The Looming War on Mortgage Lending...

I am not sure how this is going to end, but if the past few months is any indication, it is going to end in a bad way.

Conservative lawmakers have been given a mandate to cut spending. That being said, it appears all budget items are on the table, including the privatization of Fannie Mae and Freddie Mac.

In order to make to make the shift from government controlled entities back to the private sector, the two GSE's will have to be made more attractive to Wall Street and investors. One way to do so is to eliminate the subsidies and insurance now provided by the government.

That sounds good on paper, but if an action such as this is acted upon, it could place a already cold real estate market into a deep freeze. The GSE's currently purchase loans from lenders and banks and then sell them off to investors globally. This allows the lenders to offer more loans to new borrowers, and so goes the mortgage lending cycle. If the GSE's are not there, and it is left to the marketplace to decide, there could be an interruption in the cycle. The end result could ultimately harm the borrower with higher interest rates, fees and tougher loan qualifications with nowhere else to turn.

Enter the real estate consortium of real estate agents, builders, banks, civil rights groups and other concerned citizens. The NAR, ABA, NAHB, NFHA and other civil rights and real estate trade organizations are planning to go to Washington and make sure their voices are heard and actions are taken contrary to the conservative law makers wishes.

This group has galvanized their separate but equal interests in the real estate industry into one potent machine aimed at accomplishing one goal - the continuation of government backed insurance on mortgage loans.

Why is this going to be a war ? Well, a lot of new conservatives have been hired by voters to curb government spending, and cutting the responsibility of backing mortgages is a way of cutting costs and saving money. But, the aforementioned real estate and civil rights organizations are a powerful lobbying corp, with deep pockets.

These two are heavy hitters - one with a mandate to give the taxpayers what they are looking for - savings; the other looking out for the public's interest by making sure housing continues to be affordable.

I am not real clear as to which side is right, because the devil is in the details. If one side wins, does that mean the other side deserves to lose ? I have a bad feeling no matter which side is victorious, it will not end well for taxpayers or borrowers in the future...

Appraiser Independance - A Must Have For The American Economic Recovery...

I was thinking a bit about the phasing out of HVCC and how that is going to positively impact the real estate industry specifically and the economy as a whole. We sure do not need any more silly legislation that stops any of us from doing are jobs as efficiently as possible. Then I started thinking about what for sure was the central reason why HVCC was written and enacted as a rule in the first place - The Undue Pressure and "Force" applied to appraisers to get the value. This pressure caused a lot of strife, and helped to drive the whole real estate industry into the ditch. It has got to stop, for good...

Let Appraisers Be Independent

All of us - Mortgage Brokers, consumers, Realtor, Real Estate Agents, Builders, Loan Officers, Lenders, must let appraisers be independent and not unduly influenced. We have got to let these people do their jobs with confidence. Confidence in knowing there is not going to be retribution if that value is not correct. Assurance that they can give their opinion of value freely, and not be penalized because they do so in the market place by loan officers, brokers and lenders that seek their business.

I have had the privilege of working with two very fine appraisers in the last seven years. I would submit my Request for Appraisal to the appraiser. He would let me know his schedule, and would take a quick look at the comps, PRIOR to performing the appraisal. Since I have my real estate license as well, I could see a lot of the same comps that he did, so I knew what the comps looked like before I submitted my request.

But I could not see EVERYTHING that he could see. If things were going to be o.k., I did not hear from him at all, he would just perform the appraisal, and send it to me when it was completed. Sometimes it was higher than expected. Sometimes it was lower.

However - when there was a problem, a $20,000 problem - let's say, he would let me know immediately, prior to him submitting the completed appraisal to me. And I would alert the borrowers and agents that there could be a potential problem with the value and they had better start figuring out the solution right away.

Even though appraisal are opinions of value, they are based on facts. Actual market conditions. Actual comparable sales within a certain time frame. Real adjustments based on standard appraisal practices. The facts are the facts. Based on market conditions, comps and standard adjustments, the value is "X". Ever noticed how you can contact two appraisers that do not know each other and the tell you nearly the same estimate of value ? That's because it's based on factual, obtainable data that appraisers have access to...

