A Sad Story About a Mortgage Broker

Here is how my August went. I started out with ten loans that I thought I was going to close. Five of them were with one borrower which is one reason why things unraveled the way they did. My borrower has an excellent credit profile. He holds onto nine mortgages, a car loan, a couple student loans, and several credit cards and never in his life has he been late on anything. Now, because he has so much outstanding credit his score is good not great. Also, he is in sales and owns multiple properties so it is virtually impossible to ever show any documentation to verify his income. Still between his strong credit and the fact that he has money in the bank, his loans were always difficult but doable.

Right around my thirty third birthday, his loans started dropping one at a time. The worst thing about it is that they were dropping for newly made up reasons. While he had money in the bank, it wasn't "congruent" to the amount of money I claimed he made. In other words, he didn't have enough money in the bank for the amount of money I claimed he made in income. While this is a reasonable way of judging things, it was NOT any of the bank's guidelines when I submitted the loan.

I kept trying to find new banks for his loan. I found one and the next day they announced they were shutting down operations. I found another and they changed guidelines right after I found them. I finally found one that I thought would work. They fumbled around with it for five days. Then, while I was driving to a wedding in Minnesota, I got the news on Blackberry that they too were denying the loan, and also because his so called liquid assets weren't congruent to his income.

By the end of the month, the ten loans I thought I was going to close wound up being zero and this is a story that most mortgage brokers will tell you about the month of August and even into September. In those two months, banks were looking for reasons to deny loans. It was near impossible to close anything, and thus, it was near impossible to do what I had dedicated the last six years of my life to. The industry was in turmoil and there was confusion and fear everywhere. Almost no one was sure they would even stay in the business and no one knew what would happen next.

I bet I know your reaction. Who cares? You are a scummy mortgage broker and your excess brought this upon yourself. I have no sympathy for you and I hope that your next year is like August. If you think this way, then ask yourself why you sympathize with the people in this article.

This is an article about people about to face foreclosure. There stories are no less heartwrenching, but frankly no more. If you think it is tough facing the reality that you can't afford to pay for your house, try facing the reality that your industry is in such a state of chaos that you can probably no longer afford to be in it. Losing a house is bad, however losing a career is much worse.

Yet, there is NOT one article about any mortgage broker and the difficulties we have faced in these months. That is despite the fact that our stories are no less poignant. That's because unlike homeowners we aren't sympathetic.

Thus, newspapers like Chicago's Daily Herald, and this one from the New York Times, print stories in which borrowers are portrayed as empathetic victims. Their stories are heartwrenching and we are supposed to feel sorry for them. No one feels sorry for the mortgage broker, even though it is no less heart wrenching to watch your career go up in smoke.

That is frankly not the point. I don't much care if anyone has sympathy for me or my industry and I certainly could care less if any newspaper ever wrote a sympathetic piece about us. Unlike the borrowers, most of my industry could care less if the world has any sympathy for us and we don't seek attention at these times. The reason for this piece is that policy is being determined based on the misleading narrative that borrowers are sympathetic and mortgage brokers and banks are bad. Policy can't be determined based on this principle. Yet, newspapers are hammering this theme home.

The politicians are responding. They have responded with H.R. 3915, which attacks predatory lending, and provides even more protection for borrowers in case they go bad on the loan. In other words, based on the narrative that borrowers are good victims and brokers are evil predators, the pols will design a bill that protects the borrower and punishes the broker.

While this may be good politics, especially when it is egged on by the media, it is terrible policy. Borrowers signed paperwork and they agreed to certain conditions. They aren't meeting those conditions, and now the legislature wants to provide extra protection in case they won't meet those conditions. That is called a moral hazard.

It is hard to know exactly how the final version of H.R. 3915 or its equivalents and cousins will look like, however there have already been several scary things being floated. For instance, Senator Dick Durbin wants to allow for bankruptcy courts to be able to renegotiate the terms of mortgages. In other words, if you go into bankruptcy, you will be rewarded with a better mortgage.

