Thursday, July 26, 2007

SB 1167 and My Favorite Reagan Quote

Today the Illinois Senate Passed SB 1167. This is a new version of a disastrous bill known as HB 4050. Because fraud is so pravalent in the mortgage industry, the politicians in Springfield felt they had to do something. This bill calls for in some cases that borrowers before they can close on a loan that they meet with a state certified representative to discuss the loan. While this may all sound good in theory, in practice it is not only an intrusion, but a looming disaster for all.

While HB 1167 hasn't been finalized here are the basics of HB 4050

HB 4050 is a pilot program in Cook County (Illinois) designed to protect
mortgage applicants from unscrupulous loan originators.
The pilot
program lasts four years.
HB 4050 was passed in July 2005 and became
Illinois state law January 1, 2006. It will not be implemented and
enforced until the physical database to compile and store data is completed,
HB 4050 applies to state-chartered loan originators (i.e. mortgage
brokers and local mortgage bankers). Therefore, federally-chartered banks
are exempt (i.e. Chase, National City, Fifth Third, Bank of America) from the
HB 4050 requires "High Risk" individuals to receive financial advice
from federally-approved financial counselors before completing a mortgage
The definition of "High Risk" is stated in the rules of the
law. These are summarized as follows:
Applicant FICO
score is less than 620, or
Applicant FICO score is between 621-650 and any
one of these conditions is true:
Subject property was financed within the
last 12 months
Mortgage product has an Interest Only feature
product is an ARM with an initial fixed period of 3 years or less
application does not require the verification of applicant's income
product contains a prepayment penalty
Mortgage product contains a negative
amortization feature (i.e. Option ARM)
Total points and fees payable by
borrower at, or before, closing exceeds 5% of the loan size
HB 4050 does not
apply to all of Cook County. It only applies to designated zip
codes. This is a map of
those zip codes
. We also created an overlay
of the pilot program with a map of areas in which mortgage fraud has

Some of you may have read my recent diary about Illinois High Cost and my favorite Reagan quote. The principle is the same here. On certain mortgages the government has decided that the consumer is not smart enough to make decisions on their own and so the government will step in and before the deal is finalized they will scrutinize the decision. Imagine if before you bought a car, you had to meet with a government sponsored counselor to make sure that car did in fact fit your needs. Imagine putting in any other product or service in place of a mortgage and see if that is something that you would stand for.

When HB 4050 passed, a great many banks simply decided not to lend in the areas affected. What this did was it drove real estate down in those areas. Just take a look at this chart...

60620 experienced a 43% drop in sales
60621 experienced a 25% drop in sales
60623 experienced a 57% drop in sales
60628 experienced a 15% drop in sales
60629 experienced a 63% drop in sales
60632 experienced a 34% drop in sales
60636 experienced a 41% drop in sales
60638 experienced a 54% drop in sales
60643 experienced a 49% drop in sales
60652 experienced a 43% drop in sales
Compared to September 2005, one year ago, sales were also down 45% in the target zip codes. So, we can say with near certainty that the plummet is not strictly seasonal. The breakdown by zip code:
60620 experienced a 28% drop in sales
60621 experienced a 37% drop in sales
60623 experienced a 61% drop in sales
60628 experienced a 17% drop in sales
60629 experienced a 70% drop in sales
60632 experienced a 54% drop in sales
60636 experienced a 1% drop in sales
60638 experienced a 65% drop in sales
60643 experienced a 49% drop in sales
60652 experienced a 41% drop in sales

As you can see each zip code affected by HB 4050 experienced a drop off in sales. HB 4050 was wrong on principle, however the government though it was wrong because it isolated certain zip codes, poor zip codes, and they thought this, and this only, was wrong. Look again at the sales figures for every zip code affected by HB 4050. Apparently the government wasn't satisfied with dropping off sales in a select few zip codes because the new law will cover the entire County of Cook. Now, if HB 4050 caused drops in every zip code it affected, what do you think will happen if there is a new law that does the same thing in the whole county?

Once again, my favorite Reagan quote applies, "the nine most dangerous words in the English language are 'I'm from the government and I'm here to help'". Yes, there is way too much fraud in the mortgage industry and it is a problem that can be catastrophic, however the answer is NOT for the government to step in and create even more bureaucracy to a process that is already insanely bureaucratic. Anyone who has gotten a mortgage probably remembers wanting to pull their hair out from all of the paperwork waiting and red tape. Now, the government wants to add yet another layer of bureaucracy to a process that usually drives people crazy as it is.

That's right. The government thinks most of you are too stupid or too unscrupulous to make your own decisions with your own mortgage. So, before you can make a decision, you need to meet with a counselor, for $300, and talk to them and explain yourself to them. Does this sound like the sort of liberty that the great Thomas Paine wanted to die for?

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