Wednesday, January 23, 2013

Qualified Mortgages, Loan Originator Compensation and the Law of Intended Consequences

We are getting used to massive federal changes at the beginning of each year.  Last January, we saw President Obama's controversial recess appointment of Richard Cordray as the first permanent director of the Consumer Financial Protection Bureau.  (The appointment was controversial because the Senate was not actually in recess at the time.)  This year we are seeing the new qualified mortgage rules and the 3% cap on loan originator compensation.  These rules are mandated under the Dodd Frank bill, passed in 2010, and we have been waiting now for two and half years to see the final versions.  Now, this month, the CFPB has rolled both out, along with other new housing regulations.

With the nation's attention turned to the president's second inauguration, the battle over the budget and debt ceiling and a growing fight over gun control, new mortgage rules barely have made a blip on the national radar.  The morning that the new qualified mortgage rules were introduced, the local ABC affiliate in El Paso carried the story that new mortgage rules were being introduced.  "This should cause banks to start lending again," the local morning show anchor added optimistically.  Other press releases from non-industry sources seemed to indicate that the new rules would provide the certainty that the market needs in order to commence mortgage lending again.

Of course, those of us who work in housing know that nothing could be further from the truth.  David Stevens, former Assistant Secretary of HUD under President Obama, who left his position to become President of the Mortgage Bankers Association, said bluntly that the new standards will do nothing to loosen credit and in some interviews he went on to add that the new standards will actually tighten credit.  That is a more realistic picture of what is going to happen.  Where Stevens and I disagree is how much the new standards will tighten credit--he appears to believe that there will be a slight tightening while I predict that ultimately, the new standards will make mortgage credit much more difficult to obtain.

Why?  As industry participants have pointed out, the new standards are much less restrictive than the original proposal.  For example, the new qualified mortgage calls for debt to income ratios at 43% rather than the originally proposed 36%, and loans which are being sold to Fannie Mae and Freddie Mac and government loans are automatically in the safe harbor so their debt-to income ratios can remain higher.  Also, the final rule allows for smaller downpayments and equity requirements than the 20-30% minimum initially suggested.  So why am I pessimistic?

First of all, we must consider the climate in which this rule was created.  Sheila Blair, former chair of the FDIC who worked on the qualified mortgage concept, said initially that the qualified mortgages were meant to be a very small slice of the mortgage market.  If a borrower receives a mortgage that does not meet the qualified mortgage standards, the borrower can use the lack of "ability to repay" standards to forestall foreclosure almost indefinitely, and the lender may be required to repay three years of finance charges to the borrower.  That is a powerful incentive to originate only qualified mortgages.  As Stevens properly mentions in some of the interviews I read, the trend is going to be to begin underwriting according to these standards before they are actually mandatory next January.

Any mortgages sold to Fannie Mae and Freddie Mac are considered to be covered under the safe harbor provisions, but we have watched both Fannie Mae and Freddie Mac consistently tighten their own underwriting standards.  I predict that prior to the effective date of the new rule in January of 2014, both Fannie and Freddie will have adjusted their automated underwriting systems to accept a maximum debt to income ratio of 43% and to comply with the downpayment standards of the new rule.  Don't be misled; the qualified mortgages may not officially become effective until next January, but the industry is going to begin using these standards this year in preparation for their full implementation 12 months from now.

Many housing professionals are concerned about the impact of the new rule on the jumbo housing markets in higher cost places such as California and Nevada.  Tighter credit standards are going to negatively impact the market.  Most probably the major impact will be that housing prices will fall again in these states as borrowers struggle to qualify with the new guidelines.  This is particularly true since the qualified residential mortgages do not allow homeowners to qualify with interest only payments.

Finally, there is the 3% cap on points and fees.  There still appears to be some confusion about what this covers exactly.  Fees include lender fees, originator fees (including yield spread premium) upfront private mortgage insurance on conventional loans (though not on government loans) attorney fees in states that require that attorneys prepare the documents, title and third party fees when affiliates companies are used, and in some cases appraisal fees. 

