a certified or licensed appraiser.  However, the industry standard has traditionally been a 10 percent random review of a portfolio.  We believe that this would be an appropriate minimum measure for the SEC to adopt.  We do not believe that automated valuation models and broker price opinions should be the primary or exclusive source for residential appraisal reviews.  Despite this, we acknowledge that the use of AVMs and BPOs in the review process has gained some acceptance.  We strongly believe that any properties that are found to fall below recognized statistical confidence levels using these abbreviated tools should be field reviewed by a qualified appraiser or trigger a second appraisal altogether.  For instance, if an appraisal reported a value of a residential property of $300,000 and an AVM reported a value of $200,000, this should trigger some additional action.  However, if the AVM resulted in a value of $290,000 under the scenario above, the margin of variance is likely acceptable, so long as appropriate due diligence is conducted on the entire pool."

A few years ago, appraisal reviews were fairly common because when the originator ordered the appraisals, it was assumed that the originator had exercised influence over the appraiser to bring in a higher value than the property deserved.  But when the Home Valuation Code of Conduct was implemented last year, the appraisal process became totally independent of the originator.  Originators could no longer have any contact with the appraiser, and in most cases that meant that an appraisal was ordered through a third-party appraisal management company which had its own quality control procedures. Although HVCC is technically gone, as part of the Dodd Frank bill the appraiser independence regulations are now permanently in place.

Over the last year, however, Fannie Mae has expanded its internal valuation model to include a greater number of properties.  This means that an increasing number of properties being secured by loans sold to Fannie Mae don't need appraisals at all, or they need very minimal appraisals.  So while the average appraisal costs more than it did two years ago, more properties do not require appraisals at all.  But the SEC's new rule could mean that all properties require at least one appraisal to independently verify the automated valuation model and a larger majority of homes will require a second appraisal or a review. And since this review will be a field review, the borrower will essentially be paying for 2 appraisals at a cost of $400 a piece or more.

Of course, when an underwriter calls for a field review or a second appraisal, if there is a difference in value between the original appraisal and the second appraisal, the underwriter uses the lower of the two to establish value.  The net result of this will be that once again we are going to see more appraisals for less than the sales price of the house.

What all of this means to the average home buyer is that costs to get a home loan are about to go up and underwriting times are about to increase.  The bottom line for companies originating loans is that those loans have to be sold on the secondary market.  And no loan is good if it cannot be sold.  So the underwriter is not going to sign off on a deal if she can be subject to "expert liability" when the loan is sold. That may mean second level underwriting reviews for all files and appraisal reviews on most files.  We can look for lenders to increase their underwriting fees since they can expect to have to pay for additional underwriting reviews,  and we can expect to see the appraisal costs on a transaction effectively double. These additional costs and delays--which also result in more costs--make the homebuying process more difficult and more expensive.  Continuing tightening of credit standards is going to keep the real estate market stagnant.  So these new rules, which are supposed to inspire greater investor confidence in asset backed securities, in the end could help to keep the housing market flat.  And that is bad news for all of us.


                                                                           

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 WSJ.com 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.

More Changes to Disclosures

Those of us actively working in the real estate industry remember last July when the Mortgage Disclosure Improvement Act of 2008 went into effect.  At that time, each Truth in Lending form was revised to contain the verbiage, "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."  In addition to mandating the sentence, the new law mandated that if the APR increased more than 1/8 of a 1%, a new truth in lending had to be disclosed to the borrower and the borrower had to wait three days to close.

Now, over a year since this revision, the Federal Reserve is changing the form again.  They published their interim rule on August 16, 2010 regarding the new truth in lending form.  The new form is optional for lenders from October 25 through January 30 of 2011, when it will become mandatory for all mortgage lenders.

Amazingly, the Federal Reserve has announced that even though use of the form is optional beginning this past Monday, they are still accepting comments about the new form and may issue further revisions to it before January 30, 2011. 

The most basic change is that the new truth in lending must disclose a payment summary for all mortgage loans, whether fixed or adjustable.  The payment summary must include the initial interest rate of the loan, and if it is an adjustable rate mortgage, the maximum interest rate and payment that can occur for five years and the maximum interest rate and payment possible over the life of the loan.  The truth in lending must also contain a statement that there is no guarantee that the consumer will be able to secure a lower rate by refinancing the loan.  Even though the Mortgage Disclosure Improvement Act of 2008 calls for this statement only on adjustable rate loans, the new Federal Reserve rule requires that the statement be on all Truth in Lending forms for all loans.

The new form will require several new tables.  For instance, on adjustable rate loans, at each scheduled rate adjustment, the form must display the payment corresponding to the increase and the earliest date at which the increase could occur.    Loans that are escrowed for taxes and insurance must display the full payment with the taxes and insurance on the truth in lending.  (Presently the truth in lending form displays only the principal and interest and the mortgage insurance if applicable.)  The irony is that the full payment with the taxes and insurance used to appear on the good faith estimate form, but when HUD introduced the new revised form this year, they took the escrowed payment off the form which has created a lot of confusion.  If the loan has mortgage insurance on it, the truth in lending form must display the mortgage insurance  and the date of automatic termination.