The borrower is actually able to sue the securitizer, Wall Street, if their loan goes bad, and the borrower is afforded all sorts of new protections if they go bad on a loan. Here is the language vis a vis securitizers...

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.

Here is the language vis a vis foreclosures...

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.

This is a moral hazard and it is dangerous. If you give people an incentive to go bad, that is exactly what they will do. This is happening because newspapers are perpetuating a narrative. It is a narrative that gives politicians a political angle. None of the narrative is rooted in reality mind you. The reality is significantly more complicated. The reality is something that politicians and their partners in the media have no desire of discovering. Instead, they will pass laws that fit the narrative and perpetuate the very problems they claim to be attacking.

Here is the problem. They create vague concepts that fit their narrative. They are concepts like "predatory lending". Here is the problem with that concept.

There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.

In other words, politicians have created a concept they can't define. It is there solely to make them feel good and also so they can tell the masses they attacked the bad guys. The problem is that in my business there is only one practical effect of vague and undefinable concepts,

YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET

That's right. The practical effect of all of the legislation that is currently on the books is even more paperwork to sign during the process. Anyone who has closed a loan knows how much attention you pay to the paperwork you already sign, and now you will sign even more.

Why does this happen? That's because politicians are responding to political not policy opening, and that opening is created by one sided heart wrenching pieces in which certain groups are painted as victims and others as villains.

Imagine how much different the legislation would be if every newspaper published stories like the one that started this piece. They would of course be no less dangerous, but they would be different.

Trifecta from the New York Times vis a vis Mortgages

Either I have come late to the game or the New York Times used this week to come out swinging against the mortgage industry. In the last two days, I have featured two separate articles vis a vis mortgage from the New York Times. The articles follow a pattern of narrative of the mainstream and it is a dangerous pattern.

The New York Times takes on a populist message. They side with the borrower against the mortgage broker and the bank (and even against Wall Street). The propose all sorts of legislation that protects the borrower even more against foreclosure and the undefined "predatory lending". For instance they back a bill by Dick Durbin that gives an incentive to go into bankruptcy. Under his bill, a person that goes into bankruptcy can re negotiate the terms of their loan. I assume that means for the better. Not only does this give incentive to go bad, but frankly all good borrowers would scream bloody murder and it would create an obscene amount of legislation.

That is some of the legislation they support in the first and second installment. Here is their third installment. (I believe it is their first in chronology however I found it last). First, the New York Times laments a portion of H.R. 3915 that has been altered.

Industry has already scored some regrettable victories. It persuaded the bill’s backers to include a provision that would prevent borrowers from suing Wall Street firms in state court — where consumer protections are often stronger — for common abusive loan practices.

Here, the New York Times, much like most in the media and unfortunately in Congress as well is dealing with concepts well beyond their grasp. While it may make for a great populist message to say you back allowing borrowers to sue Wall Street if they suffer hardship, this is an absolute nightmare. The first problem is that most people don't understand Wall Street's role and of course the consequences of opening them up to suit. Wall Street creates markets for loans. Whereas banks deal in millions of dollars of loans, Wall Street turns those loans into bonds and deals in hundreds of millions. If each individual borrower could actually go to the securitizer (that is Wall Street or the folks that turn loans into bonds) and sue them because they felt they were wronged, that would open up the litigation floodgates with unknown results. That said, the practical results would be that Wall Street would simply not get involved in securitizing loans.

This is in fact what Wall Street has done already with no legislation. Long ago Wall Street soured on mortgage backed securities and without legislation they have washed their hands of the instrument. The sort of legislation the Times touts would give Wall Street even less incentive to get back into that market. Remember, it is those "evil" Wall Street folks that the Times is dying to attack, that created a market for most of the poor folks to get loans in the first place. Before there was such things as mortgage backed securities, the standard loan usually required 20% down and good credit. It was only the innovation of mortgage backed securities that lead to the revolution in mortgages and created the sophisticated system we have today.

