Monday, March 7, 2011

In Praise of Competition

This morning I had a good email exchange with a friend of mine who reads this post.  He disagreed with my position about Affiliated Business Arrangements, which are now in danger thanks to the Fed Rule on the Loan Originator Compensation.  The most recent staff interpretation threatens to make it impossible to get paid on these transactions because if the loan originator also owns another entity and the consumer pays the other entity, the loan originator cannot receive compensation from the lender without violating the "dual compensation" clause.  And, since Dodd Frank caps loan originator compensation at 3%, if the Federal Reserve Board's definition of payments to affiliated companies as part of the loan originator compensation stands, then the total of all payments to all entities would necessarily be capped at 3%, which would effectively force the companies to sell off their affiliates.

My friend's position is that we need to have a "good riddance" attitude toward affiliated business arrangements, and I suspect that many independent mortgage originators who do not have such relationships would share this attitude.  How many times have we been denied the opportunity to even quote business because we were shut out by a builder who owned his own mortgage company and would pay the consumer's closing costs if the consumer used the affiliated mortgage company?  Worse yet, how many of us have actually met borrowers who tell us that the builder will not accept a contract to purchase one of his houses without approval from his in-house mortgage company.  I understand the frustration, but today I want to play devil's advocate and write in defense of competition in all of its forms--including one-stop shops for mortgage products.

Competition keeps the world moving forward.  In El Paso, Texas, where I have spent my entire professional life--we have only one utility company that provides electricity.  El Paso Electric meets all of our electric needs.  We have very high electric rates, and we always have.  During the first week of February of 2011, El Paso was hit with an ice storm that dropped our temperatures to record lows.  For the first time in my life, I saw negative temperatures for overnight lows.   El Paso Electric's generators froze over and could not operate.  As a result, EP Electric had to purchase power from other areas, including Mexico.  However, EP Electric could not purchase enough for all of us, so the company instituted rolling blackouts for the city.  During various times of the day and evening, the power went out for at least an hour. Rumors persisted that some parts of town did not experience blackouts at all, but I verified that we lost power at our house on at least three separate occasions.  We lost also power at my office.

The rolling blackouts caused El Paso Water Utilities to lose power and, consequently, pipes froze and burst all over El Paso.  Many residents were without water for days.  After a few days, El Paso Water Utilities and El Paso Electric apparently had a conversation about not including EP Water in the EP Electric blackouts, but by then the damage had already been done.  El Paso's reservoirs of water dropped so low that high-water consumption businesses (laundry mats and car washes, for example) were ordered to close by the mayor.  Residents were ordered not to cook, shower, or wash their clothes until the water restrictions ended.  (Fortunately, this lasted for only about two days.)

El Paso Electric has told us that they will reassess their generators and the overall condition of their equipment, but they also have informed us that it would be prohibitively expensive for them to have generators which can perform in the high summer temperatures which we always experience and also in the extremely cold temperatures which we almost never experience.  They have further notified their customers  that this summer we can expect to see higher electric costs since they are passing on to the community the cost of having to buy electricity during the storm.

Now I contrast our situation with a monopoly utility company to that of my sister who just moved to Dallas.  In Dallas, there are many companies that provide electricity.  My sister tells me that she did not have to pay a deposit to set up her account although she and her husband are new residents of the city.  In El Paso, that would be unheard of.  Rates  in Dallas are comparatively  low and electricity providers are very competitive.  My sister's new home is entirely electric--it does not use natural gas at all.  In El Paso, such a home would be prohibitively expensive, but she tells me that in Dallas there are many such homes, because the utility rates are affordable.

Apparently, in Dallas the utility companies can afford to keep equipment that can survive both the ice storms and freezing temperatures that are part of East Texas winters, and also the sweltering heat and humidity that make up the summers.  (I visited Dallas in 2000 in September for a mortgage brokers' convention when the temperature was 113 degrees, so I know that they can match us for heat!)  And they manage to maintain that equipment and keep the lights turned on while charging less!

The difference here is competition.  Competition brings quality up and prices down.  And that is true in the housing and mortgage industries just as it is true in public utilities.  Are one stop shops anti-competitive?  In my opinion, they are not.  I am a very small mortgage company, and I have never been affiliated with anyone.  As a result, I never got business from the volume home builders.  But I developed niches that worked for me and that have sustained my company through three years of recession. If a builder wants to go through the headaches of owning a mortgage company and a title insurance company then he has the right to enjoy the profits of his dual enterprise.  Likewise, if a real estate company wants to own a mortgage company or a title company, those enterprises should be able to offer those services.   Meanwhile, those of us who have no affiliated companies but do have lower overhead distinguish ourselves by offering cheaper mortgages and lower interest rates. 

The most important fact I learned over nearly 13 years in the mortgage business is that when free enterprise is allowed to work, there is enough business for everyone.  A rising tide actually does lift all boats.  It is only when excessive regulation decides the winners and the losers in an industry that we all begin to suffer.  In a regulatory environment where we are all allowed to compete at whatever level we choose to, we as business people are able to grow our businesses and the consumer is presented with plenty of options and choices to get the home/loan combination that meets his needs.  Everyone wins. 

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