Thursday, February 3, 2011

With Friends Like These...

A number of years ago, I had the pleasure of hearing Don Manzullo, Republican Congressman from Illinois, speak at the National Association of Mortgage Brokers Legislative Conference in Washington D.C. As someone who had made loan origination my career, I was faithful to attend the NAMB conference every year in D.C. for many years, and NAMB always invited a wide array of politicians and regulators to speak out our events, including then-director of HUD Alphonso Jackson and Congressman Barney Frank, so we were accustomed to hearing from some high level politicians.  What made hearing Manzullo pleasurable was that he had actually worked as a real estate attorney in Illinois before running for Congress and so he really "got" our industry.  He talked about his practice and the frustrations of getting home buyers closed who were short on cash--first time home buyers are always short on cash it seems.  He told a story about going to a closing where the buyers were about $400.00 short to close.  He looked at the escrow officer and the real estate agent and the loan originator, and as a group they decided that they did not want this young couple to not be able to purchase their home because they could not come up with $400.00, so "We each kicked in $100.00 and they closed."

I have remembered that story for many years because it was such a common sense approach to real estate.  Everybody worked together to make the deal work, and at the end of the day, the buyers walked out of the title company with keys to their new home.

Today, the mindset is so totally different.  In the lending environment we have today, the attorney, the title officer, the real estate agent and the loan originator would wag their fingers at the young couple knowingly and tell them that if they can't raise the extra $400.00 they probably cannot afford the house in the first place.  And we suddenly feel very pious as we raise the bar so high that many young people cannot qualify to buy a home.  Not only the incentive, but also the ability, to help push the first time home buyer across the finish line into homeownership has been destroyed. 

Take for example the new compensation rule that is going into effect April 1. 2011.  This is being sold as a consumer protection act which is necessary to protect consumers from bad loans by not allowing loan originators to tie their compensation to the terms of the loan.  But in reality, the new rule really does the exact opposite by tying the consumer into higher interest rates and worse terms.

Much has been made in our industry of how the new rule will affect loan originator; almost nothing has been said about how the rule will impact consumers.  But in fact, it is going to create some very negative situations.

Since the rule goes into effect in less than sixty days, lenders are beginning to publish their guidelines on how independent loan originators should comply with the rule.   Lenders who have existing relationships with originators are contacting the originators to find out how they want their compensation contracts to read. Since the originator cannot receive compensation from both the lender and the consumer, the originator must choose whether he wants to set up his contract to be paid by the consumer or to be paid by the lender.  The obvious problem with this--and the one that the small business entities want clarification on--is that the originators have to be paid the same way each time.  Loan compensation can be renegotiated on a periodic basis but not on a per transaction basis. The idea is that the loan officer cannot earn more on any one specific transaction.  But the reality is that the loan officer also cannot earn less.  For example, guidelines from one national wholesaler sent to their brokers last week state that when the lender is paying the originator, the "broker may not reduce compensation [to the broker] by offering concessions or paying for tolerance violations...the consumer must pay all third party fees with cash at closing or through the loan principal or interest rate.  These may not be funded by the broker...The consumer can use interest rate credits to fund third party fees, but not broker compensation."

In other words, if I have a contract with Lender X to make $2000.00 on your $100,000.00 loan, if you close on that loan I am walking away with my $2000.00 no matter what.  I cannot reduce the fee, cover the cost of your appraisal, or do anything else to give you any sort of a break.  It is against the law.

In the old days, before all of the craziness of the last few years, real estate was a highly competitive market place.  I cannot count the number of appraisals I was coerced into paying for at closing or the number of times I had to reduce my commission to make all the parties happy, or to cover the cost of additional fees.  But, thanks to the Fed Rule, that apparently will never happen again. 

Of course, if I selected the "consumer paid" option for compensation, I can still negotiate with the consumer and I can still pay part of his closing costs if I need to.  But, how many consumers want to pay the entire origination fee in cash?  And frankly, with my choices being guaranteed compensation paid by the lender or negotiable compensation paid by the consumer, why would I want to choose the latter?  Why would any loan officer?

Now the down side to the consumer is that my guaranteed compensation makes the interest rate higher on all transactions I offer from all of my lenders.  The interest rate is no longer a negotiable item.  Granted, consumers can pay discount points to reduce the interest rate if they choose to do that, but that is also an additional expense to them.  So in the Federal Reserve's insistence to stop brokers from tying their compensation to the rate, they have ended rate and fee negotiation.

Under the new rule, brokers are under a "safe harbor" if they provide consumers with options for the loan with the lowest interest rate and the loan with the lowest costs and fees.  But these options are to be selected from the lenders with whom the originator regularly works.  So if all of my rates are .5% higher than they normally would be, I am just allowing the consumer to select among three artificially expensive loan options.

The worst part of all, from the consumer standpoint, is that because there are so few available sources of residential mortgage money, he or she is going to have no choice but to pay the higher costs and fees, whether to a small independent originator or to a loan originator at a major bank.  Studies have already demonstrated that the implementation of the new good faith estimate has actually added several hundred dollars to the cost of each mortgage transaction rather than lowering costs as promised.  And the net cost  of the new Federal Reserve rule to the individual borrower will be enormous.

We have been told repeatedly that all of these new "anti-steering" provisions are necessary to make sure that the consumer does not pay more for a mortgage loan than he should.  But with consumer protections like these in place, lenders don't have to try to think of ways to raise the costs for the home buyers.  The government has already done it for them.

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