Now, the market in the aftermath of the crisis is threatening that system. Sub prime, the outlet for loans for most of the poor folks the Times pretends to care about, is being threatened out of existence through market forces. By this I mean, Wall Street is refusing to make markets for those loans. Without a market, most of these banks will go under or move out of sub prime. Again, this is happening without the push of any legislation. Now, the Times is supporting legislation that would hold Wall Street liable for bad loans. This gives the folks on Wall Street even less reason to make a market. This is at exactly the time when we need to give them as much reason as possible.

Then, the Times says this...

Another must-pass amendment would adopt sensible underwriting standards for all nontraditional mortgages — not just subprime loans — including a rule that lenders must verify a borrower’s ability to repay. The amendment is crucial because it is not only subprime loans that have turned out to be toxic. Another important proposed change would give borrowers the right to modify an illegal loan, before they’re forced into foreclosure.

The first problem with this philosophy is that the word sensible is vague and difficult to define. In my business, whenever there is legislation that is vague and difficult to define what that means to the consumer is

YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET

If there is legislation passed and all it says is a reference to sensible underwriting standards, then banks will create a sensible underwriting standards disclosure. That is what banks do every single time there is vague legislation and the reason why there a hundred documents to sign and not ten or so. Second, the Times, with their cohorts in Congress, continue with their attack on stated loans. (these are loans in which income is claimed but not verified). While the concept of stated loans gets debated in the halls of the Times, the mortgage market has long rendered its verdict. Stated loans are virtually non existent. If Congress wants to outlaw them completely, that is their prerogative but they will only be following the market. The problem with outlawing stated loans is that it assures that the overwhelming majority of self employed borrowers and real estate investors never get a mortgage. Since they are able to take a plethora of write offs, proving income is virtually impossible. (for real estate investors, there is a complicated mortgage formula too boring to discuss that also makes it impossible)

By throwing out the baby with the bathwater so to speak and outlawing stated loans entirely, all Congress would do is remove their original intent. The market has long ago on its own returned stated loans to their original intent, self employed borrowers and real estate investors. The problem wasn't stated loans but rather that garbage men, secretaries, and janitors, could now claim income even though they were salaried and thus had only lying as a reason to go stated.

The New York Times, along with their cohorts in Congress, don't care much about that or frankly good policy. They have figured out which side they need to be on to look good. Keep in mind that while the Times looks to punish banks, brokers and Wall Street for providing loans to borrowers who "lacked a reasonable ability to pay". It was these same borrowers that willingly agreed to take loans that they either did know, or should have known, they couldn't afford. If the borrower themselves had followed their own reasonable ability to pay philosophy, we wouldn't have this mess. The blame isn't solely on their shoulders however, unlike what the Times, and the Congressional cohorts believe, they must shoulder some of the blame.

The reason this is important is because the crisis will affect everyone. The legislation that will no doubt follow must be sensible. Right now, it is not. The Times is effectively cheerleading for Congress to pass legislation who's sole effect is playing political games at the expense of good policy. Ultimately the only practical effect of these new laws will be that the borrower

HASN'T SIGNED ENOUGH PAPERWORK YET

There are two huge problems with this entire mortgage debate. The first is the naive and uninformed making statements, observations, and recommendations regarding the path forward. The second is the uninformed making policy on how to move forward. The New York Times represents the first and Congress represents the second. The mortgage market is at vulnerable state and the last thing it needs is the contribution of the uninformed.

H.R.3915: THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET: The Political Reality if Republicans Choose to Take It

The full House voted on H.R. 3915 yesterday and the vote was almost entirely party line. Here are the final tallies.

