by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Congressman Banker…err…Barney Frank co-authored legislation to “reform” the mortgage business on Monday. You can view the 66-page text here.
Bullet Points of the bill include:
1- Prohibition of “yield spread premium” as compensation to originators.
2- Mandatory licensing of mortgage originators by a Federal registry or state regulator. This Bill does direct the Office of Thrift Supervision to establish a registry for bank employees who originate loans.
3- Ability to repay the loan must be established. Limits on cash-out refinances and a determination of a net tangible benefit to the borrower will apply.
4- Mandatory “pre-funding counseling” for certain “high-cost” loans by a certified HUD counselor.
You really must read this bill in its entirety. Hidden among the bowels of the bill is language specifically limiting interest rates to 1.75% over the “published market rate” for conforming loans. How can you determine a “market rate” if there are limits? That’s just a paradox.
All of these proposed measures will be more costly to the consumer and is a prime example of “Big Momma” acting as YOUR financial planner.
Yield spread premium is a very effective way to defray the up-front costs of a loan.
Mandatory licensing will cause consumers to place undue trust in the “government-approved” originator. While I philosophically oppose any form of occupational licensing, I would support this mandatory licensing if it were unilaterally applied with testing of expertise. If the government is going to create a class of “loan agents”, they had better be qualified to effectively counsel consumers about how to use their mortgage as a financial planning tool.
Government regulated underwriting guidelines will contract the real estate market.
Financial planning tips from a government agent? Seriously, does anyone else notice the irony in this?
< ?PHP include("https://www.bloodhoundrealty.com/BloodhoundBlog/HR3915.php"); ?>
Phil Hoover says:
Our guvmint at work ~ saving we stupid people 🙁
October 25, 2007 — 4:15 pm
Benn says:
Please let it be noted here in this public record that NAR had nothing to do with this:
2- Mandatory licensing of mortgage originators by a Federal registry or state regulator. This Bill does direct the Office of Thrift Supervision to establish a registry for bank employees who originate loans.
or did they…. ‘queue scary halloween music’
October 25, 2007 — 4:59 pm
Brian Brady says:
LOL at Benn
October 25, 2007 — 5:22 pm
Robert Kerr says:
The lenders have brought this upon themselves because of years reckless, irresponsible and, in many cases, predatory and fraudulent lending.
Having said that, I agree that it’s a terrible proposal.
But, if this turns out to be the worst idea to come from Congress to address the credit crisis, consider yourself lucky. I expect more and worse regulations, as time goes on and the situation deteriorates.
October 25, 2007 — 7:51 pm
Kaye Thomas says:
The lenders aren’t the ones who will bear the “cost” of these new regulations.. it will be the consumer.. .
October 25, 2007 — 10:54 pm
Charleston real estate blog says:
Brian, I also noticed that the bill “would for the first time let homeowners sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying”. The lawyers should have a field day with this one if that sneaks in. I hope all is well in San Diego for you and your family and friends.
October 26, 2007 — 3:57 am
Lenn Harley says:
The top industries supporting Barney Frank are:
1 Securities & Investment $177,808
2 Insurance $144,248
3 Real Estate $140,485
4 Lawyers/Law Firms $112,083
5 Commercial Banks $108,150
October 26, 2007 — 6:33 am
Dave Shafer says:
Agree this is a terrible bill. Also agree that the government certifying mortgage originators is ludicrous. But having said that the current hiring practices of lenders for loan officers has brought on much of their current pain. Currently, anyone can originate loans for lenders and if you take a look at who does it is scary. Folks who have no math skills, no finance training, and no understanding of personal finance other than their own pocketbook are the norm for the industry. Here in Florida to work for a mortgage broker you need to take a class and pass a test, but work for a lender and you don’t. The class is useful for understanding mortgages 101, the test is easy and they let you use a calculator, but for what I don’t know since there was no math calculations needed other than one simple addition.
I think the real professional mortgage originators will remain while the rest go back to selling cars or whatever they were doing before.
If the government really wanted to improve the process they would require face to face interviews, eliminating the 1-800 telemarketers, and the internet marketers from the process.
October 26, 2007 — 8:52 am
Jeff Brown says:
I’m trying to handicap the chances of this bill becoming law. The Rockies have a better chance of taking four straight from the Red Sox.:)
October 26, 2007 — 4:35 pm
Brian Brady says:
Don’t say that, Jeff. I’m a Sox hater.