Last night I watched a video by the National Association of Mortgage Brokers explaining the loan originator compensation rule introduced on Sunday January 20.  NAMB's Government Affairs Chair, John Hudson, stated that by writing the 3% rule as it has, the CFPB is picking the winners and the losers, favoring large Wall Street banks over the small business owners.  He stated that since the CFPB is unwilling to look at the impact of the rule on small business owners, we need to try to fix this problem legislatively as he does not believe that the intent of Congress when they passed the Dodd Frank bill was to restrict access to credit and to discriminate against small business owners.

As far as I am concerned, this whole conversation is wrong on so many levels.  First of all, to have national underwriting standards codified into law is ridiculous.  Lending is based on risk and reward.  Just as we should never bail out failing firms--failure is part of risk--we also should not have national legal standards for mortgage loans.  Such standards do not allow for underwriters or investors to make any decisions for the individual borrower's situation.

Second, the intent of Dodd Frank and all of its resulting rules IS to limit access to credit and to pick winners and losers.  When Mitt Romney stated that Dodd Frank was the biggest "kiss" the Wall Street banks ever got, he spoke the exact truth.  Every inch of the Dodd Frank bill benefits Wall Street at the expense of everyone else. The major banks can afford to salary their employees and since the money that they make selling their loans on the secondary market is specifically excluded from the 3% points and fees cap, they do not have to worry about staying in compliance.  A mortgage broker, on the other hand, who is paying all of his own brick and mortar expenses and originating loans may be forced to reduce his fee to 1% or less to comply with these requirements.  And since the advent of lender paid compensation and lender contracts, we cannot vary our compensation from loan to loan, so we will have to reduce our fees on all loans in order to stay within the 3% guideline.  (There are provisions for smaller loans under $100,000 to exceed the 3% cap, but that will not help the loan originator much since the lender paid compensation is a set percentage of the loan.)  In a tight market, more fee reductions simply mean that smaller originators cannot earn enough money to pay their expenses and keep their doors open.

Many in our industry are calling this "the law of unintended consequences."  In an effort to protect consumers, Congress passed a bill that will cut off competition, limit access to credit and prevent consumers from having lending options. Again, I disagree.  This is the law of completely intended consequences.  Remember that Dodd Frank was passed by a Democrat house and Senate and named for the extremely liberal Chris Dodd and Barney Frank.  The liberal agenda of the past four years is not to promote home ownership--instead it is to promote sustainable living as our government transitions us from a society of home owners to a society of renters living in sustainable housing.  We know that this was particular goal of Chris Dodd because the last bill he sponsored before he retired was the "Livable Communities Act," which did not pass but which would have created federal frameworks for implementing Smart Growth and Sustainable living initiatives.  The problem with making such a transition is that home ownership has traditionally been the American dream, and many Americans are not willing to just abandon that dream in favor of a lifetime of living in crowded, tiny multi-family housing.  Micro apartments such as the ones Mayor Bloomberg is commissioning in New York--for more information see the post Dream Small--may find willing residents in the Big Apple, but in the rest of the country we want a house.

Very simply, in order to move toward the radical environmental agenda of tiny apartments and densely populated housing demanded by environmentalists and called for in Agenda 21, the government has to cut off other housing options.  Access to credit gives Americans options to buy and sell housing and to live where they choose. By cutting off access to credit and limiting the availability of loans, the government can continue its current trend of rebuilding our society into one without a middle class--a society where the rich become richer and the poor stay poor.  And since home ownership has been one of the defining characteristics of the middle class, Dodd Frank had to attack it at its foundation--access to and availability of mortgage credit for a majority of Americans.

