Sunday July 20, 2008

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HR 3915 - Getting Warmer

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This bill has passed the house, though many changes were made from initial drafting to the final version.

• Brokers will still have the ability to earn YSP
• Borrowers can still finance origination costs
• The national registry will apply to all originators
• There will be increased educational and licensing requirements for non FDIC originators
• High costs loan trigger is dropping from 8% to 5%
• Prepayment penalties are getting stricter

All of that preceding has been analyzed and discussed elsewhere--form your own opinions as you will. My question is: are you a Socialist or a Capitalist? Wait, I'll make it even simpler. Do you want the government to decide what is best for you? Not simple enough? How about this? Can you read? Barney Frank doesn't think you can.

"it will be very clear to anybody by the time this bill becomes law, there is no possibility of anyone getting higher compensation in return for putting someone in a higher-cost loan."

I love this because it reinforces my yet-to-be-made assertion that certain members of Congress are on a witch-hunt and still don't understand how the market forces behind that statement could actually benefit someone. Representative Feeney's thoughts will serve as a better synopsis for what I'm about to say:

"I happen not to like prepayment penalties, [but borrowers should have a choice to choose a loan whose terms are best suited to them]"

But I digress. The reason 3915 makes me so incensed is that it will still harm those who it professes to protect. I could care less about what you think CAUSED the CRISIS. If you are focused on blame, like Ralph Roberts and Barney Frank, you are missing the big picture. Blame is something people do when they don't understand the intricacies of a situation or are attempting to look proactive. It is also something smart people do to get "shock-jock" press (see guys? I left the door open for you to be smart!)

Incontrovertibly, the entire mortgage value chain was corrupted, right from the consumer all the way to the Wall Street investor. This interconnectedness cannot be overlooked, and to single out several aspects of this very large and complex value chain is irrational at best. So until you understand the value chain, please refrain from enlightening us with your opinion.

But Wait! In the case of 3915, you don't have a choice! Congress will enlighten you with their opinion in the form of legislation whether you like it or not.

Hopefully I'm perceiving the bill's intention correctly. I had assumed it was to PROTECT consumers from bad loans (gross oversimplification). Great news! That's already done! The value chain that created the bad loans has been cut off at the roots! The money to fund those types of loans is no longer available. The devastation felt by the consumer is the same devastation that numerous money sources for alternative loans have felt. So they won't be offering that money any more. Banks won't be funding it. Conduits won't be distributing it. Brokers won't be selling it. Originators won't be telling you about it. So you, the consumer, cannot have it. That's all! Thanks for attending "Market Forces 101," and have a good day.

But Wait Again! That would be the capitalistic end of the story, but Congress seems to be leaning towards Statism (the principle or policy of concentrating extensive economic, political, and related controls in the state at the cost of individual liberty). Congress doesn't think you know how to read. They think that you are lemmings and will continue to be led blindly over the cliff of mortgage ignorance, yet I'd bet a majority of the "Yea" votes for this bill were born of that same lemming mentality: "Oh, if it's to protect consumers, that has to be good, right?"

Wrong.

The NAMB figures the provisions in Title 3 will hurt far more people than they help and I agree. But that's not the point. The point is we're taking away CHOICE. I'm all for stricter standards for originators. I especially like the fact that FDIC loan officers are not held to the same standards as brokers. That will just let my clients know that it is safer to do business with me as I am held to a higher regulatory standard. So the increased regulation is fine. What is not fine is Congress deciding what types of financing are available in a free market.

Now we get to the hardball... This may shock and amaze you. This may be the most radical thing that anyone has ever suggested, but I just have to say it. I may be shunned for all eternity for suggesting something so radical, but it has to be done. No more stalling, here goes nothing:

YOU SHOULD READ SOMETHING BEFORE YOU SIGN IT!!!!!!!

Wow, I actually feel better. Unless consumers trust their mortgage brokers with their lives, they should make sure they understand the terms of what they are getting into. Are there other factors here? Sure. Some brokers didn't even know the harm they were causing, but the fact is the whole value chain got caught up in making bad loans, and the whole value chain has responded. The end all, be all of the value chain is the consumer. No consumer, no loans.

So punish bad people all you want. ANYONE that purposely causes financial harm to another person should be subject to repercussions. In my mind, the whole "going out of business thing" has been a pretty effective repercussion for most of these lenders. Does Congress really need to hyper-regulate the market now? If you want to go back to paying $1200 to fly from NY to LA, be my guest, but I'd rather have the choice to sit on the runway for an hour and pay $243.

My final thought... Perhaps you agree that the consumer really is as ignorant as Congress thinks. There's still a better solution for that. I think we can all agree that the consumer being armed with information is a good thing. If we can't trust consumers to read all their paperwork, maybe we can institute a new policy and one new sheet of paper. Just make one sheet of paper. The title would have to be very catchy "READ THIS OR DIE," or something like that. And it would be required to be presented by the escrow company or real estate attorney in every transaction. It would just collate all of the information that the client is already signing, but dumb it down so they can understand it. For example: "In 3 years, your payment will go up by $400. If you pay it off before then, you will be charged $7500. If you don't make your payments, we will take your house away." And so on...

You get the picture. All the disclosures are ALREADY in place, they just need to be READ. If you want a more simple, all encompassing, "danger danger," disclosure, I'm happy to write it for you and I support it. The point is: let's get those consumers educated! But as long as you have confidence in their ability to read let's allow them to make their own choice! Though 3915's heart is in the right place, and there aspects of it that will actually protect consumers without damaging their individual liberties, there are still parts of the bill that are unnecessary and will only serve to prevent a large demographic from obtaining competitive financing.

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	Contributed By:  Matthew Graham Matthew Graham has diverse experience in the mortgage industry having worked as a loan originator, processor, manager, trainer, wholesale rep, and now chief of operations at Residential Lending Group in Portland OR.