Tuesday, June 22, 2010

Redefining Lending

Today is D-day for the mortgage industry. Today the House and Senate are conferencing the financial reform bill specifically with regard to the issues that affect mortgage lending--the Merkley Amendment (which requires that loan originator compensation be capped at 3% and that a borrower's ability to repay be considered in every case,) and the Landrieu/Isakson amendment (which creates a standard for qualified loans which would be exempt from the 5% risk retention requirements) will forever change the way that mortgage loans are originated in the US.

It is one of the ironies of financial reform that most of the bills hit the working American taxpayer the hardest. For instance, many politicians have called for more help from bankers to allow people to refinance their homes into better terms. And yet, if the Merkley Amendment passes today as it is currently written, the amendment will end FHA and VA streamline refinance loans, which allow borrowers to refinance into more favorable terms without requalifying. Since guidelines are much stricter now than they were three years ago, a borrower wanting to refinance today might not qualify today even if his or her credit is good and all of the mortgage payments have been made on time. That is why a streamline is great. The borrower does not need a new appraisal on a streamline. If streamlines are gone, they will have to pay for the cost of getting the house appraised and hope that the appraisal comes in for value. A good, useful product being used by employed Americans who are meeting their obligations is being eliminated.

This is, of course, just one example of how life will change for consumers and lenders after financial reform becomes law. And industry groups on both sides are lobbying hard at the last minute. For instance, the Americans for Financial Reform, an umbrella group of unions and consumer advocacy groups, has posted on its website its eleventh hour push to make sure that the reform bill gets to the president's desk sooner rather than later. The AFR's efforts include lobbying Senators in states across the U.S. to make sure that they vote for the provisions of the bill and manning a phone bank in coordination with the SEIU to make sure that all elected officials get the AFR's message.

One interesting but little discussed provision that the AFR is pushing for today is passage of the House of Representative's amendment for foreclosure avoidance and affordable housing. On their website, the AFR has posted an open letter with today's date demanding that Congress include as part of financial reform a $3 billion fund to assist homeowners facing foreclosure because of unemployment or medical debt. This $3 billion would come from TARP money. The AFR's letter states that 58% of delinquent homeowners are delinquent on their payments because they are unemployed. "The Obama Administration's foreclosure prevention program, Making Home Affordable, was designed to assist homeowners in costly subprime loans. It has had mixed success dealing with that population. However, the only provision focused on the unemployed guarantees a mere three month's forbearance to those without jobs. This is totally inadequate and offers homeowners little more than is already the practice in the private market."

Actually to say that HAMP has met with mixed results is extremely generous--most people would say that it is has been a mess. A Huffington Post article dated June 21 states that 436,000 of the 1.24 million people who started with the HAMP program have dropped out since the program started in March of 2009. Initially the government pressured banks to bring borrowers into the program without insisting on proof of income, but then when the banks began to demand proof of income, the borrowers could not qualify. Of those who modified, 65-75% will default according to a CNN money story posted June 16. Diane Pendley, a managing director of Fitch, is quoted in the article as saying that the reason for the high defaults is that "on the average HAMP borrowers have 64% of their monthly pre-tax income spent before they can buy a quart of milk."

And since this program which is about thirteen months old has been proven not to work, Congress is going to take a typically governmental approach to the problem by throwing more money at it. Rather than continuing to concentrate on overextended working homeowners who cannot make their payments, why not turn the focus on to borrowers who are not working at all and cannot make their payments?

And that is what the AFR is lobbying for: a Congressional amendment to use $3 billion in TARP money so that HUD can make 24 month bridge loans to unemployed homeowners to give them time to find work. Also, "It is well known that homeowners who have legal representation have a much better chance of successfully navigating the HAMP foreclosure prevention program, which is the main government foreclosure-prevention effort," so the amendment would authorize $35 million for legal aid attorneys to represent homeowners facing foreclosure.

And finally, since foreclosures are devastating for neighborhoods, the amendment authorizes $1 billion for the Neighborhood Stabilization Program to purchase and redevelop foreclosed properties which will be turned into affordable housing.

This is the crux of what I believe is wrong with financial reform--it punishes people who are employed and qualify for mortgages by taking away competition and sound market choices while making it possible for the unemployed to stay in houses they cannot pay for. Don't misunderstand--I really do empathize with people who have lost their jobs over the last three years. I know first-hand how devastating long term unemployment can be to a family. But is a taxpayer subsidy of the family's mortgage payment for up to 2 years really the answer to this problem? I don't think so. Rather, I believe that if Congress really wanted to help the unemployed, they would stop killing small businesses with over regulation so that everyone could go back to work and pay their own mortgages.

Stay tuned; within the next couple of days we are going to know exactly what is in and out of the final bill.

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