If Boston wins the World Series, the luck might carryover to their Congressman (Frank)
October 26, 2007 — 4:38 pm
Jillayne Schlicke says:
Dave made a comment about basic math skills. I teach a loan originator exam prep course and in that class, the LOs take practice quizzes. When finished with the first quiz, I say “Okay, now shout out your scores.” The majority of students do not know how to figure out “number of correct answers divided by total number of questions” and some need basic prompting for how to do this on a simple, basic calculator.
No wonder we have laws like this coming our way.
Didn’t I predict this many months ago, Brian? YES!
Any federal legislation will be aimed at brokers, not the bankers because the bankers have more lobbying dollars. (Thanks Lenn.)
There will be no national licensing that covers all LOs at all types of lending institutions. No fine argument or well written blog post will make it happen. The only thing that will move congress in this direction is money.
October 26, 2007 — 11:11 pm
Brian Brady says:
“There will be no national licensing that covers all LOs at all types of lending institutions. No fine argument or well written blog post will make it happen. The only thing that will move congress in this direction is money”
…which is why occupational licensing is dangerous. It dupes the consumer into believing he’s dealing with a professional. Of course, when that “licensed professional” can’t deal with fraction conversions, we’re in big trouble.
So…my take on licensing?
“Go Big or Go Home”
October 27, 2007 — 11:33 am
Dave Shafer says:
Jillayne,
Totally scary account you have given, but it is what I have seen here in Florida. Even at banks, who should do better, the LO’s are usually pretty inept (as well as very young). Don’t see things changing anytime soon. This will all die down and nothing will change.
October 29, 2007 — 6:35 am
Dan Ward says:
Mr. Frank’s bio contains absolutely no experience outside of government and grad school. This is a man who has never had to worry about how to make a profit, ever. He frankly shouldn’t be trusted with any idea about anything to do with economics or business policy.
That said, don’t under-rate the chances of this bill passing. Hard times make it easy for bad ideas to become law. Any reader of this blog should be contacting any Democratic Congressman that they have standing with (donations, constituent representation) and calling on this today. NAMB should also have this on the top of their website.
October 29, 2007 — 7:52 am
Ken Cook says:
Brian – thanks my friend! I have NO PROBLEM (as you know) with licensing originators/loan officers. But not just the ones that work for brokers … ALL of them or none. I have to call you about this – thanks to Leigh Brown for telling me just today that you wrote this. I’m hotter than a firecracker as we say over here on the other coast.
October 31, 2007 — 9:04 pm
Dave Shafer says:
A quick look at other financial services should put to bed the lie that licensing helps the consumer. Does having a series 7 license keep stock brokers from making inappropiate investments for their clients? Does having a insurance license keep insurance salesman from putting their clients into inappropriate annuities?
Do CFP’s always put their clients interest first?
Obviously, the consumer has to be able to make smart decisions and learn who to trust and who not to. Boiler room sales tactics have been around since the 1960’s. It works because people are nieve and yes, greedy. Many companies in the mortgage industry are just employing boiler room techniques. I’m not sure what could be done to stop it, but I know that it is much easier to screw consumers over the phone than in person. It also drives the costs up so companies that derive their profits from outgoing calls and 1-800 call me numbers would have to change their business models if you required face to face interviews. It would also allow consumers an opportunity to see who they are dealing with and encourage a different type relationship to emerge. Not that this would eliminate the bad apples in the industry, but it would certainly limit their prospects.
November 1, 2007 — 7:29 am
Floyd says:
Dave, your numerous comments are right on task. I am also a mortgage broker in Florida. I was in the business for 4yrs before I finally decided to go take my classes & test. I probably could have done it sooner but it wasn’t necessary. I can feel good though that when I tell someone that I’m a “Licensed Mortgage Broker” it actually has experience & commitment behind it. I’m not a paper broker like so many are. I have said numerous times to newly licensed brokers I have met that a license doesn’t make you a broker. I tell most people I have interviewed in the past it will take them a 1 1/2yrs at least to get to a point that they really know what they are doing. It takes numerous real life deals & scenarios to get the education you need in this industry. It’s like the IT field; if you are not constantly educating yourself in this field you will get left behind. On another note, meeting your clients in person…WOW!! What a novel concept. So many brokers email docs to a client & expect they will know what they are signing or in most cases won’t ask or care. I don’t see how people can do business that way in this industry. Most of my business is local or within an hour & a half of my office. I drive to meet all my clients face to face. It gives them an opportunity to meet me as well as I them. Most my meetings are one & a half to two hours but when I leave we have a connection & they trust me. I see it in their eyes & their handshakes. I love technology but sometimes the old school way of doing things is still so much better. I understand the governments need to make changes, I just hope they make the right ones. If they want mortgage brokers licensed (which I’m all for) make the licensing requirements the same in all states. It’s to confusing now as it is. I know there are Mortgage Brokers out there that take their jobs seriously & are not just in this for their benefit but to truly help people realize that American dream of owning homes. I just hope the government doesn’t drive us out with unrealistic regulations.
