Friday, November 2, 2007

Congress Vs. Mortgage Brokers


Every good story needs a good narrative, a villain, a hero and a victim. Congress thinks they have discovered a good story in the mortgage crisis. They have created a narrative with a victim, a villain and they have decided to cast themselves as the heroes. They see themselves something like Shane protecting the settlers (in this case the poor borrowers) against Striker (in this case the evil mortgage brokers). It really matters not that the narrative is not accurate and that their tactics end looking more similar to something the Gestapo would have done than what Shane did.

A hit tip goes to mortgage industry site Baton Online for bringing this to my attention however this story is going to gain steam everywhere. Congress is looking at a bill called H.R. 3915. Here is how Baton described it.



The U.S. House Committee on Financial Services is considering Bill H.R. 3915 as a response to the housing crisis. One of its two main provisions is to prohibit brokers from earning even disclosed YSP.

Already brokers must disclose YSP, while banks don't. Under this law, brokers may not even earn it. If the borrower has little or no money to bring to the table, brokers will either work for free or suggest that they take their business to a big bank. How long do you think you'll stay in business doing that?

For a generation brokers have originated the majority of home financing because they represent lenders without a large retail network as well as money center banks. Because of brokers, there are countless Americans who are now homeowners and wouldn't be without the resourcefulness of a mortgage broker.

H.R. 3915 will eventually put most brokerages our of business - not just the few players who shoehorned unqualified buyers into risky loans, but the thousands of ethical people who work hard every day to help good people participate in the American dream of home ownership.

I will get into the details of the bill in a minute however let's just look at some of the regulation that someone like myself already has to deal with, and some of the regulations that Congress wants to enact.

In my state, Illinois, government bureaucrats already set a limit to the rate I can charge. While this may in fact create a nice populist narrative for any politician in Springfield, anyone can go to the link and see what the practical effect of the law is. Two years ago, the Illinois legislature created a bill called H.B. 4050. It was a pilot program set up in certain hand picked, very poor zip codes. For certain high risk loans, before a borrower could close on the loan they were forced, for $300, to meet with a state sponsored counselor. While the intention may have been good, the practical effect was an obscene drop in real estate sales in each of those zip codes. Rather than scrapping the program, the state has decided that rather than making it only a few selected zip codes, they now want to make it the entire county of Cook. The new version is going to be called S.B. 1167. The state of Nevada has a similar bill going through their legislature and banks are already pulling out of doing business in that state in anticipation. I am already limited to charging no more than 5.5% in ALL fees on any residential loan

I haven't even talked about the mountain of paperwork associated with every loan in every state which is also a response to all sorts of government regulations.

To say that my industry is already hyper regulated is to make quite an understatement.

This brings me back to H.R. 3915. Yield Spread Premium is the fee that the banks pay me, the mortgage broker, that is embedded in the rate that is charged to the client. At the risk of treating the reader like a third grader, the higher the rate the higher the YSP. Congress wants to outlaw any YSP that mortgage brokers can charge. The practical effect would put me specifically out of business. The bulk of my clients have excellent credit and at all times a great deal of my business is from refinancing those clients into lower rates. Many times I do this by paying for their closing costs. I accomplish this by raising the rate enough so that the YSP covers the closing costs and leaves enough for me. If this law is enacted, that entire portion of my business is gone.

For every mortgage broker, this means that the only way they can make money is by charging up front fees, or points, at the closing. Here is where the law is insidious. This law doesn't apply to any bank. That means that someone working for Washington Mutual, Countrywide, Chase, Wells Fargo, Bank of America (which all have retail divisions) is exempt from this law. In fact, banks currently are exempt from even revealing how much in YSP they charged as Baton indicated. In fact, banks are exempt from most laws and regulations that apply to brokers.

This latest law leads me to conclude only one thing. Congress has decided to make it their mission to end the industry of mortgage brokers altogether. They figure that if it is impossible for brokers to make money that there won't be any left. They are right. If this law is enacted, the industry will crumble. The key in my industry is flexibility and options. Some people look for the lowest rate possible and aren't as concerned with fees, and others are the opposite. This law would limit the options of mortgage brokers. Obviously, if they are forced to charge points to every borrower they aren't going to be able to compete. It is the equivalent of one basketball team only being allowed four players on the courty while the other has the standard five.