Anyone reading this who wants a private home and can qualify for one should consider buying in early 2013.  After these rules are fully implemented, buying, selling or refinancing is going to be much more difficult.  And with each month that passes we are moving closer to the remaking of our society.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. Her novel, The Planner, about an out of control, environmentally-driven federal government implementing Agenda 21, is available on Kindle and in paperback. For more information, visit her website at

Wednesday, January 16, 2013

A Tale of Two Cities in 2013

Today we saw President Obama, flanked by school children who had supposedly written letters to the President asking him to act on the issue of gun control, signing his 23 executive orders on gun control and issuing new proposed regulations which he will ask Congress to act upon.

Of course, today is really just the opening round in the battle over the Second Amendment.  The big wars--the fight to ban assault weapons or to limit the size of magazines--are already being strategized in Congress, in the media and in the court of public opinion.

According to several polls I have seen lately, a majority of Americans seem to favor bans on assault weapons as unnecessary.  While over 70% of Americans support individual gun ownership and are opposed to gun laws that would restrict gun possession to the military and law enforcement, many Americans don't seem to understand the value of the average citizen being able to own a large capacity weapon with a large capacity magazine.

I was very glad to see Governor Perry's office stand up for the rights of gun owners today.  The right to keep and bear arms is essential in a free society--to protect ourselves and our families and to reduce crime.
As a life-long resident of the El Paso, Texas, region I have gotten to witness up close and personal the difference between a society with limited gun control (Texas) and a society with restrictive gun control (Mexico) and to see the differences between the two.

Many who live off the border wrongly assume that Mexico's problems with violence are the product of the drug war between warring cartels. That is the current source of the murder and mayhem in Mexico, but Juarez has been a dangerous, violent city for many years--long before former Mexican President Felipe Calderon began the war that has torn the country apart. Several years ago, before the drug wars began, I did a mortgage loan for a woman living in the U.S. whose family owned a money-changing business in Juarez. She and her brothers had inherited the business, but she told me that her brothers did not want to work in it because it was too dangerous. The business had been robbed a number of times, and during one of these robberies her husband had been shot. Fearing that he would be killed if he continued to work in the business, she had encouraged him to go to work in a restaurant in El Paso. She, herself, continued to cross the bridge every day to open and operate her business, and she hoped and prayed each day that she would not be killed while doing so.

My client was unable to buy a gun to protect herself and her business because of the strict gun control laws in Mexico. These laws, which are among the strictest in the world, are designed to make gun ownership nearly impossible. According to an article in the Washington Post, the entire nation of Mexico has only one gun store, which is located in Mexico city and operated by the Mexican military. The clerks are soldiers. The store is located on a secure military base and to enter customers must provide valid ID, pass through a metal detector, give up their cell phones and cameras, provide proof of income, submit references, pass a criminal background check and provide proof that they have been honorably discharged from any military service. If they pass all of these checks, they are allowed to purchase just ONE small caliber weapon and a box of bullets. The weapons are allowed only at home. A business owner who wants to possess a weapon must apply for a separate permit. Business owners are normally encouraged to hire a private security company to protect themselves rather than getting a gun.

Mexico's no tolerance laws about gun control frequently cause problems for U.S. citizens who cross the border with weapons. The most recent case is, of course, that of former U.S. serviceman Jon Hammar who was imprisoned for months in Matamoros, Mexico after attempting to declare a shotgun that he was planning to take with him in his vehicle while driving across Mexico.  Mexican officials agreed that the gun was not on the list of banned weapons, but that did not stop them from jailing Hammar for four months and threatening him with ten years imprisonment for entering the country with a weapon.  Unfortunately, Hammar's case, while very well publicized, was really not an isolated incident. Several years ago, a member of our police force drove his vehicle across the border in pursuit of a suspect. Upon crossing to the Mexican side, he was immediately detained by Mexican authorities and jailed. (He remained in custody for months while U.S. officials negotiated his release.) Most recently, a young truck driver from Dallas, Texas, who was transporting a shipment of ammunition, crossed the border and was jailed in Mexico. Although the Mexican customs official who detained him said in her statement that he told her he had crossed accidentally and was trying to turn around before entering Mexico, and in spite of calls from various civic leaders for his release, he remained incarcerated for over six months for illegally bringing guns into Mexico. 

