Fed and Sen. Dodd will create the perfect storm â€¦ recessionJoe Adamaitisyield spread premium, Washington Mutual, World Savings, Wells Fargo, Fannie Mae, Freddie Mac, Federal Housing Administration, predatory lenders
Disclaimer: The views expressed and written in this article are
those of the author alone and do not necessarily represent the
views of The Mortgage Press, the National Association of Mortgage
Brokers and NAMB's state affiliates.
Mortgage reform is moving at a breakneck speed, similar to a
runaway train. Presidential candidates, and now the Fed, are
trumpeting their horns with their savvy ability to blame the bad
guys and correct a corrupt systemrestoring confidence, as they put
it. Let me be clear from the beginning, I am the first to go after
those who destroyed the industry; I have been adamant about certain
reforms, but allowing those in government to overreact with "a bull
in a china shop mentality" will destroy the housing industry.
Reform leader and Senate Banking Committee Chairman Christopher
Dodd recently had company as the Fed (Gov. Randall Kroszner) jumped
in with its version of reform. The Fed followed the lead of Dodd
and others to again target Mortgage Broker compensation (yield
spread premiums) and imply that their new rules will bring
stability back to the housing and lending industry. However, if one
reads and listens closely, they will notice an underlying motive
from both Dodd and the Fedwhich is to take Mortgage Brokers and
their industry out of play and insert banks as the new haven of
Ironically, Dodd and the Fed seem to have forgotten that it was
the largest banks behind the programs currently wreaking havoc on
the market. Do the names Washington Mutual, World Savings, Wells
Fargo, etc. ring any bells? What about pay option adjustable-rate
mortgages, stated-income and no doc loans?
Has everyone forgotten how mortgage lending works? Yes, large
banks and Wall Street wizards provide programs and distribute those
programs through various channels known as retail, correspondent
and wholesale. These channels, which are huge sales forces, include
brokers, bankers and lenders. Therefore, it was a combination of
bad brokers, bankers and lenders who participated in predatory
tactics, as well as in the design of these exotic programs. Yet the
blame on any bank falls on deaf ears.
Let's cut to the chase. Those in the industry knew that it was
enormous, boiler room type lenders such as Ameriquest, Champion and
Aegis Lending (to name just a few) who spawned new and aggressive
models to originate and close loans. They also created a new breed
of loan officers/salespeople who were intensely trained on how to
prey on unsuspecting borrowers via dinnertime telemarketing. This
became the poster model for predatory lenderstheir innovative and
bigger than life success began filtering down to smaller players
who sought the same success. Imagine a Super Bowl and World Series
sponsor one minute and predatory lender the next, all the while,
spending millions in profit from unsuspecting borrowers on
advertising and phone calls.
Here's a novel thought: Perhaps Mortgage Brokers should be
considering a class action suit against the lenders that truly
ruined the industry for both borrowers and those who did provide
solutions in the industry.
The gathering storms As for the Fed and
grandstanders like Dodd who continue to spout reform rhetoric, the
average consumer may not have the time to dissect the frenzy of the
blame game along with the new guidelines and reform being put in
place simultaneously. While some reform is necessary, Dodd's focus
is aimed squarely at costing consumers thousands of dollars in
extra costs to obtain a mortgage. If one takes the time to listen,
the message is clear, and the consumer, along with the housing
industry, is about to be pushed further down into a big, black
If we consider that the president's concept of helping prevent
foreclosures was immediately weakened or wiped out by new
guidelines, the extensive costs recently imposed by Fannie Mae,
Freddie Mac and the mortgage insurance agencies, and then add in
the suggestion of not compensating brokers, we now have the
ingredients for a perfect storm, which is about to impact American
homebuyers, sellers and homeowners in a horrific way.
The Fed and Dodd are using reform to force stricter and costlier
guidelines to be put in placeall in the name of safety. If we want
to truly correct the problem, it begins with reasonable guidelines
which still allow first-time homebuyers and self-employed borrowers
to obtain reasonable financing without significant cost increases.
