Friday, August 13, 2010

Brave New World

It has been more than twenty years since I first read Aldous Huxley's dark anti-utopia about a society comprised of genetically engineered workers and elites. In Huxley's book, society has "bred" certain classes individuals to be less intelligent so that they can do all of the menial work while a higher class of elites runs the society. All of society is controlled through the universal use of Soma--a narcotic which induces placid behavior--and since the workers lack the intelligence of the elites, they never question their station in life, until one day a slightly more intelligent worker is born who challenges the system.

I have not thought about the book for years, but this week as our entire office took our national tests to comply with the Secure and Fair Mortgage Enforcement Act, I was reminded of Huxley's vision of a society of workers and elites.

I estimate that the cost to comply with the provisions of the Safe Act averaged approximately $500 for each person in my office. That cost would have been greater if the other three people here had needed continuing education hours for their licensure. Texas allowed them to certify the hours they had already accumulated from the prior licensing period. I, however, have always previously met my license requirement through an insurance license, which was legal under Texas licensure but not permissible under the Safe Act. So, when we were notified by the state in mid July that we would have to transition our licenses by mid August, I found myself taking 20 hours of continuing education, purchasing study guides and test prep for the office, and registering us to take both state and federal exams, all while working and closing loans during the busiest season of the year.

Today we finished the testing process. Because we have been in business for twelve years, Texas had grandfathered us in when they introduced testing as a license component in 2003. But there is no grandfathering with the SAFE Act, so each of us had to take a national test and each of us had to take a state test.

We are told that the Secure and Fair Enforcement Act, which was signed in 2008, is necessary to prevent another financial crisis. What I did not know until I had to do this test preparation is that the National Mortgage Licensing System, which directs the licensing procedures is actually just a few months older than the SAFE Act itself. The system was designed as a means for tracking loan officers nationwide so that each loan originator is assigned one federal number which follows him or her for life. Ultimately, the performance of the originator's loans will be tied to his or her license number so that defaults will follow the originator for life.

The tracking system makes it impossible for an originator whose license is suspended in one state to go to another state and begin originating. And the testing component is said to be necessary to measure knowledge and competency. But can knowledge and competency really be measured in a 100 question multiple choice test? Some of the questions were so vague that I had to really think--not about what the correct answer was but which answer I thought they wanted. Others were so basic that a person who cannot perform the simple functions necessary to answer them would not be able to work as an originator.

The irony is that while many educators decry multiple choice tests because they are basically a better indicator of how well you study than of how much you really know, the federal government is hinging people's careers on passing this test. And an overwhelming number of the people who take this test fail it the first time. The first person from my office to take the exam took hers on Monday. She came back and told me that the personnel at the testing center were congratulating her because of all of the people who had been scheduled to take the test that day, she was the first one who had passed it. One individual had just failed it for the seventh time.

But unlike many tests of its type, the SAFE Act National Mortgage Licensure Test does not allow an immediate do over. If you fail it, you have to wait thirty days before you can take it again. If you fail that it is another thirty days, and then another thirty days after that. After the fourth failed test, the applicant must wait 180 days (6 months) before testing. (By then this poor person will have had to go get a job because, of course, it is a criminal act to originate mortgage loans without a license.)

Fortunately for the unhappy originator, that other job can be right down the street originating loans for a depository bank because employees of depository banks do not have to undergo testing. (A requirement to test employees of depository banks would be onerous and difficult and expensive.) We are reminded of Barney Frank's promise to have death panels for non depository lending institutions.

So here is how it works out. If you have been a self-employed mortgage broker for 20 years, and you fail the test because you don't take tests well or you did not study hard enough or you have poor study skills, you cannot get your license until you pass the test. But with no experience at all you can work for the local branch of your bank supercenter.

When I was explaining this process to a friend of mine who works in a different but also heavily regulated industry, she replied that at least all of this regulation gets the people out of the industry who have no business being in it. I used to hear that sentiment constantly in the mortgage industry. Originators in our trade association were forever saying that we should have more regulation to get rid of the "bad actors."

But this attitude, and the assumption that the SAFE Act will accomplish this, is based on what I believe to be two false premises. Premise # 1 is that the financial meltdown was caused by poorly trained and undereducated originators and that by giving these people more training they will behave differently in the future. To that comment I would respond that, first of all, if a person really does not know how to calculate income or payments or debt ratios, he is going to get a rude awakening from his underwriter just minutes before his loan file is denied. And studying to the test does not mean that you really know anything about how to properly originate and process a loan.

The second premise is that people break laws because they don't know what the laws say. Certainly, since laws are constantly changing and being updated, an industry such as ours should have continuing education requirements. But to presume that most fraud is the result of lack of knowledge is silly. Imagine the number of hours of testing and continuing education that Bernie Madoff must have taken to maintain his licenses. That information just made him a more informed and effective crook. Education does not make a dishonest person honest.

Finally, do we really accept the premise that the financial meltdown occurred primarily because of under-educated, unsupervised greedy mortgage brokers putting people into houses they could not afford? When I got back from my test yesterday, I saw an article in the Washington Post about the chairman and chief executive of OneUnited Bank, Kevin L. Cohee, who is now at the center of the Maxine Waters' controversy. According to the Washington Post article, Cohee "promoted the a uniquely responsible investor in impoverished minority communities and urged prospective clients to live modestly. Customers ought to focus on 'real connections, real relationships,' Cohee urges in a recording on the bank's Web site. Avoid 'people who want to be with you based on the things that you have.'"

However, Cohee lived himself by a slightly different set of rules. The bank provided him with a Porsche and an $880,000 condo on Miami Beach and leased him a $26,500 a month mansion owned by Bruce Springsteen's drummer in California. When he and the drummer had a dispute over surveillance cameras, Cohee purchased a $6.4 million home in 2006 and OneUnited paid him a housing allowance. (At the height of the real estate boom none of my friends or acquaintances could pay $26,500 for a lease on a house or $6.4 million for a mansion.)

In 2008, Cohee's extravagant lifestyle caught up with him when the federal government issued a cease and desist order and accused the bank of lax spending. (You think?) Fortunately for Cohee, he had friends in high places, and he was able to plead his case directly to Barney Frank and Maxine Waters who came to the rescue with $12 million in TARP money,

All of this takes me back to Aldous Huxley and his Brave New World society of elites and workers. In the Huxley society, everyone is bred for and born into their class with no hope of upward mobility. But in real life, genetically engineering people for certain roles just is not practical, so to create a society of elites and workers, you have to eliminate the options that the workers would have to better themselves. So the self employed middle class business owner has to comply with expensive and difficult rules to keep his business. If he cannot comply, he can go work for a protected class who does not have to comply with these rules, but then he is relegated to the role of a worker with much less hope of improving his life. For an elite, however, such as Kevin Cohee, he does not have to be held to any standard because his political connections will absolve him from any wrongdoings or misdeeds. And so his status never changes. In Huxley's story, an elite could never be expected to do menial work because it would be too distasteful to him or her. And in real life, the scores of Kevin Cohees at the top of our system are allowed to live by a different set of rules.

Aldous Huxley would be proud.

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