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.
Showing posts with label financial reform. Show all posts
Showing posts with label financial reform. Show all posts
Where Is the Money Being Spent?--The CBO Scores HR 4173
Yesterday we looked at the CBO score card for HR 4173--The Restoring American Financial Stability Act. According to the CBO, HR 4173 will cause a net increase to the deficit of $19.7 billion over the 2011-2020 period. Today we will look at where that money is going to be spent.
According to the CBO's report, which can be viewed by going to www.cbo.gov, most of the cost of the bill will occur as a result of the cost of the orderly liquidation program. As you may recall, in May we wrote about the program which allows the Secretary of the Treasury to identify financial institutions which may be in danger of failing and take them before a panel of judges which are appointed by the Chief Justice of the U.S. Bankruptcy Court. If the judges decide that the Treasury Secretary has proven his case, they can order immediate dissolution of the firm. The firm can appeal but they cannot remain open pending appeal. The CBO estimates that the cost of the Orderly Liquidation Authority alone will increase the deficit by $20.3 billion from 2011-2020, but this deficit spending will be offset by a $4.9 billion increase in revenues from fees.
Why so expensive? The bill gives the FDIC the authority to take steps to liquidate endangered firms through organizing bridge banks which would be exempt from federal and state taxes. The FDIC will borrow funds from the Treasury to finance the creation of these banks. Any borrowed sums are to be repaid with interest through assessments on bank holding companies and financial firms. "Although the estimate reflects CBO's best judgment on the basis of historical experience, the cost of the program is inherently unpredictable...it might take several years, for example, to recoup the funds spent to liquidate a complex financial institution. As a result, some of the proceeds from asset sales or cost recovery fees related to financial problems emerging in any 10-year period might be collected beyond that point. All told, actual spending and assessments in each year would probably vary significantly from the estimated amounts--either higher or lower than the expected value estimate provided for each year."
The reason that it is hard to come up with a firm number is that the CBO acknowledges that if the Orderly Liquidation Authority has to liquidate a large firm, the costs will be huge. CBO estimates that the costs of liquidating large firms through 2020 will be as much as $26.3 billion and that $6 billion of that will be recovered through assessments.
On a brighter note, the new regulatory authority issued to the SEC, which will give them permanent authority to collect and spend fees, is projected to decrease deficits by $4.9 billion from 2011-2020. Most of that figure--$4.3 billion--will be unavailable to the agency for spending.
Since this fee collection will be permanent rather than subject to annual appropriations, the collections will become part of the SEC's budget. The SEC will be authorized to collect fees sufficient to maintain its annual operating expenses and to retain a reserve of 25% of the following year's budget. However, since the CBO estimates that the SEC will need to add 800 new jobs over the next few years in order to meet all of its regulatory authority, we can look for their budget to increase. "The reduction in budget deficits from changes in direct spending and revenues would probably be accompanied by increases in discretionary spending."
Another money pit will be the Bureau of Consumer Financial Protection which will exist as an independent regulatory authority within the Financial Reserve. The Board of Governors of the Federal Reserve will fund the Bureau through earnings from the Federal Reserve, at a rate of 10% in 2011, increasing to 12% in 2013. If the Bureau's expenditures are reported in the federal budget as direct spending--as the CBO recommends--creating and maintaining the Bureau will cost $4.5 billion over the 2011-2020 period. The CBO estimates that the Federal Reserve will transfer 515 jobs to the Bureau of Consumer Financial Protection--which will ultimately be responsible for making that payroll. All told, the CBO estimates the the Bureau of Consumer Financial Protection will contribute $3.2 billion to the deficit during 2011-2020 period.
The bill creates a Federal Insurance Office within the treasury department to coordinate federal policy on insurance issues. This department will cost $9 million from 2011-2015.
Finally the bill creates a huge new entitlement to provide access to traditional banking services for those people who are currently using payday loans, non bank money orders, check cashing businesses and rent to own agreements. HR 4173 will subsidize access to banking services for these people who have traditionally been considered a poor credit risk at a cost of $248 million from the 2011-2015 period.
Tomorrow we will talk about the costs to the private sector.
According to the CBO's report, which can be viewed by going to www.cbo.gov, most of the cost of the bill will occur as a result of the cost of the orderly liquidation program. As you may recall, in May we wrote about the program which allows the Secretary of the Treasury to identify financial institutions which may be in danger of failing and take them before a panel of judges which are appointed by the Chief Justice of the U.S. Bankruptcy Court. If the judges decide that the Treasury Secretary has proven his case, they can order immediate dissolution of the firm. The firm can appeal but they cannot remain open pending appeal. The CBO estimates that the cost of the Orderly Liquidation Authority alone will increase the deficit by $20.3 billion from 2011-2020, but this deficit spending will be offset by a $4.9 billion increase in revenues from fees.
Why so expensive? The bill gives the FDIC the authority to take steps to liquidate endangered firms through organizing bridge banks which would be exempt from federal and state taxes. The FDIC will borrow funds from the Treasury to finance the creation of these banks. Any borrowed sums are to be repaid with interest through assessments on bank holding companies and financial firms. "Although the estimate reflects CBO's best judgment on the basis of historical experience, the cost of the program is inherently unpredictable...it might take several years, for example, to recoup the funds spent to liquidate a complex financial institution. As a result, some of the proceeds from asset sales or cost recovery fees related to financial problems emerging in any 10-year period might be collected beyond that point. All told, actual spending and assessments in each year would probably vary significantly from the estimated amounts--either higher or lower than the expected value estimate provided for each year."
The reason that it is hard to come up with a firm number is that the CBO acknowledges that if the Orderly Liquidation Authority has to liquidate a large firm, the costs will be huge. CBO estimates that the costs of liquidating large firms through 2020 will be as much as $26.3 billion and that $6 billion of that will be recovered through assessments.
On a brighter note, the new regulatory authority issued to the SEC, which will give them permanent authority to collect and spend fees, is projected to decrease deficits by $4.9 billion from 2011-2020. Most of that figure--$4.3 billion--will be unavailable to the agency for spending.
Since this fee collection will be permanent rather than subject to annual appropriations, the collections will become part of the SEC's budget. The SEC will be authorized to collect fees sufficient to maintain its annual operating expenses and to retain a reserve of 25% of the following year's budget. However, since the CBO estimates that the SEC will need to add 800 new jobs over the next few years in order to meet all of its regulatory authority, we can look for their budget to increase. "The reduction in budget deficits from changes in direct spending and revenues would probably be accompanied by increases in discretionary spending."
Another money pit will be the Bureau of Consumer Financial Protection which will exist as an independent regulatory authority within the Financial Reserve. The Board of Governors of the Federal Reserve will fund the Bureau through earnings from the Federal Reserve, at a rate of 10% in 2011, increasing to 12% in 2013. If the Bureau's expenditures are reported in the federal budget as direct spending--as the CBO recommends--creating and maintaining the Bureau will cost $4.5 billion over the 2011-2020 period. The CBO estimates that the Federal Reserve will transfer 515 jobs to the Bureau of Consumer Financial Protection--which will ultimately be responsible for making that payroll. All told, the CBO estimates the the Bureau of Consumer Financial Protection will contribute $3.2 billion to the deficit during 2011-2020 period.
The bill creates a Federal Insurance Office within the treasury department to coordinate federal policy on insurance issues. This department will cost $9 million from 2011-2015.
Finally the bill creates a huge new entitlement to provide access to traditional banking services for those people who are currently using payday loans, non bank money orders, check cashing businesses and rent to own agreements. HR 4173 will subsidize access to banking services for these people who have traditionally been considered a poor credit risk at a cost of $248 million from the 2011-2015 period.
Tomorrow we will talk about the costs to the private sector.
Texas Home Equity Laws, Reasonable Oversight and Stable Property Values
This afternoon I closed a home equity loan. Going through the often tedious process of complying with the Texas Equity Law (the A6 law) reminded me of at least part of the reason that Texas property values have remained more stable than those in many other parts of the U.S. Texas has reasonable regulation and enforcement of those regulations which protect consumers against some of their most ill-conceived ideas while still allowing them the freedom to make choices about their financial future and their real estate.
Texas was the last state to allow homeowners to borrow the equity out of their home. Texas is a homestead state, and the homestead laws provide a special layer of protection for homeowners. For example, a married homeowner cannot purchase a primary residence, refinance a primary residence, or sell the residence without his spouse's signature. This can sometimes pose problems since if couple's separate without divorcing, one spouse cannot purchase or sell his primary residence without involving the other spouse. In cases where an ugly divorce is underway, often the party who wants to purchase a new home has to wait until his decree of divorce has been signed by all parties and then the judge, but in most cases of amicable separation, one spouse will sign the deed of trust so that the other party can purchase their home.
The homestead law not only protects the interests of both spouses by preventing one from entering into a contract on a primary residence without the other party's permission, it protects the homeowner by preventing creditors for taking the home because of non-payment of non-real estate related debts. In Texas, the mortgage company can take your home if you do not make the payments, the IRS can take your home if you owe back taxes, and the county property tax office can take your home for failure to pay property taxes. Other than that, you are fairly safe. A judgment filed against you by your business partner for the money you owe him from your failed venture will not cost you your home.
Because of these protections, Texas lawmakers were careful when they drafted the home equity law in 1998. The A6 law--which takes its name from its amendment number to the Texas Constitution--was designed to protect the homeowner from himself. The law mandates that no homeowner may borrow more than 80% of the fair market value of his homestead for an equity loan. Since the fair market value can be established only by an appraisal, even during the height of lax guidelines, no property which was being underwritten for a home equity loan could use an appraisal waiver option. The appraisal had to be presented to the borrower not later than at closing so that he would have proof of the fair market value of his home.
Lawmakers were concerned with equity stripping, so they established a provision that all fees, including origination fees, third party fees for credit reports, and surveys, lender fees, and title insurance and title fees, could not exceed 3% of the loan amount. This fee cap did not apply to discount points paid to the lender, and it did not cover prepaids for escrows for taxes and insurance, or prepaid interest on the loan. This provision made it more difficult to do loans under $80,000.00. However, yield spread premium--the spread on the interest rate--which is paid by the lender to the originator, was not included, so the originator could still be compensated for his work. Borrowers understood that a cash out loan would carry a higher interest rate than a non cash out loan, but they also understood that the fees rolled into their loan had to be contained in the 3% cap, so they did not have to worry about their equity being eaten up by excessive costs.
Most interestingly, Texas mandated a 12 day disclosure form which the borrower and his spouse had to sign at application. This disclosure form listed for the borrower his rights under Texas law. His loan would never have a pre-payment penalty; he could not borrow more than 80% of his equity; his fees would never exceed 3%. A Texas cash out loan is recorded on a home equity deed of trust, and if that loan is ever refinanced, it must be also refinanced on a home equity deed of trust. Whether the borrower is taking out additional cash, or just reducing his interest rate and term, the provisions and protections of the original equity note apply--he can never borrow more than 80% of the value of his house, his fees can never exceed 3%, and he can never have a pre-payment penalty. A Texas home equity loan can be refinanced only once a year, so the borrower has to wait one year and one day before obtaining a new loan--even if no cash is being taken out of the house. Further, foreclosures on Texas cash out loans are judicial foreclosures.
The 12 day disclosure started a 12 day cooling off period. Loan docs could not be signed until the 13th day, and then the borrower entered another 3 day federally mandated cooling off period. If at any time during the cooling off period he decided to cancel the transaction, all fees paid to the loan originator, including the appraisal fee, had to be refunded to the borrower in full.
I entered the loan origination industry in 1998--the first year of the law. In fact, my first mortgage origination was a Texas cash out. I had never seen so many forms in my life! As I got to know other people in the origination community, I heard a lot of complaints about the new law--other states allowed the borrowers to borrow 100% or more of their property values. (In New Mexico in 1998, a homeowner could borrow 125% of their home's equity in cash!) Many people complained that the new law was too strict and that borrowers who really needed cash would have to sell their homes because they were too restricted in the amounts they could borrow.
A few years later, the Texas legislators returned to make some changes to the A6 law in response to demands for home equity lines of credit (HELOCS) which were becoming increasingly popular around the country. Texas did allow HELOCS, but only up to 80% of the property's fair market value. And even as they added the revolving line of credit as a lending option in Texas, they also added some additional protections. Now, in addition to waiting through a 12 day cooling off period before signing loan docs, the borrower had to review his HUD 1 settlement statement of closing costs and his final loan application 1 business day before closing. No changes could be made to the application or the settlement statement after the borrower's review, so this eliminated the possibility of changing any fees at the closing table.
And while a homeowner could get a line of credit against his house, he could not take a sum of less than $4000.00 at any one time, and he could not have credit card for his HELOC. This eliminated the possibility of spending one's home equity on fast food or a weekend trip to DisneyLand. By making the minimum draw $4000.00 and prohibiting credit cards for accessing the HELOC, the state sent a clear message that the equity in an individual's home is not to be frittered away on impulse purchases.
During the height of the real estate boom, we read about many homeowners who tapped and utilized up to 100% of the equity in their home. In states like California, Arizona and Florida, the appreciation was so rapid that the equity replenished itself like a magic elixir. But in Texas, and specifically in my market of El Paso, we never had great appreciation. I counseled many disappointed borrowers from other states that in our market, the property values remained fairly steady and they could not expect to see much appreciation in their homes for the first several years of their note.
But today in 2010, the wisdom the Texas home equity protection is clearer. By protecting borrower's equity, lawmakers protected property values for entire state. By requiring that borrowers who were cashing out maintain at least a 20% equity in the property, the state did not enable borrowers to end up "upside down" in their properties. It would be interesting to know how many of the borrowers nationwide who are choosing "strategic default" as an option for dealing with the fact that they are in an upside down equity position are in that position because of home equity loans and lines of credit.
"Lead us not into temptation," is a line from the Lord's Prayer. The truth is that most of us do not have the willpower to resist the impulse buy on credit, and if protections are not in place, Aunt Martha's home equity will be spent on a series of afternoon shopping trips and lunch with the girls. But the other truth is that people need flexibility to access their equity when they have a legitimate need or a desire to do something that could potentially better their lives.
That is what reasonable well-planned oversight and consistent enforecment does--it provides boundaries. It gives consumers the freedom of choice while acknowledging that not all choices will necessarily be positive ones.
As Congress wrestles with financial reform, maybe it should be using Texas as a model. Without reasonable oversight, we have financial chaos and widespread irresponsible behavior for which in the end all of us pay. But excessive and burdensome regulation kills opportunity, choice and freedom. A well-planned, consistently enforced regulatory model creates an environment in which businesses can prosper and consumers can thrive, and that is the kind of reform all of us should embrace.
Texas was the last state to allow homeowners to borrow the equity out of their home. Texas is a homestead state, and the homestead laws provide a special layer of protection for homeowners. For example, a married homeowner cannot purchase a primary residence, refinance a primary residence, or sell the residence without his spouse's signature. This can sometimes pose problems since if couple's separate without divorcing, one spouse cannot purchase or sell his primary residence without involving the other spouse. In cases where an ugly divorce is underway, often the party who wants to purchase a new home has to wait until his decree of divorce has been signed by all parties and then the judge, but in most cases of amicable separation, one spouse will sign the deed of trust so that the other party can purchase their home.
