There’s always something to howl about.

HR 3915: Open Letter to Senator Dodd from a Veteran Mortgage Originator

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,

Brian Brady

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