November 01, 2007

HR 3915 and how it might get harder to buy a house

I'm kinda having a warm fuzzy when it comes to the Dem's in the US House... until I read about HR 3915 which is currently in the Financial Services Committee. I keep thinking someone is going to shut this piece of crap down but it hasn't happened yet. So, I'm taking time out of my life (no, it's more than OK... I wasn't doing anything anyway) to let you know what's about to happen.

This horrible bill is one of these geared toward addressing the sub-prime credit crunch. It's well intentioned and it'll do absolutely nothing to fix the problem.

Here's the breakdown...

Title 1 will create a federal duty of care and outlaw steering. The anti-steering language will outlaw incentive compensation and YSP that varies with the terms of a loan. The section will allow indirect compensation if disclosed early in the process. This section also creates a minimum licensing standard for all originators and net worth or bond requirements of $100,000.

Sounds reasonable, right? Not so much... YSP is what brokers get paid for delivering loans at set interest rates. They vary from lender to lender and even with YSP built into the rate, brokers are still cheaper than traditional banks. YSP is ALWAYS disclosed on the Reg Z Good Faith Estimate. This law will ban it outright and have the perverse effect of INCREASING the cost of financing. FYI - whether you go to a bank or or a broker, someone is getting paid YSP.

The national licensing and bonding is fine by me... just make sure there is a good migration path over the next few years so as not to create any shocks in the system. Further, and this is essential, REGULATION must be funded. Without that, all the laws in the world are useless. Finally, let's apply this to ALL originators in the market, even those that work at banks, credit unions, etc.

Title 2 creates an ability to repay standard and hardwires underwriting guidelines. Underwriting will include a verified ability to repay and take into account amortizing payments. Guidelines will also include taxes and insurance payments when calculating ratios. For refinancing, the act will define and require a net tangible benefit. For prime loans, there is a safe harbor. However, for subprime there is assignee liability and expanded rescission rights. Standards will also create a defense to foreclosure. Severe restrictions will be placed upon first-time homebuyer mortgages with negative amortization features.

Here's the meat of the stupid... putting underwriting guidelines into law and removing any flexibility on the part of the lender. This is potentially the most devastating thing as it will effectively remove 30-35% of Americans from even being able to own a home. I'm fine with additional disclosures and notices to the borrower. However, don't kill the product as it will just make it hard for people to buy homes. Don't make it so that we can't make common sense exceptions which are a lot more common than predatory lending.

Title 3 will expand the existing Section 32 of TILA by reducing the points and fees triggers and expand lender liability. Prohibitions include no balloon loans, no lending without regard to ability to repay, prohibit a pattern or practice of making such loans, restrict late fees, and prohibit the financing of any points/fees. Taken together, the expansive liability and prohibited terms and conditions will make Section 32 lending practically impossible.

I'm OK with national guides regarding section 32. However, reducing point and fee triggers is largely pointless since the vast majority of loans already conform to section 32 limits (more than 95%). The remainder are usually the way they are because of particular issues related to the borrower. Removing that removes that buyer from the marketplace.

As for balloons, no or limited documentation loans, etc. making changes here is a unsettling. For some people it IS the best way to finance a home. A better way to making sure that brokers don't try to steer people in one direction or another is to rework the disclosures to make it crystal clear to the borrower that they are taking out what has historically been high risk financing.

If you really want to protect us, make originator licensing and regulation effective for all parties. Forbid Realtors and Builders from owning mortgage companies and or having affiliated business arrangements/agreements with mortgage companies and fully fund regulation. It's easier and it will actually fix the problem, Barney.

Posted by mcblogger at November 1, 2007 10:43 AM

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