Introductory and "teaser" interest rates must be clearly defined as such with a clause that says "You have a discounted introductory rate of _____% that ends after (period).  In the (period), even if market rates do not change, this rate will increase to________%)."

I do not disagree with all of this.  A lot of consumers simply do not understand the difference between an introductory rate and a permanent rate, just as there were consumers walking around a few years ago who believed that they had a "fixed" rate when in fact the rate was fixed for only a set period of time, say five or seven years, and after that they were going to experience a rate increase.  So disclosure, especially where adjustable rate mortgages are concerned, is very important.

I do not even disagree with the statement to the consumer that there is no assurance that they can refinance their loan in the future.  Those are just the facts.  Many people across the U.S. would have loved to have refinanced their homes over the last two years but were unable to for a variety of reasons.

What I do disagree with is taking the time to make our industry revise all of these forms yet again when the new Consumer Financial Protection Bureau is actively working on getting rid of both the truth in lending and the good faith estimate and combining both forms into one new disclosure.  In fact, the Dodd Frank Bill actually mandates that a new form be created.  Every time that we have to change or revise disclosures or change the processes, it costs the entire industry money, from the very smallest shop like mine who has to invest in new software, to the mortgage giants who have to invest in new software.  If the changes make sense and they can be expected to be permanent--or as permanent as anything in our world is--then the cost is worth it.  But if what we are spending money on will be obsolete as soon as we have invested in it, then it is a wasted expense which is going to be passed on to the consumer in the form of higher fees.

Why don't we just all wait until Elizabeth Warren and company get one new form ready and then we can all spend of all our money switching over to that system?

Rumor Has It...

Rumors are flying that President Obama is about to appoint Linda Warren, Harvard Law Professor and Chair of the TARP Oversight Committee to be the new head of the Consumer Financial Protection Bureau. Supporters of the Bureau applaud Ms. Warren's possible nomination, since she is vocally on the side of consumer advocates and against the lending and credit industries.  Ms. Warren's anti-business and anti lending positions seem to conflict somewhat with her position as chair of TARP oversight where she was responsible for handing out bailouts to the very banking giants whom she claimed needed policing.  Still, the White House seems committed to its choice--so much so that President Obama may appoint Warren as an interim chair so that she can avoid the Senate confirmation process.

Senator Jeff Merkley (D- Oregon) posted an article on Huffington Post yesterday defending Warren.  "The new consumer watchdog will only be effective, however, if it has strong leadership.  There is no doubt in my mind that Elizabeth Warren is that leader.  She has been America's leading voice on behalf of financial fairness for families and the driving force behind the creation of the Consumer Financial Protection Bureau."  Not everyone in the Senate is such a fan, however.  Even Chris Dodd, for whom the Dodd Frank Financial bill is named, says that the votes may not be there to get Warren confirmed.  Senator Richard Shelby, (R Tx) wants a confirmation process so that Warren can be questioned and vetted  properly before the Senate turns over to her the responsibility for such a huge, powerful new agency.

My issue with Warren and, others like her, is that, political differences aside, she is an academic.  Rather than having our laws and policies written by business people, many of the new rules coming out of Washington are being written by professional politicians and university professors.  Teaching law at Harvard does not qualify any individual to head a major agency that writes rules for business.  In fact, in my opinion, it does not qualify an individual for anything except going into legal practice or being appointed to a judgeship.

The Consumer Financial Protection Bureau is going to have broad, sweeping powers to write whatever regulations it sees fit to govern and regulate all types of lending transactions including mortgages and credit cards.  It will have life and death power over many different types of businesses, from very tiny mortgage companies like mine to huge banking centers with assets of over $10 billion.  It will track consumer spending habits and purchases, and will determine what types of credit cards we can have and what types of mortgages are available.  It has not only the right, but the responsibility, to call in the IRS on any business that it supervises which it suspects might not be paying its taxes properly.  It seems to me that if such an agency is going to exist at all, it should be headed by an individual with many years of real world business and lending experience.  The director should be someone who knows in practical terms what works and what does not work in lending and credit.  He or she should be a person who understands the possible unintended consequences of legislation that might sound good but may end up costing the consumer a lot more money or might lead to even more credit restriction. 

To me this is one of the greatest problems with our country right now.  We have people with a lot of theory about how the economy should be run but no practical experience, so when their ideas do not work in the real world, they are shocked.  The politicians simply do not know how to react to real world crises that do not line up with their theoretical ideas.

Chris Dodd has warned the White House that if the President appoints Warren as interim director to sidestep the Senate confirmation process, Congress and the Senate may retaliate by de-funding the Consumer Financial Protection Bureau, essentially killing it before it has a chance to be born.  If that happens, Warren's appointment will have been responsible for the death of her beloved newly formed agency, and many businesses in this country will have dodged a bullet.  Maybe I was wrong--maybe the president should go ahead with his plans to appoint Warren after all.

