by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The Hon. Senator Christopher Dodd
Chairman- US Senate Committee on Banking, Housing, and Urban Affairs
534 Dirksen Senate Office Building
Washington, D.C. 20510
Dear Chairman Dodd:
Soon, HR 3915 will be endorsed by the House of Representatives and most likely referred to the Senate. The committee you chair, will have an opportunity to read, discuss, debate, and amend this bill before recommending it to the general Senate for vote. I am a 20 year veteran of consumer financial services with the last 14 years in mortgage lending. I have helped over 700 families finance their homes and closed some 1700 loan transactions. I humbly submit my expert opinion to you for consideration.
The Libertarian in me begs you to do absolutely nothing; it’s the borrowers’ cavalier attitude towards financial planning that caused this mess. While my statement is true, it is but a component of the underlying malaise in the residential real estate industry; we adopted an even more cavalier approach to loan approvals and that irresponsibility is being felt by the investors who trusted us to perform adequate due diligence. Failure is a costly but cogent instructor; to discourage failure on both the borrower and investing lender sides of the equation might be more costly in the long run.
I oppose individual originator licensing in its proposed form. It doesn’t demonstrate true expertise and might induce a false sense of security to the consumer. This very act may very well damage the consumer by perpetuating the adolescent approach to financial planning the average American exhibits. It transfers the responsibility of prudent money management from the consumer to the license issuing body; sadly, those bodies are not up to the task.
I am a pragmatist so I know that my remarks about licensing, while philosophically pure, are impractical from a political view. Inasmuch, I recommend that the licensing requirements be strengthened to include any and all participants in the origination process: originators, processors, and underwriters. I further recommend that the license be national in scope so it is more consistent with the standardization mortgage securitizations induced. State regulations are onerous, inconsistent, and ineffectual when it comes to enforcement- make the license consistent with the industry.
I am recommending a NASD-type licensing model, with comprehensive education and testing standards. Originators should have education in financial planning, loan programs, and consumer suitability- that license will look a lot like a Series 7, General Securities Representative. Loan Processors should be proficient in loan programs and suitability, like the Series 6 license for mutual funds and variable annuities. Finally, managers and underwriters should have supervisory jurisdiction like the Series 24, General Securities Principal license. These licenses should be required for any and all participants, regardless of their employing company, and include federally-chartered banks. The effect will be higher costs to the consumer but expertise has its price.
Yield spread premium and prepayment penalties are useful tools to lower borrowing costs to the consumer in the hands of a professional originator. These tools can be explained and presented to the consumer in a straightforward fashion. The transparency laws, followed by mortgage brokers, can be adapted to mortgage banking firms and federally-chartered banks alike. A benchmark “costs of funds” rate can be established daily by comparing the institution’s COF rate to the FNMA 60-day delivery rate. Rate differentials and their corresponding cost savings as well as the cost savings commensurate with a specific prepayment penalty can be disclosed to the borrower, in specific dollar figures, and acknowledged by that borrower when the loan rate is locked.
An amendment to the truth-in-lending disclosure statement, as it pertains to ARMs, should clearly outline what anticipated payments will be in a stable interest rate environment, a 2% declining interest rate scenario, and a 2% increasing interest rate scenario. “Required monthly income to service that debt” should be disclosed along with these scenarios. The borrower should acknowledge those scenarios, in writing, at least three days prior to signing loan documents. This disclosure allows for a borrower to fully understand what the lending institution’s recommended income requirements are for these loans, in simple terms. The borrower should acknowledge that he/she is not relying upon a refinanced mortgage to repay the loan.
The required “counseling” for high-cost loans is not functional. Most of those borrowers have caused their dire situations through financial mismanagement and procrastination. The government “counselor” will, most likely, offer advice that suggests more “shopping”. Borrowers in dire straights generally seek a timely response so that they may “cure” their problems. One more layer of regulation would dissuade lenders from catering to this growing market and likely result in an exacerbation of the problem.
Finally, any and all licensing should be abolished for non owner-occupied properties. Investors should be treated as “savvy” individuals. The very “danger” of “swimming in the deep end” should be a sufficient enough incentive for the investor to perform the due diligence required. Investing should have a degree of “danger” associated with it. Again, failure is often a costly but cogent instructor.
I will reiterate my philosophical opposition to all of the provisions of HR 3915. I have practiced my trade, with transparency and disclosure to all of my customers, like most of the nation’s originators. Most of us will not be affected by this measure at all. If, however, political pressures persist to the point of legislating a “trade union”, I ask that you take the courageous measures so that the result is consistent with the intent.
In closing, I’m telling you not to “do it” but if you’re going to “do it” then “do it right”.
Sincerely,
< ?PHP include("https://www.bloodhoundrealty.com/BloodhoundBlog/HR3915.php"); ?>
Ann Cummings says:
Wow Brian, what a well-thought out and very well-written open letter to Sen. Dodd! I hope he not only finds this post but that you also sent directly to him his own copy of this letter. I don’t pretend to know your industry well enough to understand everything you wrote, but I can clearly see your firm grasp on things and your plea for him to do the right thing. I hope you get a response from him, and if you do, I hope you post it here for us to read.
November 10, 2007 — 5:06 am
Charleston real estate blog says:
Brian, in general government response is one of overreaction and the idea of government “counselors” is bureaucracy at its finest.
November 10, 2007 — 5:19 am
Mike Volpe says:
A couple of things. One, I found nothing in the current language that strips away YSP entirely. You claimed it was one percent. Two, if you read the book, Freedomnomics, you would agree that licensing and testing is self defeating. I worked as a stock broker and the information I learned for the series seven was NEVER used again. There are so many more problems than the ones you listed. I agree that counseling is totally counter productive. We tried and will try that again here in Illinois and surprise, surprise, it lead to a drop in real estate prices. Here is how I see the bill.
http://www.proprietornation.blogspot.com/2007/11/parsing-language-on-hr-3915.html
November 10, 2007 — 7:04 am
Chuchundra says:
A proper counseling and disclosure law should lead to a drop, or at least a moderation, in real estate prices.