So how has all of this gun control worked out for Mexico? Since 2008, over 51,000 people have been murdered in Mexico in the nation's drug war. (To put this figure into perspective, only about 58,000 Americans died during the entire Vietnam War). In 2010, over 3100 people died in the city of Juarez, Mexico, earning the city the title of the "murder capital of the world." In 2011 the number of murders in Juarez dropped to 1904. In 2012, murders declined but there is still incredible violence in the city. In 2012 over 60 women were murdered in a story that is being largely obscured by the larger story of the wars over drug territory; a total of about 100 women have been reported missing over the past two years. More women were killed in Juarez in 2012 than in any of the earlier years of "femicide."

As a nation we have grieved over the loss of innocent children at Sandy Hook, and many seem to believe that if guns were more difficult to obtain, this tragedy could have been avoided. But a look at international headlines shows that in Mexico, where guns are virtually impossible to legally obtain, a shooting that claims the lives of multiple people, including children, is a common occurrence:

1. October 23, 2010, at least 10 gunmen burst into a birthday party in a private home in Juarez, killing 13 people and wounding twenty. The party was for a 15 year old boy; at least four of the people killed at the party were teenagers, and one wounded was nine years old. This incident was the second shooting at a house party that month--in the first attack, gunmen stormed a house and killed six people.

2. February 12, 2011, LA Times reports that 8 people, six of them waitresses, were gunned down in the Las Torres bar in Juarez, Mexico. Assailants bearing assault rifles opened fire in the bar. Elsewhere throughout the city, an additional 10 people were killed in other shootings for a total of 18 deaths in 24 hours.

3. January 13, 2011, Mexican activist Susana Chavez was found strangled with one hand cut off in Cuidad Juarez. Chavez had worked during the 1990's to bring attention to the murders of hundreds of young low-income women in Juarez. The Chihuahua State Attorney General's office said that Chavez's death was not the result of her activism but was the work of teenagers who cut off her hand to make authorities think she had been killed by organized crime.

4. April 5, 2011, CNN World reports that 41 people were murdered in Juarez, Mexico in four days, including a 10 year old boy who was shot and killed in an attack meant to kill his father.

I have known many people living in Juarez who have not been able to continue to run their businesses because of crime and violence. Many are afraid to visit family members and loved ones because of the constant threat of violence. Danger is not confined to people involved in drug trafficking. In Mexico, business owners are routinely targeted for kidnappings. In Mexico in 2011, an average of 49 kidnappings took place every single day. In 2010, there were 13,505 abductions; in 2011 that number rose to 17,889. These figures do not include "express kidnappings" which normally last just a few hours and are facilitated by taxi drivers.

With the election of the new president of Mexico, there appears to be general consensus that the city is going to become less violent. Many attribute that to the fact that "El Chapo" Guzman and his Sinaloa Cartel have actually taken control of the city away from the Juarez cartel. A few months ago, our local news featured a story about business owners who are once again reopening restaurants and nightclubs in downtown Juarez to take advantage of anticipated visits from Americans as well as to serve the needs of residents of Juarez who are becoming less afraid to go out in public. These entrepreneurs admit openly that they are allowed to open these businesses only if they pay protection money to organized crime, but the "tax" that the cartels impose on them is just a cost of living and working in Mexico.