The Freedom From Information Act

It is amazing to think that it has been only about 2 weeks since the Dodd Frank bill became the law of the land, and already its provisions are immersed in controversy. The first problem caused by the new bill started last week, when Fox Business Channel reported on July 28 that the SEC was citing section 9291 of the Dodd-Frank bill as a reason not to provide subpoened documents to the Fox Business Channel.

The battle between Fox Business Channel and the SEC apparently began in March of 2009 when FBC sued the SEC for failing to produce documents relating to the Bernie Madoff scandal and the specific involvement of the SEC with Madoff and R. Allen Stanford. The SEC had investigated both men prior to their arrests but had not discovered the Ponzi scheme. FOX Business Channel made a request in February of 2009 under the Freedom of Information Act regarding information covering the agency's investigations into Stanford's behavior.

Apparently, on Tuesday, attorneys for the SEC notifed attorneys for Fox Business Channel that with the passage of the Dodd Frank bill, the suit is moot because under the provisions of Section 9291, the SEC no longer has to release documents under FOIA.

For the last week, there has been increasing attention on Section 9291, which states that the SEC cannot be compelled to respond to most requests for information. Under the old rules, the SEC did not have to release documents under the Freedom of Information Act for ongoing investigations, but under the new rules, the SEC does not have to turn over documents collected during "risk assessments or surveillance...or other regulatory or oversight activities," even for cases that are closed. This language could be interpreted to mean that the SEC is no longer subject to FOIA since they are a regulatory agency.

On July 30, the Washington Post published two letters written by SEC chairman Mary L. Shapiro, one addressed to Barney Frank and the other addressed to Chris Dodd, defending the language that now protects the SEC and arguing that the new provisions do not exempt the SEC from FOIA. In her letter to Dodd and Frank as published in the Post, Shapiro writes, "Section 9291 addresses a significant and longstanding impediment to the agency's ability to quickly obtain important information from entities registered with the SEC when performing examinations. In our examination and surveillance efforts, we often seek to gather highly sensitive and proprietary information and records from regulated firms including, for example, customer information, trading algorithms, internal audit reports, trading strategy information, portfolio manager trading records, and exchanges' electronic trading and surveillance specifications and parameters....Prior to the Dodd Frank Act, regulated entities not infrequently refused to provide Commission examiners with sensitive information due to their fears that it ultimately would be disclosed publicly. Existing FOIA exemptions were insufficient to allay concerns due in part to limitations in FOIA, (including that certain existing exemptions may not apply to all registrants) and the fact that FOIA exemptions are not applicable when the SEC must respond to a subpoena...The Commission's resulting inability to obtain this information hindered our capacity to enforce the securities laws and protect investors." Shapiro's letter goes on to say that it is more difficult to detect insider trading when complying with FOIA because management at trading firms often requires that SEC investigators review the documents on the trading companies' premises rather than providing sets of documents which could later be subject to FOIA.

In an interview with Fox News on Thursday morning, July 29, California Congressman Darrell Issa (R.CA) promised to introduce legislation to remove section 9291 from the Dodd Frank bill, although obviously such an effort would be met with a lot of resistance from the SEC. Shapiro argues that the new provisions do not skirt FOIA because Congress and other regulatory agencies can still demand to see the information, even though the public cannot. But as Issa pointed out in his interview, in real world terms, an investor hurt by Bernie Madoff's Ponzi scheme would not be able to request the SEC investigation through FOIA to use in his civil law suit, which might mean that he ultimately he would not win his suit.

The irony about this whole thing is that the Dodd Frank act was supposed to bring increased transparency and accountability to Wall Street. One of the Senate bills which ultimately became the Dodd Frank Bill can be found on line under the name "The Wall Street Transparency and Accountability Act of 2010." The opening text of this bill summary states, "This is landmark reform legislation that will bring 100% transparency to an unregulated $600 trillion market." Making the SEC virtually exempt from the Freedom of Information Act does not look much like 100% transparency to me. How can we hope for transparency or accountability in either Wall Street or our government if everybody is allowed to operate in secrecy with only Congress and other regulatory bodies allowed to see what is happening?

But, to me, there is a bigger issue here than the Madoff case, or the Fox Business Channel's suit, or even the SEC itself. The justification for the new exemptions from FOIA is that the SEC has been given broad new regulatory authority and responsibility. What about the newly created Orderly Liquidation Authority, which has been created and given broad new regulatory authority to take private companies before a panel of bankruptcy judges and dissolve them? Should their activities be exempt from FOIA? We also have the brand new Consumer Financial Protection Bureau, which will have regulatory authority over banks and mortgage companies and consumer credit companies. This agency certainly has broad regulatory authority. Should they be exempt from FOIA? Who decides when one agency is powerful enough that they should not have to release any documents to the public or to the press? Where do we as a society draw the line?