A good portion of the run-up in RE prices was fueled by people paying too much money for homes they couldn’t afford using various ARM/Option ARM/Neg Amort products. If the borrowers truly understood the consequences of the loans they were thinking about taking out, many of them would have declined to do so. Therefore there would have been less money being pumped into an overheated RE market and prices would have risen more slowly.
November 10, 2007 — 7:44 am
Mike Volpe says:
That sounds like the defense to the prevent defense. Proper prevent defense also forces field goals not touchdowns. In other words, if you play the defense right, then you still give up points. If something works right, and that causes real estate to suffer, I don’t think that it is much of a strategy.
Of course, if you think that real estate prices need to fall anymore, you really haven’t been paying attention in the last year.
November 10, 2007 — 8:12 am
Eric Bramlett says:
Fantastic piece, Brian. Unfortunately, most of the concepts are a little too well articulated to fit into a 5 second sound bite. I think this bill will turn into a fight over “government counselors” because it’s a concept that everyone can grasp without much knowledge or thought.
November 10, 2007 — 8:16 am
Bob in San Diego says:
>”I am recommending a NASD-type licensing model, with comprehensive education and testing standards.”
You know I am an advocate of this type of licensing.
>”Two, if you read the book, Freedomnomics, you would agree that licensing and testing is self defeating. I worked as a stock broker and the information I learned for the series seven was NEVER used again.”
I agree with this, and I’ll bet Brian does too. I think the purpose it serves is too raise the barrier to entry to at least one notch above “alive”.
>”If the borrowers truly understood the consequences of the loans they were thinking about taking out, many of them would have declined to do so.”
Most borrowers knew the possible consequences of these loans. They just didn’t believe the status quo would change so quickly because they didn’t understand the underlying economic principles and factors that influence these loans. Instead, they relied on the knowledge and advise of the agents and lenders who counseled them.
None of this matters though, as I believe that you will get your wish and nothing will be done, at least until after next year’s election.
November 10, 2007 — 8:21 am
Mike Volpe says:
Again, the book Freedomnomics makes the argument that I agree with that raising the way in which testing raises the barrier to entries is artificially too high. If the comparison is to the series seven then that is not, in the opinion of someone who took it, much of a model.
November 10, 2007 — 9:01 am
Bob Wilson says:
>Again, the book Freedomnomics makes the argument that I agree with that raising the way in which testing raises the barrier to entries is artificially too high.
I haven’t taken the series 7. What I do know is that my best lenders have had either a solid financial background, or a ton of experience. Those new to the mortgage biz that didn’t have a financial background were more likely to just sell the deal of the day.
How would you raise the bar?
November 10, 2007 — 9:53 am
Michael Cook says:
I like the NASD idea. As a holder of a Series 7 & 63 I know that you really have to know your stuff. It would raise the bar for the industry and provide better services to the customer. Good letter.
November 10, 2007 — 10:13 am
Michael Cook says:
Additionally, I think the name of the book is Freakonimcs. And while I agree with the overall premise of the book’s view on testing, there has to be a level of testing to ensure compentency. You dont let a doctor operate on people without a license because it has disasterous (sp?) consequences.
While no one’s life is threaten by a bad mortgage, as we see by the current fallout not having a great understanding of the right products can have very negative consequences. While I would also love to blame the consumer, but as someone that works in the finance industry I know I could put together tons of products that look great, but could have some nasty side effects. If consumers had a basic understanding of finance, I would expect more from them. The sad truth however is that most do not.
November 10, 2007 — 10:25 am
Jillayne Schlicke says:
Processors and underwriters need not be licensed. They only need to NOT be supervised by a sales manager whose job and bonus depends on approved loans.
I like the idea of requiring tiered licensing.
In order to change how banks disclose their yield, we would have to change RESPA, a bill that is NOT going to Senator Dodd. This constant whining we hear about banks not disclosing their yield is getting boring. Not gonna happen.
The way people are pouring into HUD counseling offices right now, they need more people in there helping defaulting homeowners. Don’t like it? VOLUNTEER to help out in one of these places.
Savy investor? No way. Some of these people went to the get rich quick seminars and were lead to their own demise by real estate agents and mortgage people. SOME investors are savy, not all.
We must change the nature of the relationship between the LO (no matter where they work) and the consumer, from that of retail to fiduciary.
HOWEVER, If mortgage brokers could get past all their fear, they might be able to see that if ONLY MORTGAGE BROKERS/LOs had fiduciary duties, they would have the opportunity to differentiate themselves between bank LOs. But right now they’re very stuck on same/same treatment, which I believe is a mistake.
November 10, 2007 — 10:34 am
Jillayne Schlicke says:
HR3915 gives mortgage brokers everything they’re asking for:
An attempt to put a stop to predatory lending
An attempt to stop the abuse of YSPs on subprime loans
Licensing LOs who work for a broker or a bank
No more refi-churning
Good, solid underwriting standards (well, maybe mortgage brokers didn’t want this one, but really now, without this, we end up with the subprime meltdown which brings dire consequences to a large number of people, including brokers, so perhaps good underwriting is good for everyone.)
and money for HUD counseling centers. Hey guys, at least they’re not making the lenders pay for this in the form of higher HUD/FHA fees.
If mortgage brokers are getting everything they’ve asked for, and they still don’t want this bill to pass, then maybe we’ve called your bluff and mortgage brokers really DO want….predatory lending to continue, the abuse of YSPs to continue….the ability to refi churn to continue….and so forth.
What gives, mortgage brokers?
November 10, 2007 — 10:43 am
Jeff Brown says:
First — The post was magnificently written, and made so understandable, maybe even a senator might understand it. 🙂
As you’re aware, it’s been my conviction from the beginning this bill will essentially go nowhere fast. It’s merely the stage for ignorant politicians to get face time in front of voters.