I have already pointed out that I have no use for most of my industry. I have also pointed out that the dynamics of the mortgage crisis are complicated. There is plenty of blame to go around for the crisis. The real estate market got hot. Banks got irresponsible and they created loans they shouldn't have. The created loans that allowed for irresponsible people to be approved. Because real estate was going up at lightning speed, most of these irresponsible people were able to refinance or sell before disaster struck. This lead banks to create even more irresponsible loans. The house of cards came crashing down when the real estate market stopped going up. Now, all those irresponsible people are in over their heads and furthermore they have loans that are more than the value of their homes.

The Congress would have everyone believe that mortgage brokers arranged for loans that they knew the borrower couldn't afford. While it is probably true that mortgage brokers did plenty of loans they knew the borrower couldn't afford, the truth here is also a lot more complicated. Mortgage brokers aren't usually also realtors. That means they get the loan and someone else gets the property. The reason that people were in loans they couldn't afford was because they bought property they couldn't afford. Most competent mortgage brokers knew they couldn't afford it. It maybe true that they should have suggested not buying it, however, it was the borrowers themselves that ultimately decided to buy a property they couldn't afford. The idea that mortgage brokers suggested loans out of the blue that weren't affordable is really absurd.

While it is true that mortgage brokers gladly put people into homes they knew they couldn't pay, they were ultimately the middle man in bringing together irresponsible people and irresponsible borrowers. Remember, it was the banks that created loans that allowed borrowers to buy homes they couldn't afford. The irony is that the market itself has long ago corrected the excesses that Congress thinks they need to correct. Those loans have long been eliminated. At this point, the banks have become too risk averse not the other way around.

None of that matters to Congress though. They have created a narrative. Poor helpless borrowers were lead into disaster by psychopathic mortgage brokers that put them into untennable situations. The borrowers were completely helpless. Here is one Hillary Clinton proposal.



Clinton also proposed banning contracts that trap borrowers in "unworkable"mortgage scenarios in which nothing is budgeted for taxes and insurance.

Thus, just like in Shane, they will be the heroes. They will protect the poor folks against the Strikers. While they may see themselves as Shane, what they are really is the height of hubris. If they believe in capitalism, they would know that the market would eliminate any and all scum on its own. For them to regulate an industry so that it ceases to exist is something the Gestapo would have been proud of. Yet, they feel empowered because the general population has no more use for my industry than I myself have. They think this will work politically because they think the average joe will cheer them on. Everyone should be afraid of this bill because your industry may be next. Used car salesman, insurance agents and contracters are just three examples of industries that have bad reputations. If Congress succeeds in regulating our industry out of existence they may find it advantageous to go after other industries as well. Please go here and write your representative and tell them H.R. 3915 is a bad idea. Also, please go here and sign the petition.

2 comments:

Jonathan said...

I am a broker and the elimination of yield spread premium is the equivalent to Lowes or Home Depot adding no mark-up to me for tools or household goods in excess of their costs from the venders supplying them with these products. YSP embodies the very concept by which our economy is built, across the board for all industries in retail or wholesale. Why stop at mortgage originators, when we can just ask consumers to pay costs at all retail chains, with no regard to what ex. above, Lowes or Home Depot has to pay in expenses for location in order to make available the products that we need? The fact of the matter is, the predatory lending percentage cap of 5 is the fail safe already put in place to govern this sort of inflation. It would only make sense to lower this cap across the board to 4 or even 3 halves, rather than another "knee jerk" reaction to loan defaults, which will ultimately clean the market out, by taking out the compensation methods allowing people to be experts in their respective industries. The snow ball effect will be less available loans for lenders whom rely on the brokers spread out nationwide to feed loans to service with-out the overhead of branches etc.. When there are less loans available, there will be less borrowers. When there are less borrowers, there will be less sold homes. When there are less sold homes, there will be much less appreciation, making it increasingly less likely for the holder of a mortgage, to recoup the liability left behind by foreclosure's. Shall I continue? Great bill, they really put a lot of thought into that one!

Ned said...

Mike, both you and Jonathan are spot on. Here's the rest of the story, as it were.

Mortgage Brokers originated loans for submission to underwriters at lenders who then sold the loans to Wall Street mandarins who then chopped them up into acronyms with Triple A ratings and sold them at great profit to institutional investors.

Brokers just sold the programs offered by the lenders. Lenders just offered the products that Wall Street demanded. Since Wall Street could redefine crap as investment grade secured debt obligations 'til the cows came home, The spigot of cheap money for unqualified borrowers stayed on WAY too long.

The cows have come home, and the guys who essentially said 'approve everything, ask no questions, we just need product' aren't being investigated. It's the guys at the mouth of the pipe who read the UW guidelines, shrugged, and submitted.

Why is the broker industry being closed rather than the wall street packagers being jailed?