It is too early to say, but we may just have seen the death of the Freedom of Information Act as a meaningful tool for obtaining information about our government and the companies that it investigates. And that will produce neither greater transparency nor accountability.

Leading the Way--but to What?

Tomorrow, July 21, is the date that the White House has set for the signing of the historic Dodd Frank Financial reform bill. We can expect a lot of hoopla as the White House celebrates the passage and signing of this bill as a hallmark achievement of the current administration. But the Obama administration is not content just to let the new rules govern the United States; President Obama is hoping that the new financial rules will become a blueprint for implementation by other countries.

The Dodd Frank bill is a highly ambitious piece of legislation which appears to me to be coming under increasing criticism in the days leading up to the President's signature. Take for example, a Wall Street Journal piece, published July 1, 2010, authored by John Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, who highlights various flaws in the new regulations including the fact that the new bill leaves Fannie Mae and Freddie Mac intact, and allows for a system of bailouts for financial institutions who are "participant in any program or facility with broad based eligibility." He concludes, "The continuing debate over the Dodd Frank bill in the days since it emerged from conference is good news. People may be waking up to the fact that the bill does not do what its supporters claim. It does not prevent future financial crises. Rather, it makes them more likely and in the meantime impedes economic growth."

One huge problem with the Dodd Frank bill is that it calls for a lot of new studies--I counted around 30, but another article I read stated that there are 68. Hundreds of new regulations will be written in response to the new bill, so we won't know the full impact for many years to come. While we know that the new Consumer Financial Protection Bureau will have regulatory authority and the right to investigate complaints and that any statement made to them is actually sworn testimony given under oath, we won't begin to see the effects of that for probably 9 months to a year when the agency is in place, and the full effects will not be seen for several years as the bureau writes new rules and begins to regulate businesses. We know that one of the first mandates of the Bureau is to create a new good faith estimate and truth in lending which will be one combined form, but we have no idea what that form will be. We know that the bill will limit compensation--such as the Merkley amendment capping loan officer compensation--but we don't know what that will mean in real terms.

With so many unknowns, it seems a little premature to be calling for other nations to adopt similar laws. And, obviously, the other nations think so too. An article posted today in Bloomberg Businessweek quotes Federal Reserve Governor Daniel Tarullo as saying that "some countries will decline to follow the US in adopting limits on proprietary trading at banks and other regulatory restrictions." According to the article, the undersecretary of the Treasury for international affairs, Lael Brainard, has stated, "The challenge before us now is to ensure that the world's standards are every bit as strong as America's....Our reform efforts are focused on the largest and most consequential economies in order to reinforce our domestic reform efforts...International consistency is at a premium." This, according to Ms. Brainard, is important to stabilization of the world economy since the collapse of hedge funds can impact on the global banking system.

But a concentrated effort to force our laws on the world's "largest and most consequential economies," may end with dialogue straight from school recess, as other countries remind us, that "You're not the boss of me!"

And with so many unknowns wrapped into a 2300 page bill, maybe other nations want to see what direction we are leading them into before they decide to get on board.

Taking a Closer Look at Appraisals now that Dodd Frank is on its Way to the President's Desk

The Senate passed the Dodd Frank bill at about 3:00 P.M.Eastern Standard time this afternoon. The bill is expected to be signed by the President next week, and then the long process of implementing each of the various changes to the financial system which are codified into law will begin.

I read this afternoon that the new law requires that over 550 new regulations be written, so we will not really know what we have on our hands for quite some time.

On that note, I need to correct and amplify a post from last week regarding HVCC and the new law. First, an apology. I always want to be as accurate as possible, and I said in error that the bill does not get rid of HVCC. The section on appraisals starts on page 2205 of the bill, in Subtitle F, and goes on to about page 2251. I started reading further past that, so I missed the paragraph sunseting the bill. On page 2216, paragraph J, the bill reads, "Sunset--Effective on the date the interim final regulations are promulgated pursuant to subsection g, the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect." So, technically, HVCC is gone. But many of the provisions of the code are enacted into the new bill. I am quoting here, but I invite everyone to read this section and see if you interpret it as I do.

For instance, on page 2208, section (c) "Free Copy of Appraisal:--A creditor shall provide 1 copy of each appraisal conducted in accordance with this section in connection with a higher-risk mortgage to the applicant without charge, and at least 3 days prior to the transaction closing date." Page 2243 states, under copies furnished to applicants--"In general each creditor shall furnish an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant's applications for a loan that is secured or would have been secured by a first lien dwelling promptly upon completion, but in no case later than 3 days prior to the closing of the loan..." And then on page 2244 it clarifies, "The applicant may waive the 3 day requirement provided for in paragraph (1) except where otherwise required in law."

This language comes directly from the home valuation code of conduct. I certainly have no problem furnishing borrowers with their appraisals--we always did even before HVCC, but this three day requirement with a possibility for a waiver came straight out of Cuomo's rule. We even have a form that borrowers have to sign with this exact language in it. So the three day rule with possibility of waiver is here to stay.

