by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
HR 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, was introduced by Barney Frank, (D-MA). Congressman Frank is also the Chairman of the House Committee on Financial Services. I outlined the key components of the bill with a link to the text here.
The danger behind this bill is that it doesn’t regulate the proper parties. When you read through the text, you’ll discover that there are two entities that are shouldering the brunt of the blame for the meltdown of the sub-prime mortgage market: originating firms and Wall Street securitizers. The bill stops short of levying any responsibility to the two most interested parties: borrowers and lenders (the individual investors). This bill exonerates them of the responsibility of due diligence.
Experience is the best instructor. An investor needs to lose 10% of his mortgage pool investment and a borrower needs to have his home foreclosed. That experience will instill a sense of personal responsibility in both parties. While loss of investment principal and foreclosure are devastating experiences, the old adage “time heals all wounds” truly is appropriate.
Jane Shaw, discussing Public Choice Theory:
Public choice takes the same principles that economists use to analyze people’s actions in the marketplace and applies them to people’s actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest.
Ms. Shaw further exposes the dangers of regulation to correct market failure:
In the past many economists have argued that the way to rein in “market failures” such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as “government failure.” That is, there are reasons why government intervention does not achieve the desired effect.
This bill will provide a false sense of security to the consumer and encourage even more irresponsible behavior. Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition. The scoundrels will fleece the ignorant under the protective cloak of a highly regulated industry- it happens on Wall Street daily.
Big lenders will support this bill because it allows them to narrow the eye of the needle through which future borrowers will pass . Ms. Shaw illustrates this theory with the anti-competitive nature of the Clean Air Act of 1977; the polluters, in Rust Belt states, screamed for regulation so that the more nimble Sun Belt firms couldn’t open. The regulations protected the very scoundrels who should have been allowed to fail.
Peter Van Doren illustrates this theory, applied to banking, for the Cato Institute:
Supposedly, banks are regulated and bank deposits are insured to correct defects in the market for information about the quality of banks’ investments. But, again, recent scholarship indicates that the threat of runs on banks induces banks to make sounder investments. And healthy banks can form private associations to insure one another against runs that are motivated by fear, not facts. Even in the Depression, most banks closed by runs were insolvent and should have been closed. Instead of making banks sounder, regulation (especially restrictions on branch banking) and deposit insurance simply allowed smaller (and usually weaker) banks to survive against their larger and more efficient competitors.
This is why the scoundrels support this bill. A free market would allow for upstart competitors to gain market share from the wounded giants. Rather than suffer from their poor lending practices, big lenders will benefit from the high barrier to marketplace entry this bill promotes.
Allow failure. Foreclosed borrowers will think twice about leveraging up their next ranch to buy a Hummer. Investors will demand that lending decisions fall within acceptable risk parameters. If we deregulate the lending industry rather than tighten the laws, the American homeowner and American investor will emerge from the protective cocoons of ignorance as beautiful butterflies. Pass this bill and they will emerge like moths, serially attracted to the only source of light they know.
That light is government promoted ignorance.
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Lenn Harley says:
I listened to the hearings last Friday.
These are not persons I want writing regulations for the lending industry.
It was absolutely freightening. Hopefully, Mr. Frank was simply looking for some “face time”.
October 29, 2007 — 5:10 am
Dave Shafer says:
Although your examples leave me a little cold, your sentiment is correct. Experience is a great teacher. I wonder though if the lenders will ever really change, hiring folks who have at least a minimum amount of finance education/experience, who have some responsibility to the consumer and the end line buyer of these securities? I mean all those sub-prime buyers could have been put into a fixed rate slightly higher than the 2-28’s and 3-27’s, and everyone would be in a better position now. But that would have taken loan originators who had some experience and/or concern about the consumer. I know what few sub-prime mortgages I did, I insisted on the fixed rate option. Lost some deals because of it, but all my clients still have their homes.
October 29, 2007 — 7:23 am
Michael Cook says:
I am not sure how sound your economic argument is Brian. In principle, it makes perfect sense, a child touchs a stove and finds out it hot, therefore, he/she doesnt touch the stove again.
Unfortunately, there are two problems here. One, for some homeowners, this situation is akin to jumping into a fire. While you certainly learn a lesson, the penalty of foreclosure and the inability to make any major purchase for seven or more years seems kind of steep.
Secondly, this is not a localized problem that only effects one party. I think Banks certainly should pay for their bad investments, but they never will. At the end of the day they will pass the cost back onto the consumer by way of higher fees and higher rates of interest. Worse, this could have significant effects on the economy.