When the drug war started in 2008, many of us who own businesses and work in El Paso feared that the violence might spill over into our community. By and large, that has not happened. El Paso has been ranked for the past several years as one of the safest cities in the United States. In 2010, there were just a mere 5 murders in El Paso. In 2011 that number rose to 16, but six of those were proven to be domestic-violence related killings. I could not find specific statistics regarding kidnappings in El Paso, but I did find FBI statistics that in 2010 the FBI had identified 25 cartel-related kidnappings along the entire Southwestern border of the United States. Our city has made national headlines when bullets have strayed across the border and hit our city hall or bounced off a pedestrian, but the guns and gunmen connected to those bullets have remained on the other side of the border. (In a recent incident, a bullet grazed, but did not penetrate, the leg of a woman pushing a stroller near the border. The bullet was believed to have come from a shoot- out involving automatic weapons taking place between masked gunman and authorities on the streets of Juarez. The woman was treated for minor injuries and allowed to go home.)

So what is the difference? Why is Juarez, Mexico, so dangerous and El Paso, Texas, so safe? Some attribute the safety of our city to Fort Bliss, but the military is not allowed to function as a police force on U.S. soil. And the mere presence of military does not make a city safe--during the height of the violence the president of Mexico stationed military troops in tanks on the streets of Juarez, but it did not stop the killings or the extortion or the other crimes. In fact, residents just complained that they were now victims of crimes perpetrated by the soldiers.

Is it our law enforcement? We do have a lot of federal law enforcement here--FBI, DEA, and ICE all have a powerful presence in our city. But is that enough to keep armed gunmen at bay and to protect a population of over 800,000 people? I don't think so.

Is it demographics? No. Many of the residents of El Paso have family members living in Juarez or in other parts of Mexico. We are separated from Mexico by a few international bridges and a river--for the most part our culture and the dynamic of our community is the same.

The difference is guns. Whereas Mexico has restrictive gun laws that allow criminals to access weapons illegally while keeping weapons away from the citizenry, El Paso is the beneficiary of Texas' gun laws which allow residents to carry guns openly and to apply for concealed carry permits.  Would be killers and kidnappers who operate without any real obstacles in Mexico know that if they enter an El Paso business to kill or extort money, they run a very good risk of being killed themselves.  And those weapons that protect us include the maligned "assault weapons."  Mexican drug cartels often use ex-military and renegade former police as enforcers.  To stand up to them, we need weapons that compare with theirs.  And this is a better deterrent than the world's finest law enforcement. Trained law enforcement may be able to successfully track down murderers after crimes have taken place and bring the perpetrators to justice, but an armed populace can keep those murders from ever happening in the first place.

I have received a lot of criticism of my anti-gun control stance.  Many seem to think that mutually assured destruction is not a good deterrent. I disagree. Mutually assured destruction is often the only deterrent. A lifetime spent living a few miles from one of the most dangerous cities on earth has taught me that most violent criminals are also cowards. They may not mind slaughtering everyone else, but they don't want to risk getting killed themselves. Mexico is proof that complete disarmament of a society is not possible. We just have to decide who we want to be armed--only the violent criminals, or the whole of society. Having seen both situations up close, I definitely vote for the latter.

If we want to live in a free society, we have to protect our Second Amendment rights to protect ourselves.  We cannot allow the mainstream media to spin this narrative--to tell us what types of weapons we may own or what types of ammunition we can keep or how many guns we should be allowed to have.  An armed population is a free population--a disarmed population is the victim of every type of petty tyranny and crime imaginable.  That crime and tyranny does not have to come from a government agency--it can simply come from a criminal a few blocks away who wants your money and is willing to hold you for ransom to get it.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. Her novel, The Planner, about an out of control, environmentally-driven federal government implementing Agenda 21, is available on Kindle and in paperback. For more information, visit her website at

Wednesday, January 9, 2013

The Price of Liberty

It has been said that the price of liberty is eternal vigilence.  As the first full week of 2013 unfolds, we are beginning to see true price of liberty all across the country as the federal government imposes onerous new mandates and crafts new legislation to undercut our freedoms.

For Hobby Lobby and the Green family, the price of liberty is $1.3 million a day.  That is the cost of the fines that Hobby Lobby is facing for its refusal to comply with the Department of Health and Human services Obamacare mandate on supplying contraceptives including morning after and week after abortifacents through the Hobby Lobby health plan.  Although other companies have been able to get these fines suspended, Hobby Lobby's judge was less understanding and refused to give the company a waiver on the fines while their case was going through court.

