From the New York Times
The Obama administration plans to move quickly to tighten the nation’s financial regulatory system. Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.
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Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.
None of this should be a surprise for regular readers of Raincityguide. I’ve been talking about tighter rules for mortgage brokers since 2001 and here on RCG for two years. Mortgage brokers will always argue that they are already tightly regulated. In some states, brokers have tougher regulations than consumer loan companies. Hey, wait a minute. Is President Obama going to let the consumer loan companies slide by without proposing tougher regulations for them as well? The top two largest predatory lending lawsuits were against consumer loan lenders Household Finance and Ameriquest. Both companies settled out of court and “admitted no wrongdoing” even though there was lots of evidence that their sales people were meticulously trained by management on how to do wrong.
Maybe tougher minimum sanctions and penalties are in order as well. We must also realize that these new regulations mean nothing without enforcement. I would rather see the states be in charge of enforcement than the federal government (well, with the exception of Florida where they have proven their supreme incompetence.) We need only to look at RESPA and the miserable job HUD has done trying to enforce this massive piece of regulation since 1975. So if it’s going to be up to the states, then the industry should prepare for a higher cost of doing business as a mortgage broker or consumer loan lender. This will be passed on to the consumer in the way of higher fees, rates, or both.
Florida is also one of the only states that downgraded its real estate agency laws to Transaction Broker, basically paper pusher. It was supposed to be ONLY the replacement for Dual Agency, when that was outlawed back in…1996 or 1997. But immediately brokers saw it as an option in all transactions to decrease liability. Transaction Brokerage (representing the transaction vs. the client – loose translation) became the preferred designation the day after the law was passed.
So the fox was ruling the henhouse, not watching it, but ruling it.
Obama should tighten guidelines for all loan originators–including mortgage bankers. It is ludicrous how this one industry is being picked apart while a bigger part of it is being left alone thanks to lobby dollars.
I’m really sick of it.
I do more counseling for consumers who have received bad advice or mortgages from mortgage bankers than I do brokers.
Right now, I’m helping a home owner review her Note from WaMU…no one there will help her review it to understand how it may adjust. They just want to refi her.
The consumer loan companies present a different issue in that I don’t believe any of their product is bundled and sold like mortgages are.
I’m not a big fan of such companies, but I’m also not a big fan of them being clamped down on too tightly, as was proposed recently with the payday loan folks. Too much nanny state for me. Sometimes dealing with such companies is a logical move for people. If I were to make any change I would outlaw the practice of post-dated checks (authorized electronic transfers would be okay) and their being able to take a security interest in household goods.
I really think that tighter regulation is not the answer we are all looking for. The fact is that unscrupulous people were doing bad loans that lenders approved of and let slide.
Regardless of the regulations for mortgage brokers, if lenders had been using an ounce of logic and common sense, they would have killed most of the bad loans. Who in their right mind would lend $500,000 to someone with a 550 credit score and no down payment? Who would believe that someone working as a janitor actually makes enough to pay for a $400,000 house?
As I see it, tighter regulation is going to cause more problems that it will solve. The days of free and easy lending that the majority of the dishonest loan originators were using to make a buck are gone. Now I am sure they are off working a new scheme like buying homes from people in default and leasing them back.
Jillayne:
It is so funny….I get an email about the NYT headline, and I think to myself…where to fnd more info…RCG?
And there is it is.
OK, so it’s not much more info, but it is nice to see you are on it.
Consumer loan companies (like Ameriquest, HFC, etc) did securitize their loans, aided in large part by the use of derivatives and credit default swaps on Wall Street. Most of their loans were not run through Fannie or Freddie, but went straight to private investors.
The use of derivatives and CDS enabled even more conservative lenders (banks) to write risky loans, and shovel them out the back door to private investors, sometimes via Fannie and Freddie, and sometimes not. The article mentions a focus on that, which is a welcome and needed reform.
National regulation, and standardization of the mortgage broker industry will lead to greater consolidation, making it easier for bigger companies to reach across state lines.
Whether this will provide any advantage to the consumer is questionable, but it WILL provide an advantage to bigger companies, and to regulators.
The loan origination culture simply had to change: it already has, and will continue to do so, but probably not quick enough for itchy politicians
Sadly, when it comes to enacting laws, the best financed and best organized companies almost always win the lobbying wars.
Yes, the new laws MAY cause more problems than they solve, and I totally agree that (some) states are doing a far better job of regulating the industry, but the financial industry will insist on common standards, and those standards will largely benefit the best lobbyists.
They have, and will, paint the “broker” as bad, and insist these are necessary protections, but the ultimate outcome will be to pass greater risk and expense onto the borrower, to increase their profits.
They do not spend their lobbying dollars unwisely.
We brokers should enjoy our current freedoms to “do the right thing”, guard as well we can against the coming changes that harm consumers, and ultimately adapt to the changes that are surely coming.
No surprise here. It was obvious brokers would be the scapegoat from the beginning of this mess. Admittedly, the broker community allowed itself to be corrupted by a few. Unfortunately, the broker community sees itself as a salesmen instead of professionals. We are going to need a subtle shift in culture to elevate ourselves.
I fully support increased barriers to entry and more aggressive enforcement of SENSIBLE laws to ensure loan originators being ethical. The last thing we need is the SEC fining and auditing brokers because they filled out the 1003 in blue ink instead of black.
However, what I find illogical in placing blame at the broker’s feet is that brokers were offering what banks provided. Brokers DO NOT UNDERWRITE OR FUND MORTGAGES. So if a broker originates a bad loan, it fall squarely on the shoulders of the banking institution, not the broker.
If a bank comes out with a NINJA loan and a broker has clients who fit into that loan product, they are going to originate the loans. That is what they are paid to do. We assume the bank understands the risks with certain underwriting guidelines and have priced the loans accordingly.