The House bill was supposed to contain strong language to guarantee appraiser independence. Page 2210 Section 129E states, "In General--It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraiser independence as described in or pursuant to regulations prescribed by this section...For purposes of subsection a, acts or practices that violate appraisal independence shall include--any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm or other entity conducting or involved in an appraisal, or attempts to compensate, coerce, extort collude, instruct, induce, bribe or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser; mischaractering, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of a transaction; and withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between parties." This section goes on to say, that these requirements shall not be construed to prevent any mortgage lender, mortgage banker, mortgage broker, real estate broker, appraisal management company, employee of an appraisal management company, consumer or any other person with an interest in a real estate transaction from asking an appraiser to: "Consider additional appropriate property information, including the consideration of additional comparable properties to make or support an appraisal; provide further detail, substantiation or explanation for the appraiser's value conclusion,[or] correct errors in the appraisal report." This final sentence is also straight out of the Home Valuation Code of Conduct. These were the three areas in which a lender could request that changes be made to a report.

Nothing in the new law appears to prohibit loan originators from ordering appraisals or having contact with the appraiser. However, the penalties for anything which may be interpreted as collusion are so severe that I believe in practice lenders will have to continue using AMCs. Page 2212 Section E, "Mandatory Reporting--Any mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency."

On the creditor side, "In connection with a consumer credit transaction secured by a consumer's principal dwelling, a creditor who knows at or before loan consummation, of a violation of the appraisal independence standards established in subsections (b) or (d) shall not extend credit based on such appraisal unless the creditor documents that the creditor has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling."

The penalties for violating this statute are severe. Violates "shall forfeit and pay a civil penalty of not more than $10,000 for each day that any such violation continues" for the first violation and $20,000 per day for any subsequent violation (page 2216 and 2217 section K items 1 and 2). OUCH! Those types of penalties are stiff enough to get anyone's attention. Further, the exact activities that constitute violations are unclear because these will be written in regulations developed by the Consumer Financial Protection Bureau along with the Federal Reserve Board and other regulatory agencies. "[They] and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services." Page 2214 states, "The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services..." Those rules, whatever they are, will determine the extent of the contact, if any, that the loan originator is allowed to have with the appraiser. But if a lender and I are both facing a $10,000 fine if the government decides that we are influencing the appraiser, both of us are going to err on the side of extreme caution. And if a loan that violates appraiser independence is an illegal loan, which it now is, we are going to be doubly careful. So I believe that ultimately, the use of AMCs will spread to all loans, not just those sold to Fannie Mae and Freddie Mac. Right now, my portfolio savings and loan lender can accept an appraisal that is not HVCC compliant because they don't sell the loan, but when this bill becomes law next week, they will not want to face the fines and consequences of having an appraisal that I ordered in the file. And I believe that the authors of this bill know this too, because they have instructed that the new good faith estimates should contain a breakdown of the AMCs fee and the part that was actually paid to the appraiser.

The bill does correct one big problem with HVCC and that is the low pay of appraisers by AMCs. On page 2215, the bill states that lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. "Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignments ordered by known appraisal managemnt companies." And the bill makes provision for a fee appraiser to charge more for a complex report: "In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non complex assignments."

Finally, one of the most frustrating and expensive aspects of HVCC for the loan officer and the borrower is that appraisals are basically not portable among lenders. Today, for instance, I have a loan that was declined, but the borrower had already paid for and received a perfectly good appraisal and a rent comp schedule. These two products are expensive, but she has no choice but to order new ones. When I was explaining to the agent that we have to move the loan, she said, "Under the new rules they have to transfer the appraisal." I explained that the financial reform bill will not be law until next week, but I looked up this provision especially because of this conversation. Page 2214 states under letter (h) Appraisal Report Portability, "Consistent with the requirements of this section, the Board, [and other federal agencies] may jointly issue regulations that address the issue of appraisal portability, including regulations that ensure the portability of the appraisal report between lenders for a consumer credit transaction secured by a 1-4 single family residence that is a principal dwelling of the consumer." So what does that mean exactly? We have to wait until they write the new rules to find out.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at http://www.frontier2000.net

Government of the People for the People

Abraham Lincoln once famously stated that "Government of the people, for the people, by the people shall not perish from this earth." But what happens when the people lose faith that their government is actually representing them.

The Dodd Frank bill goes up for a vote on Thursday. With Scott Brown, Olympia Snowe and Susan Collins (all Republicans) promising to vote for it, the Democrats now have the votes pretty much assured. That is not a surprise--the passage of this bill has been a foregone conclusion since the healthcare bill passed in March amid lots of screaming from voters and contention. Financial reform was obviously much less contentious although I have been surprised at the passion of those on both sides of the political aisle who disagree with this bill.

But today, as we wait for the inevitable final vote which make this massive, intrusive legislation the law of the land, what I see is that even those who are most opposed to the bill seem convinced that their representatives do not represent them.

