Monday, April 4, 2011

The Only Place We Can Go from Here Is Up

No, unfortunately, the title of today's post does not refer to our beleaguered industry or our future as loan originators, although after the last few punishing years in the mortgage industry, it would be incredibly tempting to adopt the view that "things have to improve."  Nor does the title refer to the pay scale for appraisers under the newly implemented appraiser independence rules that went into effect on Friday.  What I am referring to is the cost of interest rates, the cost of closing fees, and the cost of mortgage money in general.  Every indicator points to an increase in the near future. 

What is ironic about the imminent rise of costs and fees to consumers is that it comes at the same time that wages and pay for participants in the industry are steadily declining.  Last Thursday our industry trade groups, NAMB and NAIHP, were able to secure a stay of the implementation of the final Fed Rule on loan originator compensation, while a DC Appeals court hears arguments on both sides today and tomorrow.  When the stay was granted, we were less than 12 hours away from implementation of a rule that another court has already acknowledged will do "irreparable harm" to  the small business owners in our industry.  Friday also marked the first day for implementation of a sort of permanent, universal HVCC--mandatory compliance with appraiser independence rules that are bankrupting independent appraisers.  I received a comment over the weekend on one of the posts that I have written about appraisal issues, and I wanted to reprint it here because it is representative of the blogs that I read and the various posts that I see from appraisers who have had their business relationships and livelihoods destroyed over the past two years through excessive regulation. "HVCC has destroyed my 20 year old appraisal firm. Our business is about 1/3 of what it was. And the new "reasonable & customary" fees appear to be lower than our normal fees.  In fact, fees have remained flat for years. And with inflation (i.e. $3.50 per gallon gas) we are already making less of a living. I received the new fees from Corelogic Friday and a 1004 was $285.00 to $325.00. My fee has been $350 to $400 for the past several years.  I will not do it."   The comment was posted anonymously, but it certainly echoes the sentiments of appraisers all over the country.

Remember that all of the mechanisms leading up to these pricing controls were supposed to be necessary to protect the consumer.  RESPA Reform and the new Good Faith Estimate was supposed to save borrowers hundreds of dollars per transaction, but by itself.  So since our incomes are going down, consumer costs to get a mortgage should be going down too, right?:

Wrong.  Every indication is that mortgages costs are about to rise.  While the appraiser independence rules mandated by the Federal Reserve and included in the Dodd Frank Act have cut appraiser's pay so much that they are losing their businesses, these same rules have increased fees to consumers by introducing a middle man into the transaction in the form of an appraisal management company. I have watched fees go up several hundred dollars on various appraisal products since the original implementation of HVCC, while at the same time hearing that the small appraisal companies are getting paid a fraction of what they once earned. Although if the new loan originator compensation rules go through we will not be allowed to charge a fee to the consumer, our wholesalers we sell the loans to will, of course, charge fees, and these fees have gone up dramatically.  In the past year, I have seen administrative fees increase up to $200.00 per transaction.  One reason for the increases is so that the lenders have additional money to cover the risk that they are taking.  But a second more important reason is that less competition in the market place means higher costs--my prices are going to be lower if I have to compete against twenty companies in my market place than they are if I compete against only three.  Less competition means fewer options and that means higher prices.

And, of course, the new "lender paid compensation" agreements which are written in stone are going to increase mortgage interest rates for all consumers, since those of us who cannot afford to be salaried will have to build our compensation into the interest rate with absolutely no possibility for negotiation on the part of the consumer.  So consumers can look for their closing costs and interest rates to rise immediately upon implementation of this new rule.

Now we also have a new class of mortgages being introduced--"the qualified residential mortgages".  These mortgages will include FHA and VA and loans sold to Fannie Mae and Freddie Mac.  But as FDIC chair Sheila Bair told us last week in her press announcement, QRM's will be "exception, not the rule"--"a small slice of the market."  These are going to be the only loans that smaller originators can originate because of the requirement to maintain 5% of the risk in all other loan products.  That means that for the lion's share of mortgages originated in this country, consumers will have to seek financing from handful of banking giants who can afford to securitize 5% of the risk.  And these loans will bear higher interest rates and fees because the 5% risk retention requirement in and of itself necessarily makes these riskier loans. 

We also see new rate additions for Fannie and Freddie looming closely on the horizon.  As the Obama Administration works to shut down Fannie and Freddie, the Administration has announced its plans to raise fees tied to interest rates on Fannie and Freddie loans.  One basic reason for that is to make loans from these agencies more expensive so that they are less competitive with other types of financing.  In other words, if Wells Fargo is offering a loan at 7.5% that is not qualified residential mortgage, a strong borrower with a good down payment would probably rather make the down payment and get a cheaper mortgage which could be sold to Fannie and Freddie.  But if the additional fees on Fannie and Freddie loans raise the price of their mortgage to 7.25%, then the Wells Fargo loan with a down payment requirement of 10% or 15% might be more attractive than the qualified residential mortgage with the 20% down payment.  By raising the fees and interest rates as high, or higher, on the QRMs as the private mortgage products being offered by the mega banks, the government can in fact insure that QRM's are a very small slice of the market. They can also "steer" the stronger, more credit worthy borrowers into these private market products. Since qualified residential mortgages include loans sold to Fannie and Freddie only as long as they remain in government conservatorship, the Treasury Department can engineer the success of the new mortgage products offered by the megabanks simply by controlling the pricing at their major source of competition.

Finally, we see that apart from Fannie and Freddie and Treasury department acrobatics, interest rates are poised to move upward.  The Federal Reserve's program to purchase mortgage backed securities which pushed the interest rates down to historic lows appears to be drawing to a close. And if Bernanke does end the much maligned Quantitative Easing Program, QE2, in June of this year, the treasury bonds yield to investors will have to increase in order to make Treasury bonds attractive to more investors.  But, as we all know, mortgage interest rates are tied to Treasury note rates and a higher yield to the investors means a higher monthly payment for consumers getting a mortgage in the form of a higher interest rate.

As I said at the beginning, the only place we can go from here is up.

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