They’re NOT too stupid to realize doing something as extreme as this bill will come back to bite them. They enjoy throwing their weight around, seeing the fear they generate.
This to will (not) pass — at least in any form having real effect.
Your analysis of this has been more than impressive, Brian. At the least, folks can see what I’ve been telling clients for quite awhile — you’re the most knowledgeable mortgage guy I’ve known in almost four decades in the business.
November 10, 2007 — 11:02 am
Brian Brady says:
“If mortgage brokers are getting everything they’ve asked for, and they still don’t want this bill to pass, then maybe we’ve called your bluff and mortgage brokers really DO want….predatory lending to continue, the abuse of YSPs to continue….the ability to refi churn to continue….and so forth”
What we, Jillayne? Did you write HR 3915?
You’re trying the fallacious argument of affirming the consequent, here. I can despise poor business practices and still not want to government to intervene- I trust the free market to weed out the crap. This bill overreaches and can be dangerously expensive to the consumer.
Again, if we must license the industry, license everyone who touches the loan file through approval, and require competency testing.
November 10, 2007 — 4:40 pm
Brian Brady says:
Mike Volpe-
You are confusing my articles. I never advocated a cap on YSP, my satirical post about how a bill becomes a law PREDICTED that a compromise would be made.
HR 3915 is bad law but not because it eradicates the mortgage brokerage community. If the elimination of mortgage brokers would provide better financial counseling to the consumer, for a lower price, I’d support it in a heartbeat (and I is one).
The REAL issue is that the consumer will be duped into believing that she IS dealing with an expert because of the license; a license that is meaningless is more dangerous than no license.
I’m stipulating that the political winds will mandate that originators be licensed. While I think that’s a stupid idea, if it is to happen, then raise the bar to a level of competence.
The real truth is…nobody REALLY wants that because it will most of the educators lined up to profit from this bill couldn’t meet the strict requirements I promote (with exception noted to Jillayne).
November 10, 2007 — 4:41 pm
Brian Brady says:
“Savvy investor? No way. Some of these people went to the get rich quick seminars and were lead to their own demise by real estate agents and mortgage people. SOME investors are savvy, not all.”
Agreed, Jillayne. I want those wannabe investors to experience failure so they’re more judicious the next time they want to invest. Failure is a cogent instructor’ legislation perpetuates the underlying problem of investor incompetence.
November 10, 2007 — 4:44 pm
Brian Brady says:
Mike Cook-
I thought you’d like this idea. I’ll reiterate that licensing isn’t the answer, personal responsibility by the consumer is. However, if we are to trick th consumer into the belief that they will deal with a competent professional, I want us to be truly competent.
Jeff Brown-
Thank you.
November 10, 2007 — 4:47 pm
Mike Volpe says:
The bar will be raised because anyone that survives this crisis will know what they are doing. A useless test that will be forgotten and never used again a la the Series 7 and 63 (I had to study for roughly one hundred hours for the seven and that was right after college). The way to raise the bar is for mortgage companies to actually train their employees. A test is not going to resolve that problem.
Brian,
I believe that you said that YSP is going to be held at 1%. I can’t find that in the bill. I believe that there is no YSP limit on prime loans, just on sub prime.
No one is talking about the draconian measures that will eliminate sub prime altogether. That is the pernicious part of this bill. Sub prime will not only have no YSP but you won’t be able to finance points and costs. That will make sub prime no longer viable.
While we are arguing about the minutae of this bill, Congress has decided to wipe out an entire niche of the market. Why aren’t we talking about that?
November 10, 2007 — 5:39 pm
Brian Brady says:
Mike Volpe,
We mostly agree but for different reasons. I have less concern for the mortgage brokers than I do for the customers.
The point of my satirical post (discussing how a bill becomes law and the compromises that drive that) was to demonstrate that the legislative process will alter the bill to be more inline with the real problems in our industry.
Subprime will be reinvented because it didn’t work for the investors. I have been engaged in private mortgage lending (hard money-definitely subprime) for years. We receive our compensation as borrower-paid points.
Subprime loans, since inception, were meant to be “band-aid” loans, not a driving force of the GDP. Borrower-paid costs highlight the very high expenses; eliminating YSP would have zero effect on the subprime market, when used for it’s original intent.
I never advocated a limit to YSP- I just think we’ll see that compromise in the legislative process (again, I implore you to read that article I write- I said the limit will be raised to 2% for YSP)
“While we are arguing about the minutae of this bill, Congress has decided to wipe out an entire niche of the market. Why aren’t we talking about that?”
What niche is that?
November 10, 2007 — 6:04 pm
Mike Volpe says:
Sub prime is that niche.
If you read the summary of the bill as I did, from Barney Frank’s site, you would have seen that sub prime is addressed in four different ways.
1) YSP is eliminated on sub prime loans
2) Points and other fees can no longer be financed into the loan but rather have to be paid for by the borrower
3)Anti steering. Someone can no longer be put into a sub prime loan when they qualify for prime. Since this language is quite vague, I wonder if they consider EA III to be prime. Would Congress go so far as to say that if someone qualified for EA III, that they have to be put into such a loan over sub prime.
4) The new counseling program.
Sub prime is already taking a standing eight count and now Congress just came in reigning hay makers. These four things combined together would not only kill off sub prime but frankly it would be overkill. Haven’t you read the summary? I have asked several times where you found the 1% YSP. You haven’t answered that for me.
There is no mention of limiting or eliminating YSP at all, besides in sub prime in which it is eliminated.
If YSP is eliminated on sub prime but not on prime, that gives prime that much more of an advantage as a marketing tool. If this law passes in any form near the one it is in now, sub prime is destroyed, and yet no one, besides me, is talking about that.