This morning I saw Jay Sekulow on Fox News Channel discussing the Hobby Lobby case.  Sekulow is, of course, the lead attorney for the American Center for Law and Justice and while he is not involved in the Hobby Lobby case, he has successfully represented other companies who are currently suing to uphold their First Amendment rights to object to abortion and therefore not have to pay for contraceptives and abortifacents.  When asked whether Hobby Lobby was actually paying these fines, Sekulow responded that they will not have to do so unless and until the fines are actually levied by the Treasury Department, which he hopes the Administration will choose not to do while the case makes its way through court.

At the heart of the Hobby Lobby fight against the Affordable Care Act is their First Amendment right not to be forced to violate their religious beliefs.  The Obama Administration claims that the mandates which require private employers to pay for contraceptives do not violate the rights of  private employers by virtue of the fact that private employers don't have any First Amendment freedom of religion rights, or as they explain “for-profit, secular employers generally do not engage in any exercise of religion protected by the First Amendment.”

The Heritage Foundation's newsletter today spotlighted three  other employers who are in the same situation as Hobby Lobby--Autocam of Grand Rapids, Michigan, Grote Industries and KL Construction.  KL Construction is a family-owned construction company facing $730,000 a year in fines if they refuse to violate the tenents of their Roman Catholic faith.  (The fine is $100.00 per employee per day so it varies from company to company). All of these cases are headed to the U.S. Supreme Court.

The question that all of us are facing is one of Constitutional protections.  Does the First Amendment protect all of us--or does it just protect non-profit institutions?  In our society we vilify--and sometimes imprison--those who violate the consciences and their own ethics in order to meet the demands of an abusive boss backed by a greedy corporation who intimidates them into committing some moral infraction for the good of the company.  Are we willing to stand up as a society for those who refuse to be bullied by an abusive government being backed by a greedy electorate which apparently believes that business people have no rights at all?

Of course, the question of whether the Constitution protects all of us or none of us goes far beyond the current First Amendment battles.  This week Joe Biden is holding hearings on gun control and threatening that the president will act by executive order if necessary.  It is ironic that the same group who will tell us that abortion is a Constitutionally protected right will also lecture us about gun control when the Constitution says nothing about the right to kill one's own child and has an entire amendment devoted to the right to keep and bear arms. 

The Constitution can be amended only by a vote of 2/3rds of the states.  It cannot be changed or rewritten, legally, by executive orders, or by Congressional legislation, or even by the courts, although the courts do have a long standing right to determine whether laws pass the test of being constitutional.  But the Constitution is only as strong as the people who stand up for it, believe in its principles, and demand that it be upheld.

A little over 10 year ago, I heard NYC Mayor Rudy Guiliani speak at an event here in El Paso.  Guiliani was talking about the lessons he had learned from experiencing 09/11 as the mayor of New York.  I have always remembered what he described as one of the most important, "Stand up to bullies."  Guiliani made the point that the world is full of bullies, but when we encounter them, we can't back down.  We have to stand strong and push back.  And when we do, we often find that they are much weaker than we thought.

Hobby Lobby has chosen to stand up to bullies and pay the price of liberty, to the tune of a staggering $1.3 million dollars a day.  I hope that their business survives, and that they win their battle to uphold their rights under the U.S. Constitution.  I hope that all of us stand up for the rights that others have died for and protect and preserve the Constitution and the liberties it affords us all.

Read Alexandra Swann's novel The Chosen about one small group of Americans battle to uphold the Constitution, free on Kindle January 11th through January 15th. 

Alexandra Swann is the author of  No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. Her novel, The Planner, about an out of control, environmentally-driven federal government implementing Agenda 21, is available on Kindle and in paperback. For more information, visit her website at