Latest HR 3915 Vote in the House of Representatives
FINAL VOTE RESULTS FOR ROLL CALL 1109
(Democrats in roman; Republicans in italic; Independents underlined) H RES 825 YEA-AND-NAY 15-Nov-2007 11:36 AM QUESTION: On Ordering the Previous Question BILL TITLE: Providing for consideration of H.R. 3915, Mortgage Reform and Anti-Predatory Lending Act
Yeas Nays NV
Demsocratic
224 6
Republican

193 2 7




TOTALS
224 195 13

My initial interest in this bill was entirely self interest. The bill threatened to remove Yield Spread Premium, a tool that I use not only to make money but to provide better loans for my borrowers. There continues to be all sorts of confusion as to whether or not YSP has been eliminated. The members of my Representative's office (Rahm Emanuel) weren't sure themselves. His financial services specialist first sent me here ( this link was useless to me since I had already referenced it myself.) He then sent me here ( a document that is about one hundred and thirty confusing pages. You can take my word for it or open up the link and see for yourself). It was clear that my Representative and his office didn't have much more information about this bill than I already did on my own. I registered my extreme opposition to this bill to which his guy reminded me that Emanuel is NOT on the banking committee. It was typical politico. Whenever there is a bill they are proud of, the Democrats passed it. In this case facing an irate constituent, Emanuel is suddenly not on the committee. Those excuses are no longer acceptable since Emanuel voted for the bill.

What I have figured out is that YSP is NOT the best tool for political hay in this bill. YSP can be removed and added easily. There is another much more serious much more systemic problem with this bill and that can be used to make political hay. The bill is called The Mortgage Reform and Anti-Predatory Lending Act of 2007. Here is the first and main problem (from a Winston Salem newspaper regarding the North Carolina anti predatory lending law upon which this is modeled)

There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.

That's right, the Democrats (which we can now say since the vote was essentially party line) are attacking a problem they can't define. That should scare everyone. In my business if you can't define it, what that means is you, the borrower and consumer of loans, HAVEN'T SIGNED ENOUGH PAPERWORK YET. In practical terms, when someone is vague and cannot define an issue, it means they are actually quite ignorant to it.

What the Democrats are equivalent to is someone going into a lab and mixing chemicals even though we have no science background. We wouldn't accept that, but yet we sit by while totally clueless individuals mix perverbial chemicals with the loan process.

Let me lay out every instance within this law where I believe the practical effect will be YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide net tangible benefit, or has predatory characteristics

There are at least three new disclosures just in this sentence. I know there will be a net tangible benefits disclosure because the Illinois Legislature has already created that for ALL loans in Illinois. There will no doubt be a reasonable ability to pay disclosure, and probably an anti predatory lending disclosure. In other words, without looking at any other part of this bill, THE DEMOCRATS THINK YOU DON'T SIGN ENOUGH PAPERWORK YET.

Safe Harbor: A presumption can be made that the minimum standards (reasonable ability to repay and net tangible benefit) are met for “qualified mortgages” and “qualified safe harbor mortgages.” Qualified mortgages (prime loans) are presumed to meet the minimum standards and this presumption may not be rebutted. For qualified safe harbor loans, the presumption may be rebutted only against creditors.

The term safe harbor is very important in this bill because "safe harbor" loans are excluded from much of the legislation. Since it becomes vital that a loan be a "safe harbor" loan, you can bet that banks will create however many disclosures they feel necessary in order to insure that each loan meets the vague definition that the law lays out. Since the law itself is vague and undefined, the banks can respond with whatever paperwork they deem necessary to make sure becomes defined as "safe harbor" in the closing documents. In other words, if we went no further, THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

steering any consumer from a prime loan to a subprime loan,

This sounds reasonable however "prime loans" can mean a lot. For instance, Fannie Mae is prime. Fannie Mae has several different categories. For instance, Fannie Mae has Expanded Approval levels, 1, 2, and 3. If someone is only approved for EA 3, their rate can easily reach 9% and beyond and if the loan to value is over 80%, there will be a large PMI payment as well. So, what if someone is only approved for EA 3, and I steer them toward sub prime (which very likely would have a better deal in such a scenario). Could I be sued? That question is very undefined. The most likely reality is that no one that voted for this bill even knows that there is such a thing as Expanded levels on Fannie Mae loans. I bet most of the legislators think Fannie Mae is candy. What is the practical effect of such vague and undefined situations, that's right, YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

You think I am at the end. Oh no, I am just getting started.