If you care about the consumer like you continue to claim, how come you have made no mention of the draconian ways in which sub prime is addressed?
November 11, 2007 — 7:26 am
Bob Wilson says:
You are debating a bill that is going nowhere. Just like HR3648, the Mortgage Debt relief Act of 2007, it barreled through the House at light speed, only to be dumped into the Senate to rot. The passage by a Democrat controlled Senate of either of these bills is counter productive to the political agenda at hand.
No intelligent reform will be passed prior to the electing – a year off.
November 11, 2007 — 8:32 am
Mike Volpe says:
Bob,
I don’t make predictions. I merely deal with what is at hand. What we have is a group of legislators that have passed something out of committee that is in my opinion a monstrocity.
If you want to be cavalier in your predictions, that is frankly your problem. I am not waiting until it reaches the President’s desk to make my voice heard.
The Democrats so plenty of opportunism in passing such a bill and there is no politician that I know of that understands or cares about what happened in the mortgage market or how best to deal with it.
Frankly, I thought blogging was for debate, and I assume real estate and mortgage blogs are perfect for debates on those areas.
Last I checked, Doc Brown wasn’t my friend and I don’t have one of those special Deloreans, thus unless you do, you don’t anymore about the future than I do. I know about the present and in the present we are dealing with a bill that has the potential to do a lot of bad.
November 11, 2007 — 8:46 am
Bob Wilson says:
Mike, if you knew me, you would know that I am rarely cavalier. With regard to both bills, I have spoken to staff of House members, staff of the Senate Finance Committee and staff of a dozen Senators who have the ability to either bottle or un-bottle those bills in committee.
What I have been told across the board is that the House passes numerous bills that never become law.
With regard to HR3648, Republicans don’t like the pay for, they want a 3 year sunset clause and Bush won’t sign it as written. Democrats won’t alter it to something he will sign. With regard to HR3915, there is just as much opposition.
What I have been told off the record, but just as frequently, is that they won’t become law anytime soon because passing anything that solves the mortgage related morass that exists takes away the ability to point to the White House as being unwilling to do anything.
Take the Distinguished Gentleman from New York, Sen. Charles Schumer. Good ole Chuck has been harping on Bush about not doing anything since September. Chuck sits on the Finance Committee and could bring HR3648 to a vote in a week. Instead, it has sat unheard in committee since it was referred there on October 4th.
As I read it, HR3915 would hurt the housing economy. We all know that there are many times when sub-prime is used by prime borrowers to creatively solve some problems (Brian wrote something somewhere that covers that). These bills were created solely as political tools and/or pulpits, which is typical of most legislative actions. Dodd is a master craftsman who knows how to use both.
November 11, 2007 — 11:31 am
Bob Wilson says:
>Frankly, I thought blogging was for debate, and I assume real estate and mortgage blogs are perfect for debates on those areas.
Agreed. I was merely debating the merits of debating an outcome that some legislators don’t believe will materialize. 😉
If all you got here was a bunch of me too “I agree, great post” responses, then all you would have is Active Rain. 😉
November 11, 2007 — 11:43 am
Jeff Brown says:
Bob — At the risk of your wrath, I have been saying about the same thing you’ve been saying all along.
You just said it better, and more convincingly. 🙂
November 11, 2007 — 11:47 am
Bob Wilson says:
Jeff,
I am a raving fan. I apologize for failing to note your earlier points.
November 11, 2007 — 12:00 pm
Jeff Brown says:
Geez Bob, you don’t need to note my points. 🙂 Those who disagree with us, for the most part, and with few exceptions, haven’t, over the years, seen what we’ve seen. Brian’s experience is one of his biggest assets, especially when these kinda bills are written.
He understands two things I think.
1. As you point out, solving the current problem takes a punching bag away from Demos.
2. By producing this piece of lawn feed as ‘legislation’ they get to shout loud without ever having to put up or shut up.
They get a double win.
November 11, 2007 — 12:09 pm
Mike Volpe says:
Bob, I am proud of you however again, I don’t have a time machine and neither do you. Thus, all I can deal with is what has been passed and this bill has been passed out of committee. The only thing I know about politics is that no one can predict anything. This bill is being passed strictly for political purposes. I know of no one on either side in Congress that knows the first thing about this crisis or how to deal with it.
Schumer thinks that ARM’s should be done at the fully amortized rate (something that is in some of this current bill I believe) which of course would eliminate ARM’s as a viable option. If you want to debate what chances this bill has of passing, that to me is much less worthwhile debate than the merits of what is currently about to go to the floor.
November 11, 2007 — 3:34 pm
Brian Brady says:
“This bill is being passed strictly for political purposes. I know of no one on either side in Congress that knows the first thing about this crisis or how to deal with it.”
The point of this post, Mike Volpe. I am told by a staff member that it will be read.
November 11, 2007 — 5:09 pm
Bob Wilson says:
Mike, you are correct. I have no crystal ball and no time machine (but I can do a card trick that always fools my 4 year old). I think the bill is mostly garbage and without enough merit worthy of debate.
I am simply pointing out that this bill has a long way to go, and a lot of opposition who are in no hurry to see it turned into law. If by chance it isn’t sent back to be sliced, diced, drawn and quartered in committee before a final vote, then when it is sent to the Senate, it will require someone (Senator Dodd) with a will to see it proceed. I believe, for the reasons Jeff mentioned, that it is not in the Senator’s best interests to push this too hard. It isn’t close to veto proof and Bush is not likely to push for it unless Wall St and the Big Banks demand it. At the moment though, I think those two groups have more pressing concerns that this doesn’t fix.
It isn’t fortune telling or magic. It’s simply math based on the preliminary research of a political junkie. In it’s present form, this bill doesn’t have the broad based support that equates to enough votes to become law.
