Wednesday, June 19, 2013

The Major Federal Regulation Impacting Your Life in Six Months That You Probably Haven't Heard Anything About

Enjoy the next six months--whatever they bring.  In January of 2014 our nation is about to be buried under a tsunami of regulations that will limit our freedom and quality of life in ways that we have never before experienced.

No, this post is not about Obamacare.  The regulation I am talking about is the qualified residential mortgage piece of the Dodd Frank bill, which will also go into effect in January of 2014 and which will impact nearly everyone in this country.

Not sure "everyone" includes you?  Ask yourself these three questions:

1. Do I currently own a home?
2. Do I want to sell my home, now or in the future?  (As in, do I ever want to sell my home?)
3. Do I want to buy a home, now or in the future? (This could be a first home, or an upgrade, or a smaller home when I am ready to retire and the kids are gone?)

The qualified mortgage piece of the Dodd Frank bill will affect your ability to do any of these things.  How? The qualified mortgage rule contains a couple of very important components.  One of these sets the debt to income ratio at 43% for home borrowers.  Another caps the total fees and points, including the fees that a mortgage broker or loan officer can earn, at three percent of the loan amount, even if those fees are paid by a third party, such as a lender to whom the broker is selling the loan.

This week is small business week across America.  As I have seen ads for small business week I can only shake my head in amazement that a country that pretends to honor small businesses is forcing them to close at an astounding pace.  This 3% rule is the final nail in the coffin for small and independent loan originators.  (After fifteen years as a loan originator, I closed my own business April 1st of this year because this regulation had been finalized.  By including all mortgage fees, to include escrows for taxes and insurance and in some cases, title insurance, in a 3% cap, there is simply no way that a loan originator can earn enough money to keep the doors open.)  Of course, as with all of the rules in Dodd Frank the 3% rule cap on fees specifically excludes the fees (service release premiums) that banks receive when they sell closed mortgage loans.  So the Dodd Frank bill completes a process that has been going on for several years now--it closes down all of the independent mortgage originators and makes banking entities that can afford to salary their loan originators the only providers of mortgage credit.

What does this mean to you?  First of all, it means that starting in January of 2014, you will have a very difficult time finding anybody to originate a home loan for you--even more difficulty than you may be currently experiencing.  Second of all, if you do find somebody to originate the loan for you, you probably won't qualify for it.

Dodd Frank, like Obamacare, was a huge framework on which to hang more regulations, so the Consumer Financial Protection Bureau was able to write up these new regulations however they wanted. The original bill required a 3% cap on the points and fees of a loan in order for a mortgage to be "qualified".  The bill also required an "ability to repay" test.  The bill allows for a "presumption of compliance" if certain requirements are met.  In other words, if lenders meet the 3% cap for points and fees and comply with some of the other guidelines, in case of an investigation by the CFPB or a consumer complaint, they are presumed innocent until proven guilty as long as they have adhered to all of the rules written by the CFPB in drafting the new regulations.

The geniuses at the CFPB decided that 43% would be a good debt to income ratio for a qualified mortgage.  That means that your house payment (including your taxes and insurance), your car payment, your credit card bills, and your court ordered child support payments cannot exceed 43% of your total income.   If you make $10,000 a month, every month, your total credit card, auto, and housing expenses, plus any court ordered child support cannot exceed $4300.00 a month.

Due to outcry from industry members, HB 1077 was introduced in March of 2013.  The bill, which has never made it out of committee, has 43 co-sponsors, and would modify the 3% rule to exclude escrows for taxes and insurance, loan level price adjustments by Fannie Mae and Freddie Mac or FHA--this is critical because loan level price adjustments set by these agencies can be substantial--and any compensation paid by a mortgage originator or creditor to any individual employed by the mortgage originator or creditor.  Presumably this could allow an independent contractor under contract to a lender to be paid by the lender, as has been the custom for many years.  At this point, it is looking as though HB 1077 will die in committee without ever seeing the light of the House floor, but even if it did pass, it likely would not pass the vehemently anti business, anti-property ownership elements in the Senate.

In response to this bill and the considerable complaints about the qualified mortgages, the Consumer Financial Protection Bureau recently announced some modifications to its own regulations.  The new modifications allow the compensation to an originator to exceed the 3% cap IF those funds are paid out of pocket by the borrower.  This is very important, because the housing model to which Americans have become accustomed over the past several decades is one in which they finance most of the originator's fee through a slightly higher interest rate.  In a climate where the interest rates are historically low, if given the option of paying $3000.00 in fees or an extra .25% in interest over 20 years, for a final rate of 3.5%, most borrowers would rather save the cash and pay a little more each month in interest.  Starting next year, that won't be an option.  If your loan costs and fees exceed the 3% cap, you will have to write the originator a check.

The second modification makes even less sense.  The CFPB has decided that 43% is an appropriate debt to income ratio for a borrower UNLESS you are low income and you are obtaining your mortgage financing through a non-profit organization.  In that case, your total debt to income ratio can go up to 47%.