The homestead law not only protects the interests of both spouses by preventing one from entering into a contract on a primary residence without the other party's permission, it protects the homeowner by preventing creditors for taking the home because of non-payment of non-real estate related debts. In Texas, the mortgage company can take your home if you do not make the payments, the IRS can take your home if you owe back taxes, and the county property tax office can take your home for failure to pay property taxes. Other than that, you are fairly safe. A judgment filed against you by your business partner for the money you owe him from your failed venture will not cost you your home.
Because of these protections, Texas lawmakers were careful when they drafted the home equity law in 1998. The A6 law--which takes its name from its amendment number to the Texas Constitution--was designed to protect the homeowner from himself. The law mandates that no homeowner may borrow more than 80% of the fair market value of his homestead for an equity loan. Since the fair market value can be established only by an appraisal, even during the height of lax guidelines, no property which was being underwritten for a home equity loan could use an appraisal waiver option. The appraisal had to be presented to the borrower not later than at closing so that he would have proof of the fair market value of his home.
Lawmakers were concerned with equity stripping, so they established a provision that all fees, including origination fees, third party fees for credit reports, and surveys, lender fees, and title insurance and title fees, could not exceed 3% of the loan amount. This fee cap did not apply to discount points paid to the lender, and it did not cover prepaids for escrows for taxes and insurance, or prepaid interest on the loan. This provision made it more difficult to do loans under $80,000.00. However, yield spread premium--the spread on the interest rate--which is paid by the lender to the originator, was not included, so the originator could still be compensated for his work. Borrowers understood that a cash out loan would carry a higher interest rate than a non cash out loan, but they also understood that the fees rolled into their loan had to be contained in the 3% cap, so they did not have to worry about their equity being eaten up by excessive costs.
Most interestingly, Texas mandated a 12 day disclosure form which the borrower and his spouse had to sign at application. This disclosure form listed for the borrower his rights under Texas law. His loan would never have a pre-payment penalty; he could not borrow more than 80% of his equity; his fees would never exceed 3%. A Texas cash out loan is recorded on a home equity deed of trust, and if that loan is ever refinanced, it must be also refinanced on a home equity deed of trust. Whether the borrower is taking out additional cash, or just reducing his interest rate and term, the provisions and protections of the original equity note apply--he can never borrow more than 80% of the value of his house, his fees can never exceed 3%, and he can never have a pre-payment penalty. A Texas home equity loan can be refinanced only once a year, so the borrower has to wait one year and one day before obtaining a new loan--even if no cash is being taken out of the house. Further, foreclosures on Texas cash out loans are judicial foreclosures.
The 12 day disclosure started a 12 day cooling off period. Loan docs could not be signed until the 13th day, and then the borrower entered another 3 day federally mandated cooling off period. If at any time during the cooling off period he decided to cancel the transaction, all fees paid to the loan originator, including the appraisal fee, had to be refunded to the borrower in full.
I entered the loan origination industry in 1998--the first year of the law. In fact, my first mortgage origination was a Texas cash out. I had never seen so many forms in my life! As I got to know other people in the origination community, I heard a lot of complaints about the new law--other states allowed the borrowers to borrow 100% or more of their property values. (In New Mexico in 1998, a homeowner could borrow 125% of their home's equity in cash!) Many people complained that the new law was too strict and that borrowers who really needed cash would have to sell their homes because they were too restricted in the amounts they could borrow.
A few years later, the Texas legislators returned to make some changes to the A6 law in response to demands for home equity lines of credit (HELOCS) which were becoming increasingly popular around the country. Texas did allow HELOCS, but only up to 80% of the property's fair market value. And even as they added the revolving line of credit as a lending option in Texas, they also added some additional protections. Now, in addition to waiting through a 12 day cooling off period before signing loan docs, the borrower had to review his HUD 1 settlement statement of closing costs and his final loan application 1 business day before closing. No changes could be made to the application or the settlement statement after the borrower's review, so this eliminated the possibility of changing any fees at the closing table.
And while a homeowner could get a line of credit against his house, he could not take a sum of less than $4000.00 at any one time, and he could not have credit card for his HELOC. This eliminated the possibility of spending one's home equity on fast food or a weekend trip to DisneyLand. By making the minimum draw $4000.00 and prohibiting credit cards for accessing the HELOC, the state sent a clear message that the equity in an individual's home is not to be frittered away on impulse purchases.
During the height of the real estate boom, we read about many homeowners who tapped and utilized up to 100% of the equity in their home. In states like California, Arizona and Florida, the appreciation was so rapid that the equity replenished itself like a magic elixir. But in Texas, and specifically in my market of El Paso, we never had great appreciation. I counseled many disappointed borrowers from other states that in our market, the property values remained fairly steady and they could not expect to see much appreciation in their homes for the first several years of their note.
But today in 2010, the wisdom the Texas home equity protection is clearer. By protecting borrower's equity, lawmakers protected property values for entire state. By requiring that borrowers who were cashing out maintain at least a 20% equity in the property, the state did not enable borrowers to end up "upside down" in their properties. It would be interesting to know how many of the borrowers nationwide who are choosing "strategic default" as an option for dealing with the fact that they are in an upside down equity position are in that position because of home equity loans and lines of credit.
"Lead us not into temptation," is a line from the Lord's Prayer. The truth is that most of us do not have the willpower to resist the impulse buy on credit, and if protections are not in place, Aunt Martha's home equity will be spent on a series of afternoon shopping trips and lunch with the girls. But the other truth is that people need flexibility to access their equity when they have a legitimate need or a desire to do something that could potentially better their lives.
That is what reasonable well-planned oversight and consistent enforecment does--it provides boundaries. It gives consumers the freedom of choice while acknowledging that not all choices will necessarily be positive ones.
As Congress wrestles with financial reform, maybe it should be using Texas as a model. Without reasonable oversight, we have financial chaos and widespread irresponsible behavior for which in the end all of us pay. But excessive and burdensome regulation kills opportunity, choice and freedom. A well-planned, consistently enforced regulatory model creates an environment in which businesses can prosper and consumers can thrive, and that is the kind of reform all of us should embrace.
How Will Financial Reform Affect the Future of HVCC?
As the two financial reform bills (HR 4173 and SB 3217) go to conference committee this week, one of the major questions on the minds of those in various aspects of the real estate industry is how the bills will ultimately affect the future of the HVCC (Home Valuation Code of Conduct).
The Home Valuation Code of Conduct was the outgrowth of a settlement between New York attorney general Andrew Cuomo and Fannie Mae and Freddie Mac. Cuomo agreed to drop an investigation against the two mortgage giants if they would agree to accept the code. HVCC went into effect of May of 2009 and has presented a number of challenges for the industry ever since.
HVCC was supposed to guarantee appraisal independence by banning mortgage loan originators from ordering appraisals, choosing appraisers, or speaking to appraisers directly. Retail banks can have a separate department that is not compensated based on loan volume order the appraisals, but the code expressly states that no mortgage broker or employee of a mortgage broker can order an appraisal.
In order to ensure compliance with the code, the appraisal-ordering process was turned over to appraisal management companies who take down the order, charge the loan originator for the appraisal, select the appraiser, handle all interaction with the appraiser, and send the completed report back to the loan originator.
The problems arose as AMCs hired out of area appraisers who did not understand the real estate market, undervalued houses, and refused to acknowledge errors or look at different comps. The costs also rose for the consumer (in some cases dramatically) since the AMC added its fees for managing the process to the fees of the appraiser who was actually doing all of the work.
Both mortgage brokers and many appraisers have opposed the provisions of the code, and widespread industry opposition has led to lobbying efforts to include a "fix" in the financial reform bill. In fact, the house bill, HR 4173, section 4312, specifically deals with the Home Valuation Code of Conduct and appraisal independence issues. Under the provisions of the house bill a negotiated rulemaking committee would be set up to review and set in place new standards for appraisal independence. The Negotiated Rulemaking Committee: "shall not prohibit lenders, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) from accepting any appraisal report completed by an appraiser selected, retained or compensated in any manner by a mortgage loan originator" (provided that the originator is properly licensed under the SAFE ACT). The bill also mandates appraisal independence, sets clear guidelines for maintaining the autonomy of appraisers and seeks to enforce, "state or federal laws that make it unlawful for a mortgage originator to make any payment, threat or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to consider additional appropriate property information; provide further detail, substantiation or explanation for the appraiser's value conclusion, or correct errors in the appraisal report." The bill also covers appraiser compensation, which has become a huge issue since HVCC was enacted. Once appraisals on loans which were sold to Fannie Mae and Freddie Mac had to be ordered through third party AMCs, the AMCs could dictate how much money appraisers were paid. HR 4173 does address this issue, and states that "lenders and their agents [must] compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area."
Effective on the date that the new rules are introduced, the problematic Home Valuation Code of Conduct will no longer remain in effect.
While the House bill spells out this section very clearly, the Senate bill ignores HVCC and appraisal independence totally, so it will be up to the conference committee to see whether the final bill includes the verbage from section 4173 or whether the current Home Valuation Code of Conduct is allowed to stand. But regardless of what happens in conference for the final bill, HVCC's days are probably numbered. The reason? HVCC is not federal law--it was a legal agreement among Fannie Mae, Freddie Mac and the attorney general of New York. Loans that are not sold to Fannie Mae and Freddie Mac are not governed by the agreement, although most lenders do require the use of AMCs on all loans now. And the Senate Bill does call for a study of exit strategies for Fannie Mae and Freddie Mac to be completed no later than January of 2011. Barney Frank and Tim Geithner have both stated that a whole new system of housing finance needs to be introduced. That new agency, whatever it turns out to be, will not be bound by HVCC; it will be subject to whatever laws and guidelines are set in place by its creators. So for everyone who is hoping for an end to all of the problems caused by HVCC, help appears to be on the way--one way or another.
The Home Valuation Code of Conduct was the outgrowth of a settlement between New York attorney general Andrew Cuomo and Fannie Mae and Freddie Mac. Cuomo agreed to drop an investigation against the two mortgage giants if they would agree to accept the code. HVCC went into effect of May of 2009 and has presented a number of challenges for the industry ever since.
HVCC was supposed to guarantee appraisal independence by banning mortgage loan originators from ordering appraisals, choosing appraisers, or speaking to appraisers directly. Retail banks can have a separate department that is not compensated based on loan volume order the appraisals, but the code expressly states that no mortgage broker or employee of a mortgage broker can order an appraisal.
In order to ensure compliance with the code, the appraisal-ordering process was turned over to appraisal management companies who take down the order, charge the loan originator for the appraisal, select the appraiser, handle all interaction with the appraiser, and send the completed report back to the loan originator.
The problems arose as AMCs hired out of area appraisers who did not understand the real estate market, undervalued houses, and refused to acknowledge errors or look at different comps. The costs also rose for the consumer (in some cases dramatically) since the AMC added its fees for managing the process to the fees of the appraiser who was actually doing all of the work.
Both mortgage brokers and many appraisers have opposed the provisions of the code, and widespread industry opposition has led to lobbying efforts to include a "fix" in the financial reform bill. In fact, the house bill, HR 4173, section 4312, specifically deals with the Home Valuation Code of Conduct and appraisal independence issues. Under the provisions of the house bill a negotiated rulemaking committee would be set up to review and set in place new standards for appraisal independence. The Negotiated Rulemaking Committee: "shall not prohibit lenders, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) from accepting any appraisal report completed by an appraiser selected, retained or compensated in any manner by a mortgage loan originator" (provided that the originator is properly licensed under the SAFE ACT). The bill also mandates appraisal independence, sets clear guidelines for maintaining the autonomy of appraisers and seeks to enforce, "state or federal laws that make it unlawful for a mortgage originator to make any payment, threat or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to consider additional appropriate property information; provide further detail, substantiation or explanation for the appraiser's value conclusion, or correct errors in the appraisal report." The bill also covers appraiser compensation, which has become a huge issue since HVCC was enacted. Once appraisals on loans which were sold to Fannie Mae and Freddie Mac had to be ordered through third party AMCs, the AMCs could dictate how much money appraisers were paid. HR 4173 does address this issue, and states that "lenders and their agents [must] compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area."
Effective on the date that the new rules are introduced, the problematic Home Valuation Code of Conduct will no longer remain in effect.
While the House bill spells out this section very clearly, the Senate bill ignores HVCC and appraisal independence totally, so it will be up to the conference committee to see whether the final bill includes the verbage from section 4173 or whether the current Home Valuation Code of Conduct is allowed to stand. But regardless of what happens in conference for the final bill, HVCC's days are probably numbered. The reason? HVCC is not federal law--it was a legal agreement among Fannie Mae, Freddie Mac and the attorney general of New York. Loans that are not sold to Fannie Mae and Freddie Mac are not governed by the agreement, although most lenders do require the use of AMCs on all loans now. And the Senate Bill does call for a study of exit strategies for Fannie Mae and Freddie Mac to be completed no later than January of 2011. Barney Frank and Tim Geithner have both stated that a whole new system of housing finance needs to be introduced. That new agency, whatever it turns out to be, will not be bound by HVCC; it will be subject to whatever laws and guidelines are set in place by its creators. So for everyone who is hoping for an end to all of the problems caused by HVCC, help appears to be on the way--one way or another.
The Merkley Amendment, Safe Harbor Provisions, and Small Business
Now that financial reform bills have passed both houses of Congress, industry groups are going to be lining up to influence the final draft of the bill. And with Congress scheduled to reconvene next Monday, conflicts in Washington DC this June will likely be hot.
A primary issue for the mortgage industry will likely be the Merkley/Klobuchar amendment, sponsored by Senators Merkley (D OR) and Klobuchar (D. MN). This amendment was introduced after business hours on a Tuesday evening and approved early the following Wednesday morning before industry groups had a chance to weigh in. Both the National Association of Mortgage Brokers and the Mortgage Bankers Association have expressed concerns about the amendment, although unquestionably, the mortgage broker community has the most to lose in this debate.
The Merkley/Klobuchar amendment is an eleven page document which both mandates that a consumer's ability to repay a loan be taken into consideration in underwriting a loan and at the same time caps originator compensation. The amendment bans the use of Yield Spread Premiums--the spread on interest rates--as compensation for a mortgage loan originator unless the mortgage loan originator is not receiving any other compensation. Yield Spread Premiums are used to reduce the amount of upfront fees that the consumer pays to get his mortgage loan by allowing the originator to be compensated through the rate.
Banks also earn a spread on the interest rates of loans which they sell, but the Merkley amendment expressly does not limit or prohibit these: "No provision in this subsection shall be construed as limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent loan purchaser."
The amendment mandates that determination of a consumer's ability to repay the loan must include, "consideration of the consumer's credit history, current income, expected income, current obligations, debt to income ratio, employment status," or financial resources other than the equity in the subject property.