At the end of the day, I think we agree. The bill sucks and its purpose is strictly political. The difference is you have a greater fear and distrust of the process than I. While I fear and distrust the players, the process has built in stumbling blocks that make it hard for them to do damage with any real speed. The players know this, so they posture to keep themselves busy and look good.
It must have been nice when Congress was a part time job.
November 11, 2007 — 5:41 pm
Brian Brady says:
“While I fear and distrust the players, the process has built in stumbling blocks that make it hard for them to do damage with any real speed. The players know this, so they posture to keep themselves busy and look good.”
The point of my satirical post:
HR 3915: Anti-Consumer Bank Protection Act of 2007
Sen. Dodd thinks Bernanke has his finger on the pulse of the real problems. I think this bill will pass in a much watered down version of the original draft.
The only thing which will come from this bill is a national licensing of originators (which is just plain wrong). The only way for that to be effective is for the license to mean something. That is the point of this letter
November 11, 2007 — 6:10 pm
Mike Volpe says:
I understand how politics works and the bill will go through an evolution however no one Republican or Democrat Senator or Representative is someone that I believe will resolve anything.
I know from experience that pols would put the ridiculous counseling into law. Check out HB 4050 and its reincarnation SB 1167 for a good example in my state Illinois.
You can all tell me that this has no support however I have also done the math and this passed committee 45 to 19 which means that members of both parties voted for it.
No one knows what the final bill will look like however I do know what it looks like now and this version WILL destroy sub prime and take lots of poor folks out of the market for buying property.
November 11, 2007 — 6:30 pm
Brian Brady says:
Whoa, Mike, now you’re spinning this issue !
Poor people don’t need sub-prime loans. I have funded loans for many lower-income families with a prime loan or guvvie.
Sub-prime loans were designed for people who have:
(a) demonstrated financial irresponsibility
(b) have had a temporary event that caused financial hardship
(c) who have the ability to buy but don’t wish to wait until their credit/income profile is commenseurate with guvvie or prime loan guidelines guvvie.
Many “rich” people use sub-prime and have used it irresponsibly.
Most “poor” people pay their bills and live within their means; they still get great rates and terms.
November 11, 2007 — 8:02 pm
Mike Volpe says:
I am not spinning anything. If you think that most, not all, but most of the people that get sub prime are anything but poor than you are kidding yourself.
I have plenty of experience as well and sub Prime loans are done for a lot more poor people than are prime.
Your evidence is anecdotal not scientific.
I neverb said that all poor people go sub Prime however if you think the elimination of sub Prime is anything but a disaster for the poor you are kidding yourself.
Here is how analyzed how H.R. 3915 will crush sub prime in its current format at least.
http://proprietornation.blogspot.com/2007/11/ironies-of-hr-3915.html
November 11, 2007 — 8:29 pm
Brian Brady says:
Mike-
Your using the fallacious argument of affirming the consequent.
Mike, not everybody is “entitled” to a house. Sub-prime loans should seek to solve problems, not perpetuate them. Many of the “poor” would do well to delay gratification, save up some money, pay bills on-time, and buy a home within their financial means.
In fact, elimination of sub-prime could very well “help” by the “poor” by restricting access to an instrument that is potentially damaging in the wrong hands.
Eliminating YSP for sub-prime wouldn’t be all that bad; I’d just hate to see it legislated.
November 11, 2007 — 11:26 pm
Mike Volpe says:
I never said everyone is entitled to a house. I said this bill will eliminate sub Prime.There are four different parts to this bill devastating to sub prime and eliminating YSP is only one of four.
I encourage everyone to read the piece I referenced earlier because it does not appear asb though anyone else has studied the actual bill as I have.
November 12, 2007 — 6:36 am
Dave Shafer says:
Licensing would change the model for many of the large lenders. No longer can they put “anyone with a pulse” on the other side of a telephone line. So I don’t think this passes. The lenders will put their muscle behind no liscensing requirement. Not that it would solve “the problem” of folks getting into loans that don’t work for them.
I have a mortgage broker license here in Florida. The test was as easy of a test as I have taken (Also have taken Series 6, series 7, life/health insurance, real estate tests). Bottom line it does not guarantee good advice.
I gotta say that the problem is not one of consumers being taken adavantage of, although some were. But it was of Wall Street not adjudicating risk correctly.
85% of these sub-prime loans are not in foreclosure, so the consumer/investor was able to purchase a home that they couldn’t without the sub-prime option. You got a large majority of bad credit folks making their house payments. The investors that were going to flip the houses in short order, got caught with a bad RE market. So what? They foreclose, the market suffers for a while because they bid up homes past where they should of, and the investor/buyer learns to do it better the next time.
My prediction: nothing changes!
November 12, 2007 — 9:53 am
Mike Volpe says:
David,
the law in its current form excludes banks. Obviously, it would make sense for licensing to be for everyone, but there is politics involved.
As for licensing removing everyone with a pulse, that is nonsense and if you hold a Series 7 you know that. Are you saying that stock brokers are the model of intelligence and knowledge? They aren’t. There are as many incompetent and scummy stock brokers (I know I have worked in both professions) as there are mortgage brokers.
All the series seven did is force me to study for an obscene amount of time right after I graduated. I didn’t work. I made almost nothing while I studied, and none of what was on the test was ever used again.
November 12, 2007 — 10:29 am
Bob Wilson says:
>”it does not appear asb though anyone else has studied the actual bill as I have.”
That is a tad presumptuous.
November 12, 2007 — 10:48 am
Mike Volpe says:
I have a question for anyone with knowledge. H.R. 3915 continues to reference North Carolina’s anti predatory law. Does anyone know anything about that law?
November 12, 2007 — 10:50 am
Mike Volpe says:
Well, there are those saying that removing YSP from sub prime is good. That maybe so however YSP is only removed from sub prime in the current bill. If that is the case, it makes sub prime that much more uncompetitive, and yet no one is pointing that out. Like I said, there are four major hits that sub prime takes in this bill and people point out one or two and not all four. If you have read the bill, you would see what it does to sub prime and you wouldn’t claim that removing YSP may help sub prime, because YSP is only one thing that is done.