The National Association of Mortgage Brokers is sending out a final call to action asking all of their members to contact their Senators and ask them to vote against the Dodd Frank bill. The letter that NAMB has prepared contains talking points regarding the damage the bill will do. Note the first paragraph: "I write to you today, as your constituent, urging you to carefully weigh your vote for the Dodd-Frank Wall Street Reform and Consumer Protection Act. I have outlined in numerous letters and calls to your office the harm this bill will have on consumers, my customers and your constituents. A vote for this bill will do more to harm consumers and will be remembered by voters for many years to come."

The NAMB letter concludes with, "As a small business mortgage professional, I will undoubtedly be adversely affected should this bill pass, at a time when I have already suffered greatly throughout the economic downturn. But in the end, my consumers will be the biggest loser because of reduced competition in the marketplace and the lack of available credit."

While I do commend NAMB for a final effort, and I believe that it is our duty as U.S. citizens to remain engaged and involved with our government, I have to wonder about the wisdom of sending a letter that essentially says, "Even though you have ignored my repeated pleadings not to pass this bill, I am just letting you know that you are going to put me out of business when you do this." Acknowledging that they have ignored the grassroots efforts of the industry implies an understanding that they are not going to listen this time either.

This attitude was also reflected an email being sent out by Mortgage Trends with the subject line, "Act Now, before Congress Acts for you in July." The email starts with "Our industry is going down in flames RIGHT NOW unless we do somthing about it. One thing learned in the past is letter writing campaigns and phone calls have been completely ineffective." The author of the email is asking recipients to subscribe to a third party validation system which, he promises, will allow Congress to see that the industry is capable of acting as its own watch dog. The fact that registration for this system does not require a credit card or any fees to participate lends credance to his assertion that his system is about showing politicians that our industry is capable of policing itself. But if they don't care about our letters or our phone calls, and they don't care about the numerous mortgage credit restricting guidelines which have been implemented over the last two years, why would politicians suddenly respond to yet another campaign to "clean up the industry."

I emailed both of my Senators and my Congressman regarding the financial reform bill. I used strong language--words such as "evil" and "socialist"--because I wanted them to understand that I am completely opposed to this legislation. I knew before I wrote that my efforts would fall on deaf ears because I know their voting records, but I did it anyway because it is important to participate in the process. I got three generic emails back telling me that this bill is wonderful. On July 8, my Congressman, Harry Teague, sent out an email to his constituents who had emailed him on the subject of financial reform. It reads, in part, "Over the last few weeks, a bi-partisan House and Senate Conference committee has worked to create legislation to address dangerous Wall Street banking practices and help protect American consumers. Through this process it was important to me that their final product hold the big banks that caused our current economic mess accountable and protect the average New Mexican from predatory practices. I was pleased when the final bill, the Wall Street Reform and Consumer Protection Act, met my standards and I was proud to vote for it on the House floor...This bill ensures that taxpayers on Main Street won't be forced to pay for mistakes made on Wall Street, as those most responsible for these mistakes grow richer by the day."

In reality, we know that actually the opposite is going to happen. The biggest banks will be such an integral part of the financial system that they are indeed too big to fail. And since the Bureau of Consumer Financial Protection will have governance over both the smallest players in the industry--the self employed mortgage brokers--and the largest, and it will write regulations which will govern both, we can be pretty sure that Bureau will soon be adhering closely to the golden rule--he who has the gold makes the rules.

That is part of the problem we have right now. Huge corporations, including bank holding companies, can afford lobbyists to get their message across to law makers and regulators. But small business people, including mortgage brokers as represented by the National Association of Mortgage Brokers, and small mortgage banks as represented by the Mortgage Bankers Association, don't have the money to pay top notch lobbyists. All we have is our voice--our letters, our emails, our grassroots lobbies in Washington D.C. I participated in six lobby trips with the National Association of Mortgage Brokers, and I was always amazed by the open lack of interest that our legislators displayed toward us. We after all, paid our own expenses to go to Washington D.C. to meet with our elected officials to let them know about the issues that mattered to us, and yet, so often, the legislators let us know that they were not very interested in what we were there to say. We were just a grassroots lobbyist, rather than a top notch Washington lobbyist. The distinction between the two is the difference between having your income capped (us) and getting to keep all of the yield earned on interest rates when you sell a closed mortgage loan (them).

Lincoln said that government for the people shall not perish--not government for some people, or government for lobbyists, or government for corporations. Making trips to Washington D.C. as a grass roots lobbyist may not make any difference, but making a trip to the voting booth in November could. We still have a voice, and we need to use it. Laws can be changed, revoked, replaced and undone, but that will happen only if the people in Washington passing the laws actually understand that our government is representative, and they represent us.

I am From the Government and I am Here to Help

The title of today's post comes from a famous quote by Ronald Reagan. According to him, those are the scariest words ever uttered.