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.

This wordy and most likely extemely confusing portion of the bill, first, actually allows that a foreclosed borrower can sue the securitizer (Wall Street or those that turn mortgages into mortgage backed securities). This is of course unprecedented and would open up a pandora's box that none of the legislators could possibly manage and control, however the second portion of this piece of the law lays exception to the suits. Since those exceptions are also vague and undefined (for instance it says as long as Wall Street did its "due diligence"...keep in mind mortgage backed securities have markets in the billions so we can assume that no law is necessary for there to be "due diligence") and the stakes are so high, we can expect that with this portion of the bill, THE DEMOCRATS REALLY, REALLY, THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

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.

This portion of the bill could ACTUALLY be construed as motivating the borrower to get foreclosed because instead of punishing the borrower for not carrying out their end of the bargain (since a mortgage is a contract and a borrower agrees to make payments on time) the bill mostly lays out steps which the borrower can take action against their creditor. Since it goes without saying banks would never allow themselves to be sued by those they foreclose on, the practical effect of this portion of the bill is YOU REALLY, REALLY, REALLY, HAVEN'T SIGNED ENOUGH PAPERWORK YET.

Finally, there is this,

requiring pre-loan counseling.

We tried pre loan counseling here in Illinois. What it did was forced mostly poor folks to spend $300 extra dollars in closing costs (it was of course mandated that the broker pay but those costs are invariably then passed onto the consumer) to meet with a state sponsored counselor so some stranger can tell them if their loan is good for them. The practical effect was a significant drop in real estate sales, more bureacracy, and of course a handful of new disclosures specifically to address that portion.

Here is the bottom line. If I debated anyone, on either side of the aisle, about this bill they would be so embarrassed I could probably force them to resign. Most of the legislators are clueless about any part of my business. It is easy to pass legislation that only creates more paperwork if you never have to deal with any of it. By the time a loan is closed, it looks much like an edition of an encyclopedia. Those loans must be kept in storage since regulators can inspect any of them anytime. That means that a successful mortgage company has an overwhelming amount of paperwork to deal with. Again, it is easy for the legislators to constantly legislate more paperwork since they have no responsibility in managing it. I have no such luxury, and you the consumers don't either.

The only conclusion I can make is that clueless legislators from one party (the Democrats) have designed a bill that tackles a problem they don't understand or define. The only practical effect of this bill is YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. Imagine any Republican running with that slogan. H.R. 3915 can become the symbol of the Democrat's entire domestic economic agenda if the Republicans want it to. Leaders like Barney Frank led in crafting it. Chris Dodd is leading the charge on the Senate side. The Republicans can add H.R. 3915 to their list of Democratic legislative failures. All they need to do is make a few commercials with this on the screen

THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET.

This bill is the perfect test case to see just exactly how powerful the internet really is. While this bill may not be known by much of the mainstream, it is the equivalent of a rockstar on the internet. The blogosphere is abuzz with it and my own site's traffic has exploded with with people reading my work regarding it. The beauty is that on the internet, there is bipartisan opposition all over the internet. Whenever the crazies at Daily Kos find themselves on the same side of an issue as libertarians, small government conservatives, and of course mortgage professionals, you know you have a juicy opportunity. What needs to happen is for all the sides to get connected and to attack Congress at once.