In a perfect world only the people, who perpetrated the action would get hurt. Sadly, I dont think its the case. I am not saying this legislation is good or bad, but merely that a strict economics interpetation here has its flaws.
October 29, 2007 — 9:53 am
Brian Brady says:
“While you certainly learn a lesson, the penalty of foreclosure and the inability to make any major purchase for seven or more years seems kind of steep.”
That’s a really hot stove; be careful. Foreclosure is not a penalty, it’s the result of financial mismanagement.
“At the end of the day they will pass the cost back onto the consumer by way of higher fees and higher rates of interest”
Not the responsible banks, Michael; they’ll clean up. While CFC tries to “pass through” those costs, they’ll get their clock cleaned by Chase et al
October 29, 2007 — 10:40 am
Richard Rose says:
Dear Sir,
I have owned my own mortgage company in Ohio for over 15 years.
I am a hands on operator and have built a business (as have my loan officers) on repeat customers and referrals.
We’ve used alot of the available mortgage instruments that have been available to us through the subprime market to enable those borrowers who would otherwise not qualify for conventional financing, achieve their goals.
We were not hesitant to use 2/28 and 3/27 products. If structured properly, they are were, and still are affordable. Our company simply does not opt to slam people into loans, collect maximum fees, and then leave them to the dogs. Conversely, we work with them after the loan closes. We counsel them on improving their credit scores. We advise them that we would like to see them achieve the position of ultimately qualifying for a Fannie Mae or Freddie Mac loan so that if they wanted to, they could refinance to a lower conforming fixed rate. (Maybe it’s the borrwer who needs educating after getting a mortgage. Maybe Congress should mandate financial responsibility education for its citizens. Hey, that’s not a bad idea!).
A previous person commented that he/she always insisted on a fixed rate for a subprime borrower. That’s unrealistic. If the borrower is already at a 50% back end debt ratio on an arm, how are they going to qualify for a fixed rate that was usually 1% to 1.5% higher? And for us, the subprime lenders with whom we did our business had a 50% ratio as the maximimum d/r allowed.
One program that I refused my company to use was the option arm. Not only was it confusing to us, but the lenders even had a hard time explaining it. These instruments were used quite a bit, particularly in the highly speculative states where mortgage loan amounts were considerably higher than in the typical midwestern states. I think that these volatile products, along with either greedy or unwary speculators in those states where property values were appreciating at 20% per annum over the past ten years fueled the mortgage problem.
I’m babbling a little here, but I think that the mortgage crisis is the result of the absolute perfect storm. Quite a few misfortunate things occurred all at the same time. Manufacturing jobs in the midwest vanished, people can’t afford their mortgage payments, foreclosure. The bubble burst in highly speculative states where people were using arms to buy investment properties with no money down. The bubble bursts, property values adjust downward, people can’t refinance their arms, the arm adjusts, payments can’t be made, foreclosure (big time foreclosures in those states where the average mortgage was ove $500,000.00). And yes, even though I hate to admit it, their is predatory lending that is real in my industry, and it stinks. It disgusts me. It has to be stopped. BUT IT IS NOT THE ONLY CONTRIBUTANT TO THE CURRENT CREDIT CRISIS.
All I ask is that any additonal regulation weed out the scumbags in my industry. All mortgage brokers are not scumbags contrary to the media hype, and God only knows that in Ohio, mortgage brokers are regulated to the hilt. I mean as of January 2007, I now have a fiduciary responsiblity to make sure my customer makes the right choice regarding a mortgage product. Do banks have to do that?
All I ask for is a level playing field. If more education is needed, fine. But make sure the borrowers are educated to so that they know it’s not a good idea to go slam their credit cards to the max and expect to be able to bail themselves out by refinacing their houses. I mean can Congress do that?
I could go on infinitum, but I would like to close by quoting George Bailey (Jimmy Stewart) from the Christmas movie It’s a Wonderful Life. “This town needs this measly old one horse institution just to keep people from having crawl over to Mr. Potter.”
Clean it up, don’t close it down. If you do close it down, you’ll be sorry, guaranteed.
October 31, 2007 — 5:06 pm
Consumer Mortgage Reports says:
Please goto http://www.consumermortgagereports.com/no-on-hr-3915-this-is-not-consumer-friendly/
and sign the petition if you do not agree with HR 3915!