As we near the finish line on the Dodd Frank Bill, it is clear that the prevailing attitude which is apparent throughout the pages of this bill is, "I am from the government, and I am here to help."

As I look through the pages of the final bill, I see new entitlements in the form of additional funding to the Making Home Affordable Program which will subsidize mortgages for those who are unemployed and in the form of entitlement programs to create mainstream access to financial institutions for those relying on payday lenders and check cashing institutions. Those programs are going to get a lot of press because people love giveaways. On the Monday after financial reform passed through conference, I got a phone call from a young woman from a very affluent family in El Paso asking me about the changes to HAMP program which will allow her to get a principal reduction on her mortgage. That's all many people are going to hear--"What can I get out of this that is free?"

I also see a lot of new restrictions and limitations on freedom, and these apply mainly to consumers and small businesses. No longer are you as the consumer going to be able to decide what you can afford in the way of a mortgage, or how you should be able to invest in the stock market. The government is going to be "limiting" the types of mortgages that are available and apparently determining the financial literacy of investors.

Who gets hurt in this? The middle class, the small business owner, the man or woman who works hard for a living and is hoping to move ahead in life. Those of us who work hard each day and start our own businesses, pay our taxes, and do not rely on the government for help are ultimately going to have fewer options to borrow money, less access to credit, and less access to investment options for our money. The government will be studying us to determine whether we are smart enough to make positive choices about loans and investing. The price of security is often freedom, and in their promise to keep us safe from ourselves, they must tell us what we may and may not do.

Who benefits? The banking giants who got the bailout money in the first place. This is the real irony of the financial reform bill, and it is a fact agreed upon by both liberals and conservatives who are angry about this bill. I read an opinion piece this morning by a liberal blogger furious at the Democrats and the Obama Administration because the financial reform bill basically gives more power to the giant banking lobbies. A Newsweek article published June 25, echoes this same sentiment with the headline, "Financial Reform Makes the Biggest Banks Stronger." In the article, author Michael Hirsh quotes a former U.S. Treasury official who insisted on remaining anonymous but has followed the bill closely, "The bottom line: this doesn't fundamentally change the way the banking industry works. The ironic thing is that the biggest banks that took most of the money end up with the most beneficial position, and the regulators that failed to stop them in the first place get even more money and discretion." Hirsh continues, "Indeed the bill may make these banks even more critical to the economy and therefore even more likely to be rescued in some future crisis....by imposing new capital charges that will create barriers to entry for new firms, especially in swaps and other derivatives, while at the same time permitting giant bank holding companies to continue controlling most of what they were before, 'we've consolidated the position of the five banks that were most central to the crisis.'" The five banks he is talking about are JP Morgan, Goldman Sachs, Bank of America and Morgan Stanley and Citigroup. He also throws Wells Fargo into the mix, for now. (If I were an executive at Wells Fargo I would be very nervous about being number six since Treasury officials keep insisting the final number is five.) Hirsh also quotes a former Federal Reserve official as stating, "It makes it tougher now to kiss somebody off when they get into trouble."

What the Dodd Frank Act is ultimately about is the consolidation of wealth and power into a few hands. The mortgage industry, for instance, was an over $3.2 trillion dollar industry a few years ago, but those dollars were spread among many small businesses--small mortgage brokers, small mortgage banks, and small independent mortgage lenders who packaged their loans and sold them. There were a lot of players and a lot of competition, which kept costs down.

The Dodd Frank bill makes the cost of business higher for smaller players. The entire focus of the bill is on making business more difficult and more expensive so that the smaller, less well capitalized entities will wash out, which then leaves the largest entities more empowered.

Consumers are going to see a difference as the smaller players now disappear completely and only the larger companies are left. Taxpayers are going to see a difference the next time that these companies need help. As Hirsh points out, the Federal Reserve cannot bail out any one firm, but it can supply liquidity to shore up the entire system, and since the five surviving major banks have become the five pillars of the US financial system, if one of them wobbles, the entire system is endangered, thus justifying a bailout to save the system as a whole.

What is most disturbing about this whole thing is that while financial reform is just becoming a reality next week, the processes that allowed it to happen have been going on for years. The former president of the former Ohio Savings Bank reportedly told his staff in 2003 just at the beginning of the real estate boom, "When this is over, there will only be five major banks left." That was well in advance of the height of the boom or the subsequent bust. An AE for Ohio Savings Bank at the time repeated his statement to me in 2007. I have never forgotten it. Was it prophecy, or did he know that what we are seeing today is not a reaction to the stock market freezing in 2008 but a well thought out and orchestrated strategy which was developed years ago to fundamentally change the American system? I don't really subscribe to conspiracy theories, but this situation really makes me wonder who is pulling the strings of our government and our financial system.

John Boehner has taken a lot of criticism lately for equating the Dodd Frank bill to using a nuclear weapon to kill an ant. I like the analogy, but I think it needs tweaking. I would say that this is more like using a nuclear weapon to kill an ant, missing the ant, and annihilating all life within a thirty mile radius. This bill will fundamentally change the way we live, work, save money, invest money, and manage our money in this country. And when it is all over, only the chosen elites win.