NOW, I am not talking about fraudulent behavior. False comps, False adjustments and False opinions of value. Those people are criminals. And they belong in jail.

I am talking about an honest, open, fluid relationship between the client and the appraiser.

If we do not allow appraisers to do their jobs honestly, comfortably and with dignity, then some body is going to invent another HVCC type fiasco and set us back at least another two or three years, again...

Heard It Through the Broker Vine Vol. 1 - No More HVCC ?

I heard something the other day through what I call the "broker vine" that was very interesting.

First, let me tell you what the "broker vine" is - it's a mortgage broker "huff & puff" fest that generally happens once or twice a month.

Here's how it works - some loan officer or broker hears some "news" from some inside or unknown source and begins having these "impromptu" meetings all over the office about some good or bad legislation or law that's coming down the road real soon (whether real or imagined).

These sessions are almost always followed by a series of hoots and hollers and high fives for good news, and a lot of fist clenching, teeth gnashing and swearing at the ceiling at bad news.

Huff & Puff. Get it ?

You want to know EXACTLY what I mean. Visit tbws.com. These guys are the huffiest, puffiest mortgage guys on the internet, period. Watch one of their daily videos. You'll see what I mean...

Alright - Back to the Point.

I was told the other day that the Home Valuation Code of Conduct, or HVCC, is going to be nixed within the next 90 days. Apparently, President Obama just signed The Death of HVCC with the signing of the Dodd-Frank Act. It must be true, because news sources all over are stating that is for real. But still - Like I said, it's "huff & puff".

The HVCC bill came about from an agreement New York Attorney General Andrew Cuomo made with Fannie Mae and Freddie Mac on requiring new rules and standards over appraisals. It seems the New York Attorney General, in a short period of time, turned himself into a "real estate appraiser guru", and decided he knew what was best. For ALL of US. I like Andrew Cuomo. But. Dude. Bad Idea. Really.

Why HVCC Does Not, and Will Not Work

This is a true story. Borrowers are going to use Lender A to finance their new home purchase. Lender A orders appraisal for the property through Appraisal Management Company A. Appraisal cost equal $400, paid by borrower. Appraisal equals the sales price of the home on the Purchase and Sale Agreement. Lender A cannot close the loan for the borrowers. Per Lender A, borrowers do not qualify.

Borrowers leave Lender A and make a loan application with Lender B, while still under contract to purchase the home. Lender B approves loan. However, because of HVCC rules, Lender B cannot transfer the appraisal from Lender A. Lender B orders new appraisal from Appraisal Management Company B. Appraisal cost an additional $500 ($400 plus $100 "rush fee". Trying to still go to closing on time). Appraisal comes back from appraiser $20,000 short. And the appraisal was just completed by AMC A about 30 days ago. There are negotiations between the AMC and the appraiser, but he will not re-consider the value.

All of a sudden, the appraiser becomes GOD. All parties of the transaction are willing to do whatever it takes to get the deal done. BUT, the appraiser is NOW GOD, and GOD SAYS NO.

The appraiser unduly influences the transaction. And he is protected by HVCC. Not by his Appraisal Management Company mind you, because they opted to negotiate with the appraiser on behalf of the buyers. It did not work.

Lender B orders another appraisal through AMC B. This is appraisal number three. And that will be another $400 please. This appraisal comes in low as well. But it's $10,000 lower than the original appraisal - not $20,000. This number is much more reasonable, and it is negotiated between the buyer and seller. Deal Done. Transaction closes.

Here's the problem - Besides the borrower spending $1,300 on appraisals. Besides the HVCC rule that basically does not allow transference of appraisals from one AMC to another (in some cases it works, but from what I have seen and heard, it's rare). In the story above, Appraisal Management Company A & B are THE SAME COMPANY.