November 1, 2007 — 3:49 pm
Mike Volpe says:
This is a way for Congress to end mortgage brokers as an industry plain and simple. This is Gestapo like tactics, and the worst part is this is all political. Obviously, Congress has decided to build a narrative in which the mortgage crisis is the fault of the mortgage brokers and so they must be eliminated. Unless there is critical mass reached in the industry, this bill may in fact pass. We all need to stand up and be counted. Here is how I saw it.
http://proprietornation.blogspot.com/2007/11/congress-vs-mortgage-brokers.html
November 2, 2007 — 10:17 am
Concerned says:
I am a property appraiser and I am sorry to tell some of you mortgage brokers that you share a large portion of the blame in regards to the current mortgage crisis. I am not suggesting that appraisers are not to blame as well; I am just stating that until now, all of the accountability was placed on the shoulders of the appraisers. The system is broken! Mortgage bookers are allowed to pressure appraisers into coming in at “their” values (always higher than the market value) with threats of withholding business and promises of future business. Not only were you placing people into houses they could not afford (stated income), but you were pushing the appraisers to value those homes above the market value. Why do brokers work backwards? You qualify your borrower for a fictional amount that you obtained from a worthless AVM or Zillow and pressure the appraiser to come in at that number. Now that prices are dropping and there are a lack buyers in the market, people are stuck in their homes with their rates about to adjust (I believe you called it creative financing). They can’t refi because the home was previously appraised too high and the new appraisal will come in 10’s of thousands less than it did a year ago. A simple solution that could have saved the industry was to eliminate all contact between the broker and the appraiser or to let the broker order 1 appraisal and have the bank order another from a different appraiser. An underwriter could review both documents and determine which value mostly represents the market value and which one represents the broker’s value. In the past, brokers could be licensed with no experience, no background checks, and minimal education. This bill will add some much needed accountability to the mortgage industry.
November 2, 2007 — 12:02 pm
Mike Volpe says:
Let’s get something straight. There is plenty of blame to go around. That is beside the point. Just because an industry rightly has a bad reputation doesn’t mean the Congress should be allowed to regulate it out of existence. What about used car salesmen? They also have a bad reputation. If Congress destroys our industry what is to stop them from going after them. People can buy their cars in all sorts of ways and used car salesmen are unnecessary. Congress can regulate that industry right out of existence anyway. I am tired of playing the blame game. That is irrelevant. Everyone that works in the industry knows full well that the market has corrected the excess on its own. Who’s ever fault it was is now irrelevant. The market fixed things.
What Congress is doing is choosing a villain and punishing them by creating a law that puts them out of existence. How would an appraiser like it if Congress created a law that made it impossible for appraisers to make money? That is what Congress is trying to do with this law. It isn’t right. It is Gestapo tactics and I am tired of Congress playing politics with my livelihood.
November 2, 2007 — 12:11 pm
Also Concerned says:
There sure is a lot of hand-wringing here, but I also must agree that it’s hard to muster any sympathy. Like the fellow above, I am also a property appraiser and I’m completely frustrated. Over many years, and on pretty much of a daily basis, I have had to struggle with pressure from loan officers attempting to “persuade” me to compromise my integrity. If I had been given a nickel for every time I’ve heard some coercive demand/request – “now give me a good appraisal”,”if you make this number, we’ll definitely give you a lot of business”, “if you can’t get the value, we know someone who can” etc, etc,etc, – I could retire. Easily and well.
From my perspective, the current difficulties in the finance markets is the obvious result of a pattern of narrow short-term self-interest and excess – on the part of both too many lenders and too many borrowers. And patterns such as that have always led to crisis, and sometimes worse. I feel that I’ve been watching a kind of slow-motion train wreck unfolding over the past number of years, and now some level of critical mass appears to be at hand. I sincerely hope that it’s no more than a good solid wake-up call. But now accountability and responsibility must be more broadly applied, and from where I sit, the Mortgage lending industry is an appropriate target. I definitely do not want to see counter-productive actions taken, but in a sense, the market is speaking, and some bitter pills may have to be downed before this mess is sorted out. I for one, would be very happy to see personal financial responsiblity for property valuations borne by every actor in the financial process. In that way everyone concerned would have a strong interest in an honest appraisal, and there would be a market based incentive for delivering a product that preserves the intergrity of both the involved parties and the financial system as a whole.
November 2, 2007 — 2:09 pm
Eric Griffith says:
The right to life, liberty and the pursuit of happiness. Our fore fathers has listed this years ago and is still considered to be a right. If we don’t help ourselves out, not only would we be cutting our own throats, but those of the general public…our rights these days seems to be slipping slowly through our fingers and people do not realize it until they are left in the dark! Realize the American dream and vote against this bill and we may be able to hold onto a right that has so hard to even believe!
