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 safety.
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 hole.
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 CoreLogic).
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 percent?
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 scapegoats.
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 economy.
Joe Adamaitis is the president of Direct Mortgage Services Inc. He may be reached at (603) 427-6083 or e-mail [email protected].