Interestingly the amendment creates a safe harbor for compliance. A loan is presumed to be in compliance with this statute if the creditor has verified the consumer's ability to repay and used the maximum rate permitted under the loan during the first 5 years. However, the presumption of compliance cannot be applied to any loan where the total points and fees exceed 3%, which includes up to 1% of financed mortgage insurance or FHA premiums.
Industry lobbyists are going to argue that such a provision will make it almost impossible to originate loans under $150,000.00. However, they appear to be basically ignoring the blatantly anti-business nature of the amendment. Why does limiting total fees to 3% create a presumption of compliance for any mortgage loan? I once refinanced a loan that had been done with no charges at all by the previous loan originator who had financed the house a couple of years before. The previous loan originator had refinanced a real estate agent's home free of charge in the hopes of building a relationship with her. However, the loan had been done totally incorrectly and was actually illegal under the Texas Home Equity statute. So being free did not make it legal. (Actually, that was one of the factors that made it illegal because under RESPA no loan originator could render a service without charges in expectation of future business.) A low origination charge, or no origination charge, does not mean that the loan itself is affordable or that the consumer is going to make the payments, so to tie compensation to a safe harbor provision is ridiculous, particularly on a purchase loan where the consumer is taking on new debt and not financing his or her closing costs.
Having said that, the reality of the loan origination business is that conventional loans have to be salable to Fannie Mae and Freddie Mac, and they, therefore, have to be underwritten to comply to Fannie Mae and Freddie Mac guidelines. By creating a safe harbor that presumes compliance, Senators Merkley and Klobuchar are setting up a situation in which no loan with origination charges, including financed MI, of more than 3% will be eligible for sale. What this means, essentially, is that wholesale lending and the small mortgage brokers who are left will go out of business.
What is most interesting to me about this whole situation is that the key provisions of the financial reform bill and its amendments as they relate to mortgage lending are coming out of a study that the Center for Responsible Lending completed in April of 2008 regarding mortgage lending and subprime loans. Entitled, "Steered Wrong: Brokers, Borrowers, and Subprime Loans," the study asserted that mortgage brokers steered unsuspecting borrowers into high interest rate subprime loans. The study made three policy recommendations:
1. Ban yield spread premiums and prepayment penalties on subprime loans;
2. Create a system of accountability where lenders and investors share responsibility for brokered loans; and
3. Establish clear broker duties to their clients.
All of these policy recommendations are included in either the two financial reform bills HR 4173, SB 3217 or the amendments. Now, this is the interesting part. The recommendations were made regarding subprime loans. This same study concluded that prime brokered loans were no more expensive than retail loans and that for borrowers with better credit scores, brokered loans were an average of $900 to $1600 per $100,000 loan amount cheaper over the life of the loan as opposed to a retail loan. Today, there really is no subprime market left. However, the Center's anti-broker, anti-small business proposals are being codified into law with regard to all loans even though their own study showed that mortgage brokers were a more competitive choice than retail lenders on prime loans.
NAMB's talking points do assert that the Merkley Amendment "would treat origination channels differently, picking winners and losers in the mortgage industry." And that is really at the heart of this amendment; it is not about protecting the consumer. It is really just about squeezing out the competition.
A primary issue for the mortgage industry will likely be the Merkley/Klobuchar amendment, sponsored by Senators Merkley (D OR) and Klobuchar (D. MN). This amendment was introduced after business hours on a Tuesday evening and approved early the following Wednesday morning before industry groups had a chance to weigh in. Both the National Association of Mortgage Brokers and the Mortgage Bankers Association have expressed concerns about the amendment, although unquestionably, the mortgage broker community has the most to lose in this debate.
The Merkley/Klobuchar amendment is an eleven page document which both mandates that a consumer's ability to repay a loan be taken into consideration in underwriting a loan and at the same time caps originator compensation. The amendment bans the use of Yield Spread Premiums--the spread on interest rates--as compensation for a mortgage loan originator unless the mortgage loan originator is not receiving any other compensation. Yield Spread Premiums are used to reduce the amount of upfront fees that the consumer pays to get his mortgage loan by allowing the originator to be compensated through the rate.
Banks also earn a spread on the interest rates of loans which they sell, but the Merkley amendment expressly does not limit or prohibit these: "No provision in this subsection shall be construed as limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent loan purchaser."
The amendment mandates that determination of a consumer's ability to repay the loan must include, "consideration of the consumer's credit history, current income, expected income, current obligations, debt to income ratio, employment status," or financial resources other than the equity in the subject property.
Interestingly the amendment creates a safe harbor for compliance. A loan is presumed to be in compliance with this statute if the creditor has verified the consumer's ability to repay and used the maximum rate permitted under the loan during the first 5 years. However, the presumption of compliance cannot be applied to any loan where the total points and fees exceed 3%, which includes up to 1% of financed mortgage insurance or FHA premiums.
Industry lobbyists are going to argue that such a provision will make it almost impossible to originate loans under $150,000.00. However, they appear to be basically ignoring the blatantly anti-business nature of the amendment. Why does limiting total fees to 3% create a presumption of compliance for any mortgage loan? I once refinanced a loan that had been done with no charges at all by the previous loan originator who had financed the house a couple of years before. The previous loan originator had refinanced a real estate agent's home free of charge in the hopes of building a relationship with her. However, the loan had been done totally incorrectly and was actually illegal under the Texas Home Equity statute. So being free did not make it legal. (Actually, that was one of the factors that made it illegal because under RESPA no loan originator could render a service without charges in expectation of future business.) A low origination charge, or no origination charge, does not mean that the loan itself is affordable or that the consumer is going to make the payments, so to tie compensation to a safe harbor provision is ridiculous, particularly on a purchase loan where the consumer is taking on new debt and not financing his or her closing costs.
Having said that, the reality of the loan origination business is that conventional loans have to be salable to Fannie Mae and Freddie Mac, and they, therefore, have to be underwritten to comply to Fannie Mae and Freddie Mac guidelines. By creating a safe harbor that presumes compliance, Senators Merkley and Klobuchar are setting up a situation in which no loan with origination charges, including financed MI, of more than 3% will be eligible for sale. What this means, essentially, is that wholesale lending and the small mortgage brokers who are left will go out of business.
What is most interesting to me about this whole situation is that the key provisions of the financial reform bill and its amendments as they relate to mortgage lending are coming out of a study that the Center for Responsible Lending completed in April of 2008 regarding mortgage lending and subprime loans. Entitled, "Steered Wrong: Brokers, Borrowers, and Subprime Loans," the study asserted that mortgage brokers steered unsuspecting borrowers into high interest rate subprime loans. The study made three policy recommendations:
1. Ban yield spread premiums and prepayment penalties on subprime loans;
2. Create a system of accountability where lenders and investors share responsibility for brokered loans; and
3. Establish clear broker duties to their clients.
All of these policy recommendations are included in either the two financial reform bills HR 4173, SB 3217 or the amendments. Now, this is the interesting part. The recommendations were made regarding subprime loans. This same study concluded that prime brokered loans were no more expensive than retail loans and that for borrowers with better credit scores, brokered loans were an average of $900 to $1600 per $100,000 loan amount cheaper over the life of the loan as opposed to a retail loan. Today, there really is no subprime market left. However, the Center's anti-broker, anti-small business proposals are being codified into law with regard to all loans even though their own study showed that mortgage brokers were a more competitive choice than retail lenders on prime loans.
NAMB's talking points do assert that the Merkley Amendment "would treat origination channels differently, picking winners and losers in the mortgage industry." And that is really at the heart of this amendment; it is not about protecting the consumer. It is really just about squeezing out the competition.
Could 2010 See the End of Seller Financing?
With the implementation of the SAFE (Secure and Fair Enforcement) Act which was passed and signed into law in 2008 but is just now being fully implemented in 2010, the real estate industry could see the end of one of its reliable mainstays--seller financing. The reason is that the SAFE ACT requires that all independent mortgage originators must be federally licensed. Originators who are working for depository lending institutions have to be registered. The federal license requirements include testing, continuing education, criminal background checks and a financial stability test. No one is really certain what that last standard means. It certainly involves a credit check and proof that the originator's financial affairs are in order.
Since states each have individual licensing requirements, federal licensing requirements are mandated in addition to state requirements. For example, in Texas, loan originators are required to complete 20 hours of continuing education for their licenses and are subject to state audits. An originator receiving his or her initial license must pass a test. In Texas our state regulator has a recovery fund instead of a bond. To get completely set up in the new national system, we have to complete a test for the state of Texas and a federal test; we also need to have completed our number of hours of continuing education for Texas and then our annual continuing education for the federal licensure. We pay into the recovery fund for Texas, but we need a bond for the federal licensure.
So what does this have to do with seller financing? The authors of the SAFE ACT did not make provision for seller financing--which has become very important over the last few years as credit has become much more difficult to obtain. The bill's authors did not even provide for seller-carried second liens. So in order to carry a second lien on a home, a seller would need to be licensed both for his state and nationally, as the law now stands.
The real world implications of this are huge. For example, many investors bought a lot of properties during the real estate boom. If the investor needs to free up some cash, he might want to sell one of them. But suppose his buyer cannot qualify under the strict new terms. Traditionally, he could ask for a down payment and then have his attorney write up a note dictating the interest rate and the terms. The buyer could then pay him. This is no longer true--now the seller would have to complete all of the licensure requirements both for the state in which he lives and the federal government before being able to carry the paper on his house. As a licensed loan originator, he will become subject to audits and investigations from the soon to be created Bureau of Consumer Financial Protection.
Or, take the even more common example of the seller who wants to sell his home, but the buyer cannot qualify for more than 80% financing. The seller might agree to carry a 10% second so that the buyer has to put only 10% cash into the transaction as down payment. Under the traditional system, the buyer and seller would agree to the terms. Then the loan originator would present the loan amount of the second lien that the seller was willing to carry along with proposed interest rate and payment, to the lender who is underwriting the first lien. The first lien mortgage underwriter approves the entire transaction, and then reviews the final note and payment schedule for the second lien to make sure that the terms have not changed. If everything is acceptable the transaction closes.
Not under the new system, though. In order to carry a seller-second, the seller needs a federal and state license. Since sellers normally carry seconds only when they really need to sell, a prohibition on seller financing will create a genuine burden on sellers and another obstacle to getting home financing as we move toward the second half of the year.
Since states each have individual licensing requirements, federal licensing requirements are mandated in addition to state requirements. For example, in Texas, loan originators are required to complete 20 hours of continuing education for their licenses and are subject to state audits. An originator receiving his or her initial license must pass a test. In Texas our state regulator has a recovery fund instead of a bond. To get completely set up in the new national system, we have to complete a test for the state of Texas and a federal test; we also need to have completed our number of hours of continuing education for Texas and then our annual continuing education for the federal licensure. We pay into the recovery fund for Texas, but we need a bond for the federal licensure.
So what does this have to do with seller financing? The authors of the SAFE ACT did not make provision for seller financing--which has become very important over the last few years as credit has become much more difficult to obtain. The bill's authors did not even provide for seller-carried second liens. So in order to carry a second lien on a home, a seller would need to be licensed both for his state and nationally, as the law now stands.
The real world implications of this are huge. For example, many investors bought a lot of properties during the real estate boom. If the investor needs to free up some cash, he might want to sell one of them. But suppose his buyer cannot qualify under the strict new terms. Traditionally, he could ask for a down payment and then have his attorney write up a note dictating the interest rate and the terms. The buyer could then pay him. This is no longer true--now the seller would have to complete all of the licensure requirements both for the state in which he lives and the federal government before being able to carry the paper on his house. As a licensed loan originator, he will become subject to audits and investigations from the soon to be created Bureau of Consumer Financial Protection.
Or, take the even more common example of the seller who wants to sell his home, but the buyer cannot qualify for more than 80% financing. The seller might agree to carry a 10% second so that the buyer has to put only 10% cash into the transaction as down payment. Under the traditional system, the buyer and seller would agree to the terms. Then the loan originator would present the loan amount of the second lien that the seller was willing to carry along with proposed interest rate and payment, to the lender who is underwriting the first lien. The first lien mortgage underwriter approves the entire transaction, and then reviews the final note and payment schedule for the second lien to make sure that the terms have not changed. If everything is acceptable the transaction closes.
Not under the new system, though. In order to carry a seller-second, the seller needs a federal and state license. Since sellers normally carry seconds only when they really need to sell, a prohibition on seller financing will create a genuine burden on sellers and another obstacle to getting home financing as we move toward the second half of the year.
Free to Choose: Consumer Advocates Take on the Consumer
When ACORN's chief organizer, Bertha Lewis, speaking to a group of young people, told them that it takes courage to admit to being a socialist, no one in the mortgage community should have been surprised. We, after all, were used to dealing with ACORN and its constant complaints about the mortgage industry and the broker industry. Now ACORN is basically irrelevant--at least for this moment, but many other consumer advocacy groups have a powerful voice in Washington D.C. and they are setting policy which is affecting small business owners today and will affect all consumers of financial products in the near future after SB 3217 is reconciled with the House bill and then signed into law by the president (which is expected to happen by the fourth of July.)
Today I want to look at a study completed by the Center for Responsible Lending entitled "Steered Wrong: Brokers, Borrower, and Subprime Loans," which was published in April of 2008 and can be found on the Center for Responsible Lending's website at responsiblelending.org. I found this 54 page study and its findings fascinating, and I think in light of everything that is happening around us today, the study is worth sharing.
The study, which is filled with official looking charts and graphs and numerous algebraic equations, puts the blame for the mortgage meltdown squarely on the shoulders of mortgage brokers. The Center for Responsible Lending wants us to know that it is not loose lending practices, or Community Re-Investment Acts, or scant oversight of Fannie Mae and Freddie Mac which caused the problems--it was mortgage brokers by themselves, plus nothing.
The study claims that brokers steered borrowers into subprime mortgages who could have qualified for prime mortgages, and in doing so cost them additional fees and higher interest rates which ultimately caused their homes to go into foreclosure. To support this theory, the report cites a study comparing loans of similar interest rates some of which were originated by brokers and others by retail originators. Now, without actually seeing the data and the files themselves, it would be impossible to make a precise comparison, but I can tell you with all certainty that there are reasons besides greed and heartlessness that borrowers used to go to into subprime loans. For example, two borrowers might both have a 660 credit score. One of the borrowers might have this score because he paid a few accounts thirty days late last year, but he now has 12 months of timely payments for all accounts on his credit report. Assuming that his income qualified him for the loan, he could probably get an automated underwriting approval for a prime loan. However, the other borrower might have a 660 credit score because he had a four year old medical collection for $10,000 which he could not afford to pay. This borrower would not qualify for a prime loan even though his other credit might be fine, because prime loans required that collections be paid at closing. (Even at the height of laxness, Fannie Mae and Freddie Mac never allowed unpaid collections over $5000.00.) So that borrower could either wait three more years for the collection to drop off his credit, or he could take a subprime mortgage at a higher interest rate and plan to refinance later. The study does not appear to consider any factors other than just the credit score, the debt to income ratio, whether the loan was considered full documentation, etc.