November 2, 2007 — 2:14 pm
Trace says:
HR 3915 Information and Resources
This goal of this thread is to create a place where information on WHAT ACTION YOU CAN TAKE can be gathered. This bill is serious business and signing a petition is not enough considering the severe conequences such legislation could have on Mortgage Brokers and Consumers.
Do you have Congressional Contact Information? Post it!
Do you have other information on creative and effective ways to let your voice be heard? Post it!
RESOURCES:
HR 3915 News, Resources, and Information: http://www.ipagio.com/hr-3915-mortgage-reform-act.php
NAMB Teleconference Information: http://www.ipagio.com/hr-3915-namb-teleconference.html
HR 3915 Summary: http://www.ipagio.com/hr-3915-mortgage-reform-act-summary.html
HR 3915 Full Bill Text: http://www.ipagio.com/hr-3915-mortgage-reform-act-full-text.html
This is bad legislation that can have serious repercussions for mortgage brokers and more importantly consumers, do not think this can’t affect you.
November 2, 2007 — 4:09 pm
ohagrad98 says:
Does this apply to Mortgage Lenders as well?
November 2, 2007 — 4:14 pm
Brian Brady says:
Gentlemen Appraisers:
Nobody “withheld” business from appraisers. If appraisers compromised their integriy for the almighty dollar, they’re as dirty as the scum with whom they colluded. Business “withheld” by originators who were bad actors wasn’t business at all; it was part of a conspiracy to defraud lending institutions.
Make no mistake about it, I discuss value with all of my appraisers. I question their work product within the framework of professional discourse. The same way the 4-5 of them questioned my rate and fees when I arranged financing for them.
No licensing body is going to shield appraisers from bad actors. Appraisers will need to discern who of us are and who of us aren’t legitimate, ethical lenders.
Just like I do with appraisers.
November 2, 2007 — 4:21 pm
Darren Brennan says:
To the mortgage brokers,Realtor,Closing Attorney,and the thousands of you who work with lenders. To the credit agencies and staff. Once this bill is passed and quote me is passed, we will all be looking for jobs. The goverment has thrown us yet another curve, except this one will destroy all of us. I have always thought, why are not a union? Would this have served our business and strength in numbers. i think so, except the truth is we are only focused on ourselves and not the big picture.I trust we are a day late and a buck short, the wheels of change have already started to roll, and roll they will. Hang this up on a wall and frame it, because here is your future. Home ownership will decline from 60% across the country to 22%. Your kids will live at home longer, or rent. TAx revenue will increase and tax deductions dercrease. The remaining banks will charge a much higher rate and qualify evan harder than they do. There closing costs will triple. The old days will once again appear. The rich will get richer and the poor will be screwed. Yes, the consumers of today asked for this, and are they in for a surprise. The bill H.R 3915 has been planned for years, and the option to remove the mortgage broker, has been planned for years al well. Think about it, who makes the rules? Bankers and politicions who work together. See anything yet. Maybe we should have unionized long ago, and have a strong voice speak for us, rather than some fat guy in front of the White House with a strange smile and thumbs up stating, where here for you. Maybe we should have forced the State and Goverment agencies to have a better education in place, but remember, if they had done that, there revenue in fines and fees would have suffered. Yes, we are nothing more than players in a game designed by others. We will suffer, and the game remains. Except, you will watch from the sidelines. I wish everyone well.
November 3, 2007 — 9:10 am
Trace says:
In it’s current form, HR 3915 decreases competition, will raise financing transaction costs for American Home Owners, and limits financing options for First Time Home Buyers and other borrowers that may be better served by incurring the smallest financing costs possible. The bottom line is that the very people that should be protected by such a bill are the very ones being hurt.
November 4, 2007 — 4:34 pm
Mike Mikel says:
When I first heard of this bill I checked a few of the banks rates. The senario, $200K loan, 80%LTV, 720 FICO, rate and term refinance, settlement fees equal.
My offering rate was 6% paying .25% YSP($500 to me in YSP)with 1% origination. Bank of America was 6.5%. If I charged 6.5% the YSP would have been $4000, yes FOUR THOUSAND DOLLARS. I could only wish but the Federally Chartered Banks do this all day every day. The part I don’t get is they are “honest” and I’m slime.
In Colorado brokers have to disclose all compensation, front and back. Don’t you wish they did that to cars dealers, gasoline, et. al.?
This bill is just another way large business buys politicans and politicans use the small businessman as a whipping boy to “buy” votes.
Uncle Joe and Chairman Mao gotta’ be smiling. I should have become a commie instead of shootin’ them.
