Saturday, November 10, 2007

Parsing the Language on H.R. 3915

First and foremost, whatever the specifics of the bill it is an unmitigated disaster. It is full of vague language. Most of it is details are open to interpretation. As I mentioned in a previous post, this bill doesn't address the real problems that lead to the crisis, rather it assigns blame to targets that politicians think the public will cheerlead. This creates a bill that, in my opinion, will only continue to contribute to many of the problems that were in the market, and doesn't really do anything to resolve any of them.

First, there is an awful lot of confusion regarding the Yield Spread Premium portion of the bill. Some are claiming that it is eliminated. Brian Brady, of bloodhound realty blog, claims it is capped at 1%. Though, I have asked for him to source it and so far I have received no source. I cannot find any mention of capping YSP (for prime loans at least it is definitely eliminated for sub prime) in the summary I found. I also received an email late last night that said the the National Association of Mortgage Brokers (NAMB) was able to convince Frank of the importance of YSP. (not apparently so important for sub prime though) I will go with that for now, and just break down the rest of the bill. There are six areas of concern for me.

1) Again, a distinction is made between banks and brokers, and furthermore it creates a massive new government bureaucracy.

Provides for licensing and registration of individual mortgage brokers and registration of bank employees that originate mortgages, as well as the establishment of a Nationwide Mortgage Licensing System and Registry (NMLSR).

Now, as you can see, if you work for a bank, you only need to register whereas brokers need to go through all sorts of licensing on top of the registration. Now, here in Illinois, we already have such a law. It also distinguishes between brokers and bank employees. Brokers have to do all sorts of things while bank employees have to do nothing. This is just one example of many where Congress makes a distinction between those that originate loans through a broker and a bank. For instance, there is the cumbersome and bureaucratic nightmare known as SB 1167 here in Illinois. It forces, on certain loans, counseling mandated by the state for a fee of $300. This is of course only applies to brokers not banks. Banks already don't even have to disclose YSP like brokers do. The list goes on and on.

Furthermore, I was a stock broker before I was a mortgage broker and I can tell you that upon learning everything in the series 7 and 63, I never used any of that information EVER AGAIN. Maybe this new licensing will work, however if anyone has read the book, Freedomnomics, you know that most licensing programs only contribute to keeping good people out of any industry.

Second, this new NMLSR will create a giant new bureaucracy. Does anyone have confidence that the federal government will be able to track and monitor the fingerprints, background, testing, and monitoring of millions of mortgage professionals? Furthermore, there is this.

If a State does not have a system that meets the minimum standards for State-licensed loan originators or does not participate in the NMLSR, then HUD will establish a backup licensing system for loan originators that operate in that State. HUD will be granted enforcement authority over such loan originators similar to banking regulators.

The federal government won't only keep it all organized but it will even develop the model in those states that don't develop it themselves.

2)This bill will spell the end of sub prime. Right now, if sub prime were a boxer, it would have just been knocked down and is being given a standing eight count. Now, Congress just came in and is reigning haymakers.

First, YSP is eliminated, and if I read it right for brokers and bankers. (Retail banks rarely do sub prime loans anyway that loss would be minimal) Then, there is this.

prohibiting the financing of points and fees,

Now, keep in mind, without YSP, the only way anyone can make money is through points. Now, the government is saying I can't finance those within the borrower's loan. What that means in layman's terms is any fees and points charged have to be paid by the borrower at closing. Now, since sub prime is mostly geared toward the poor, this is probably not much of an option. Incentive has already been removed by elminating YSP and now the loans are even more difficult to get done because all the fees must be paid at closing. In other words, the government just totally screwed the very people it claims to protect. By enacting this bill we WILL go back to the elitist society we once had.

The irony is that this bill is supported by a plethora of consumer advocate groups. While they think it protects the poor from vultures like me, they can' t seem to realize that it also eliminates most of their options in buying a home to begin with.

3) Lot's of vague language and that will lead to lot's of new paperwork to sign.

That's right everyone. This should come as no surprise to anyone who has read my work. I pointed out before I realized there was an H.R. 3915 that Barney Frank thinks you don't sign enough paperwork. I counted seven separate places within the summary that will lead to new disclosures. There are words and phrases like: reasonable ability to pay (can you say the reasonable ability to pay disclosure), net tangible benefits (this will certainly be a disclosure since NTB is already a disclosure here in Illinois), presenting consumers with appropriate mortgages (the appropriate mortgage disclosure), unfair lending practices, predatory characteristics, the list is endless.

There are whole sections that are vague and thus will have many disclosures created to deal with them.