Nestled in among the charts and graphs are paragraphs editorializing about the role of the broker: "Brokers react to market incentives predictably; they seek to maximize both the number of loans they originate and their revenue per loan. However, since charging too much per loan could drive away potential customers, brokers must find the optimal balance between these two factors. We posit that brokers shift this balance according to their perception of a customer's credit profile." (page 4). "Homebuyers and homeowners have therefore trusted their brokers as mortgage professionals to help them choose a suitable loan. This misplaced trust has likely been a factor in the current foreclosure crisis." (page 5).
The report acknowledges that all states license mortgage brokers and that licensing requirements include criminal background checks, bonding, and educational experience requirements. But, this is not sufficient, according to the report, because "licensing statutes act primarily as enforcement mechanisms for substantive protections but do not actually establish protections themselves." The report fails to mention that retail originators--with whom it compares the brokers--were not required to be licensed at all until the SAFE ACT was implemented. But it asserts that retail originators are more likely to treat borrowers more fairly because of reputational risk and federal and state auditing requirements.
"Importantly, though their customers routinely rely on them as experts to help select lenders and loan products, mortgage brokers often assert that they are independent contractors and not agents of either borrowers or lenders." (page 6) Mortgage brokers asserted that because states like Texas had a form which borrowers were required to sign that said that we were independent agents and not agents of the borrowers or lenders. This form was mandatory in every file, and it was meant to clarify to the consumer the relationship between the broker and borrower. But a very large part of Center for Responsible Lending's hypothesis is that borrowers cannot and should not be trusted to read and understand forms.
The report states that "rational choice theory...assumes that people faced with choices will choose the best option based on their own set of preferences and constraints." However, the Center does not agree. "A 2007 study by Harvard University researchers finds that borrowers have a limited ability to analyze and compare multiple, complex mortgage products. The study finds that the complexity of mortgage pricing hampers both the borrowers' ability to assess risk and to comparison shop."(page 7)
This is reminiscent of the current Assistant Secretary of the Treasury's writings as quoted by Senator Richard Shelby, "Disclosures are geared towards influencing the intention of the borrower to change his behavior; however, even if the disclosure succeeds in changing the borrower's intentions, we know that there is often a large gap between intentions and actions...Product regulation would also reduce cognitive and emotional pressures related to potentially bad decision making by reducing the number of choices." Translation: Consumers can't be trusted to make the best decisions for themselves, no matter how much disclosure they have, so regulators and consumer advocacy must protect the consumer by limiting their choices. And since mortgage brokers represent a "one-stop shop" which offers many choices to borrowers, they are bad.
Now to the fascinating part. According to this study, borrowers in prime loans get a better deal with a mortgage broker than they do with a retail originator. "Finding Four: Prime borrowers who obtained loans from brokers generally experienced no additional costs compared to retail...Generally stronger credit borrowers with brokered loans that carried lower LTV ratios experienced savings compared to their similarly situated counterparts who received retail loans...Table 9 shows that in general, prime borrowers who obtained loans from brokers experienced no additional costs compared to those who received their loans from a retail lender." (page 25).
It gets better. "In six DTI/LTV combinations associated with borrowers with stronger credit profiles (credit scores greater than 720) retail loans are actually more expensive in the higher FICO scores...In fact the one year results displayed in Table 7 show that brokered loans carry lower interest costs to even more subsets of borrowers." (page 25) "Meanwhile, for a few subsets of prime borrowers, brokers seem to deliver some savings, though the magnitude of these savings is quite modest, ranging from $900-$1600 per $100,000 borrowed over the loan term." (page 31).
Wait a minute! Brokers are cheaper on prime loans? Considering that today in 2010 there is no subprime lending, and only prime loans are available, that makes the broker channel the cheapest option for consumers, or in the worst case at least no more expensive than retail options based on the Center's own study. If we are cheapest, doesn't that also make us the best? Why then is Barney Frank calling for death panels for non-depository lenders? And why are all of the recommendations from this report to be used in connection with subprime loans which no longer exist being implemented today as part of financial reform? Why is the word "mortgage broker" almost an obscenity?
Because we repesent choice and personal responsibility. Brokers offer choices, and in a world where borrowers are not trusted to read and understand disclosures and make their own choices, agents of choice must be done away with. The consumer is no longer free to choose and the business person is no longer free to offer choices, because people with choices will sometimes make the wrong ones. But they also have the opportunity to take risks, and to make choices that will move their lives forward.
The Bureau of Consumer Financial Protection's mandate is to give consumer advocacy groups such as ACORN, the Center for Responsible Lending, and myriad other groups who have signed onto Americans for Financial Reform a seat at the table when creating new rules that govern lending, disclosures and policies as it regulates brokers and banks. And since the Bureau's budget is entirely discretionary, they can fund whatever agencies and organizations they like, which means that we might even see a resurrected, fully funded ACORN back in the spotlight.
Today I want to look at a study completed by the Center for Responsible Lending entitled "Steered Wrong: Brokers, Borrower, and Subprime Loans," which was published in April of 2008 and can be found on the Center for Responsible Lending's website at responsiblelending.org. I found this 54 page study and its findings fascinating, and I think in light of everything that is happening around us today, the study is worth sharing.
The study, which is filled with official looking charts and graphs and numerous algebraic equations, puts the blame for the mortgage meltdown squarely on the shoulders of mortgage brokers. The Center for Responsible Lending wants us to know that it is not loose lending practices, or Community Re-Investment Acts, or scant oversight of Fannie Mae and Freddie Mac which caused the problems--it was mortgage brokers by themselves, plus nothing.
The study claims that brokers steered borrowers into subprime mortgages who could have qualified for prime mortgages, and in doing so cost them additional fees and higher interest rates which ultimately caused their homes to go into foreclosure. To support this theory, the report cites a study comparing loans of similar interest rates some of which were originated by brokers and others by retail originators. Now, without actually seeing the data and the files themselves, it would be impossible to make a precise comparison, but I can tell you with all certainty that there are reasons besides greed and heartlessness that borrowers used to go to into subprime loans. For example, two borrowers might both have a 660 credit score. One of the borrowers might have this score because he paid a few accounts thirty days late last year, but he now has 12 months of timely payments for all accounts on his credit report. Assuming that his income qualified him for the loan, he could probably get an automated underwriting approval for a prime loan. However, the other borrower might have a 660 credit score because he had a four year old medical collection for $10,000 which he could not afford to pay. This borrower would not qualify for a prime loan even though his other credit might be fine, because prime loans required that collections be paid at closing. (Even at the height of laxness, Fannie Mae and Freddie Mac never allowed unpaid collections over $5000.00.) So that borrower could either wait three more years for the collection to drop off his credit, or he could take a subprime mortgage at a higher interest rate and plan to refinance later. The study does not appear to consider any factors other than just the credit score, the debt to income ratio, whether the loan was considered full documentation, etc.
Nestled in among the charts and graphs are paragraphs editorializing about the role of the broker: "Brokers react to market incentives predictably; they seek to maximize both the number of loans they originate and their revenue per loan. However, since charging too much per loan could drive away potential customers, brokers must find the optimal balance between these two factors. We posit that brokers shift this balance according to their perception of a customer's credit profile." (page 4). "Homebuyers and homeowners have therefore trusted their brokers as mortgage professionals to help them choose a suitable loan. This misplaced trust has likely been a factor in the current foreclosure crisis." (page 5).
The report acknowledges that all states license mortgage brokers and that licensing requirements include criminal background checks, bonding, and educational experience requirements. But, this is not sufficient, according to the report, because "licensing statutes act primarily as enforcement mechanisms for substantive protections but do not actually establish protections themselves." The report fails to mention that retail originators--with whom it compares the brokers--were not required to be licensed at all until the SAFE ACT was implemented. But it asserts that retail originators are more likely to treat borrowers more fairly because of reputational risk and federal and state auditing requirements.
"Importantly, though their customers routinely rely on them as experts to help select lenders and loan products, mortgage brokers often assert that they are independent contractors and not agents of either borrowers or lenders." (page 6) Mortgage brokers asserted that because states like Texas had a form which borrowers were required to sign that said that we were independent agents and not agents of the borrowers or lenders. This form was mandatory in every file, and it was meant to clarify to the consumer the relationship between the broker and borrower. But a very large part of Center for Responsible Lending's hypothesis is that borrowers cannot and should not be trusted to read and understand forms.
The report states that "rational choice theory...assumes that people faced with choices will choose the best option based on their own set of preferences and constraints." However, the Center does not agree. "A 2007 study by Harvard University researchers finds that borrowers have a limited ability to analyze and compare multiple, complex mortgage products. The study finds that the complexity of mortgage pricing hampers both the borrowers' ability to assess risk and to comparison shop."(page 7)
This is reminiscent of the current Assistant Secretary of the Treasury's writings as quoted by Senator Richard Shelby, "Disclosures are geared towards influencing the intention of the borrower to change his behavior; however, even if the disclosure succeeds in changing the borrower's intentions, we know that there is often a large gap between intentions and actions...Product regulation would also reduce cognitive and emotional pressures related to potentially bad decision making by reducing the number of choices." Translation: Consumers can't be trusted to make the best decisions for themselves, no matter how much disclosure they have, so regulators and consumer advocacy must protect the consumer by limiting their choices. And since mortgage brokers represent a "one-stop shop" which offers many choices to borrowers, they are bad.
Now to the fascinating part. According to this study, borrowers in prime loans get a better deal with a mortgage broker than they do with a retail originator. "Finding Four: Prime borrowers who obtained loans from brokers generally experienced no additional costs compared to retail...Generally stronger credit borrowers with brokered loans that carried lower LTV ratios experienced savings compared to their similarly situated counterparts who received retail loans...Table 9 shows that in general, prime borrowers who obtained loans from brokers experienced no additional costs compared to those who received their loans from a retail lender." (page 25).
It gets better. "In six DTI/LTV combinations associated with borrowers with stronger credit profiles (credit scores greater than 720) retail loans are actually more expensive in the higher FICO scores...In fact the one year results displayed in Table 7 show that brokered loans carry lower interest costs to even more subsets of borrowers." (page 25) "Meanwhile, for a few subsets of prime borrowers, brokers seem to deliver some savings, though the magnitude of these savings is quite modest, ranging from $900-$1600 per $100,000 borrowed over the loan term." (page 31).
Wait a minute! Brokers are cheaper on prime loans? Considering that today in 2010 there is no subprime lending, and only prime loans are available, that makes the broker channel the cheapest option for consumers, or in the worst case at least no more expensive than retail options based on the Center's own study. If we are cheapest, doesn't that also make us the best? Why then is Barney Frank calling for death panels for non-depository lenders? And why are all of the recommendations from this report to be used in connection with subprime loans which no longer exist being implemented today as part of financial reform? Why is the word "mortgage broker" almost an obscenity?
Because we repesent choice and personal responsibility. Brokers offer choices, and in a world where borrowers are not trusted to read and understand disclosures and make their own choices, agents of choice must be done away with. The consumer is no longer free to choose and the business person is no longer free to offer choices, because people with choices will sometimes make the wrong ones. But they also have the opportunity to take risks, and to make choices that will move their lives forward.
The Bureau of Consumer Financial Protection's mandate is to give consumer advocacy groups such as ACORN, the Center for Responsible Lending, and myriad other groups who have signed onto Americans for Financial Reform a seat at the table when creating new rules that govern lending, disclosures and policies as it regulates brokers and banks. And since the Bureau's budget is entirely discretionary, they can fund whatever agencies and organizations they like, which means that we might even see a resurrected, fully funded ACORN back in the spotlight.
Big Brother is Watching III
Yesterday the Senate voted not to end debate on SB 3217, which means that interested Americans still have time to call and email their candidates and weigh in on the Financial Reform Bill. We are going to devote today and tomorrow to the specific details of a key provision of this bill: the creation of the Bureau of Consumer Financial Protection. I believe that this will come to be one of the most important, and intrusive, agencies established in the history of the United States. Since SB 3217 gives this agency almost unchecked power over the lending industry and the American Consumer, I think it is wise to look at who they will be and what they will do.
First of all, what exactly is the bureau? Under the provisions of the bill, the Bureau of Consumer Financial Protection will be established within the Federal Reserve System, and it shall "regulate the offering and provision of consumer financial products or services under Federal Consumer financial laws." The Bureau will have a director who will be appointed by the President of the United States and confirmed by the Senate who will serve a five year term. There will also be a Deputy Director appointed by the Director.
Although the Bureau is established within the Federal Reserve, the bill states that "no rule or order of the Bureau shall be subject to approval or review by the Board of Governors [of the Federal Reserve]. The Board of Governors may not delay or prevent the issuance of any rule or order of of the Bureau." Further, the Agency does not answer to any other agency or official in the government as stated on page 1211 (4): No officer or agency of the United States shall have any authority to require the Director or any other officer of the Bureau to submit legislative recommendations, or testimony, or comments on legislation, to any officer or agency of the United States for approval, comments, or review prior to the submission of such recommendations, testimony or comments to Congress," as long as the Director includes a statement that his views and recommendations are his own and not those of the President or the Board of Governors of the Federal Reserve.
The bureau is to be established no earlier than 180 days and no later than 18 months after the bill is enacted into law. If for any reason, all of the provisions cannot be enacted within this time frame, the Secretary of the Treasury may designate a later date with Congressional permission if he explains in writing why the original date is not feasible, why the extension is necessary, and what steps he is taking to make sure that implementation of this act will happen during the extension period.
The new Bureau of Consumer Financial Protection will then take on all of the consumer financial protection functions of the following agencies:
the Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Office of Thrift Supervision (as an aside, SB 3217 in section 341 halts the office of Thrift Supervision and the Office of the Comptroller of the Currency from issuing any new Federal Savings Association Charters effective the date of the enactment of this bill.) The Bureau also assumes all of the consumer financial protection powers and duties of the FDIC, the Federal Trade Commission, (although the FTC is still allowed to regulate a few select industries), the National Credit Union Administration, and the Department of Housing and Urban Development (HUD). Specifically, the bill takes oversight for enforcing the Real Estate Settlement Procedures Act (RESPA) and the Secure and Fair Enforcement Act (the national licensure for loan originators known by the acronym SAFE) and turns oversight and enforcement of these two Acts over to the new Bureau.
The statute also creates The Office of Fair Lending and Equal Opportunity, which will have whatever powers and duties are assigned to them by the Director of the Bureau. The Office will oversee and enforce Federal laws to ensure, fair, equitable and non discriminatory access to credit, coordinate fair lending and fair housing efforts with the Bureau and other agencies.
The bill gives the Director the Bureau of Consumer Financial Protection a seat as Vice Chairman of the Financial Literacy and Education Commission.