A Study on Studies

In yesterday's post, I discussed a study that the Dodd Frank Wall Street Reform Act calls for regarding appraisal methods and processes to determine whether the appraisal methods being used led to speculation during the housing boom. As I thought about this study, it occurred to me that as I have read through the Act, there appear to be an inordinate number of studies built into the new law. So tonight I looked through the table of contents and I counted them. I came up with over 27.

Title I on the subject of Financial Stability calls for a study of the effects of the size and complexity of financial institutions on capital market efficiency and economic growth. It also calls for studies and reports on holding company capital requirements. Title II, which addresses the Orderly Liquidation Authority, calls for a study on bankruptcy process for financial and nonbank financial institutions. It also calls for a study on "secured creditor haircuts," and a study on international coordination relating to bankruptcy process for nonbank financial institutions.

Title IV--Regulation of Advisers to Hedge Funds and Others--calls for a study and report on accredited advisors and a study on self-regulatory organization for private funds.

Title V--Insurance--calls for a study of the nonadmitted insurance market.

Title VI--Improvements to Regulation of Bank and Savings Association Holding Companies and Depistory institions--calls for a study of bank investment activities.

Title VII--Wall Street Transparency and Accountability--Part I calls for "Studies." The table of contents does not specify the purpose of the studies.

Title IX--The Investor Protections and Improvements to the Regulations of Securities--calls for 13 separate studies. Among these is a government accounting office study of "person to person lending", a study and rulemaking on assigned credit ratings, and a study regarding financial literacy among investors. Subtitle G calls for a study and report on credit scores.

Title XIV--Mortgage Reform and Anti-Predatory Lending Act, calls for multiple studies including a study of defaults and foreclosures, a study of the effect of drywall on foreclosures, and a study of the effectiveness and impact of various appraisal methods, valuation models and distribution channels and on the Home Valuation Code of conduct and Appraisal Subcommittee. (This one was discussed in yesterday's post.)

When I was growing up, my father equated anything particularly wasteful to a government study on the mating habits of the tsetse fly. Whether there ever was such a study I do not know, but this was the standard by which he judged bureaucratic nonsense. The numerous studies mandated by the Dodd Frank act will probably be about as helpful as a study on the mating habits of the tsetse fly, partially because rather than fixing problems that the legislators knew, or had good reason to suspect, were major issues for Americans, the Congress and the Senate merely called for a study. Rather than setting up a time frame to dismantle Fannie Mae or Freddie Mac, which the bill itself acknowledges may cost tax payers over $5 trillion dollars, the Dodd Frank bill calls for a study of the problem. In spite of industry concerns regarding HVCC and circulated petitions with over 100,000 signatures requesting that it be over turned, and in spite of the obvious legal problems with an attorney general from one state being allowed to strong arm Fannie Mae and Freddie Mac into setting a policy that affects the entire country, the bill calls for study of its effects. Why do we need so many studies?

The new bill calls for so many studies partially because the authors want to know about the personal financial habits of Americans. Where do we spend money, how do we invest, how financially savvy are we? That gives them a benchmark for how we need to be further regulated.

For example, Title IX--Investor Protections and Improvements to the Regulations of Securities--which may be referred to as "Investor Protection and Securities Reform Act of 2010," calls for a study regarding financial literacy among investors. The Act states that The Commission shall conduct a study to identify "the existing level of financial literacy among retail investors, including subgroups of investors identified by the commission, methods to improve the timing, content and format of disclosures to investors with respect to financial intermediaries, investment products and investment services, the most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies...methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products...the most effective existing private and public efforts to educate investors, and in consultation with the Financial Literacy and Education Commission a strategy (including, to the extent practicable, measurable goals and objectives) to increase the financial literacy of investors in order to bring about a positive change in investor behavior."

Retail investors--that's you and me. The government is authorizing a study of how much we know so as to affect a "positive change" in our behavior. This study is important because the newly established investor advisory committee, which the act creates within the SEC, shall advise and consult with the SEC on matters relating to investors. The Committee shall be people who are knowledgeable about investment matters, and they shall include a representative on behalf of senior citizens. They and the SEC will work together to "gather information from and communicate with investors or other members of the public, engage in such temporary investor testing programs as the Commission determines are in the public interest or would protect investors, and consult with academics and consultants as necessary to carry out this subsection."

What!!! I, the retail investor, will now be studied to find out how financially literate I am and possibly subjected to a test before I can invest my money? Seriously? This is my own money, which I earned myself, but some government bureaucrat who can't work together with a bunch of other bureaucrats to get the budget balanced and the deficit under control is going to study me like a lab rat in an effort to affect a "positive change" in my behavior. And I am supposed to be glad because it is for my own protection.

Come to think of it, I think they should stick studying the tsetse fly and leave the rest of us alone.