November 12, 2007 — 10:58 am
Dave Shafer says:
Mike,
You mean that lenders will not have to have licensed individuals, only mortgage brokers? Or only folks who want to do sub-prime loans?
Yes, I have made your second point many times in other posts. However, the business model of 1-800 call me lines is to put anyone that can read a computer screen on the telephone to take applications. This is what needs to be attacked in my opinion.
November 12, 2007 — 2:20 pm
Mike Volpe says:
The way the law reads now. If you work for say WAMU, you only need to get registered, fingerprinted, etc. Whereas if you work for a mortgage company, then you need to be registered and licensed which means taking a test.
Thus, it is another advantage for banks. Here in Illinois we already have such rules in place and in the same way, banks are immune. This follows a long line of things banks are immune from. I firmly believe that this has to with two things: money and power. These are two things banks have that mortgage brokers don’t have nearly as much. That is why these laws only apply to brokers.
November 12, 2007 — 2:24 pm
Bob Wilson says:
Mike, banks have all but walked away from sub prime, so why would they care? What do they gain from pushing this through?
November 13, 2007 — 8:10 am
Jeff Brown says:
There are two advantages to being a Bloodhound contributor. I’m granted the honor and privilege of writing here, and I get to learn really cool stuff.
For instance, take this post. I just learned that a bill currently going through the legislative process, and directly related to the mortgage and banking industries, is about money and power.
I’ve also learned, after days of reading comments, then rereading the post, that if anything, I should be sorely afraid.
Apparently, for the 143,908th time in my career, there’s a bill, somewhat related to the real estate industry, that’s gonna, this time really really really fer sure, make the sky fall.
Lord, please have mercy on us.
November 13, 2007 — 8:13 am
Mickey Ridings JD says:
Anti Mortgage Broker, Anti Consumer and Bank Protection Act of 2007
Why would anyone think that HR 3915 will “protect consumers”? Did not the makers of the previous law feel that it “protected the consumers”? This bill will not, does not, nor is it for the “protection of the consumer”. This Act is void of common sense. Shows the lack of a basic understanding of economic and business principles, along with a total misunderstanding of what a mortgage brokerage company does and why they are paid for what they do.
The Mortgage Brokerage Company
Mortgage brokerage companies are the retail marketing arms for and represent approximately 2/3rd of the banks and other lenders and originate approximately 68% of the mortgage loans in America. There is a Latin phrase in law “Res ipsa loquitur” which means the ‘thing speaks for itself”. In other words if mortgage brokers were not providing services, products and programs at competitive rates and fees they would not be able to maintain this size market share.
They are licensed, bonded and insured in the state as a financial institution. They are personally liable (punishable by revocation or prison) for fraud for the life of a loan. They have legal, moral, and professional liabilities to prevent fraud and fully disclose loan terms. Further, the agreements with lenders require them to repurchase the loan if the customer does not make their first payment or fraud, or 2 times late in the first 6 months.
Today in most developed mortgage markets especially the USA, UK, Australia, New Zealand, Spain and Canada mortgage brokers are the largest distributors of mortgage products for lenders.
In the USA there are over 50,000 mortgage brokerage companies that employ over 400,000 employees. These companies are regulated by 10 federal laws, five federal enforcement agencies and over 49 state laws or licensing boards.
They represent banks and other lenders under a wholesale agreement. The wholesale agreement allows them to offer those lenders money, products and services to the general public. The pricing of money offered by the lenders to the mortgage broker are at wholesale. The mortgage broker in turn offers the funds at the retail price depending upon the market, credit risk, loan to value and other factors. This allows the mortgage brokerage company to make an income item referred to as “yield spread”. On an average about 2/3rd of a mortgage brokerage companies income is the result of “yield spread”. This is paid to the mortgage broker by the lender for acting as their retail branch, marketing their products and delivering loans to them (otherwise the lender would have to maintain their own retail office).
The advantage to the consumer is that the mortgage broker representing a number of lenders can place the customer with the loan program or programs they qualify for at that time. Otherwise the customer would have to go to each individual lender to see if they qualify for the specific products they offer.
In addition, the mortgage broker will charge the customer a fee or fees for the services they provide for them. These fees may include points, processing, administration, credit reports, courier and other costs or charges incurred.
These services can include but not limited to, taking of application (20 to 30 pages), review of disclosures, GFE, TIL, etc, assessment of the borrowers circumstances, fact finding, interviewing, credit history review, and affordability by verification of incomes. Assessing the market to find a mortgage product or program that fits the client’s needs. Presentation and recommendations with the customer regarding the program or programs. Applying for the lenders conditional approval. Gathering all needed documents, pay stubs, palyslips, bank statements, VOE’s, VOD’s, etc., submission to lender, competition of underwriting stipulations and review with underwriting to obtain the “clear to close”. Working with insurance and title companies to obtain insurance and clear any title issues. Working with appraiser regarding comps and other appraisal issues. Working with the realtors if purchase transaction. Scheduling closing and to be present at the closing with customer to review HUD-1 and other closing documents to be signed. Post closing availability for any questions by customer or further review. Maintaining and storing the customer’s files for 3 to 5 years as required by law.
These services are performed by the mortgage brokerage companies through their employee mortgage originators generally paid on a commission, managers, assistances and processors paid a salary.
Cause of Sub-Prime Melt Down
The protection of people from abuse of any kind should be everyone’s pursuit. However, consumer protection is not one dimensional but is multifaceted. The foreclosure of homes is generally brought about, by loss of job, disability, medical, divorce or loss of spouse’s income, and other catastrophes.