The narrative is there for us to take. THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET. The parties must meet and spread the message together. On the other hand, this bill has a populist message and good targets, however our side has the truth. The way for my vision to be realized is for all of the internet to relentlessly beat the message I am talking about,

THE DEMOCRATS THINK YOU HAVEN'T SIGNED ENOUGH PAPERWORK YET

This may sound self serving and egotistically but what if everyone knew about my article? What would they think of H.R. 3915 and the party that sponsored it? If I am wrong, please challenge me. The way for this to work is for everyone opposed to this bill to spread the message throughout the internet until the internet does what it is supposed to do, create a network. Once that happens this message goes from niche to mainstream and everyone behind this bill will have to answer why

THEY DON'T THINK YOU SIGN ENOUGH PAPERWORK YET

I can't say it enough.

Defining Predatory Lending

Justice Brennan once famously said this about pornography.

I shall not today attempt further to define the kinds of material I understand to be embraced . . . [b]ut I know it when I see it .

The Supreme Court has continued to this day to try and define what is free speech and what is obscene and pornography. While in the matter of pornography vague definitions may suffice, I have pointed out over and over that vague and undefined regulations always lead to disaster in mortgages. What it always leads to is more useless paperwork to sign. If you go to the previous link, you will see that it is all the paperwork already part of the process that leads to much of the fraud.

Enter the term predatory lending which is at the center of the new bill H.R. 3915. Here is what one Winston Salem paper said about predatory lending.

There is no specific definition about what exactly predatory lending entails, though most observers believe that the description applies when lenders take advantage of borrowers by charging high interest rates and consider only the value of a borrower’s assets, as opposed to what the borrower can afford to pay.

Keep in mind the full name of H.R. 3915 is the Mortgage Reform and Anti-Predatory Lending Act of 2007. In other words, the Congress is trying to legislate that which it can't even define. Look at what this paper describes it as. First, it says that it involves "high interest rates". That is of course in the eye of the beholder. How do we determine high? Is high the same for a borrower of a credit score of 800 as it is 500? Is it the same for an investment property as it is for a primary residence? No one knows because "high interest rates" is another dangerously vague term.

Look at the other part of the description. It is a loan that considers value and assets over their ability to pay. I once closed a loan for two borrowers in which their debt to income ratio was almost 100%. You read that right. Keep in mind that income is before taxes and I still was able to get them approved even though just the debts on their credit report amounted to their monthly mortgage. How did this happen? The wife was the breadwinner and she recently got laid off. That income wasn't allowed to be counted. Since they were actually well off, their credit score approached 800. They had about as much in liquid assets (checking, saving, investment, retirement plans, etc) as though owed. Also, they only owed about 200k on a property that was worth 450K. Was I doing predatory lending? By this description I was. This is despite the fact that in this case I was merely lowering their rate while paying for all their costs. In other words, all I did was lower their monthly payment from their previous one.

Yet, without a clear definition of predatory lending, this could be construed as "predatory lending". Even in the current bill there are all sorts of vague characteristics of predatory lending. For instance, there is net tangible benefit. I personally have no problem with net tangible benefit. I use that concept to sell. After all, I have to have a reason for the borrower to take the loan. To me that is their net tangible benefit.

Then, there is the anti steering portion of the bill. According to the bill, if I steer someone into a sub prime loan even though they are qualified for prime, that could be construed as predatory. The problem is that there are times in which sub prime loans are better for the borrower. For instance, Fannie Mae has several different levels. It has Expanded approval and that reaches three levels. By the time a borrower is only approved for Expanded Approval III, they are most likely better off going to sub prime. Yet, unless anti steering isn't better defined, this may also be construed as predatory.

There is more. Look at this portion of the bill.

engaging in abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but different race, ethnicity, gender, or age.

Abusive and unfair can mean just about anything and frankly any borrower can feel as though they were treated as such. By leaving the definition as this vague, it opens just about any behavior to "predatory".

