November 06, 2007
Why is Barney Frank pimping for big banks?
This morning, HR 3915 goes to markup in the Financial Services Committee. I know this sounds about as thrilling as clipping your toe nails, but the reality is that this bill will effect your life in a number of ways, especially if you want to buy or refinance a home. If this bill becomes law the mortgage industry, already suffering under a difficult credit cycle, will cease to exist as we know it.
In it's place will return the bad old days of mortgage lending, when it was impossible to buy a home with less than 10% down and when big banks set the interest rate, not the market. This isn't a return to local lending, something that already exists with the millions of mortgage brokers that provide financing to Americans today. This is a return to big corporate banking and unless your credit is perfect, get ready to rent for a long, long time. The only question is, why would Barney Frank do this?
Here's the skinny on what's so wrong...
3915 will effectively eliminate the ability of 30-35% of Americans to buy a home. By legislating underwriting guidelines, Congress will end the ability of lenders to establish their own underwriting guidelines and risk tolerances. More than 30% of Americans have either hard to document income/assets OR have poor or no credit. Under 3915, there will be no way to lend these otherwise good borrowers the money they need to purchase a home.
3915 will destroy the competitive origination market by effectively eliminating third party originators (TPO's, or Brokers). This will leave only consumer banks who have, in the past, taken advantage of borrowers. Competition in the mortgage market is essential to making sure that the vast majority of Americans can obtain the best financing for their particular situation.
Low or no down payment options other than FHA insured/VA guaranteed loans will disappear from the market as retail banks will not need to be competitive with brokers. Borrowers who can't pay their own closing costs will find it very difficult to obtain a loan since brokers will no longer be able to buy out the fee with YSP.
Eliminating the ability of TPO’s to receive Yield Spread Premium will create an unbalanced playing field since retail banks will be able to make YSP and not have to disclose to their borrowers that they are being paid. That's the reality of every mortgage... each and every one has YSP or it's kissing cousin Service Release Premium. Most brokers make YSP which is a combination of rate and released servicing.
The bill does nothing to address the abuses of builder controlled mortgage entities, including steering borrowers to their captive subsidiaries and/or ABA’s.
HR 3915 will have a deleterious effect on the thousands of minority owned and operated mortgage brokerages around the country. These are small businesses that are truly the backbone of our economy. If this bill becomes law, millions across this country will find themselves out of work.
HR 3915 does nothing to fund enforcement which has been desperately needed for years. It does set up licensing and registration requirements, which most brokers actually favor (usually because they are licensed by their state government.
There has, admittedly, been tons of bad coverage about mortgages going bad in the US. Basically, an entire industry is being dragged down by a few bad actors, less than 2% of the brokers in the US. The real problem is with builders like DR Horton who own their own mortgage companies and steer home buyers to them by offering incentives... but only if the buyers use THEIR mortgage company.
In reality, this bill will do little to stop bad lending practices. The only thing it will do is make sure that there isn't anyone to keep the banks honest. Without mortgage brokers keeping the market competitive, there's no one to help you. Further, the laws and regulations we have now are enough but, like the EPA, the money to enforce them is lacking. Why isn't Frank concentrating on that? He can propose an appropriations bill as easily as any other member of Congress.
Chairman Frank and the other co-sponsors may not realize the damage they are about to do. That's why it's important to LET them know.
Posted by mcblogger at November 6, 2007 12:39 AM
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