Along with the reasons above, the “melt down” of the sub-prime business is the direct result of consumers not changing their spending habits. In the last 5 years the sub-prime industry continually reduced the credit requirements that consumers were required to meet to obtain a mortgage loan. Most of these consumers had become over burden with a combination of mortgage payments, credit card debt, auto and other loans. Debt consolidation loans were completed to reduce the overall monthly payments using 2 or 3 year fixed variable loans necessary to keep interest rates lower. The plan was to give time for the home to appreciate in value, get further away from the bad credit and refinance in a longer term fixed rate loan later. However, the consumers did not change their spending habits and re-incurred additional debt. What is interesting is that without the sub-prime loan most of these customers would not have been able to purchase a home in the first place.
The Act Increases Regulatory Burden
The Act requires all loan originators to be federally registered with a “unique identifier number. This is needed to give the National Association of Mortgage Brokers a marketing list. However, it will be a very short list.
The Act holds harmless any officer or employees of “The Secretary”, State official or agency, federal banking agency, or any organization serving as the administrator of the Nationwide Mortgage licensing System to any civil action or money damages.
The Act imposes a duty of care on the mortgage originator to be registered and licensed, “diligently work to present the consumer with a range of residential … loan products” (what if they only qualify for one product), make full disclosure “comparative costs and benefits of each loan product offered, discussed, or referred to by the originator,(can this be done verbally or in writing); not acting as a agent (Already required), conflict of interests (Already required), certify to creditor that requirements are met (the creditor will underwrite the file to determine requirements met, not the broker, how can the broker certify?), and provide identifier on all loans. The loan product must be appropriate, “customer have ability to repay” (What debt to income ratio would qualify for this 25%, 30%, 35%, 40%, 45%, 50% 60%) if refinance “receives a net tangible benefit” (cause customers do not have the ability to determine what is in their benefit anymore), “does not have predatory characteristics (such as equity stripping and excessive fees and abusive terms) (what does this mean?)”
The Act will add an additional level of regulatory burden to and already over burdened and regulated industry. The Act does not provide the “only standard” for state laws regarding license requirements but sets “minimum standards for licensing”. The result is that we will have federal oversight in addition to 50 other states that may have or could have stricter licensing requirements. Presently, mortgage brokerage companies are required to repurchase bad loans, face civil and criminal charges, regulated by 10 federal laws, 5 federal enforcement agencies, and over 49 state laws or licensing boards. What has gotten better for the “consumer”?
Further, the Act does not “Streamline the licensing process or reduce the regulatory burden” The Act requires submission of the same information to each state to obtain a license from that specific state (background checks, fingerprints to FBI, Personal history and experience, Credit reports, administrative, civil or criminal findings etc.) Does this duplication help the customer? No
If the federal government is going to reform mortgage laws they should preempt state law, make licensing, education requirements and mortgage laws uniform in all states in-order to reduce costs and to allow consumers in one state the same ability to obtain financing in a different state. Further, if a mortgage company is licensed in their home state they should be able to obtain a license in another state with out going through the same federal procedures.
The Act Eliminates Mortgage Brokers from the Competition
The Act amends the definition of “Points and Fees” to include yield spread paid to the mortgage broker whether or not it is a table funded loan. The result is that yield spread premium paid to the broker must be included in TIL to calculate the annual percentage rate (APR).
The practical result of this is;
The banker quotes a customer for a $100,000 loan, 30 year fixed, $3,000 closing costs, a note rate of 6.5% (2% YPS or Profit not included in APR) and APR of 6.897%.
However, the broker quotes the customer a $100,000 loan, 30 year fixed, $3,000 closing costs, a note rate of 6.5% (2% YPS included in APR) and APR of 7.104%.
Result, same deal, broker has to quote a higher APR. “I am just a simple caveman lawyer, these things mystify and confuse me” but I think the customer will be doing business with the banker and not the broker. Just a feeling. Good for the customer? No, Good for banks.
Example of Banker Ad: If you do business with us we will guarantee you that we will match or beat any mortgage brokers annual percentage rate (APR) and pay you $250 for bringing us your Good Faith and TIL.
The Act will drive all mortgage brokers and many lenders out of business leaving only depository banks and their affiliated mortgage companies. There are approximately 50,000 USA mortgage companies employing over 400,000 employees that will be affected by this Act. Good for consumer? No, limits competition and good for banks.
No Yield Spread on Sub-Prime Loans
If not a qualified mortgage YPS cannot be based on rate (“terms of the loan”) but only the principal amount of the loan. How does a lender do that without considering the interest rate? Example: we deliver a loan of $100,000 at a rate of 7% they pay a 1% YPS, next we deliver a loan of $100,000 at a rate of 6.5% they pay a 1% WHAT LENDER IS GOING TO DO THIS, RESULT NO YPS ON SUBPRIME LOANS. Which really does not make any difference since there will not be any sub-prime lenders anyway.
No Yield Spread on Non Sub-Prime Loans & No Mortgage Brokers
A “qualified mortgage” means a first mortgage that either (I) has an “annual percentage rate” that does not equal or exceed the treasury + 3% or (II) has an “annual percentage rate” that does not equal or exceed the most recent conventional mortgage rate, or such other annual percentage rate as established by regulation by more than 175 basis points.
A conventional mortgage rate are rates most recently published in the Federal Reserve Statistical Release on selected interest rates (daily or weekly), H.15 release.
For example the Federal Reserve Statistical Release rate for week ending November 23 is 6.20%. The APR on the loan could not exceed 7.95% or Treasury of 4.46% + 3% = 7.46% In order to comply with this provision on a $100,000 loan with 1 point and total closing costs of $3,906.40 and prepaid items of $878.07, a 30 year rate of 5.875% (which is about PAR) would have an APR of 7.406%. RESULT NO YIELD SPREAD AND 1 POINT.