Floyd L Pierson
November 1, 2007 — 3:22 pm
Ron Borg says:
Here we see another attempt of our legislators to limit competition among industry participants. Do they even recognize the fact that bankers use the very same strategy to earn higher revenue per loan as brokers do? That they just have a different name for it? (SRP vs. YSP) And that SRP (bankers)is NOT disclosed to the consumer while YSP (brokers) is?
Will our country be better off when we have only 2 choices for everything we want or need? (Lowe’s, Home Depot) Will our politicians be satisfied when mortgage brokers go the way of the local hardware store? (exctinct).
As the founder of http://www.Mortgage123.com, we have always strived to offer consumers the most options while doing our very best to protect them – and competition is the key.
Please contact your respresentative and tell them to oppose this bill.
Thank you.
November 1, 2007 — 7:35 pm
Dave Shafer says:
Floyd,
Always great to here from a kindred soul, doing business the right way. There are plenty of us out here, but we get drowned out by the others. I also meet my customers face to face. I also spend 1 to 2 hours talking to them in the intitial interview. Perhaps that is why I can say that none of my customers have been foreclosed on. Putting people into properly structured loans for their particular circumstances is my job, not selling mortgages. I believe in the use of technology, just not as a tool to damage others. Check out my blog: http://shaferfinancial.thewrittenblog.com
I would love your comments on it!
November 2, 2007 — 1:22 pm
Ron Borg says:
Mortgage Brokers, Realtors and ALL Small Business Owners…
You MUST ACT TODAY! You must let your representatives know how strongly you oppose this bill. Here is the simplest and fastest way to contact your congressman.
Go here: http://www.house.gov/writerep/
Thank you,
Ron Borg
Mortgage123.com
November 3, 2007 — 11:47 am
ZC says:
I am a licensed R/E agent in CA. and has been in the industry for 24 years. This problem has been around since the 80′- it will not change. I am involved in the Mortgages end of the Industry.
The differences between Mortgage Brokers vs Lenders hiring agents is only a matter of having a license or not needing one. Both hire unqualified people all day long- especially when the Brokers/Branch Managers Income and Bonus is tied to their offices production. More people equates to more MONEY?
I have been involved in both relms and have seen both Brokers/Lenders hiring anyone that can sit in a chair and read a script! Waitress, Busboys and the like are todays new R/E agents and/or mortgage loan officers (majority of brokers office do both) looking for their first clients- and majority with no training. Responsibility of training belongs to whom? Broker- Branch managers- they are to busy working their own clients to pay attention until an Audit walks through the doors, then their scrambling.
Don’t get me wrong, their are some that are truely interested in the industry and their clients, but they are the minority in this big picture. I agree that having a license also does not make a good Broker or agent= it’s comes down to each persons character and their intregity.
It has always been a running joke in CA that when we see a new Mercedes, BMW and the like drive by-that they must have just got their R/E license and are now looking to make the BIG bucks! It’s a case of if you can pass the CA DRE test (apparently it so easy to do now) then your in the money mentality.
Sure, we DO NOT need watchdogs..but there should be some kind of oversite in place to insure some kind accountability! Don’t know if this bill will help- but it just may make someone think twice before for hiring or applying for this type of position.
November 3, 2007 — 3:07 pm
ZC says:
As for the YSP and the SRP on mortgage loans- majority of these funds are used to help borrowers qualify for the American Dream. BUT, remember this all happens upfront..once the deal closes the buyers are on their own. Disclosing this is required by Respa and a voliation of the HOPEA(sp) regulations. How points and YSP are going to be applied MUST be disclosed to all parties. We now have documents in placed that outlines the type of mortgages being obtained- buyers/borrowers are required to sign them but not the Broker and/or agents involved. I know that agents do not explain this document(avoiding the questions it generates I suppose) so again consumers beware. What happened to asking questions? Concumers are more comfortable arguing over the terms of a contract when they are purchasing an automobile but not the BIGGEST liability they will be responsible for repaying? This just contributes to many of the Predatory Lending issues we have today.