Let's look at how this works in real life.  Example A:  You work as a salaried accountant for a firm where you have been employed for 10 years and you earn $5000.00 a month.  You have a car payment of $550.00 a month, one credit card with a $300.00 a month payment on it and you are purchasing a $150,000 house.  The escrowed payment on the house to include taxes and insurance will be $1500.00 per month.  You have an 820 credit score.  Using the new math of big government, you won't qualify.  Your total monthly expenses are $2350.00 a month, which would make your debt to income ratio 47%.  The fact that you have an 820 credit score, have been on your job 10 years with no gaps, and that you are currently selling a house for which you actually pay MORE than your new payment are immaterial details.  You don't meet the guidelines.

However, in Example B, you only make $2500.00 a month, so by the U.S. Census Bureau definitions you are under the median income for your geographic area.  You have 5 credit cards, which total $200.00 a month in payments.  You are paying $250.00 a month for your car.  You are purchasing an $80,000 house with an escrowed payment of $725.00 a month and, wait for it, your loan is coming being originated by an Acornesque non profit.  Congratulations, you qualify, even though you have only a 650 credit score and you have been on your current job as a retail store manager for only two years.  Your debt to income ratio is  also 47%, but you met the guidelines.

Does any of this make sense?  Logically, the accountant with 10 years on the job and the 820 score is a better risk, but he doesn't get the loan, whereas the lower income indvidual does even though his debt ratio represents substantially less disposable income than Example A.  Welcome to the world of federal underwriting standards.

My example includes only salaried persons.  The ability to repay standards that were already being implemented when I left housing finance in April of this year were choking self-employed borrowers out of the housing market.  Are you making money this year?  Do you have an exclusive patent on tiddly winks which is generating unprecedented revenue, and you want to buy a house while the prices are down?  Unless you had an equally good year in the previous two, you are not going to be able to qualify.  Do you earn salary plus commission?  If your commissions decreased over the previous two year period, you probably cannot use them to qualify even if this year your earnings exceed levels prior to the recession. 

When the FDIC's Sheila Blair was first working on the qualified residential mortgage standards she told us that the qualified mortgage and qualified residential mortgages were written with extremely narrow guidelines because they were meant to be "a very small slice of the pie".  Now that we know that the QMs and QRMs are the only mortgages that Fannie Mae and Freddie Mac are planning to purchase, they are not such a small piece of the pie--they are the entire pie.  And it is a pie that very few people will even get to taste.  In February of this year, Corelogic Credco--an industry source for financial and credit reporting information--released a study on the qualified mortgages.  Their study found that only about 50% of the borrowers who qualified for residential mortgages in 2010 would still qualify under the new QM guidelines. 

Still lurking out in the regulatory mist is another set of regulations yet to be released--the qualified residential mortgages.  If these new rules introduce a 10% down payment requirement, as they are widely expected to do, only about 40% of borrowers will qualify for a home mortgage.  So our country is about to experience yet another seismic shift--the land where traditionally 60% of the population are homeowners will morph into a country of 60% renters.  Bear in mind that interest rates are still historically low.  When rates rise, as they are already starting to do, mortgage payments will increase making it even harder to meet the 43% guideline.

Our industry has read these guidelines with sorrow and lamented about "the law of unintended consequences."  If I were allowed to ban one phrase from English usage, "the law of unintended consequences" would be the one. These new restrictions on housing lending are not unintended at all. They are fully intended and they have been carefully crafted and orchestrated to transform us from a society of homeowners to a society of renters.  And that transformation is going basically unnoticed and almost completely unopposed.

Regular readers of this post know that I have been doing a series of posts on global environmentalism and the UN.  Our global president, who apparently still has the applause of Europe even while his approval rating plummets at home, is completely committed to the goals of climate change and the UN's policy document for restructuring the world--Agenda 21.  Global environmentalism calls for ridding the world of private property and packing humans into dense "human settlements".  That demand has led to "New Urbanism" and "Smart Growth" and "Sustainable Development" all over this country.  But the problem with trying to implement global restructuring is that for it to really succeed, the people need some buy in.  Americans like to own homes.  Home ownership has been the American Dream for centuries.  The only way to eradicate that dream is to legislatively barr most people from home ownership.  Suddenly a tiny apartment in the city becomes the only option for housing space when you have been regulated out of the suburbs by a combination of mortgage rules you can't meet, high fuel prices, and soaring gas prices.  At least, you can embrace your new, dense, crowded surroundings with the knowledge that the laws that sentenced you there were passed for your own protection. 

The American people deserve a lot better than this, and we should be demanding better.  Yes, we have a lot of issues to deal with right now: looming Obamacare premiums, myriad government scandals, high unemployment, etc. etc. etc.  But just because there are a lot of other problems does not mean we get to ignore this one.

Like Obamacare, Dodd Frank can only be repealed with a Congress and Senate willing to vote for passage of a new bill and a president willing to sign it.  But Congress could defund the CFPB and set aside the regulations written under the authority of an illegally appointed director, Richard Cordray, who was assigned his post as a recess appointment while the Senate was not actually in recess.  Congress should be using whatever tools they have at their disposal to prevent these rules from being implemented and to at least maintain the status quo in housing finance, because while the status quo is not good, it is immeasurably better than what we are about to face.

Find out more about Agenda 21 and what it REALLY means:  to your city, this country and our world, by watching this presentation.

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


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