The role of the broker is to find the borrower, not act as the underwriter. We walk a very fine line between counseling borrowers and being discriminatory. There are PLENTY of clients I have personally thought were not ready to own a home or knew were a financial disaster waiting to happen. However, for me to allow my PERSONAL opinion to be the judge when I know there is a loan product that is available tailored to that individual’s risk profile could be construed as discriminatory. It is a no win situation.
You make loans that go bad, you are the bad guy. You don’t make loans, you are discriminating.
Hi Russ,
Discrimination laws such as Fair Lending and the Equal Credit Opportunity Act (ECOA) don’t require a lender/broker to make a loan just because a person IS of a protected class.
When lenders/brokers treate everyone the same, without regard to the protected classes, if an originator is recommending one homebuyer wait and the other homebuyer move forward, as long as you’re making your decision based on their ability to repay the loan, you are not discriminating.
Russ, “The role of the broker is to find the borrower, not act as the underwriter.”
This is the role of the broker now. Today.
In order to get the government off the back of the broker, the role will be to move into the underwriter’s head space and become good at risk analysis, not just to help the lender, but to help the homeowner make a good decision.
Hi Roger,
Morality and economics are linked.
Brokers will be painted as “bad” when it makes economic sense to those who make claims to what’s true.
Brokers will be painted as “good” when it makes economic sense (to those who make claims to what’s true.)
🙂
Hi Jacquie,
I believe a certain percentage of the “bad actors” are still around. They’ve just changed hats. The reason the banks made bad lending decisions is because they knew they were passing the buck on to someone else.
But the banks are falling now, too. We haven’t heard the end of the banking crisis.
When this is all over, I wonder if the banks will face tougher regulations, too. I would bet on it.
Hi Rhonda,
“I do more counseling for consumers who have received bad advice or mortgages from mortgage bankers than I do brokers.”
What about consumer loan companies or are you classifying consumer loan companies as mortgage bankers?
Did you just mean depository lenders, ie; banks?
(Consumer loan companies like to call themselves mortgage bankers which I think should be outlawed.)
“So if a broker originates a bad loan, it fall squarely on the shoulders of the banking institution, not the broker.”
What if the bad loan was made because the broker submitted false information to the bank?
I guess you could put the blame on the bank there for not requiring more documentation, but . . ..
Jillayne, I’m talking about mortgage banks–the “big guys”.
“Consumer loan companies like to call themselves mortgage bankers which I think should be outlawed.”
The State of WA has mortgage bankers (correspondents) now defined as a consumer loan company. How messed up is that?
“Who in their right mind would lend $500,000 to someone with a 550 credit score and no down payment”
Merrill Lynch via First Franklin…but you probably needed a 580 mid credit score.
Countrywide could have done this loan too, I believe….”back in the day”.
A mortgage originator, like myself, could have a pile of files that could not be approved conventional or FHA and in walks your friendly rep from a company such as one of these…bing, bang– they write up the loan scenario submission sheet and tell you “no problem, it will be approved…we do these loans all day long”.
Jillayne, I don’t see true mortgage brokers being an underwriter. They can’t. The bank is.
This is a difference between a mortgage broker and correspondent lender. We (correspondents) underwrite and take the risk…brokers do not.
Jillayne:
Easier said than done when a consumer feels slighted that you told them they didn’t need to buy a house and decides to file a discrimination lawsuit. I can see a prosecutor thundering, “You are a NOT an underwriter! Why would you deny this person a chance at the American dream. Banks pay people to develop the loans!!!”
Kary:
If a broker submits false information, then that is clearly fraud. However, keep in mind many of the stated loans were encouraged by the banks. The banks knew exactly what they were getting with a lot of these loans. I recall bank account executives coming by for sales calls showing how to “state income”. This was a selling point with many banks!
Rhonda:
Even correspondents have to follow the end lender guidelines. We underwrite to the banks guidelines. At the end of the day, a correspondent is just a broker on steroids with a credit line.
“If a broker submits false information, then that is clearly fraud. However, keep in mind many of the stated loans were encouraged by the banks. The banks knew exactly what they were getting with a lot of these loans. I recall bank account executives coming by for sales calls showing how to “state income
Russ, I agree, we do have to follow the guidelines of the lender–that’s were a big part of the risk for a correspondent lender is…btw…I prefer “super broker” over the steriod description. 😉
Now that Fannie Mae is run by our government and is doing 90% of the loans being done in The USA today. Obama is going to have to regulate his
goverment. FHA is at an all time high! The goverment is in control here.
Mortgage brokers have really taken a hit.
Don’t forget that every lending institution had underwriters,
every loan a mortgage broker submits had to be and still has to be OK’ed
by the lender. The liablility of the file is in the lenders hands and always has been. The scapegoat of blaming Mortgage brokers is like a parent leaving a kid with a book of matches, and yeling at them when you find them playing with them.. People have to realize that a mortgage broker
has always had guidelines that a mortgage file has always had to have in order to be submitted to a wholesale lending institution. That’s why lenders
pass out loan program info. When a mortgage broker sees that a file fits a program an intitutional lender has left with them.. Then they submit the file to that lender.
The mortgage broker didn’t invent the Option arm mortgage.
The wholesale lender did.
Jack, this takes all the responsibility off the broker and puts it onto the wholesale lender.
And now that the government is in control, would we now blame the government for all defaults on loans originated in 2009?
Brokers and loan originators are going to be worth a whole lot less in the eyes of the consumer if they are going to push all the responsibility onto others.
Why should I pay a loan originator at all?
You’re making an argument for the end of loan originators. Why not just allow the consumer to pay an “underwriting fee?”