As part of this bill, a separate fund will be established in the Federal Reserve Board, called the "Consumer Financial Protection Fund". All amounts transferred to the Bureau will be deposited into this fund. Any funds that are not deemed necessary for operation of the Bureau can invested by the Board of Governors of the Federal Reserve. The statute creates a separate civil penalty fund for deposits gleaned from Civil Penalties (as as we will see tomorrow, they plan on having plenty of money to invest).
Whom can they regulate? Any organization in the credit business. The current amendments specifically exclude businesses such as dentists, jewelers and the businesses that extend credit as part of selling a good or service that is not credit related. For example, furniture stores would not be covered as the bill is currently written because they offer credit only to enable them to sell the sofa sectional. The bill excludes real estate agents and brokers, manufactured and modular home retailers, and persons covered by state insurance regulators. It also gives the Director of the Bureau power to exempt any class of persons, or service providers, or consumer financial products or services, from any provision of the bill or any rule issued under the bill as the Bureau sees fit.
In addition to all banking entities and credit unions and the few savings institutions that remain, all non depository lending institutions are covered. This includes, anyone who "offers or provides origination, brokerage, or servicing of loans secured by real estate for personal, family or household purposes, or loan modification or foreclosure relief services...or is a larger participant of a market for other consumer financial products or services."
Within 1 year of the enactment of this statute, the Director is to present a list of "covered persons" whom the Bureau will regulate. The Bureau also the power to regulate service providers to any covered persons.
What do they do? The statute gives the Bureau exclusive rule making authority and exclusive enforcement authority over the entities they regulate. Tomorrow, we will look at that in detail.
First of all, what exactly is the bureau? Under the provisions of the bill, the Bureau of Consumer Financial Protection will be established within the Federal Reserve System, and it shall "regulate the offering and provision of consumer financial products or services under Federal Consumer financial laws." The Bureau will have a director who will be appointed by the President of the United States and confirmed by the Senate who will serve a five year term. There will also be a Deputy Director appointed by the Director.
Although the Bureau is established within the Federal Reserve, the bill states that "no rule or order of the Bureau shall be subject to approval or review by the Board of Governors [of the Federal Reserve]. The Board of Governors may not delay or prevent the issuance of any rule or order of of the Bureau." Further, the Agency does not answer to any other agency or official in the government as stated on page 1211 (4): No officer or agency of the United States shall have any authority to require the Director or any other officer of the Bureau to submit legislative recommendations, or testimony, or comments on legislation, to any officer or agency of the United States for approval, comments, or review prior to the submission of such recommendations, testimony or comments to Congress," as long as the Director includes a statement that his views and recommendations are his own and not those of the President or the Board of Governors of the Federal Reserve.
The bureau is to be established no earlier than 180 days and no later than 18 months after the bill is enacted into law. If for any reason, all of the provisions cannot be enacted within this time frame, the Secretary of the Treasury may designate a later date with Congressional permission if he explains in writing why the original date is not feasible, why the extension is necessary, and what steps he is taking to make sure that implementation of this act will happen during the extension period.
The new Bureau of Consumer Financial Protection will then take on all of the consumer financial protection functions of the following agencies:
the Board of Governors of the Federal Reserve, the Comptroller of the Currency, and the Office of Thrift Supervision (as an aside, SB 3217 in section 341 halts the office of Thrift Supervision and the Office of the Comptroller of the Currency from issuing any new Federal Savings Association Charters effective the date of the enactment of this bill.) The Bureau also assumes all of the consumer financial protection powers and duties of the FDIC, the Federal Trade Commission, (although the FTC is still allowed to regulate a few select industries), the National Credit Union Administration, and the Department of Housing and Urban Development (HUD). Specifically, the bill takes oversight for enforcing the Real Estate Settlement Procedures Act (RESPA) and the Secure and Fair Enforcement Act (the national licensure for loan originators known by the acronym SAFE) and turns oversight and enforcement of these two Acts over to the new Bureau.
The statute also creates The Office of Fair Lending and Equal Opportunity, which will have whatever powers and duties are assigned to them by the Director of the Bureau. The Office will oversee and enforce Federal laws to ensure, fair, equitable and non discriminatory access to credit, coordinate fair lending and fair housing efforts with the Bureau and other agencies.
The bill gives the Director the Bureau of Consumer Financial Protection a seat as Vice Chairman of the Financial Literacy and Education Commission.
As part of this bill, a separate fund will be established in the Federal Reserve Board, called the "Consumer Financial Protection Fund". All amounts transferred to the Bureau will be deposited into this fund. Any funds that are not deemed necessary for operation of the Bureau can invested by the Board of Governors of the Federal Reserve. The statute creates a separate civil penalty fund for deposits gleaned from Civil Penalties (as as we will see tomorrow, they plan on having plenty of money to invest).
Whom can they regulate? Any organization in the credit business. The current amendments specifically exclude businesses such as dentists, jewelers and the businesses that extend credit as part of selling a good or service that is not credit related. For example, furniture stores would not be covered as the bill is currently written because they offer credit only to enable them to sell the sofa sectional. The bill excludes real estate agents and brokers, manufactured and modular home retailers, and persons covered by state insurance regulators. It also gives the Director of the Bureau power to exempt any class of persons, or service providers, or consumer financial products or services, from any provision of the bill or any rule issued under the bill as the Bureau sees fit.
In addition to all banking entities and credit unions and the few savings institutions that remain, all non depository lending institutions are covered. This includes, anyone who "offers or provides origination, brokerage, or servicing of loans secured by real estate for personal, family or household purposes, or loan modification or foreclosure relief services...or is a larger participant of a market for other consumer financial products or services."
Within 1 year of the enactment of this statute, the Director is to present a list of "covered persons" whom the Bureau will regulate. The Bureau also the power to regulate service providers to any covered persons.
What do they do? The statute gives the Bureau exclusive rule making authority and exclusive enforcement authority over the entities they regulate. Tomorrow, we will look at that in detail.
Big Brother is Watching
I love reading government bills. I really do, because as I slog through thousands of pages of gibberish, I get a real sense of where we are headed as a country. For instance, take amendment 3739 to Senate Bill 3217. The amendment--which is presented as a replacement for the bill, offered by Harry Reid (D NV) on April 29, 2010, defines its intentions in the first paragraph, "To promote financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' and to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." It is the "other purposes" that really shine through in this 1566 page piece of bloated legislation.
In its first three hundred pages, SB 3217 (as presented in the amendment) creates at least 4 new regulatory authorities. We have the Office of National Insurance which will work with state regulators to oversee all lines of insurance in the United States except health insurance--which is specifically excluded. This office will "receive and collect data and information on and from the insurance industry and insurers, enter into information sharing agreements, analyze and disseminate data and information, and issue reports regarding all lines of insurance except health insurance."
We have the Financial Stability Oversight Council which will be established effective the date of the enactment of the new financial services bill. The Council will be comprised of the Secretary of the Treasury, who will be the chairperson, the Fed Reserve Chair, the Comptroller of the Currency, the Chairperson of FDIC, the Chairperson of the Commodities Future Trading Commission, the director of the Bureau of Consumer Financial Protection, which the bill also creates, the Chair of the SEC, and one other member appointed by the President. The board members will serve six year terms.
We also have the Office of Financial Research, which will conduct research on insured depository institutions (banks) and insurance companies. Section 155 establishes the financial research fund which is to be a separate fund within the United States Treasury. All monies coming into the Office of Financial Research shall be deposited into the fund. Amounts over the amount that the Director of the Office of Financial Research believes are necessary to run the agency may be invested with the consent of the Secretary of the Treasury. Interestingly, the bill states that "Funds obtained by, transferred to, or credited to the Financial Research Fund shall not be construed to be Government funds or appropriated monies." Where is all of this money going to come from? For the first two years, the Board of Governors of the Federal Reserve is to allocate enough monies to cover the office's expenses, but beginning two years after the law goes into effect, the Treasury Secretary is going to establish a schedule of fees for bank holding companies and non bank financial companies. It is interesting that the government is planning its financial portfolio for an agency that does not yet exist at a time when so many Americans can't even find a job.
Moving on, SB 3217, as amended, creates an Orderly Liquidation Authority Panel. The Orderly Liquidation Authority Panel consists of 3 judges from the United States Bankruptcy Court in Delaware. These are appointed by the Chief Judge of the U.S. Bankruptcy Court in Delaware, who is supposed to take into consideration the financial expertise of each judge in making his appointments.
The Orderly Liquidation Authority Panel is designed to speed up the process of getting rid of lenders who could be a danger to society. Here's how it works: the Secretary of the Treasury determines that a financial company is in default or in danger of default. The Treasury Secretary then petitions the Panel for an order authorizing the Secretary to appoint the FDIC as the receiver. The petition is to be strictly confidential--in fact the penalty for disclosing a petition or pending court proceedings is up to a $250,000 fine or 5 years in prison or both. The company in jeopardy is to be notified, and they have the right to oppose the petition. The Panel is to review the Secretary's petition and supporting evidence, which is supposed to be "substantial", that the financial company is in default or in danger of default. Within 24 hours, the Panel is to make a decision about whether to take the company into receivership. The Panel's decision is final, although it can be appealed through the Court of Appeals and within 30 days of their ruling can be appealed to the Supreme Court of the United States if they choose to hear the case. However, SB 3217 states specifically that the Supreme Court is limited in their ruling as to whether the Secretary's determination that the covered financial company is in default was supported by substantial evidence.
The bill states that no stay or injunction pending appeal is possible. If the Panel's finding is that the financial institution must be turned over to the FDIC, there is no recourse.
If the Panel finds that the Secretary of the Treasury did not provide substantial evidence that the financial institution is in danger of default, within 24 hours they are to provide him with a written statement of each reason that it was not supported and allow him to immediately amend his petition and refile.
Creating an enormous bureaucracy and giving Tim Geithner and whoever his successors may be life and death power over financial institutions may be part of the "other purposes" as defined in the first paragraph of the bill, but it certainly is not part of a system which fosters respect for free enterprise and private ownership of business.
In its first three hundred pages, SB 3217 (as presented in the amendment) creates at least 4 new regulatory authorities. We have the Office of National Insurance which will work with state regulators to oversee all lines of insurance in the United States except health insurance--which is specifically excluded. This office will "receive and collect data and information on and from the insurance industry and insurers, enter into information sharing agreements, analyze and disseminate data and information, and issue reports regarding all lines of insurance except health insurance."
We have the Financial Stability Oversight Council which will be established effective the date of the enactment of the new financial services bill. The Council will be comprised of the Secretary of the Treasury, who will be the chairperson, the Fed Reserve Chair, the Comptroller of the Currency, the Chairperson of FDIC, the Chairperson of the Commodities Future Trading Commission, the director of the Bureau of Consumer Financial Protection, which the bill also creates, the Chair of the SEC, and one other member appointed by the President. The board members will serve six year terms.
We also have the Office of Financial Research, which will conduct research on insured depository institutions (banks) and insurance companies. Section 155 establishes the financial research fund which is to be a separate fund within the United States Treasury. All monies coming into the Office of Financial Research shall be deposited into the fund. Amounts over the amount that the Director of the Office of Financial Research believes are necessary to run the agency may be invested with the consent of the Secretary of the Treasury. Interestingly, the bill states that "Funds obtained by, transferred to, or credited to the Financial Research Fund shall not be construed to be Government funds or appropriated monies." Where is all of this money going to come from? For the first two years, the Board of Governors of the Federal Reserve is to allocate enough monies to cover the office's expenses, but beginning two years after the law goes into effect, the Treasury Secretary is going to establish a schedule of fees for bank holding companies and non bank financial companies. It is interesting that the government is planning its financial portfolio for an agency that does not yet exist at a time when so many Americans can't even find a job.
Moving on, SB 3217, as amended, creates an Orderly Liquidation Authority Panel. The Orderly Liquidation Authority Panel consists of 3 judges from the United States Bankruptcy Court in Delaware. These are appointed by the Chief Judge of the U.S. Bankruptcy Court in Delaware, who is supposed to take into consideration the financial expertise of each judge in making his appointments.
The Orderly Liquidation Authority Panel is designed to speed up the process of getting rid of lenders who could be a danger to society. Here's how it works: the Secretary of the Treasury determines that a financial company is in default or in danger of default. The Treasury Secretary then petitions the Panel for an order authorizing the Secretary to appoint the FDIC as the receiver. The petition is to be strictly confidential--in fact the penalty for disclosing a petition or pending court proceedings is up to a $250,000 fine or 5 years in prison or both. The company in jeopardy is to be notified, and they have the right to oppose the petition. The Panel is to review the Secretary's petition and supporting evidence, which is supposed to be "substantial", that the financial company is in default or in danger of default. Within 24 hours, the Panel is to make a decision about whether to take the company into receivership. The Panel's decision is final, although it can be appealed through the Court of Appeals and within 30 days of their ruling can be appealed to the Supreme Court of the United States if they choose to hear the case. However, SB 3217 states specifically that the Supreme Court is limited in their ruling as to whether the Secretary's determination that the covered financial company is in default was supported by substantial evidence.
The bill states that no stay or injunction pending appeal is possible. If the Panel's finding is that the financial institution must be turned over to the FDIC, there is no recourse.
If the Panel finds that the Secretary of the Treasury did not provide substantial evidence that the financial institution is in danger of default, within 24 hours they are to provide him with a written statement of each reason that it was not supported and allow him to immediately amend his petition and refile.
Creating an enormous bureaucracy and giving Tim Geithner and whoever his successors may be life and death power over financial institutions may be part of the "other purposes" as defined in the first paragraph of the bill, but it certainly is not part of a system which fosters respect for free enterprise and private ownership of business.
Every Loan a Government Loan Part I
Within the last couple of weeks, the Federal Housing Administration (FHA) released guidelines regarding new rules for allowing smaller lenders and mortgage brokers to originate FHA loans. The new rules raise the minimum net worth for approved lenders from $250,000 to $1,000,000. Within three years the net worth requirement will increase to $1,000,000 plus "1% of the total loan volume in excess of $25,000,000". (Source Scotsman's Guide Volume 17 Issue 5).
For small business owners and brokers this is a huge shift. Originating FHA loans has long been a problem for extremely small brokers and originators because FHA required that the broker be FHA approved, meet net worth requirements and complete an annual audit which was very expensive. For individual companies who chose to do the work and pay the expense of approval, the ability to offer FHA gave them a distinct competitive advantage. However, over the past decade, FHA use had steadily declined. FHA, which required a 3% downpayment, did not compete favorably with conventional loan programs offered at 100% financing through Fannie Mae and Freddie Mac. These loan programs utilized private mortgage insurance, but they allowed more flexibility in appraisals than an FHA loan. Most importantly, they were readily available; any originator who sold loans to lenders who sold to Fannie Mae and Freddie Mac--which was basically everyone--offered conventional products. To compete with the other products on the market, lenders offering FHA tried to partner their 97% loan with downpayment assistance programs. But by 2005, FHA loans comprised only about 2% of the market.
Today however, government loans make up approximately 50% of all purchase applications. In a world where conventional loans require a minimum of 5%, and in most cases 10% or 20% down to secure financing, FHA, VA (Veterans' Administration loans) and USDA (US Department of Agricultural Rural Housing loans) have again become attractive options for homebuyers who want to get into the housing market but have not been able to save a downpayment.