Reform should take into consideration that it was the government
who fostered the idea of making more loans to people and increasing
homeownership to record levels. It involves capping the
compensation or creating a formula that works, which then allows
healthy competition to continue. You don't cut everyone off at the
knees in the name of safety.
These reform concepts do not focus on available solutions to
reduce costs. Instead, it has pushed Fannie Mae and Freddie Mac
along with the Federal Housing Administration (FHA) and mortgage
insurers to increase costs to cover the billions being lost.
The bottom line & someone has to pay for the so-called
bailout and recovery of the market. There's only one group who will
pay, and it is you and me. If the Fed gets its way, brokers will be
gone from lending overnight. Borrowers' options will be the banks,
and they will be forced to pay significant new costs (what I call
"the new bailout fund").
It doesn't end there, as mortgage insurers are licking their
chops to recoup the monies lost during the "piggyback" era. Instead
of resuming business as usual, they've decided to charge borrowers
much more when they dont have 20 percent to put down on a new home.
In the end, only those who can qualify for FHA and those who can
fit their large round peg into the bank's tiny round hole will be
able to qualify and afford a mortgage. Where does this leave
millions of American homeowners, sellers and potential buyers?
The markets say prices must fall to achieve balance once again.
Consider if housing values go down by 20 percentthere will be 13.7
million people with negative equity in their homes. At 30 percent,
this increases to 20 million (data is from First American
The fact is that these same people who were provided exotic
financing (including bank created programs) to purchase their homes
are now faced with no programs to refinance, negative equity,
strict guidelines and heavy costs barring potential sales; they are
also faced with payments for both their mortgage and credit cards,
which will double.
The bailout only works for those who qualify under FHA (barely a
dent) and the new guidelines by Fannie Mae and Freddie Mac, and the
mortgage insurers will insure that these borrowers will not
qualify. As I have said, the perfect storm is lining up, and
landfall is within sight.
While we prepare for the bubble's last breath, let's consider
that the mortgage industry is similar to many other businesses and
has had its fair share of bad actors. The question becomes: How far
do we go to put the train back on the tracks? If we're hell bent on
reforming the entire industry, should we not be doing the same to
the credit card companies who are charging upwards of 30
Are other professionals and organizations required to have 30
pages of disclosures? Are auto dealers, those selling life
insurance, etc., required to inform the buyer of their profit
margins? Are stockbrokers being required to insure through analysis
that their clients can afford investment? If the client loses their
nest egg, are stockbrokers subject to indictment for breach of the
covenant of good faith and fair dealing?
The blame lies on those who intentionally used boiler rooms and
sub-prime outlets to prey on borrowers. It lies with those in
government who were notified by industry professionals that bait
and switch tactics, gouging and other predatory actions were
occurring and that reform was necessary, yet they did nothing.
Brokers were the distributors for banking and Wall Street wizards
who created the programs and reaped the rewards. They were one part
of a large pool of players, yet Dodd and now the Fed want them as
The perfect storm is upon us, thanks in part to Dodd and now the
Fed. Unfortunately, this storm will lead the entire housing
industry, as well as the economy, into a recession, as gridlock
will become the norm. Sellers won't sell, homeowners won't be able
to meet the guidelines for refinancing, buyers will be limited by
costs and strict guidelines, and equity will continue to disappear,
leaving those with adjustable rates to hand over the keys. This is
not the savings debacle of the 1980s or the recession from 1987
into the 1990s. This is not a cyclical problem. There are
solutions; yet it seems no one, particularly Dodd, wants to
consider anything but increasing costs to the borrower while
preaching lowering costs. This is a perfect storm created by many,
which, if cooler and wiser heads dont prevail, will crush our
Joe Adamaitis is the president of Direct Mortgage Services
Inc. He may be reached at (603) 427-6083 or e-mail [email protected]