First time buyers should seek help- First time home buyer counseling, etc. Once the Escrow has closed, it’s aliitle to late to realize they are over their heads- never realized that they need to make sure they could cover the monthly bills that are over and above their Mortgage payments- This is where a VA loans can be used as a model. Residual income is a major part in their qualify ratios..yes it conservative, but we would not be in the mist of a credit crunch or massive foreslosure issues that are effecting the housing market now.
Having assets has always been the motivating factor in approving a mortgage loan by Lenders/Brokers- not matter what the DTI is. In todays climate- I really do not see someone depleting their assets to save a home that in under valued= potential for foreclsoure. Especially when they have the ability to buy a bigger home down the road at todays lower market price??
Loan fliping (Churning) is done all day long! Consumers need to also beware- Shop before you take that first offer…If you go back to the same Loan Officer that put you into the old loan your now looking to refinance or the agent contacts you and advises that now he can get you a better rate?? Why now and not then? More points and Fees? Unless you took the loan just to get into the home, I would Shop, Shop Shop… It’s usually all about the money? The “M” word..
Fraud..Brokers and loan officers are given the green light and do not stop until you pass go due to consumer not taking this transaction heart! Put candy in front of a child, they will take it if even you said no. Why would you Trust someone you just met? Why would you not read the papers you are signing? Review the personal information on the Final Loan Application..Jobs, Income, etc.. When you sign all the loan documents without reviewing of them, you are saying that you agree this information is true and correct..”Certification”??? Why would you sign a “Blank” loan application- are you to busy and your agent to busy to sit down and go over the most important purchase in your life?
As you can see I have many LIFE experiences that I have seen or heard of in my tensure in this Industry. It seriously need some oversite. Closing some loop holes is always better than doing nothing and letting it continue to gain speed on a destructive path. Those individuals with Intergity and Ethics have nothing to worry about..or do you?
November 3, 2007 — 4:14 pm
Nora Cooper says:
My husband and I recently became victims of the current mortgage crises. In our effort to purchase our retirement property at today’s dollar value, we wanted a loan that would allow us 2yrs to receive expected salary increases to support both mortgages. At the time, our DTI ratio was low and we had more than enough income to support both mortgages. However, we did not know that our interest only ARM would increase every 6mo with the first adjustment being approx. 4%. We have seen a payment increase of $830 in less than a year that has depleted our liquid income. We submitted a written request in with all the documentation required for loan modification to the lender in September as a proactive measure to avoid default. I request was denied. We weren’t asking for a handout, but a modification that would allow us the ability to make our payment and allow the lender to still make a profit. Apparently, the investors are only willing to modify loans that are already in default, costing everyone involved thousands of dollars. There is no reason we should have to forfeit our home or for the lender to lose money in this situation. However, we will be forced to do so. We have sufficient income to pay a reasonable interest rate, but none of us expected the market in Sacramento California to drop as quickly or as far has it did in a 1yr time period. When we attempted to refi last year, we qualified for a 7.5% rate, but do to the market dropping as fast and at record amounts in Sacramento CA, no lender could do the loan. We have lost 80,000 in equity and are now upside down on our loan. Since we have an interest only ARM, we are facing a 12.125 interest rate with no money being applied to the principle. Even if we were able or willing to pay that rate, it would leave no monies to be applied to the principle or to pay other creditors, thereby ruining our credit anyway. We only plan to be live in this home for 9.5yrs before we retire. We would be crazy to continue struggling with this mortgage loan unmodified, with the market expected not to recover for several years. It’s easy to blame one group for the state of the mortgage industries state of affairs, but keep in mind we all share a level of responsibility for what has happened: 1) Builders who flooded the market with inventory only to slash the prices to levels affecting home 2) Lenders offering loan shark products and enticing brokers to push products to increase their earning potential, but were designed to increase the lender’s profit margins. 3)Brokers- who in their attempt to increase their own profit margin, only offered products to consumers that would accomplish that task. 4) Consumers who have not armed themselves with the knowledge of how this industry really works or why these type of products are all that’s being offered. 5) The Federal/State oversight and regulatory agencies that failed to monitor the types products being offered to consumers and why. Yes, there is plenty of blame to go around. It’s ironic and appalling to hear our President state that the US Government is not in the business of bailing out irresponsible Lender/Homeowners. Has anyone ever heard of corporate bailout or ERON? Another example of how clueless he and most people are regarding how all of our actions or lack there of, impact what happens the real world!