But is the shift to government loans a good thing? According to David Stevens, Commissioner of the Federal Housing Administration in an interview that he gave to the Scotman's Guide in January of 2010, "We shouldn't be growing this fast." FHA's congressionally mandated reserve requirements have fallen below the required levels, leading some economists to argue that Congress will end up having to authorize a bailout for FHA. And according to Stevens, the FHA program was never designed to handle the type of volume it is doing today.
So what does this mean in terms of small business? No one is quite sure yet. The new capitalization requirements will exclude some smaller lenders who will not be able to meet the reserve requirements. Mortgage brokers who have always offered FHA are displeased with the changes because they have worked and sacrificed to meet the reserve requirements to offer a program that they will now be able to offer only by partnering with a major lender. Small brokers who have never been able to offer FHA hold out hope that by partnering with a lender who is willing to sponsor them, they will be able to offer FHA for the first time, but we are all aware of the warnings--by making the lenders completely responsible for the actions of each broker they sponsor, HUD (The department of Housing and Urban Development) may have killed any chance that any of us have to close FHA loans. According to Stevens, in his January interview, FHA's main plan to curb losses is to hold lenders accountable if they originate loans outside of FHA guidelines. Now that will include holding them responsible for the loans originated by brokers as well. And if that is, indeed, the case, the biggest source of financing for first time homebuyers and repeat purchasers may have just been taken away from small business owners and given exclusively to the bigger players. As refinances end due to rising interest rates, all originators will be competing fiercely for purchase loans and FHA will be an ever more important part of that competition.
The answer to this problem ultimately lies in the private sector, a fact which Stevens acknowledges as he tells Scotman's Guide that the ultimate solution is to get private capital back into the market so that FHA loans can return to their historic levels. In the end, private, free market solutions and make sense loans can meet the needs of the homebuyers and prevent Uncle Sam from having to bailout himself.
For small business owners and brokers this is a huge shift. Originating FHA loans has long been a problem for extremely small brokers and originators because FHA required that the broker be FHA approved, meet net worth requirements and complete an annual audit which was very expensive. For individual companies who chose to do the work and pay the expense of approval, the ability to offer FHA gave them a distinct competitive advantage. However, over the past decade, FHA use had steadily declined. FHA, which required a 3% downpayment, did not compete favorably with conventional loan programs offered at 100% financing through Fannie Mae and Freddie Mac. These loan programs utilized private mortgage insurance, but they allowed more flexibility in appraisals than an FHA loan. Most importantly, they were readily available; any originator who sold loans to lenders who sold to Fannie Mae and Freddie Mac--which was basically everyone--offered conventional products. To compete with the other products on the market, lenders offering FHA tried to partner their 97% loan with downpayment assistance programs. But by 2005, FHA loans comprised only about 2% of the market.
Today however, government loans make up approximately 50% of all purchase applications. In a world where conventional loans require a minimum of 5%, and in most cases 10% or 20% down to secure financing, FHA, VA (Veterans' Administration loans) and USDA (US Department of Agricultural Rural Housing loans) have again become attractive options for homebuyers who want to get into the housing market but have not been able to save a downpayment.
But is the shift to government loans a good thing? According to David Stevens, Commissioner of the Federal Housing Administration in an interview that he gave to the Scotman's Guide in January of 2010, "We shouldn't be growing this fast." FHA's congressionally mandated reserve requirements have fallen below the required levels, leading some economists to argue that Congress will end up having to authorize a bailout for FHA. And according to Stevens, the FHA program was never designed to handle the type of volume it is doing today.
So what does this mean in terms of small business? No one is quite sure yet. The new capitalization requirements will exclude some smaller lenders who will not be able to meet the reserve requirements. Mortgage brokers who have always offered FHA are displeased with the changes because they have worked and sacrificed to meet the reserve requirements to offer a program that they will now be able to offer only by partnering with a major lender. Small brokers who have never been able to offer FHA hold out hope that by partnering with a lender who is willing to sponsor them, they will be able to offer FHA for the first time, but we are all aware of the warnings--by making the lenders completely responsible for the actions of each broker they sponsor, HUD (The department of Housing and Urban Development) may have killed any chance that any of us have to close FHA loans. According to Stevens, in his January interview, FHA's main plan to curb losses is to hold lenders accountable if they originate loans outside of FHA guidelines. Now that will include holding them responsible for the loans originated by brokers as well. And if that is, indeed, the case, the biggest source of financing for first time homebuyers and repeat purchasers may have just been taken away from small business owners and given exclusively to the bigger players. As refinances end due to rising interest rates, all originators will be competing fiercely for purchase loans and FHA will be an ever more important part of that competition.
The answer to this problem ultimately lies in the private sector, a fact which Stevens acknowledges as he tells Scotman's Guide that the ultimate solution is to get private capital back into the market so that FHA loans can return to their historic levels. In the end, private, free market solutions and make sense loans can meet the needs of the homebuyers and prevent Uncle Sam from having to bailout himself.
Death Panels for Small Business Owners Part III
When I started originating mortgages in 1998, Texas did not have a mortgage licensing law. A person who wanted to start a business just went out and got started. In my case, I cashed in an IRA and with $10,000, subleased two tiny offices from a local attorney, which he agreed to lease to us furnished to include electricity and the use of the typewriter, for $245.00 per month. The offices were part of the attorney's suite of offices in a building he owned, but they had a private entrance. I did not have cell phone; I had a beeper. I could not afford a copy machine, so I took the mortgage loan files to Kinkos to get them ready before I sent them overnight to the investors. Over the summer I was able to pay cash for a fax (my father, who was my business partner, split the cost with me) and on the fax we could also make a one page copy if we needed one. Downstairs in the parking lot was a pay phone. If for any reason my phone was not working in the office--or during the week that I had the phone company install some additional lines--I stood outside in the parking lot to make my phone calls. I carried a small styrofoam ice chest to work each day with lunch and sodas, since we did not have a refrigerator. A computer was completely out of the question--I bought a good quality Hewlitt Packard financial calculator and learned to calculate APRs with that.
The first day that we signed our lease, we were referred to a good attorney who helped us incorporate, and I went out and started originating loans. I did not know what I was doing, but I was willing to work hard and eager to learn. My father had a list of investors he had worked with in his previous job, and I contacted each of them, and most of them agreed to sign us up.
To get our New Mexico license (since we are right on the state line it made sense to have both licenses) we had to have a financial statement, but of course, we had no money at all. My father had an acquaintance who was a CPA and he agreed to prepare our financial statement. At the end of the financial statement, in his notes, he wrote, "This company probably will not be open a year." I was furious; I did not think prognostication was the duty of a CPA. I threw a fit and then threw away the financial statement. I then went to see a CPA who was an acquaintance of mine. He prepared a financial statement without the personal commentary, and we found a company here in town who would write a surety bond for us. What we had was very little, but it was enough for the state of New Mexico to give us a license.
We stayed in that space for 22 months. During those months, I went to open houses and to every community meeting I could find. I took the time and effort to get to know everyone in the industry I could. I joined the Texas Association of Mortgage Brokers one year before they started a local chapter so that I could learn about my industry. I originated my first loan within days after signing my lease, and I closed it two and a half months after we opened the office. Over the months that followed, I originated more loans and I signed a factoring account for a local company that brought in some income. I picked up a builder who did affordable housing on the Eastside as a client (that was when housing truly was affordable and we had houses in the $45,000 to $75,000 range). By the time my lease was up and I had to look for new offices, I had been able to purchase a small refrigerator!
We opened Frontier 2000 Mortgage & Loan 12 years ago last month. As I look at the changes to the regulatory landscape today, I am most struck by the fact that a person today would not be able to do what we did then because of massive regulation. Most argue that the regulation is necessary to prevent another meltdown, but the regulation that exists today really impedes the small entrepreneur who wants a chance to prove that he or she can work for themselves, take care of their families, and contribute to the tax base and the local economy.
In 1999, Texas did introduce a licensing law. The law that they passed required that a broker (who would be responsible for the actions of the company) had to have a degree in business and 18 months of experience or three years experience as a loan officer. I had a master's degree in history, but that did not count, so I got an insurance license because persons holding an active insurance license satisfied the experience requirements of the law. So did a law license, or an active license as a real estate broker. We also had to have a surety bond. We made sure that we had everything ready to be fully compliant on January 1, 2000.
In 2003, Texas introduced a testing component to their law. A new loan officer coming in had to be able to pass a test in order to get the license. The test cost some money and the training to get ready for the test cost money; however, those of us who were already licensed who did not have any actions against us were grandfathered in so we did not have to retest. We had to take continuing education courses of 15 hours every two years, including a course on ethics, unless we held an active license in one of the other professions described above, and in that case we could use the continuing education required for our other license to meet the requirements. We had random audits by the state which involved the state sending a letter and informing that they would be coming to our offices on a given date and inspecting our files. We were required to keep a log of all of the loans applications we took and the disposition of those loans so that when the auditor arrived, he could choose the files he wanted to see from the list. (This would have been a great hardship when I was getting started, but fortunately in 2003 we moved into a building with on-site storage.) The state contacted us with any complaints and mediated consumer problems. We were required to have a bond for Texas and New Mexico and to pay fees to each state. We were fingerprinted and had our backgrounds checked by the FBI.
A few years later, the state introduced an entity license. Not only were we as individual originators licensed individually by the state, but our corporation had to be licensed also. This, naturally, meant more fees.
Our regulator, the Texas Department of Savings and Mortgage Lending, understood that as small business people we were not made of money, so they worked to keep the fees reasonable. Further, because their department was required to be self-sustaining within the state and was responsible for raising its own budget, they had an interest in trying to help small business stay alive and stay compliant. They communicated with us through emails and letters. The auditors were polite and professional and sent us a copy of our audit in a timely manner. Firms which were not complying with the laws could have their licenses suspended or revoked.
In 2008, after the real estate crash, Congress and the President decided that not enough had been done to regulate mortgage brokers and loan originators, so they passed the "Secure and Fair Enforcement for Mortgage Licensing Act of 2008." This bill goes into effect July 30, 2010 in most states. State licensing and supervision is no longer enough; now a residential loan originator--there are no more brokers or loan officers; we have all been made equal--must maintain a federal license. Your neurosurgeon and tax attorney are licensed by the state in which they live, but your friendly neighborhood loan originator is licensed by the Federal government with additional licensing requirements for each state. Gone are the exemptions for other professional licenses--every mortgage originator has to pass the state test and a federal test, no matter how long they have been in the industry, and they have to pass a credit check and a background check. The loan originator must demonstrate "financial responsibility, character and general fitness such as to command the confidence of the community and to warrant a determination that the loan originator will operate honestly, fairly and efficiently." (Section 1505 b). In other words, if you lost your income during the last three years and had your house foreclosed on, you will probably not be getting a license. A loan originator must take annual continuing education classes and renew annually. And we have to satisfy net worth requirements as established by our state regulatory agency. (In Texas our regulators wisely set up a recovery fund that we each pay into at every renewal which covers this requirement.)
Under the new system, we are each issued a national tracking number that will stay with us for life. It will track foreclosures and defaults and provide a record of how competently we have done our jobs. This will help regulators determine whether we are "good" or "bad" originators.
It is now May of 2010. Most originators all over the country who desire to remain in their professions are currently going through the necessary steps to complete the licensure process. But how many of them know that when financial reform passes, the law that is just now being implemented is going to change? HR 4173 (sponsored by Barney Frank [D MA] who says that he wants death panels for non-depository financial institutions) amends that SAFE act again. Currently each banking entity is regulated by its own agency. HR 4173 will replace most of those agencies with the new Consumer Financial Protection Agency, and this Agency will have charge over enforcing the provisions of the Safe Act. The bill amends the current SAFE Act as follows, "The Agency (Consumer Financial Protection Agency) may prescribe regulations setting minimum net worth or surety bond requirements for residential mortgage loan originators and minimum requirements for recovery funds paid into by loan originators." Under the current act, each State sets the regulations, but the new bill transfers this authority to a new agency of the federal government. What will the new requirements be? No one knows, but we do know that our state regulator has sent out proposed forms for comment which include a comprehensive financial statement submitted to the state every 90 days, so we know that Big Brother is watching, and that our very jobs will now depend on our ability to be profitable. Somewhere out there is a young person with a dream and an ice chest who just doesn't have what it takes financially to start her own business.
The first day that we signed our lease, we were referred to a good attorney who helped us incorporate, and I went out and started originating loans. I did not know what I was doing, but I was willing to work hard and eager to learn. My father had a list of investors he had worked with in his previous job, and I contacted each of them, and most of them agreed to sign us up.
To get our New Mexico license (since we are right on the state line it made sense to have both licenses) we had to have a financial statement, but of course, we had no money at all. My father had an acquaintance who was a CPA and he agreed to prepare our financial statement. At the end of the financial statement, in his notes, he wrote, "This company probably will not be open a year." I was furious; I did not think prognostication was the duty of a CPA. I threw a fit and then threw away the financial statement. I then went to see a CPA who was an acquaintance of mine. He prepared a financial statement without the personal commentary, and we found a company here in town who would write a surety bond for us. What we had was very little, but it was enough for the state of New Mexico to give us a license.
We stayed in that space for 22 months. During those months, I went to open houses and to every community meeting I could find. I took the time and effort to get to know everyone in the industry I could. I joined the Texas Association of Mortgage Brokers one year before they started a local chapter so that I could learn about my industry. I originated my first loan within days after signing my lease, and I closed it two and a half months after we opened the office. Over the months that followed, I originated more loans and I signed a factoring account for a local company that brought in some income. I picked up a builder who did affordable housing on the Eastside as a client (that was when housing truly was affordable and we had houses in the $45,000 to $75,000 range). By the time my lease was up and I had to look for new offices, I had been able to purchase a small refrigerator!
We opened Frontier 2000 Mortgage & Loan 12 years ago last month. As I look at the changes to the regulatory landscape today, I am most struck by the fact that a person today would not be able to do what we did then because of massive regulation. Most argue that the regulation is necessary to prevent another meltdown, but the regulation that exists today really impedes the small entrepreneur who wants a chance to prove that he or she can work for themselves, take care of their families, and contribute to the tax base and the local economy.
In 1999, Texas did introduce a licensing law. The law that they passed required that a broker (who would be responsible for the actions of the company) had to have a degree in business and 18 months of experience or three years experience as a loan officer. I had a master's degree in history, but that did not count, so I got an insurance license because persons holding an active insurance license satisfied the experience requirements of the law. So did a law license, or an active license as a real estate broker. We also had to have a surety bond. We made sure that we had everything ready to be fully compliant on January 1, 2000.