This should scare everyone. Congress can't even define what they are trying to prevent. Then, they use vague and unclear language to describe it. If this bill gets passed in its current form, predatory lending will mean just about whatever anyone wants it to mean. If that is the case, it opens up the industry for all sorts of law suits. More than that, it opens the process up to all sorts of new paperwork to sign. In fact, the legislators think that more paperwork is the answer. Let's look at another part of the article from the Winston Salem paper.

We should have more disclosure about the loan terms that people are signing on to … a one-page summary that every borrower sees explaining everything,” he said.

That was said by Republican Patrick McHenry. Notice he never says what everything is. In his world, after getting everything out in over one hundred documents, we still need one more to summarize everything. This is the sort of nonsensical perspective that our legislators from both sides bring to this debate. All it will lead to is more vague language, more paperwork, and ultimately more confusion.

The Ironies of H.R. 3915

Upon reflection, I was just slightly in error in my analysis of the mortgage crisis and the subsequent political opportunism currently being displayed by the politicians. While I believed banks provided easy targets, I also expected that politicians would never attack them because banks have two resources that make attacking them risky and unwise: money and power. For this reason, I thought banks would remain largely unscathed with responsibility and most of the punitive action would fall on the easier target: the mortgage broker.

I was only about 90% correct in my prediction. In fact, the politicians have figured out how to attack banks without necessarily picking a fight that might get messy. They have chosen the sub prime market. In layman's terms sub prime loans are those give to people with poor or mediocre credit profiles. Sub prime lending has revolutionized not only how we lend but who we lend to. The sub prime concept has also been one of the fall guys in the mortgage crisis. (Once again I recommend the book, Liar's Poker, which details how the market for these sub prime loans was created)

As I have already pointed out in previous posts, the market makers of sub prime loans created a market for so many ridiculous loans that just about anyone with a pulse could get qualified. Since merely having a pulse doesn't guarantee that you can pay your loan back, we are finding that many of these loans aren't being paid back. Since foreclosure is the ultimate punishment for non payment, and the borrowers aren't much of a target politically, the concept of sub prime has become the target of politicians everywhere.

There were layer and layers of irony in John Edwards being being attacked for his links to a sub prime mortgage provider. First, Edwards wouldn't know the difference between sub prime and a submarine ship. Second, the reason he was attacked was because this lender had the "audacity" to try and foreclose on borrowers that didn't pay. Again, it seems no one had one problem with sub prime lenders when they were creating markets for all sorts of poor and middle class folks to buy properties that never even dreamed of owning homes before.

It was only when we all realized that everyone was acting irresponsibly, and ultimately lending to irresponsible people, that everyone decided to turn certain groups into villains. Since it makes no political sense to blame the poor folks, the politicians needed an easier target. They chose the sub prime lending concept.

Thus, while I didn't initially predict the draconian ways in which Congress, lead by Barney Frank, plans on dealing with sub prime, they should have been altogether easy to predict. Make no mistake, if the remedies currently in H.R. 3915 are passed then sub prime will be eliminated.

There are four different things that H.R. 3915 does that deals with sub prime.

1) It eliminates Yield Spread Premium on sub prime loans. The great fear for all mortgage brokers is that YSP will be eliminated, however if I read the bill correctly, it is only on sub prime that it will be eliminated.

Since Congress knows very little about my industry and even less about what created this crisis, they think that YSP is what has caused the widespread delinquency on sub prime loans. The reality is that banks and their partners on Wall Street created loans for irresponsible borrowers and we, sociopathic mortgage broker, had absolutely no problem putting the three of them together. The problem is not and never has been YSP, but rather 620, stated, stated, to 100%, a loan in which a borrower with the marginal credit score of 620 could state their income, their assets, and still buy a property with no money down. YSP had absolutely nothing to do with this concept or the fact that Wall Street decided to make this concept into a market. Yet, it is YSP that is being blamed for the excesses of the mortgage dynamics.