November 6, 2007 — 11:30 am
Brian Brady says:
Nora:
If you didn’t know that your payment was an ARM, it was a violation of TILA- you might be off of the hook.
Did you receive loan disclosures, outlining your rate, margin, and index within three days of the application? If not, you’ll be refunded all interest and costs associated with the loan.
November 6, 2007 — 11:40 am
Michelle says:
Come on, all loan documents have to be signed, and unless you didn’t read anything you signed, you had to know you were on an ARM. If you did sign your documents without reading them, then you shouldn’t have been buying a second home in the first place.
November 6, 2007 — 12:54 pm
Dave Shafer says:
Nora,
Was this a sub-prime loan? Reads like it is.
Did a mortgage broker get you this loan? or was it from a 1-800 number lender or internet lender?
Did the loan officer not mention a fixed rate loan to you? Or did you choose this loan based on its initial low interest rate?
Just wonderin…..
November 8, 2007 — 8:04 am
Nora says:
We knew that out loan was an ARM, but we thought the maximum increase would be 4% with annual increments of 1% until we reached the maxiumum. This feature was added as an Addedum. We are stuck with this loan due to the market dropping 80,000 dollars within a 1yr period. An interest only ARM that changes every 6mo shouldn’t be offered to consumers. We are more than cabable of paying a resonable rate that would allow use to ride out this crisis, but the lender denied a loan modification to a fixed rate. The market crisis in Sacramento was caused by the city allowing builders to flood the market with inventory they couldn’t sell and when their bank loans came due, they dropped their sell prices $100,000 to $125,000. This drove existing homes prices down, causing existing home owners to have upside down mortgages. Michelle: Your comment is totally unprofessional. As I said before, it will take effort from all areas to recover from this crisis. Our situation is one that doesn’t have to become a statistic. If the lender would’ve adjusted our rate to a 10.125 fixed rate, they would still make money and we could keep our home.
November 9, 2007 — 1:10 pm
Brian Brady says:
“We knew that out loan was an ARM, but we thought the maximum increase would be 4% with annual increments of 1% until we reached the maxiumum. This feature was added as an Addedum”
It sounds like you have a disclosure issue, Nora. As such, you may be entitled to relief under the Truth-In-Lending Act. If you were, indeed, not properly disclosed the terms, you will not lose your home.
I could expand upon Michelle’s comment but will simply say that while caustic, it wasn’t unprofessional- Michelle is speaking for a whole slew of professional loan originators who are in disbelief that consumers didn’t properly read their loan documents (or have them reviewed by an attorney).
Nora, it sounds like you got accepted a rate, discounted from what you consider to be “reasonable” in tradeoff for the risk of an “unreasonable rate” in the future- that gamble you became unprofitable.
Again, if the loan terms were not properly disclosed to you under TILA, you are truly a victim and can sue the broker and lender for relief.
Do you need help determining that?
November 9, 2007 — 1:35 pm
Nora says:
Yes, I would like more information on TILA.
Since OWNIT Mortgage is now gone under, I’m sure we are not the only people in this situation.In response to consumers not reading their documents: That would be an assumption. I work for a government agency and I am required to explain our requirements to documents that consumers are required to submit. We have doctors, lawyers and teachers that read our documents and don’t understand how to comply. Because we are working within an industry, we forget that our language and how the consumer understands it can be two different things. That’s why we seek advice from the professionals.
November 9, 2007 — 2:00 pm
Dave Shafer says:
I encourage you to file a complaint if you entered into this mortgage based on fraudulent disclosures. It is the only way to stop this type of thing from happening.
Sorry you got into this situation.
By the way, foreclosure is not the worse thing that can happen to you in this situation. You have to stop the bleeding at some point. The risk of loss is shared by your lender (OWNIT, Merril Lynch, and whoever owns your loan at this point). People recover from these things fairly rapidly if they want to (including their credit scores!)
November 9, 2007 — 2:48 pm
max says:
Good article! Thanks
max
http://www.nycmortgage.us
November 15, 2007 — 9:04 pm