In 2003, Texas introduced a testing component to their law. A new loan officer coming in had to be able to pass a test in order to get the license. The test cost some money and the training to get ready for the test cost money; however, those of us who were already licensed who did not have any actions against us were grandfathered in so we did not have to retest. We had to take continuing education courses of 15 hours every two years, including a course on ethics, unless we held an active license in one of the other professions described above, and in that case we could use the continuing education required for our other license to meet the requirements. We had random audits by the state which involved the state sending a letter and informing that they would be coming to our offices on a given date and inspecting our files. We were required to keep a log of all of the loans applications we took and the disposition of those loans so that when the auditor arrived, he could choose the files he wanted to see from the list. (This would have been a great hardship when I was getting started, but fortunately in 2003 we moved into a building with on-site storage.) The state contacted us with any complaints and mediated consumer problems. We were required to have a bond for Texas and New Mexico and to pay fees to each state. We were fingerprinted and had our backgrounds checked by the FBI.
A few years later, the state introduced an entity license. Not only were we as individual originators licensed individually by the state, but our corporation had to be licensed also. This, naturally, meant more fees.
Our regulator, the Texas Department of Savings and Mortgage Lending, understood that as small business people we were not made of money, so they worked to keep the fees reasonable. Further, because their department was required to be self-sustaining within the state and was responsible for raising its own budget, they had an interest in trying to help small business stay alive and stay compliant. They communicated with us through emails and letters. The auditors were polite and professional and sent us a copy of our audit in a timely manner. Firms which were not complying with the laws could have their licenses suspended or revoked.
In 2008, after the real estate crash, Congress and the President decided that not enough had been done to regulate mortgage brokers and loan originators, so they passed the "Secure and Fair Enforcement for Mortgage Licensing Act of 2008." This bill goes into effect July 30, 2010 in most states. State licensing and supervision is no longer enough; now a residential loan originator--there are no more brokers or loan officers; we have all been made equal--must maintain a federal license. Your neurosurgeon and tax attorney are licensed by the state in which they live, but your friendly neighborhood loan originator is licensed by the Federal government with additional licensing requirements for each state. Gone are the exemptions for other professional licenses--every mortgage originator has to pass the state test and a federal test, no matter how long they have been in the industry, and they have to pass a credit check and a background check. The loan originator must demonstrate "financial responsibility, character and general fitness such as to command the confidence of the community and to warrant a determination that the loan originator will operate honestly, fairly and efficiently." (Section 1505 b). In other words, if you lost your income during the last three years and had your house foreclosed on, you will probably not be getting a license. A loan originator must take annual continuing education classes and renew annually. And we have to satisfy net worth requirements as established by our state regulatory agency. (In Texas our regulators wisely set up a recovery fund that we each pay into at every renewal which covers this requirement.)
Under the new system, we are each issued a national tracking number that will stay with us for life. It will track foreclosures and defaults and provide a record of how competently we have done our jobs. This will help regulators determine whether we are "good" or "bad" originators.
It is now May of 2010. Most originators all over the country who desire to remain in their professions are currently going through the necessary steps to complete the licensure process. But how many of them know that when financial reform passes, the law that is just now being implemented is going to change? HR 4173 (sponsored by Barney Frank [D MA] who says that he wants death panels for non-depository financial institutions) amends that SAFE act again. Currently each banking entity is regulated by its own agency. HR 4173 will replace most of those agencies with the new Consumer Financial Protection Agency, and this Agency will have charge over enforcing the provisions of the Safe Act. The bill amends the current SAFE Act as follows, "The Agency (Consumer Financial Protection Agency) may prescribe regulations setting minimum net worth or surety bond requirements for residential mortgage loan originators and minimum requirements for recovery funds paid into by loan originators." Under the current act, each State sets the regulations, but the new bill transfers this authority to a new agency of the federal government. What will the new requirements be? No one knows, but we do know that our state regulator has sent out proposed forms for comment which include a comprehensive financial statement submitted to the state every 90 days, so we know that Big Brother is watching, and that our very jobs will now depend on our ability to be profitable. Somewhere out there is a young person with a dream and an ice chest who just doesn't have what it takes financially to start her own business.
Death Panels for Small Business Owners? Part II
Various professionals in the mortgage industry have debated exactly what Congressman Barney Frank (D. MA) meant in his remarks in September 2009 (which can be viewed on YouTube or by logging on to Zillow.com and clicking onto the mortgage tab) when he stated that "There will be death panels enacted by this Congress, but they will be for non bank financial institutions that will not be considered too big to die."
Almost immediately after Frank made those statements, internet blogs began buzzing with interpretations of his remarks. Which non-depository institutions does he mean? Is he referring to Wall Street hedge funds? Is he referring to insurance companies who are involved in commercial and residential lending? Or does he refer to the small business owner who struggles daily to earn a living for his family? A large part of the text of Frank's new bill HR 4173, which passed the House in December and has now gone on to the Senate for debate, is devoted to dissolution. But whom does he intend to dissolve?
I would submit that the correct answer is "all of the above." To put Frank's remarks in context, it is important to understand that more than one financial reform bill passed the House of Representatives last year and went on to the Senate Banking Committee. Frank's bill, which is over 1700 pages, passed in December, but a smaller bill of only 227 pages (HR 1728) sponsored by Representative Bradley Miller (D. NC) passed last May. These bills have been sitting in the Senate Banking Committee waiting for debate to begin on the Senate's version of Financial Reform. This process was obviously held up for a while as the Senate debated Health Care Reform, but now that Health Care Reform is passed, the Senate can focus on all of the proposals and the bills dealing with financial reform.
The Miller bill is easier to navigate than Frank's bill, since it is so much smaller, and the anti-small business tone of the bill is clear. This bill has a credit risk retention clause for non-qualified mortgages, which is basically any mortgage other than a fixed rate mortgage. The originator must retain 5% of the mortgage when it is sold. The theory behind this verbage is that if the originator has "skin in the game," he will be likelier to make sure to adhere to proper underwriting standards.
The reality is quite different though. On a loan of $200,000.00, the 5% retention would be equal to $10,000.00. If the originator did 10 loans at $200,000.00, he would need to maintain a $100,000 interest in the loans. A small broker or a small correspondent lender (a broker generally sells the loan to an investor, whereas a correspondent may have a line of credit to fund the loan under his company's name and then sell it to an investor) does not have this kind of money. So this type of legislation immediately makes it impossible for the small independent to offer such loan choices.
Legislation such as this may sound good on the surface, because it restricts access to riskier loan products, but at the same time it limits consumer choice. Adjustable rate loan products are not a particularly good option for borrowers when rates are low as they have been for the past year and a half, but when rates rise as they are expected to begin doing this summer, an adjustable rate fixed for five or ten years can allow the borrower to go into a lower rate which will permit him to buy a house with a lower payment and live in it until the rates improve. Adjustable rate products are more attractive in a higher interest rate environment, and the exclusive ability to offer them gives a strong competitive advantage to larger players. Restricting access to these products limits the ability of a well-informed consumer to shop for a loan which makes sense for him.
Several years ago, I worked with a borrower from California who was buying a second home in Texas. He made all purchases on interest only ARMS (adjustable rate mortgages). I tried to get him to consider a fixed rate mortgage, but he absolutely refused. His financial advisor, whom he trusted completely, had told him that he should never own any real estate. My borrower was very wealthy--he was a successful business owner with great credit and he had chosen to manage his real estate portfolio through interest only ARMS. I complied with his wishes and financed the house on an ARM. Three years later, his ARM was about to adjust,and he called me to refinance it. This was late 2007, and fixed rates were low. This time, I really pleaded with him to do a fixed rate loan rather than an interest only arm. I pointed out that the fixed rate was 5.875%, which was the same rate as the ARM. I also pointed out that no one could predict what was going happen to fixed rates, and that if we refinanced into a thirty year fixed rate he would never need to refinance again. Once more, he adamantly refused. In the end, I once again refinanced him into an interest only ARM. I did not agree with his decision, but the final decision was HIS, not mine. This was his property, which he chose and paid for with his money, and he chose the financing he wanted. That's a big part of what free enterprise and freedom of choice is about--allowing people to make informed decisions regarding their property, their finances and their futures and respecting those decisions. Each new piece of regulation chips away at that freedom of choice.
Almost immediately after Frank made those statements, internet blogs began buzzing with interpretations of his remarks. Which non-depository institutions does he mean? Is he referring to Wall Street hedge funds? Is he referring to insurance companies who are involved in commercial and residential lending? Or does he refer to the small business owner who struggles daily to earn a living for his family? A large part of the text of Frank's new bill HR 4173, which passed the House in December and has now gone on to the Senate for debate, is devoted to dissolution. But whom does he intend to dissolve?
I would submit that the correct answer is "all of the above." To put Frank's remarks in context, it is important to understand that more than one financial reform bill passed the House of Representatives last year and went on to the Senate Banking Committee. Frank's bill, which is over 1700 pages, passed in December, but a smaller bill of only 227 pages (HR 1728) sponsored by Representative Bradley Miller (D. NC) passed last May. These bills have been sitting in the Senate Banking Committee waiting for debate to begin on the Senate's version of Financial Reform. This process was obviously held up for a while as the Senate debated Health Care Reform, but now that Health Care Reform is passed, the Senate can focus on all of the proposals and the bills dealing with financial reform.
The Miller bill is easier to navigate than Frank's bill, since it is so much smaller, and the anti-small business tone of the bill is clear. This bill has a credit risk retention clause for non-qualified mortgages, which is basically any mortgage other than a fixed rate mortgage. The originator must retain 5% of the mortgage when it is sold. The theory behind this verbage is that if the originator has "skin in the game," he will be likelier to make sure to adhere to proper underwriting standards.
The reality is quite different though. On a loan of $200,000.00, the 5% retention would be equal to $10,000.00. If the originator did 10 loans at $200,000.00, he would need to maintain a $100,000 interest in the loans. A small broker or a small correspondent lender (a broker generally sells the loan to an investor, whereas a correspondent may have a line of credit to fund the loan under his company's name and then sell it to an investor) does not have this kind of money. So this type of legislation immediately makes it impossible for the small independent to offer such loan choices.
Legislation such as this may sound good on the surface, because it restricts access to riskier loan products, but at the same time it limits consumer choice. Adjustable rate loan products are not a particularly good option for borrowers when rates are low as they have been for the past year and a half, but when rates rise as they are expected to begin doing this summer, an adjustable rate fixed for five or ten years can allow the borrower to go into a lower rate which will permit him to buy a house with a lower payment and live in it until the rates improve. Adjustable rate products are more attractive in a higher interest rate environment, and the exclusive ability to offer them gives a strong competitive advantage to larger players. Restricting access to these products limits the ability of a well-informed consumer to shop for a loan which makes sense for him.
Several years ago, I worked with a borrower from California who was buying a second home in Texas. He made all purchases on interest only ARMS (adjustable rate mortgages). I tried to get him to consider a fixed rate mortgage, but he absolutely refused. His financial advisor, whom he trusted completely, had told him that he should never own any real estate. My borrower was very wealthy--he was a successful business owner with great credit and he had chosen to manage his real estate portfolio through interest only ARMS. I complied with his wishes and financed the house on an ARM. Three years later, his ARM was about to adjust,and he called me to refinance it. This was late 2007, and fixed rates were low. This time, I really pleaded with him to do a fixed rate loan rather than an interest only arm. I pointed out that the fixed rate was 5.875%, which was the same rate as the ARM. I also pointed out that no one could predict what was going happen to fixed rates, and that if we refinanced into a thirty year fixed rate he would never need to refinance again. Once more, he adamantly refused. In the end, I once again refinanced him into an interest only ARM. I did not agree with his decision, but the final decision was HIS, not mine. This was his property, which he chose and paid for with his money, and he chose the financing he wanted. That's a big part of what free enterprise and freedom of choice is about--allowing people to make informed decisions regarding their property, their finances and their futures and respecting those decisions. Each new piece of regulation chips away at that freedom of choice.
Death Panels for Small Business Owners? Part I
Last week, Senator Richard Shelby (R. Tx) announced that the debate on financial reform would move from committee on to the full Senate. After three failed attempts to get the votes to move the bill forward, the bill could have died in a stalemate, but instead, the Republicans decided to stand down and allow the reform measure to go to the Senate floor. Of course, at this point, no one knows what the final provisions of the bill will be, but we do have Richard Shelby's warning that every small business owner should fear the provisions of the Consumer Financial Protection Act which this bill will create (which does the beg the question of why he allowed it to move forward.)
Apparently, many Americans view financial reform as an opportunity to punish those on Wall Street who squandered bailout money on lavish bonuses and vacations. The piper has now returned to be paid, and Congress is going to extract vengeance on behalf of all taxpayers everywhere (which would be amazingly ironic since many of the Congressmen and women and Senators supporting reform are the same ones who voted for the stimulus package in the first place.)
But is that really the purpose of financial reform, or is it just another excuse to consolidate more wealth into fewer hands?
Take, for instance, my profession, the mortgage broker. At the end of 2006, there were estimated to be over 50,000 independent mortgage brokerage shops in the United States, and the average shop employed approximately 7 people. According to the National Association of Mortgage Brokers, approximately 65% of residential loans in the U.S. were brokered loans. Today, according to a statistic posted on the Think Big Work Small website, mortgage brokers do about 12% of the loans in the United States. The term "mortgage broker" has almost become an obscenity, as the small independent business owners took the blame for every bad thing that happened in the real estate industry over the last five years.
While it is popular to crucify the small broker with stories of unscrupulous loan originators who put their borrowers in terrible loans, few remember that before the real estate market crashed, there were loan originators everywhere. I worked for three and a half years on a street with two other originators. I worked at the top of the street, so borrowers passed my office on their way down to the main intersection. My competitors worked closer to the intersection. So the borrower who left my office was within walking distance of two other licensed choices to receive a mortgage loan. If he did not like any of us, he could go one street over and find several more options. Additionally, Texas licensing law allowed active real estate brokers and insurance agents to obtain a license to sell mortgages. He could further choose among the mortgage departments at the banks and the credit unions, and there were always the on-line companies competing for business. This meant that after he had received his quote and even after the borrower was well into the process, he could continue to shop his loan. When he went to buy his homeowner's insurance, he might find that his agent was offering him a mortgage loan at a lower rate. And, frequently, he would come back just before closing and renegotiate for more favorable terms.
For the small business owner, this was a highly competitive environment. Service and likability were important factors in retaining the loan. So was offering a low cost mortgage with a very competitive rate. Borrowers did not live in a vacuum; they talked to their friends and family members and compared mortgage rates with their neighbors. Borrowers with good credit used their low interest rate as a bragging right.
Fast forward to May of 2010. As regulations have tightened, mortgage loans no longer abound. The one page estimate has been replaced by five pages of forms containing less information. Mortgage originators are being required to complete both state and national exams and receive both state and national licenses at very high costs, with the result that many originators are choosing not to renew their licenses. As the cost of doing business increases, the cost of getting a loan does too. A borrower with a loan approval is probably much less likely to shop his loan now because his appraisal cannot be transferred to a new company and as competition disappears, so do his choices.