The AMC managed to bilk $1,300 from the borrower with 3 appraisals, and were not able to transfer the original appraisal so that the borrower could use it with the new lender. It seems that there is some rule that once you generate a transaction number for one appraisal, you cannot change it to another lender. And there is no way you can transfer a Conventional appraisal into an FHA appraisal. Before HVCC, the appraiser had to do some additional work, but as long as he was a Certified FHA Appraiser, he could definitely change a Conventional appraisal into a FHA appraisal. No Big Deal.

So, going back to the "old way" of doing business is going to be a welcome change to what we are currently muddling through. It's time to get the ball rolling again. I believe the real estate industry is the bedrock of the U.S. economy. If we can get all of the inventory sold, new housing starts rising, and real estate sales to begin to tick up again, maybe we can get America back to work and on it's feet. HVCC was as sure-fire way to make sure an economic recovery was going to be a long, drawn out ordeal, for sure.

The phasing out of HVCC couldn't come any sooner. Hopefully this barrier to the real estate industry will be put to bed forever, never to return...

DEATH of a MORTGAGE BROKER...Loss of YSP to Remove Brokers from Mortgage Market...

Well, they have went and done it now. If you read my posts regularly, you know I am a staunch advocate for Mortgage Brokers and Yield Spread Premium.

I have worked with different mortgage brokerages for the last 7 years, and have seen the benefits of being a broker versus being a lender or a bank.

Mortgage brokers have built-in flexibility in the way they do their business. They can move fluidly from one lender to another, and the borrower does not have all of the hassle of making multiple applications and credit report pulls from different banks or lenders. And that's the simple part.

Mortgage Brokers are the kings of the low interest rate. I do not care what bank or lender you walk into off the street and that institution offers you an interest rate - the mortgage broker is almost always going to be able to beat the rate you just received. FROM THE SAME BANK OR LENDER.

Why ? You guessed it - Yield Spread Premium. Lets call it "YSP", for short. YSP, or the percentage a bank or lender will pay to a broker for a certain interest rate sold to a borrower, RULES.

The lender will offer YSP as an incentive for mortgage brokers to send them their borrowers. It's a great way for lenders and banks to supplement their mortgage loan pipeline. Quite often, banks and lenders offer better rates to mortgage brokers (wholesale) than they offer on their own websites or in their branches (retail). With retail interest rates, the bank is rolling all of the costs of the bricks and mortar into the interest rate. Somebody has got to pay the light bill. Might as well be the customer...

Ultimately with YSP - The BORROWER is the winner. How - You may ask ? Well, the mortgage broker can give some relief to closing costs by switching some of the burden to YSP. That way, the seller's contribution on a purchase can be used to help pay more than just the closing costs - now money can be extended to the escrow account, etc...Everybody Wins...

Banks do have interest rate YSP as well, but it is not disclosed. So what do you think will happen if you do not have to disclose YSP and there is not competition from mortgage brokers ? Artificially higher interest rates. The banks make a killing. Guess What ? You lose, Mr. & Ms. Borrower...

You would think the U.S. Congress would understand the way this works. Apparently they don't. Or they do and do not care. Or, they are just trying to give more business to banks. Who knows what their motivation is to legislate pure, unadulterated garbage ?

Enter the Game Changer:

The Financial Regulatory Reform Bill, or H.R. 1728, is going to change everything - or make the mortgage industry a good bit different than it has been for quite some time. According to the National Association of Mortgage Brokers, borrowers will have two choices - 1) Pay all closing costs out of pocket, or 2) put ALL closing costs into their interest rate. Now, that is not going to have that much of an effect on refinances (most refi's roll the total closing costs and escrows into the new refinance loan), but it is going to have an adverse affect on purchases. Go to the NAMB site and read their press release concerning Bill HR 1728. If you are so inclined to read more about Bill H.R. 1728, Save yourself some time - go to the Bill H.R. 1728 Summary site to get a snapshot of what we are dealing with here.

When purchases are negotiated, there is usually money contributed by the seller, and the borrower can use these funds to help pay for closing costs, prepaids, etc...But what if the seller has little to no funds available to contribute to the transaction ? Here comes the mortgage broker to the rescue. The loan officer can lower or eliminate the closing costs by utilizing YSP, and allow the borrower the flexibility to pay less or pay zero closing costs at closing, AND keep a decent interest rate.