Now pay your Loan Officer 50%-60% commission, plus taxes, plus workman’s compensation, rent, other payroll, supplies, marketing costs, storage of files, licenses and permits, insurance bonds, costs of audits and etc. In other words a mortgage brokerage company will not and cannot survive on 1% per loan. RESULT NO MORTGAGE BROKERS
The total points and fees cannot exceed 5% (Presently 8%) of a loan amount $50,000 or greater or be considered a “high cost loan”. Lenders do not make high cost loans now and they certainly will not under this Act. Result, the mortgage brokerage companies will not be able to earn enough money to remain in business.
This Act basically is the same (because citizens of the US are overweight) as requiring Baskin Robbins 31 flavors (mortgage brokers & lenders) to only sell diet vanilla at a price were they cannot stay in business, while exempting the ice cream parlors (depository banks and affiliated mortgage companies) who can sell all 31 flavors at a price they determine.
Under the Act USA Borrower’s not competent to Contract
A mortgage is simply a contract between two or more parties. People are either competent to enter into the contract or not. The right of private citizens to enter into a contract concerning their own property should not be interfered with whether at the federal or state levels.
The retail market price of a mortgage is the APR (annual percentage rate) clearly defined by statute and regulations. APR considers both closing costs and interest rate which can be compared by the consumer. The financial market place should be allowed to freely seek the needs of borrowers to determine products, programs and associated underwriting guidelines based on credit, loan to value, income, APR and other considerations. The Act will not allow this to occur.
Under the Act, federal regulators HUD, OCC, OTS, FDIC will determine what mortgage loan is in the best interest of the consumer, if ability to repay, if a “Net-Tangible Benefit”, not the consumer.
The Act deprives Citizens of use of their “property”
The Fifth Amendment of the US Constitution provides that a US citizen shall not “be deprived of life, liberty, or property, without due process of law, nor shall private property be taken for public use, without just compensation.” One of the traditional property rights is to any benefit from the property (to mortgage it). This Act deprives some of its citizens of the benefit of their property for they will not be able to obtain mortgage financing on their homes (property) to benefit from appreciated equity necessary to lower their rate, lower payment or debt consolidation.
The Act will restricts available credit to a select few
The Act will eliminate the sub-prime programs. (The sub-prime loan programs were used to cover customers with credit scores from 500 to about 620 that could not qualify for Freddie Mac, Fannie Mae or government guaranteed loan. A majority of Americans fall in this category.) Without these sub-prime loan programs many consumers will not be able to obtain a home to “protect” or refinance an existing mortgage. Good for consumer? No
The Act will eliminate stated income (Credit Based) programs used mostly by self employed that make up over 60% of businesses in America. Most of the consumers in this category will not be able to refinance their existing home. Other self employed consumers will not be able to purchase a home to protect. Good for consumer? No
The Act will eliminate (Credit Based) no ratio loan and no document loan programs. Good for consumer? No
The Act will eliminate “hard money” (Collateral Based) loan programs for customers with below 500 credit scores used to save homes from foreclosure, bankruptcy or to purchase a home for the very low credit score consumer. Good for consumer? No
If there was not a need to the consumer for the above products they would not exist. Without these programs a majority of American citizens will be unable to obtain mortgage financing. People have got to have access to money to purchase or refinance a home. This is basic Economics and Business Finance. Inability to obtain money, reduces the demand for homes, drop in demand causes a market devaluation of the property. Good for the consumer? No. And not good for Realtors.
The Act will restrict available funds in secondary market
The Act will create contingent liabilities on the secondary mortgage markets. Investors simply will redirect their monies into other investments or mortgage backed securities in other countries. Result, fewer programs and funds available to lend to USA consumers. Good for consumer? No
The Act Pre-empts State Foreclosure Laws increases risk of losses which could result in higher mortgage insurance for customers
Further, if a creditor violates TIL 129B (a) or (b), the consumer can sue for rescission of the loan and costs including attorney fees. The assignee and securitizer can be sued by the customer for rescission of loan and costs. The Act provides customers defenses to foreclosures. What lender is going to make a mortgage loan, where the Act on this issue pre-empts state laws, creates a potential court fight with attorneys for years while the consumer is living in the home, not making payments, incurring additional costs just to get control of the property in-order to sale and reduce their losses. Just on this issue alone, I can see the mortgage insurance paid by mortgage customers going up in price.
Example, home owner quits making mortgage payments (for whatever reason). Lender starts foreclosure proceedings in state court incurring additional legal costs. The home owner goes to his pre-paid legal attorney and says “can you help me; they are going to foreclose on my home”. The attorney has to represent his client zealously using the laws at his disposal or he could be sued for malpractice. Why yes I can, says the attorney, we will notify the lender of our intent to file suit in federal court under HR 3915 and tie it up for a year or two. We will see if we can extort some agreement from the lender. A lender must be able to get possession of the property to reduce their losses. The Act interferes with the lender and investors foreclosing on the property. Result, risk of loss increases, lenders will pass this increased risk to mortgage insurance carriers. The mortgage insurance carriers because of the increase risk of loss will have to increase the mortgage insurance premiums charge to the borrowers. Good for the consumer? No bad for the consumer.
Results if HR 3915 becomes law
1. Mortgage brokers will go out of business or become bankers;
2. Additional lenders will implode;
3. Foreclosures and bankruptcies will double;
4. 20% to 30% additional drop in housing sales;
5. A substantial devaluation of all residential homes through out the nation;
I remember the “Tax reform Act of 1986”. That Act caused the failure of S & L’s, devaluation of commercial real estate portfolios and bankruptcy of thousands of investors and general partners. HR 3915 since it applies to all home owners will have 10 to 20 times the effect of the 1986 tax act.
I think Larry the Cable Guy illustrates HR 3915 very well when he said “I was riding my horse and he broke his leg, they say you got to shoot them if they break their leg, so I shot him, I still do not know why, cause now he has a broken leg and a gun shot wound and if he’s not better tomorrow, I am going to shoot him again”
December 12, 2007 — 11:09 pm