In December, the House of Representatives passed HR 4173, sponsored by Barney Frank (D MA). This over 1700-page piece of legislation aims at completely remaking the financial landscape of the US. It includes a new Consumer Financial Protection Agency which will oversee all consumer lending. The bill includes oversight for all types of financial institutions and a long section detailing dissolution of firms. Which firms? In September of 2009, Frank was captured on video speaking about financial reform in front of an audience that included Treasury Secretary Tim Geithner, who is smiling during Frank's remarks. The video associated with these remarks can be viewed by logging onto www.zillow.com and also by going to YouTube. In speaking about public frustration over bailouts, Frank states that he is going to be "putting together a package...of legislation that will substantially diminish that problem. We will be providing a mechanism for putting non-bank financial institutions out of everybody's misery. There will be death panels enacted by this Congress, but they will be for non-bank financial institutions not considered too big to die. I say that because we have this euphemism that we are going to be 'resolving' these institutions. It has not been my experience that when someone says they are going to resolve something, they kill it. And we are talking about dissolution, not resolution."
Considering that approximately 500,000 jobs have been lost in the financial sector and that jobs continue to be lost as regulations become more restrictive and business tightens up, perhaps Congress should be trying to introduce regulation to grow business, not to kill it.
Apparently, many Americans view financial reform as an opportunity to punish those on Wall Street who squandered bailout money on lavish bonuses and vacations. The piper has now returned to be paid, and Congress is going to extract vengeance on behalf of all taxpayers everywhere (which would be amazingly ironic since many of the Congressmen and women and Senators supporting reform are the same ones who voted for the stimulus package in the first place.)
But is that really the purpose of financial reform, or is it just another excuse to consolidate more wealth into fewer hands?
Take, for instance, my profession, the mortgage broker. At the end of 2006, there were estimated to be over 50,000 independent mortgage brokerage shops in the United States, and the average shop employed approximately 7 people. According to the National Association of Mortgage Brokers, approximately 65% of residential loans in the U.S. were brokered loans. Today, according to a statistic posted on the Think Big Work Small website, mortgage brokers do about 12% of the loans in the United States. The term "mortgage broker" has almost become an obscenity, as the small independent business owners took the blame for every bad thing that happened in the real estate industry over the last five years.
While it is popular to crucify the small broker with stories of unscrupulous loan originators who put their borrowers in terrible loans, few remember that before the real estate market crashed, there were loan originators everywhere. I worked for three and a half years on a street with two other originators. I worked at the top of the street, so borrowers passed my office on their way down to the main intersection. My competitors worked closer to the intersection. So the borrower who left my office was within walking distance of two other licensed choices to receive a mortgage loan. If he did not like any of us, he could go one street over and find several more options. Additionally, Texas licensing law allowed active real estate brokers and insurance agents to obtain a license to sell mortgages. He could further choose among the mortgage departments at the banks and the credit unions, and there were always the on-line companies competing for business. This meant that after he had received his quote and even after the borrower was well into the process, he could continue to shop his loan. When he went to buy his homeowner's insurance, he might find that his agent was offering him a mortgage loan at a lower rate. And, frequently, he would come back just before closing and renegotiate for more favorable terms.
For the small business owner, this was a highly competitive environment. Service and likability were important factors in retaining the loan. So was offering a low cost mortgage with a very competitive rate. Borrowers did not live in a vacuum; they talked to their friends and family members and compared mortgage rates with their neighbors. Borrowers with good credit used their low interest rate as a bragging right.
Fast forward to May of 2010. As regulations have tightened, mortgage loans no longer abound. The one page estimate has been replaced by five pages of forms containing less information. Mortgage originators are being required to complete both state and national exams and receive both state and national licenses at very high costs, with the result that many originators are choosing not to renew their licenses. As the cost of doing business increases, the cost of getting a loan does too. A borrower with a loan approval is probably much less likely to shop his loan now because his appraisal cannot be transferred to a new company and as competition disappears, so do his choices.
In December, the House of Representatives passed HR 4173, sponsored by Barney Frank (D MA). This over 1700-page piece of legislation aims at completely remaking the financial landscape of the US. It includes a new Consumer Financial Protection Agency which will oversee all consumer lending. The bill includes oversight for all types of financial institutions and a long section detailing dissolution of firms. Which firms? In September of 2009, Frank was captured on video speaking about financial reform in front of an audience that included Treasury Secretary Tim Geithner, who is smiling during Frank's remarks. The video associated with these remarks can be viewed by logging onto www.zillow.com and also by going to YouTube. In speaking about public frustration over bailouts, Frank states that he is going to be "putting together a package...of legislation that will substantially diminish that problem. We will be providing a mechanism for putting non-bank financial institutions out of everybody's misery. There will be death panels enacted by this Congress, but they will be for non-bank financial institutions not considered too big to die. I say that because we have this euphemism that we are going to be 'resolving' these institutions. It has not been my experience that when someone says they are going to resolve something, they kill it. And we are talking about dissolution, not resolution."
Considering that approximately 500,000 jobs have been lost in the financial sector and that jobs continue to be lost as regulations become more restrictive and business tightens up, perhaps Congress should be trying to introduce regulation to grow business, not to kill it.
Paying for Protection: The High Cost of Reform
Last week, the EPA announced a national contest for videos promoting the notion that federal regulation makes life good. The rules of the contest explain that regulation touches every part of American life and that there are approximately 10 federal regulations for every law that Congress passes. Each video must contain the phrase, "Let your voice be heard." The winning entry will receive a $2500.00 cash award.
It's too bad that nobody is sponsoring a contest to describe the ways in which federal regulation makes life worse. The government would certainly have many more entries to choose from, and we small business owners who have had our livelihoods trampled on by excessive government regulation could surely use the prize money.
The government may not want to hear the other side, but in the interests of a fair and balanced debate, I wanted to devote a little space to ways in which regulation is cumbersome and expensive. Maybe if all of the rest of us let our voices be heard, we would see some real hope and change.
For instance, in January of 2010, long anticipated changes to the Real Estate Settlement Procedures Act, which governs all residential real estate transactions in the United States, went into effect. The government started working on these reforms in July of 2002. As the president of the El Paso Association of Mortgage Brokers at that time, I worked over a long period of time lobbying against this piece of rule-making by the Department of Housing and Urban Development (HUD). HUD argued that the changes would save consumers hundreds of dollars in unnecessary settlement fees by allowing consumers to shop more effectively for a loan. Our argument was that the provisions of the new act were anti-competitive for small businesses and tilted heavily to favor large banking institutions. In retrospect, both of us were wrong. Consumers shop most effectively for a cheaper loan when they have plenty of choices available to them, and they save money when they close their transactions on time. As for us, the forms are not anti-competitive; they are completely unintelligible. It's hard for the consumer to know what he's paying for when no one in the transaction can understand the estimate he has been provided.
So what does this mean in real life? Prior to January 1, 2010, if you went to a loan officer to get a loan, you received a one page good faith estimate that listed all of the anticipated costs on your loan. This included the origination fee, junk fees, any points you were paying, escrows for taxes and insurance, etc. At the bottom of the page on the left was a column that showed how much cash you could expect to bring in if you were buying a house, and at the bottom of the page on the right was a breakdown of your anticipated monthly payment including your taxes and insurance. You signed and dated the form on receipt. If you wanted to negotiate a fee with the loan originator, you could do so by looking at the form to see how much each individual fee was and negotiating to reduce or eliminate it.
The new form is three pages. The fees are lumped together, so that you no longer see what your originator is making or what junk fees are included. Some of the fees are not yours--they are the sellers. Some of the fees no one is actually going to be paying at all, unless you really want a home inspection for that house you have already lived in for twenty-five years that you have decided to refinance. But by federal law, all are listed as an expense. In addition to the three page form, there is a fourth page that lists the various companies whose fees were included on the estimate in case you want to shop for a different vendor. Be sure to ask your loan originator what your monthly payment is--that is nowhere on the form, so if you fail to ask you could be surprised at closing. You do not sign the new form--signing the new form is considered "defacing a federal document". Instead, you sign an additional page which states that you have reviewed the good faith estimate. In addition to the good faith estimate and the other attachments, you receive a 45 page booklet prepared by HUD explaining to you how to read the good faith estimate. So we now have 5 pages of documentation and a 45 page booklet which give you less information than the 1 page form we used before January 1.
The new forms are a binding contract with the buyer, so you cannot get your appraisal started until you have reviewed the good faith estimate for three days. The lender is completely responsible for any charges on your final documents that do not appear on the good faith estimate, so they have to carefully review everything before your loan can go to underwriting. And they have to review it again before closing.
Two months ago, I closed a purchase loan for a very prominent executive here in El Paso. He had refinanced his home in December to take advantage of extremely low interest rates, and then a couple of months later, he decided to buy a new house. He is highly paid, very well educated, and has very little personal debt and credit scores over 800. Further, he has considerable savings in investment accounts and was making a 20% down payment on the new home. After we packaged the loan and sent it in to the lender, the lender had to first review all of the new estimates, and then they had to decide whether they wanted to make him a loan at all. Concerned that maybe he got a loan he really did not deserve in December when he refinanced his house (why did he care about getting a better interest rate on the home he already owned if he were thinking about moving?), the lender was prepared to correct the situation by not giving him a loan he clearly deserved in February. It took them four days to decide to go forward with the loan.
When we finally got through underwriting and were ready to close, it was Thursday. My borrower had taken the week off from work to get some items packed, and he had movers scheduled for Friday morning. Prior to January 1, we would have sent a request to the lender asking them to prepare the documents so that he could close and get his keys Friday morning. Since it takes about 2 hours to prepare documents, we would not have had any problem closing right on time. Not any more. We were informed that the new policy is that we have to wait 48 hours after loan approval before the closing department can start preparing the documents. The new regulations require more time. Unfortunately, my borrower had to be out of town for work related travel starting the following Monday.
In the end, the borrower signed a lease agreement on the house he was moving into with the seller to lease the house for five days at a cost of $440.00. By the time that all the delays were finished, we closed the following Wednesday. When he asked me to explain the reason for the delay, I simply told him, "The government has introduced new regulation to protect consumers. Because of that new regulation, there are a lot of new delays because the lender has to have plenty of time to check and recheck the documentation to make sure it is correct, and for this reason they cannot close you until next week. Do you feel protected?" Do you?
It's too bad that nobody is sponsoring a contest to describe the ways in which federal regulation makes life worse. The government would certainly have many more entries to choose from, and we small business owners who have had our livelihoods trampled on by excessive government regulation could surely use the prize money.
The government may not want to hear the other side, but in the interests of a fair and balanced debate, I wanted to devote a little space to ways in which regulation is cumbersome and expensive. Maybe if all of the rest of us let our voices be heard, we would see some real hope and change.
For instance, in January of 2010, long anticipated changes to the Real Estate Settlement Procedures Act, which governs all residential real estate transactions in the United States, went into effect. The government started working on these reforms in July of 2002. As the president of the El Paso Association of Mortgage Brokers at that time, I worked over a long period of time lobbying against this piece of rule-making by the Department of Housing and Urban Development (HUD). HUD argued that the changes would save consumers hundreds of dollars in unnecessary settlement fees by allowing consumers to shop more effectively for a loan. Our argument was that the provisions of the new act were anti-competitive for small businesses and tilted heavily to favor large banking institutions. In retrospect, both of us were wrong. Consumers shop most effectively for a cheaper loan when they have plenty of choices available to them, and they save money when they close their transactions on time. As for us, the forms are not anti-competitive; they are completely unintelligible. It's hard for the consumer to know what he's paying for when no one in the transaction can understand the estimate he has been provided.
So what does this mean in real life? Prior to January 1, 2010, if you went to a loan officer to get a loan, you received a one page good faith estimate that listed all of the anticipated costs on your loan. This included the origination fee, junk fees, any points you were paying, escrows for taxes and insurance, etc. At the bottom of the page on the left was a column that showed how much cash you could expect to bring in if you were buying a house, and at the bottom of the page on the right was a breakdown of your anticipated monthly payment including your taxes and insurance. You signed and dated the form on receipt. If you wanted to negotiate a fee with the loan originator, you could do so by looking at the form to see how much each individual fee was and negotiating to reduce or eliminate it.
The new form is three pages. The fees are lumped together, so that you no longer see what your originator is making or what junk fees are included. Some of the fees are not yours--they are the sellers. Some of the fees no one is actually going to be paying at all, unless you really want a home inspection for that house you have already lived in for twenty-five years that you have decided to refinance. But by federal law, all are listed as an expense. In addition to the three page form, there is a fourth page that lists the various companies whose fees were included on the estimate in case you want to shop for a different vendor. Be sure to ask your loan originator what your monthly payment is--that is nowhere on the form, so if you fail to ask you could be surprised at closing. You do not sign the new form--signing the new form is considered "defacing a federal document". Instead, you sign an additional page which states that you have reviewed the good faith estimate. In addition to the good faith estimate and the other attachments, you receive a 45 page booklet prepared by HUD explaining to you how to read the good faith estimate. So we now have 5 pages of documentation and a 45 page booklet which give you less information than the 1 page form we used before January 1.
The new forms are a binding contract with the buyer, so you cannot get your appraisal started until you have reviewed the good faith estimate for three days. The lender is completely responsible for any charges on your final documents that do not appear on the good faith estimate, so they have to carefully review everything before your loan can go to underwriting. And they have to review it again before closing.
Two months ago, I closed a purchase loan for a very prominent executive here in El Paso. He had refinanced his home in December to take advantage of extremely low interest rates, and then a couple of months later, he decided to buy a new house. He is highly paid, very well educated, and has very little personal debt and credit scores over 800. Further, he has considerable savings in investment accounts and was making a 20% down payment on the new home. After we packaged the loan and sent it in to the lender, the lender had to first review all of the new estimates, and then they had to decide whether they wanted to make him a loan at all. Concerned that maybe he got a loan he really did not deserve in December when he refinanced his house (why did he care about getting a better interest rate on the home he already owned if he were thinking about moving?), the lender was prepared to correct the situation by not giving him a loan he clearly deserved in February. It took them four days to decide to go forward with the loan.
When we finally got through underwriting and were ready to close, it was Thursday. My borrower had taken the week off from work to get some items packed, and he had movers scheduled for Friday morning. Prior to January 1, we would have sent a request to the lender asking them to prepare the documents so that he could close and get his keys Friday morning. Since it takes about 2 hours to prepare documents, we would not have had any problem closing right on time. Not any more. We were informed that the new policy is that we have to wait 48 hours after loan approval before the closing department can start preparing the documents. The new regulations require more time. Unfortunately, my borrower had to be out of town for work related travel starting the following Monday.
In the end, the borrower signed a lease agreement on the house he was moving into with the seller to lease the house for five days at a cost of $440.00. By the time that all the delays were finished, we closed the following Wednesday. When he asked me to explain the reason for the delay, I simply told him, "The government has introduced new regulation to protect consumers. Because of that new regulation, there are a lot of new delays because the lender has to have plenty of time to check and recheck the documentation to make sure it is correct, and for this reason they cannot close you until next week. Do you feel protected?" Do you?
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