November 15, 2007

HR 3915 : A solution that creates bigger problems

Reality is never an easy thing to acknowledge, especially when it becomes clear that our intention to help people will, instead, fail them. That's the case with Representative Brad Miller's bill, HR 3915. It's also hard for me, as a Democrat, to believe that a member of my party, serving his constituents, would propose this horrendously bad, consumer harmful legislation. Last night I finally realized that he didn't do this to help out big banks, the special interest that will most benefit from the passage of HR 3915.

It's my belief that Rep. Miller had nothing but good, even noble, intentions. He wanted to protect consumers from being taken to the cleaners by unscrupulous mortgage brokers. Fortunately for Rep. Miller of North Carolina, his bill does exactly that, by killing the entire mortgage brokerage industry. Unfortunately, it still leaves consumers vulnerable to unscrupulous mortgage bankers and builder/Realtor controlled mortgage companies.

It also removes 25% of Americans from even the possibility of owning a home because they will not able to obtain financing.

This entire meltdown in the credit market is really nothing more than bad press and stupidity. For one thing, more than 80% of even the riskiest sub-prime mortgages are performing. That means that 80% of the people who obtained financing for a home outside of conventional (good credit, easy to document income and assets - the overwhelming majority of mortgage loans in US) guidelines still own their homes and will continue to. The reason the market has slowed down to a crawl (and why subprime has already disappeared) is that the loans packaged as securities and sold to investors were priced as if they bore no credit risk. In short, investors got panicked when they realized that the B/C credits they paid A prices for actually performed like, well, B/C credits.

The market has already corrected the underwriting criteria available to brokers and frozen out subprime options. This has effectively removed 25% of Americans from the marketplace for mortgage financing. Rep. Miller's bill won't change that. What it will do is make sure that these people will never buy a home by making it illegal to underwrite loans to lenient, high risk, characteristics. They may be able to refinance into FHA, some may even clean their credit to the point where they will be able to see and buy a home. However, that basket will go away and many people with poor credit will never be able to achieve the American Dream.

Of course, some of these people will able to obtain FHA or conventional financing with larger than usual down payments. However, at the very least, 15% of Americans will never own a home if Rep. Miller's bill passes.

The saddest thing about this that Rep. Miller is trying to do through legislation what should more properly be done through regulation. Mortgage brokers think national licensing, standards and regulation is a great idea. However, it has to be funded. Rep. Miller's bill tasks the same old people with implementing the new rules. As we've all seen from the anecdotal cases of broker-initiated mortgage fraud in the US, those agencies just aren't up to the task of enforcing the rules we have now.

The reality that Rep. Miller doesn't want to acknowledge is that more than 98% of brokers are good, decent professionals, a fact which no one has sought to question because more than 60% of the loans originated in the US are originated by brokers. These people who have close relationships with their borrowers. In many case, they have replaced the community banker and basically become the George Bailey's of the 21st century.

What's needed is a better bill that creates a level mortgage loan origination playing field between banks and brokers, creating an even more vibrant and competitive market. A bill that ends the ability of builders and Realtors to own mortgage companies or profit from them. A bill that protects consumers without crushing them or destroying their options.

What's needed is a do-over. We ask every Democrat in the House to vote against this horrible piece of legislation. And start over again on something that will actually do something to strengthen the market, not kill it.

Posted by mcblogger at November 15, 2007 08:58 AM

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