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.
GLC's parliamentary unit assists with 2 new Bills
First, the Protection of Workers (Scotland) Bill (SP Bill 47), sponsored by Hugh Henry MSP, a Bill for an Act of the Scottish Parliament to make it an offence to assault certain persons in the course of or by reason of their employment; and for connected purposes.
Second, the Property Factors (Scotland) Bill (SP Bill 51), sponsored by Patricia Ferguson MSP, a Bill for an Act of the Scottish Parliament to establish a register of property factors and require property factors to be registered; to make provision in relation to the resolution of disputes between homeowners and property factors; and for connected purposes.
Second, the Property Factors (Scotland) Bill (SP Bill 51), sponsored by Patricia Ferguson MSP, a Bill for an Act of the Scottish Parliament to establish a register of property factors and require property factors to be registered; to make provision in relation to the resolution of disputes between homeowners and property factors; and for connected purposes.
The Bills, together with accompanying documents (Explanatory Notes & Financial Memorandum, and Policy Memorandum) are available from the Scottish Parliament's website:
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.
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