November 5, 2007 — 10:49 am
Mike Volpe says:
Some here are asking what else can we do. It is simple. We need to contact our borrowers. If anyone has had a borrower that had their loan paid for by us, they need to know that will no longer be an option. We need to contact our appraisers. We need to contact the banks we work with. We need to contact the attorneys we work with and everyone needs to sign the petition, email their rep, email the sponsors, and call their reps and the sponsors. We need to create critical mass. Make no mistake we are on the verge. My blog post on this is the most popular post I have ever done. I started a discussion on Power Line about this and it is almost in their most popular. The key is to get as many people outside the industry to demand an end to this.
November 5, 2007 — 11:06 am
Graham R Forman says:
If this Bill passes my business may not be around to celebrate its 25th Anniversary next year. Parts of the bill make sense. There should be universal licensing for ALL originators, especially bank and mortgage banker’s employees. And why not have every borrower, regardless of where he gets his loan, sign a ‘refi benfit’ loan. I personally don’t know how you sell a refi to a homeowner if there is no benefit to him.
BUT, the removal of YSP for Brokers only is insane. Less than 5% of my customers pay points for their loans and 80% or more pay no cost at all. This is only possible becasue I can use the YSP to pay for everything. So how do I help these people now? Tell them they have to pay $5,000 to $10,000 to get a loan? Or they have to go to DiTech, Wells, Citi, B of A or the like and get a no-cost loan at 0.5% higher than I could have done it for? Yeah, only an extra few hundred dollars a month to pay for the next 30 years!
The reason they have come to me for all these years is so that they DON’T have to go to these other rip-off places!
And what about the customers with Fannie, Freddie and jumbo loan resets coming up? With decling home values, many of these good citizens will not have sufficient equity to roll the costs into the loan. So hey, bring in $8,000 and we’ll get you off that high rate and mamoth payment you are now going to struggle to pay.
Nice job, Washington, way to protect the interest of your Constituents. Next time you write a bill try understand the problem first.
November 6, 2007 — 12:40 pm
David says:
What is the likelyhood of this actually passing through? In my opinion it looks like more of a publicity because the mortgage industry has been in the limelight for the past 6 months.
November 6, 2007 — 7:33 pm
HR 3915 says:
HR 3915 has been passed by the House Financial Services Committee in a 45-19 vote. The bill will now proceed to the Senate to be voted upon before going to the President for signing. Further changes to the bill are expected.
November 6, 2007 — 9:40 pm
HR 3915 Mortgage Reform Bill Resources says:
I’m trying to dig and infromation on what has happened to YSP, but details seem to be sketchy as this point…. please post any info if you have it….
November 6, 2007 — 9:43 pm
Brian Brady says:
I don’t think it goes to the Senate, yet. It must pass the full House of Rep before going to the Senate for a full vote. It will now be referred to the “HR Committee for the Whole” where the horse trading starts. The “Committee for the Whole” refers a final draft to the full HR for vote.
Then, it’s referred to the Senate. Committee, horse trading and ultimate vote. If the two versions differ, the managers of each chamber of Congress either compromise or kill the bill.
If a compromise is made, it goes to the Pres. for signing or veto.
There is a LOT of horse trading ahead. This vote, today, was thought to be ceremonial. While it is a definite “shot across the bow”, it is hardly a missile amidships…yet.
November 6, 2007 — 10:23 pm
HR 3915 Mortgage Reform Bill Resources says:
You are absolutely right. Thank you for the correction…it will go to the Full House, THEN Senate…
November 6, 2007 — 10:29 pm
Ron Bowen says:
Mr. Brady is absolutely correct. Driven by greed, banks will continue to contrive ways to wring profit from a domestic economy that is failing against global competitors. HR-3915 is a finger in the dyke. After the whining has ceased and the plea for federal help subsides, banks will retreat, regroup, and resurface with creative ways to sidestep this highly-flawed proposed legislative balm. This is the power of greed.
Will the bailout of the banks’ liquidity issues restore faith in our system? No. But it has unfairly downloaded the consequences of irresponsibility to the common taxpayer. I am outraged.
Banks and ratings agencies are responsible for this debacle. The banks created broker loan origination. Ratings agencies, true to form, were asleep at the switch. Of course there will always be those (independant and corporate loan originators) who will abuse the system and commit fraud. When found out (by the Banks and ratings agencies performing due diligence) they should be punished severely. So let’s not throw out the baby with the bathwater with HR-3915. It ain’t gonna work and those in-the-know know it!
Require banks to commit a percentage of the value of loans underwritten toward the audit of those loans. Further require ratings agencies to conduct audits of banks policies and practices relating to the audit of loans underwritten and to make their finds public.
November 7, 2007 — 7:16 am