Qualified safe harbor mortgages are loans with (1) documented consumer income, (2) underwriting process based on fully indexed rate (taking into account taxes, insurance, and assessments), (3) no negative amortization, (4) other requirements that may be established by regulation, AND (5) one of the following: (i) fixed payment for at least 5 years, (ii) for variable-rate loans, APR that varies less than 3% over the interest-rate index, OR (iii) DTI not greater than a percentage prescribed by regulation.

Qualified safe harbor loans face almost no regulation and thus it will become very important for banks to establish that your loan is a safe harbor loan. No amount of paperwork will be too great in establishing that fact, and since they aren't the one signing anyway, we can all expect a whole host of new disclosures strictly to establish that your loan is a "safe harbor loan". Remember, as I pointed out already, one of the main reasons it is so easy to rip people off is because there is so much paperwork. Congress' solution to the problem is more paperwork.

4) This bill is either heavy handed to Wall Street or more likely it pays lip service to being heavy handed while actually doing nothing.

Assignee/Securitizer Liability (does not extend to trusts and investors): Subject to exemptions below, for loans that violate the minimum standards (reasonable ability to repay and net tangible benefits), a consumer has an individual cause of action against assignees and securitizers for rescission of the loan and the consumer’s costs for rescission.

Exemption from Liability: An assignee/securitizer will not be liable for a loan that violates the minimum standards if the assignee/securitizer provides a cure to make the loan conform to the minimum standards within 90 days of receiving notice from the consumer, OR (1) has a policy against buying mortgage loans that are not qualified mortgages or qualified safe harbor mortgages and exercises reasonable due diligence to adhere to such policy AND (2) has obtained representations and warranties from the seller or assignor of the loan regarding not selling or assigning loans that violate the minimum standards.[1]

If this is confusing, then everything is fine with you. (not with Congress mind you, just with you). If I read this correctly, Congress has established that borrowers that get into trouble can actually go after Wall Street, the securitizer. Now, imagine the nightmare that would cause. Wall Street securitizes millions of loans all at once and Congress wants each individual to be able to go after them. Now remember everyone, mortgage backed securities, the securitized, are out of favor with Wall Street already. Now, Congress wants to come in and allow for the potential of class action law suits against it.

Before you get too scared, I believe this is all lip service anyway. The second paragraph establishes outs for Wall Street. As long as they have a policy against securitizing bad loans and they have done their due diligence, they are immune. How vague is that? Wall Street securitizes billions of dollars worth of loans, or at least it used to, I hope it does its due diligence. This portion of a bill is a lawyer's dream, and ultimately it is impossible to know how anyone will respond to it. Wall Street may see this as reason enough to never go back to this market, or they may realize that Frank put this in only to look as though he is being tough on them.

5) If I read it correctly, this bill actually incentivizes a borrower to get foreclosed on. Remember, there is no way that the politicians would ever hold any irresponsible borrower responsible for any of this. That wouldn't play well politically. Thus, they are doing everything they can to protect the borrower from more problems. (except for the problem of signing more paperwork) This portion is one of several places where they do that and of course the portion regarding Wall Street is another.

When the holder of a mortgage loan or anyone acting on behalf of the holder initiates a judicial or non-judicial foreclosure, (1) the consumer who has a rescission right under this bill may assert such right as a defense to foreclosure against the holder to forestall foreclosure, or (2) if the rescission right has expired, the consumer may seek actual damages (plus costs) against the creditor, assignee, or securitizer.

First, it takes up to nine months and more after payments have been stopped for someone to lose their homes already. This bill will add even more time to that process. In the meantime, a bank receives no payment. While I can sympathize with a borrower that got in over their heads, how about some sympathy for a bank that loans hundreds of thousands and receives no payment for a year and more.

It is portion two that scares me. I can't make heads or tails of it. I can see it being interpreted though as allowing borrowers recourse for lawsuit if they are foreclosed on. Doesn't that sound like an incentive to allow foreclosure.

Yes, the entire section is quite vague and, if you have being paying attention, the practical effect is that YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. This section will likely have dozens of new disclosures to address it.

6) Finally, there is mention of a new counseling program. I have already referenced the counseling program here in Illinois. While SB 1167 hasn't yet been enacted, its earlier reincarnation HB 4050 did enough damage. It applied to only a handful of zip codes. Take a look, here are the sales figures from those zip codes.

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

If you have come to my blog often, then you know my favorite quote. This bill is the perfect vehicle for that quote so I will end the piece with Ronald Reagan,

the nine most terrifying words in the English language are 'I'm from the government and I'm here to help'

I know that H.R. 3915 terrifies me.

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