Bum rap for mortgage brokers
When things go wrong, its human nature to place accountability for the event somewhere else, preferably at a distance. Our organized compartmental minds are not comfortable with the simple rational that “stuff happens.” It’s an unnerving thought to think that we cannot control our environment. We are more comfortable by endlessly investigating the possibilities that caused the ill occurrence and then focusing our attention in the direction of a single source that we can hold accountable. This insures that the event or occurrence will never befall us again. It’s a comforting thought.
The meltdown in the real estate market is an example. We want to know who or what was responsible, discover how and pass laws to insure that it will never happen again. One industry group that has been receiving most of the attention for their part in deflating the housing balloon is the mortgage brokers. They have been attributed for declining property values, increasing foreclosures and the worst housing recession in 20 years. Is it fair that one group of industry professionals take the blame?
The federal government has been holding hearings and conducting investigations on the mortgage mess to discover who to pin the tail on (an old children’s game, “Pin The Tail On The Donkey”, now played by members of Congress). Many large national lenders have been testifying before Congress that mortgage brokers duped them into making home loans to unqualified borrowers.
In response to the poor duped lenders, Congress is considering the passage of the Mortgage Reform and Anti-Predatory Landing Act of 2007. Mortgage brokers call the bill the anti-broker bill and if passed in its current form will severely restrict mortgage brokers from originating mortgage loans. The first thing the bill does is to exempt all federal depositories (banks or their mortgage affiliates) from the new legislation. The bill would make all easy qualifying loans to borrowers, not so easy. The legislation creates “minimum standards” which includes a provision that no residential loans will be made without documented proof of credit worthiness. Goodbye “stated income” and “easy documented” loans popular among self-employed borrowers.
The bill also requires applicants for adjustable rate or interest only loans originated by mortgage brokers (remember lenders are exempt from the legislation) must be qualified at the fully indexed rate. This eliminates the attractiveness of adjustable rates loans. Brokers must also maintain a $100,000 net worth to originate loans, be registered in a national database and any indirect compensation from a lender in the form of rebates or yield spread premiums are prohibited.
The smack-down continues. Democratic presidential frontrunner, Hillary Clinton, in a speech in Derry, New Hampshire and reported by MSNBC, called for penalties against mortgage brokers who engage in predatory lending. She said she would introduce legislation targeting “fly-by-night mortgage lenders (not having a net worth of $100,000) who make really seductive offers.” Clinton also proposed mandatory impound accounts by banning contracts that “trap borrowers in unworkable mortgage scenarios in which nothing is budgeted for taxes and insurance.” Mortgage brokers are not without some responsibility for our current correction but a little perspective is in order.
Imagine for a minute, you are the head of a large national bank in 2002. Wall Street investors are seeking higher returns than available in the stock or bond market. Interest rates are at historical low levels. There is a high demand for housing. You want to increase your loan originations and come up with some creative loan programs that include no down payments and no or easy qualifying. To implement your creative loan programs, you increase your advertising, hire telemarketers and offer financial incentives to loan brokers if they will bring their borrowers to you. Through your bank, the loans are underwritten, funded and sold off to Wall Street investors. You receive a big fat bonus at Christmas for your marketing prowess. If and when the market changes and a few borrowers or investors get hurt, you can always blame the mortgage broker.
Mortgage brokers did not think up the slick, high-risk loan programs implemented over the last few years but they are now taking all the flack for the results. These programs were conceived, promoted, underwritten and funded by large national lenders and then sold to Wall Street investors. Now some big banks see an opportunity to eliminate their competition by having Congress regulate the mortgage broker out of existence. National banks have always had a love/hate relationship with mortgage brokers who have greater success at loan originations despite their smaller size, money and influence.
Mortgage brokers are already regulated by both state and federal agencies while most national lenders are exempt from any state licensing requirements. The National Association of Mortgage Brokers maintains that mortgage brokers and bank loan originators should be treated equally. I agree, lenders came up with these goofy loan programs. It’s unfair to now say that everything would be just fine if the brokers hadn’t messed it all up.
The meltdown in the real estate market is an example. We want to know who or what was responsible, discover how and pass laws to insure that it will never happen again. One industry group that has been receiving most of the attention for their part in deflating the housing balloon is the mortgage brokers. They have been attributed for declining property values, increasing foreclosures and the worst housing recession in 20 years. Is it fair that one group of industry professionals take the blame?
The federal government has been holding hearings and conducting investigations on the mortgage mess to discover who to pin the tail on (an old children’s game, “Pin The Tail On The Donkey”, now played by members of Congress). Many large national lenders have been testifying before Congress that mortgage brokers duped them into making home loans to unqualified borrowers.
In response to the poor duped lenders, Congress is considering the passage of the Mortgage Reform and Anti-Predatory Landing Act of 2007. Mortgage brokers call the bill the anti-broker bill and if passed in its current form will severely restrict mortgage brokers from originating mortgage loans. The first thing the bill does is to exempt all federal depositories (banks or their mortgage affiliates) from the new legislation. The bill would make all easy qualifying loans to borrowers, not so easy. The legislation creates “minimum standards” which includes a provision that no residential loans will be made without documented proof of credit worthiness. Goodbye “stated income” and “easy documented” loans popular among self-employed borrowers.
The bill also requires applicants for adjustable rate or interest only loans originated by mortgage brokers (remember lenders are exempt from the legislation) must be qualified at the fully indexed rate. This eliminates the attractiveness of adjustable rates loans. Brokers must also maintain a $100,000 net worth to originate loans, be registered in a national database and any indirect compensation from a lender in the form of rebates or yield spread premiums are prohibited.
The smack-down continues. Democratic presidential frontrunner, Hillary Clinton, in a speech in Derry, New Hampshire and reported by MSNBC, called for penalties against mortgage brokers who engage in predatory lending. She said she would introduce legislation targeting “fly-by-night mortgage lenders (not having a net worth of $100,000) who make really seductive offers.” Clinton also proposed mandatory impound accounts by banning contracts that “trap borrowers in unworkable mortgage scenarios in which nothing is budgeted for taxes and insurance.” Mortgage brokers are not without some responsibility for our current correction but a little perspective is in order.
Imagine for a minute, you are the head of a large national bank in 2002. Wall Street investors are seeking higher returns than available in the stock or bond market. Interest rates are at historical low levels. There is a high demand for housing. You want to increase your loan originations and come up with some creative loan programs that include no down payments and no or easy qualifying. To implement your creative loan programs, you increase your advertising, hire telemarketers and offer financial incentives to loan brokers if they will bring their borrowers to you. Through your bank, the loans are underwritten, funded and sold off to Wall Street investors. You receive a big fat bonus at Christmas for your marketing prowess. If and when the market changes and a few borrowers or investors get hurt, you can always blame the mortgage broker.
Mortgage brokers did not think up the slick, high-risk loan programs implemented over the last few years but they are now taking all the flack for the results. These programs were conceived, promoted, underwritten and funded by large national lenders and then sold to Wall Street investors. Now some big banks see an opportunity to eliminate their competition by having Congress regulate the mortgage broker out of existence. National banks have always had a love/hate relationship with mortgage brokers who have greater success at loan originations despite their smaller size, money and influence.
Mortgage brokers are already regulated by both state and federal agencies while most national lenders are exempt from any state licensing requirements. The National Association of Mortgage Brokers maintains that mortgage brokers and bank loan originators should be treated equally. I agree, lenders came up with these goofy loan programs. It’s unfair to now say that everything would be just fine if the brokers hadn’t messed it all up.
posted by Ken Calhoon at 8:06 AM
0 Comments:
Post a Comment
<< Home