Recently, I hosted a Webinar which covered a summary of the new financial services legislation as it affects those in the mortgage industry. We had a guest speaker, Jim Milano of Weiner, Brodsky, Sidman and Kider PC, who focused on the topic of greatest interest to mortgage loan officers, compensation. Of course, the feedback we have heard time and time again, is “woe is us.” The industry will never be the same. Actually, the industry will be the same. This legislation completes a cycle that takes it back to where it was 30 years ago when I first got in the industry. We had some fixed-rate loans, adjustable-rate loans and some growing equity mortgages, but nothing fancy. There were no overages paid. Banks had lists of approved appraisers and that is all you could use. There wasn’t much of a secondary market outside of being able to sell government and conforming loans, and I made quite a good living at that time.
Now in reality, I don’t think that the industry will stay at this 30-year-ago phase. This is truly a pendulum that was swung completely to the other side from the cowboy days of just five years ago. The pendulum will swing back. But it will swing back more slowly and not nearly as far. The legislation really makes sure this pendulum does not move as violently as it has in the past. That is probably a good thing. Not only had the industry swung too far, but it has also swung too fast. Who could possibly keep up with the changes? That is one reason I moved to having a legislative update two to three times per week as part of our Certified Mortgage Advisor program (www.webinars.originationpro.com) and I can tell you that it has been a major task for me to keep up to communicate this information on a timely basis.
Rather than just continue with the “woe is me” bent on all the information coming out with regard to the financial services and all the other legislation, I would like to advance one very important benefit for the mortgage and real estate industries—survival. Perhaps I am being a bit melodramatic about what is happening here, but I don’t think so. There is nothing that is more important that what has happened within this industry and what could go wrong if this industry does not continue to be healthy in the future.
It is true that most in this industry consider this legislation just another aspect of government intrusion. After all, we already have the government taking over the world in the wake of the financial crisis, including hundreds of billions of dollars in stimulus spent over the past three years, bailing out major corporations and putting Fannie Mae and Freddie Mac into conservatorship. However, believe it or not, sometimes a higher level of government regulation can actually have the longer-term result of lessening the need for government involvement. How can that be?
One impact of the financial crisis was that the secondary markets for home loans pretty much shut down in response to this crisis. Not only were the secondary giants—Fannie Mae and Freddie Mac—basically bankrupt, what investors were going to purchase securities backed by mortgages as they were defaulting and home prices were declining? Immediately, rates on home loans rose even as the Federal Reserve Board was lowering benchmark rates because of this lack of confidence. The most dramatic affect was on jumbo mortgages, as this market dried up completely.
The Fed stepped in and became the primary purchaser of these loans, as well as purchasing Treasury securities. This helped stabilize the markets. The good news is what resulted from these actions. What could have resulted in hundreds of billions in losses for the government with regard to this operation actually has turned out to be profitable. Rarely has there been such a "win-win" result as the markets also stabilized. We should mention also that the recently "retired" TARP program has been met with similar success in regard to at least limiting losses to the government as banks and automobile companies were also saved.
But here is the problem, the government cannot support the secondary markets forever just as it cannot own stakes in private companies forever. That is not how capitalism works. The tight controls upon home loan programs and underwriting sought by the financial services legislation may restrict choices with regard to exotic mortgages for consumers and business models for originators, but they are designed to give confidence to the world that our mortgages are safe to purchase. If it works, a healthy secondary market will mean lower rates and more choices in the long run, which will help restore long-term health to the real estate markets. If the secondary market begins to strengthen, it can start evolving again … and that is what will start the pendulum swinging back. Only this time, it can evolve within a healthy regulatory framework. There is no doubt that a lack of regulation with regard to the markets helped an unhealthy situation become worse. Too much regulation? Perhaps. But it is a necessary medicine to fix a very sick system.
Most everyone agrees that the real estate markets will take a long time to heal. A healthy secondary market for mortgages is one of the more important parts of this healing process. In reality, they will both heal slowly, together. Meanwhile, don’t be surprised that the foundation will be put in place for a recovery that comes more quickly than many are predicting. Why? There will be pent up demand and population growth. Even those who are relegated to renting will need homes in the future. But first, the foundation must be put in place.
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial or e-mail [email protected]