The interest rate staying low is in the best interest of the borrower and the lender. The borrower can remain qualified with their debt-to-income ratio and payment, and the lender has a better chance of getting the monthly payment from the homeowner because they can afford to pay the mortgage payment. Well, guess what just destroyed THAT practice ?

If the borrower must roll all of his closing costs into the interest rate, then they may not qualify. Either go buy a cheaper home or forget it. In the Metro Atlanta area, that can be quite easy to do. In Charleston, West Virginia, well - Good Luck ! Or, they lose the house because they cannot DTI, nor do they have the additional funds to pay ALL of the Closing Costs. Lose/Lose...

Mortgage Brokers are not the only losers with the new legislation. Lenders who use brokers for their pipeline are going to lose as well. The lenders I currently work with count on me and other mortgage loan originators to feed them fresh, highly qualified borrowers to keep their businesses viable and solvent. If a lender does not have retail outlets to handle customers, and borrowers have never heard of them so they will not consistently receive internet traffic, then what are they going to do ? Collateral Damage is at play here. The Winners ? The Big Banks. Hmmm...Aren't they the ones that got us into this big mess in the first place ?

You may ask about the rampant fraud in the mortgage industry, some of it due to mortgage brokers doing a lot of illegal activities just to get a deal done. Well, in some cases the lenders own employees where steering a lot of mortgage brokers into doing a lot of "shady" things so they could get things done. The income margins for some lenders employees was so low during the housing boom, employees where doing whatever they could to make more income. But that is not excuse for bad behavior.

Bottom line is this - fraud was rampant in the mortgage industry. Builders, Real Estate Agents, Closing Attorneys, Mortgage Brokers, Lenders, Banks, Buyers, Sellers, Appraisers, Borrowers, Home Inspectors, ANYONE involved with a real estate transaction - ALL sectors of the real estate industry were committing mortgage fraud.

Hence the regulatory changes to common practices we have seen in all sectors of the real estate industry. Some of the changes are good. For instance, I do not particularly like HVCC (it gets in the way of getting things done - not everybody is a crook, for gosh sakes), but I think it serves it's purpose. And the Mortgage Disclosure Improvement Act of 2008 portion of the Truth In Lending Act (TILA or Regulation Z) requirement surely offers protections for borrowers by not allowing them to go hastily to closing.

But this new legislation if just plain bad. Misplaced, Misunderstood, Misjudged, Misaligned - It just Misses, Know What I Mean ? It's like a $4 bill. Just wrong...

Borrowers for purchases and refinances are going to be the Ultimate Losers. And when the borrowers lose, WE ALL LOSE.

Wall Street Wishes and Reform Dreams...

Every since the financial crisis began, I have been waiting to see what response would be rendered by Congress and the White House.

Reform is eminent ! I said to myself. The taxpayer and the individual should be given some kind of protection against the greed machine that is Wall Street.

I watched for years as my money in my mutual funds would creep up ever so slowly for years, and then once worth something - would lose half the value in three months. Enough I said. I took my money out and paid bills with it. Was I losing money because I had the wrong funds in my portfolio, or was it due to fees ? I used to think it was because my ignorance. Nope. Fees. Wall Street greed.

So, our government had a REAL chance of making a difference in how our financial institutions operate. I was looking for a return to the Glass-Steagall days, when the government actually governed.

Well, it looks like they blew it. Again. The two most important issues, banks to stop trading with their own money, and the requirement to move derivative operations to separate companies - appear to have been squashed.

Shahien Nasiripour with the Huffington Post reports that the nation's largest banks now appear to have MORE capital available for speculation under the new reform bill. I would say the House and Senate negotiators should have went home and got some sleep instead of voting in favor of the reform garbage compromises at 5:40 AM that for sure will lead us to another financial crisis in the future.

Wow. My question is - "who runs this country - the citizens or the businesses that hold their money ?"

I am afraid I know the answer, as I am sure you do as well, dear reader.

Now we just have to sit back and wait to see what the next financial disaster is going to look like...