As a small shop pure broker who has so far successfully withstood the onslaught of the alphabet soup of regulations: The CFPB, FrankenDodd, AML, FACTA, LO Compensation Rule, GFE/TILA, Red Flags, etc. (looks like the list of ingredients of an insecticide and with the same intended results), the qualified mortgage (QM) rule will be one that has the most dire effect. At the time of this writing, it is still not clear, to me anyway, what is included aside from the origination fees in the three percent cap. The fees cap portion of the QM rule is intended to protect consumers from alleged excessive origination fees when in fact, the result will be that many consumers will be protected from getting loans at all. In a high-cost area like those on both coasts with larger loan amounts, this will be inconvenient, but probably not fatal. However, in areas with loan amounts under $250,000, which is the majority of the United States, this will be disastrous for the small business broker. The QM rule really hit home for me because I recently closed a loan for $89,000 that I will not be able to do after January. It was a very difficult and time consuming transaction with a great end result, but absolutely not be worth the effort or the trouble under the new fees cap mandate of the QM rule. Philosophically, it is useless to debate the need for this latest rule given the LO compensation rules and the new disclosures; it is the last gasp of the eruption of regulations that started with the abomination known as Home Valuation Code of Conduct (HVCC) years ago.
So what are the alternatives for those independent brokers still surviving to adapt to this latest rule? Clearly the rule is slanted toward the banking model, due to their much stronger lobbying resources. One of most likely choices is that brokers will have to go the "net branch" model which was popular for a few years. However, the popularity of the branch model has waned in the last few years, when the inherent disadvantages became apparent, and brokers learned they could survive without being in a net branch. Brokers could choose not to do QM loans at all, and go back to the fringes of real estate lending where they started many years ago. This is a quite viable option with the recent loosening of credit, more investors getting into the market, and more commercial loan opportunities occurring as the economy improves.
I think the recent loosening of credit and availability of credit and capital will have the greatest impact on the choices that will become available to brokers as evidenced by the concept of the mini-correspondent (mini-C)—previously known as a warehouse line, but with lower net worth requirements. A broker with this facility will be able to fund in their own name, circumventing the Dodd-Frank QM rule and putting brokers on a level playing field with bankers. I am eagerly awaiting the various iterations of this concept from many investors who will be looking to offer these lines of credit, who are flush with cash, and like all money lenders, need to "put the money out on the street" to get a good return, especially in this very low interest rate environment. Investors are desperately searching for alternatives to the stock market for investments with good yields, especially those whose risks are mitigated, like real estate-related lines of credit.
One of the admitted benefits of the housing market collapse is that those who survived are stronger and smarter … good credit risks. For those small brokers who still may not have the resources to afford their own mini-C, I am sure that opportunities will develop for mergers or partnerships with other like-minded businesses.
As statewide president of the California Association of Mortgage Professionals (CAMP), I am always looking for the "value-added" proposition of our association. Applying the principle of "There is Opportunity in Chaos," it occurs to me that this is an opportunity for CAMP, NAMB—The Association of Mortgage Professionals and the other state associations to enhance their "value-added" proposition by facilitating communications between small brokers looking for answers in exploring the mini-C option. Social media and expansion of the LinkedIn NAMB and CAMP sites can be used as catalysts of introductions for brokers seeking investors or merger partners, and I'm sure this technology can be leveraged for this purpose.
I am a huge fan of small business ingenuity in adapting to regulations, and I am confident that this latest QM challenge will be met. Yes, it will be inconvenient, probably expensive and consumers will suffer for it because we all know the road to hell is paved with good intentions (and unintended consequences).
George L. Duarte, CMC is president, CEO and broker with Wentworth Enterprises Inc., parent company of Horizon Financial Associates, and Elite Real Estate Properties, real estate brokerage, located in Fremont, Calif. George has 27-plus years in the mortgage industry and is the current statewide president of the California Association of Mortgage Professionals (CAMP). He may be reached by phone at (510) 377-9059 or e-mail [email protected]