By eliminating YSP on sub prime but not on prime, Congress merely makes even more incentive for someone like me to focus on good borrowers. If I know that I can make money on good borrowers without necessarily charging extra fees but not on marginal borrowers, guess which borrowers I will focus on. Furthermore, sub prime was never meant to be a long term loan. It was meant to be taken on while the borrower's credit was being turned into that of someone that would qualify for a prime loan. That being the case, why would it ever make sense for that borrower to pay anymore costs than they absolutely have to. By eliminating YSP, I am forced to make all my money in up front fees. Thus, borrowers with loans intended for short periods are now forced to take on extra fees.

2) Fees and points can no longer be financed. I have already explained that all new sub prime loans will be hit with even more up front fees than normal. Now, Congress is forcing that the borrower rather than the loan pay for these extra costs. Keep in mind that sub prime tailors to the poor. It is ludicrous to believe that poor folks be forced to take on extra fees, pay for those fees up front, and not have any unintended consequences. Financing of points and fees is an old trick that scummy brokers use to hide those fees. If someone isn't paying for something out of their pocket, they simply usually don't realize that they are still paying for it. By simply rolling fees and points within any new loan, brokers are able to use slight of hand so to speak to make people believe they aren't paying costs or merely not paying that much.

It is used much more often, though, by scrupulous brokers to make sure that borrowers that have little or no funds are able to get loans without going broker. What the politicians have never figured out is that despite our reputation the overwhelming majority of loans that are done are done with the borrower's best interest in mind. Thus, while there were plenty of brokers that abused rolling points and other costs into loans, the majority did it with the borrower's interest in mind. By throwing the baby out with the bathwater so to speak, all the politicians will really do is make it that much more difficult to do loans. Since most poor folks, the overwhelming majority of sub prime's target market, don't have thousands lying around, it is going to be very hard to do a loan for them that involves coming to closing with thousands of dollars. That is ultimately the practical effect of no longer allowing rolling in closing costs into the loan. Poor folks will just have to bring the closing costs and points to each closing they have.

3)Anti Steering. Here is another vague and very important part of the current bill.

steering any consumer from a prime loan to a subprime loan,

Now, what this means, I assume, is that anyone who qualifies for a prime loan has to go into a prime loan. While this may sound good and well to a politician, there are times when a non prime loan makes more sense for the borrower. For instance, Fannie Mae loans actually have three levels, called expanded approval 1,2, and 3, besides their standard approval. These are much like the minor leagues of Fannie Mae loans (with EA 3 being like single A). Anyone that only qualifies for EA3 would most likely be better off getting a sub prime loan especially those where the loan to value is high thus making their mortgage insurance expensive as well. Again, it is unclear if EA3, for instance, is considered prime. Thus, it is unclear if someone could be sued for steering a borrower away from it in favor of a sub prime loan.

Whenever it is unclear or murky, either new disclosures are created, or banks and brokers simply stay away from such borrowers. Either thing is ultimately not good for the fate of poorer borrowers as well as sub prime altogether.

4) This bill introduces loan counseling for borrowers in sub prime loans.

This was tried here in Illinois with HB 4050. Here are the real estate sales in the zip codes it was tried in.

Compared to August 2006, sales were down 45% in the target zip codes. The breakdown by zip code:

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

Counseling brings with it extra fees and extra paperwork and most of all it brings with it a lot of confusion. Some thirty lender decided to pull out of zip codes in which HB 4050 applied. Many lenders will simply pull out of doing loans wherever this sort of counseling is done.

Everyone needs to keep in mind that if sub prime was a boxer it would be taking a standing eight count after taking a huge upper cut. Now, Congress is coming in reigning haymakers with H.R. 3915. If this bill gets passed in a form even close to what it is now, it WILL end the area of sub prime. This WILL hurt the poor the most, and ultimately Congress WILL blame someone else for it.

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.