The US House of Representatives is considering a bill that would Legislate Underwriting Guidelines into Law and outlaw Yield Spread Premium. The bill came out last week and the US House Financial & Services Committee will vote on Tuesday, November 6th, 2007. Let's be clear, THIS BILL EFFECTS THE ENTIRE REAL ESTATE AND MORTGAGE INDUSTRY AS A WHOLE, Real Estate Agents, Mortgage Brokers AND Mortgage Bankers!
Yesterday afternoon, I received an email from The National Association of Mortgage Brokers regarding this bill. HR 3915 The Mortgage Reform and Anti-Predatory Lending Act of 2007 was introduced by House Financial Services Committee Chairman Barney Frank (D-MA), along with Representatives Miller (D-NC) and Watt (D-NC). This morning I was on a nationwide conference call regarding the effects HR 3915 will have on our industry.
After this conference call, and reviewing the bill, all 66 pages of it, I applaud the efforts of these congressman. Their intent is commendable in many areas! I have always said that our current Mortgage and Real Estate crises will bring about much needed reform. However, there are some items in the bill that will effectively raise Interest Rates almost immediately, all but ELIMINATE MORTGAGE BROKERS, and dramatically reduce banks abilities to practice in a free market. I will break it down.
The good items of this legislation:
- The bill would require criminal background checks, testing to demonstrate basic knowledge of loan products, and continuing education and professional ethics training for all who originate mortgage loans.
- It would also require loan originators to provide a simple, straight-forward disclosure of their role in the mortgage transaction, including all fees and other sources of compensation, and to do so at the onset of the process.
- The establishment of a national registry. I assume this would be governed by a federal agency such as the Federal Trade Commission and is to include every individual mortgage originator (including loan officers working for federal- and state-chartered banks and lenders, credit unions and mortgage brokers)
- It will eliminate special incentives paid by lenders to mortgage originators who sell particular loan products i.e. Hefty YSP or rebates for Option ARM's. In other words, some loans are more profitable for Lenders, so they place extra Yield Spread Premium (YSP) on them so that Loan Officers sell those loans as opposed to other loan products. This is a practice that I have always been against, so HOO RAY! for this piece of it!
The bad items of this legislation:
- The bill will create a Federal Duty of care and outlaw steering. This doesn't sound like a bad thing, BUT the anti-steering language will outlaw incentive compensation and Yield Spread Premium (YSP) that allows Brokers and Bankers to be competitive.
It would require all originators to have a minimum net worth or bond requirements of $100,000. Aside from the fact that many originators would not qualify with a net worth of 100k, the bond requirements would effectively eliminate many originators due to the expense to carry this type of bond. In addition, this would create a run of litigation on future loans strictly because consumers would know the bond and/or net worth is there.- The bill will legislate "STRICT UNDERWRITING STANDARDS". This means that every loan will have to fit into a perfect box that many homeowners and potential homeowners DO NOT fit into. Also, with set underwriting standards, this will basically eliminate the free market in respect to Mortgages. As NAMB President Elect Hanzimanolis stated, "We need to have confidence in the market's ability to correct itself. Further restrictions through legislation will cripple the industry, and will adversely affect the very people we're trying to help."
- Borrower's will no longer be able to finance closing costs. So basically, if you are going to refinance your house, you will have to pay ALL closing costs out of pocket. For instance, if average loan closing costs were 2 to 3% of the loan amount and if the average refinance loan amount was $200,000, you would have to come out of pocket with 4,000 to 6,000 to refinance your home.
What does this all mean:
- First, Mortgage Brokers would be put out of business. The enormous cost of bond requirements and additional liability would be too much for most Mortgage Brokers to stay in business. Those that could afford the cost would have limited profitability because of the elimination of YSP. This would force most all Mortgage Brokers to cease operations.
- Without Mortgage Brokers, borrowers would have little ability to "shop" for a more competitive rate and loan program. In essence, it would create a monopoly for Mortgage Bankers.
- Even-though Mortgage Bankers would have little competition, they ALSO could not benefit from YSP. In order to be profitable, they would have to depend on shear volume which would drastically reduce the level of Customer Service! This would favor the larger Mortgage Banks like Chase, Countrywide, etc. as they have more employees to handle the volume.
- With standardized underwriting, there would be no difference between a large Mortgage Bank and a small Mortgage Bank with the exception of rate. Because of the ability for the larger banks to operate at a higher volume, this would eliminate the ability for the smaller Mortgage Bankers to compete. This would further create a monopoly for the larger Mortgage Banks.
- In addition, standardized underwriting would limit the ability for "exceptions" to be made in underwriting files. For anyone who has been in the industry, for any amount of time, you know that there are exceptions in virtually every loan file. Standardized underwriting means there are little to no exceptions that can be made. Without an individuals ability to get an exception, this would further decline the number of qualified buyers and people qualified to refinance their homes.
- Less home sales means Real Estate Agents and Brokers are competing over a smaller piece of the pie.
I could go on from there but I am sure you get the picture!
Here you will find a Summary HR 3915 along with the Full Bill HR 3915. Please see updates for amended versions of the bill below.
You can also sign an online petition to vote NO for HR 3915.
Although this legislation is a direct attack on Mortgage Brokers, it will end up affecting every piece of both the Mortgage and Real Estate Industry. I urge you to act!
Update November 2, 2007 2:56pm PST:
I just received this email from The National Association of Mortgage Brokers. After reading the email I think you will see that our voice is being heard loud and clear already! In the email, we are asked to refrain from contacting our congressmen until we know the final language of the bill. However, I think this is too big a matter to wait. We waited in Nevada regarding AB 440 and now we are stuck with legislation that is crippling our ability to do many types of Mortgage Loans. If you decide to contact them please do so in an orderly and professional manner. Here is the email:
Dear NAMB Member:
We continue to work in good faith with Chairman Frank and his staff on HR 3915, "The Mortgage Reform and Anti-Predatory Lending Act of 2007." Chairman Frank and staff for the House Financial Services Committee have been willing to have an open dialogue on our concerns on this bill. The process has been and continues to be transparent. We are working diligently to ensure that the bill is revised to include language that is acceptable to the broker industry.
We know this is a critical and stressful time. We understand all of your concerns. However, we are asking each of you to please refrain from calling or emailing your Congressional Representatives on HR 3915 at this time. We are working hard to resolve the concerns that you have on your ability to earn a living and operate a successful business. We do not want to place in jeopardy the efforts that are underway and the gains that we have achieved so far.
Allow the process to work. We will update you on the next steps once we are clear where the final language in HR 3915 stands. Expect this in the coming days as the official debate on HR 3915 is scheduled for next Tuesday, November 6th. Again, we are working around the clock in good faith to ensure that a revised bill addresses and resolves many of the concerns that we have communicated to Chairman's staff.
In the meantime, it is critical that you continue to learn about this bill and the process. Staying informed will ensure you are ready to act when that time comes.
Update November 5, 2007 11:45pm PST:
I attended a NAMB conference call this morning regarding the bill. As of around 8:00am EST, a new version of HR 3915 has come out. The original version of this bill was 66 pages, the new version is now 121 pages. After reviewing the amended bill these are the changes that I think are significant:
Good amendments:
National Registry will include all Loan Originators
Eliminates net worth and assurity bond requirements
YSP ok for Qualified Mortgages
Qualified mortgages are prime loans with APRs that do not exceed the North Carolina standard.
Qualified safe harbor mortgages are loans with (1) documented consumer income, (2) underwriting processbased on fully indexed rate (taking into account taxes, insurance, and assessments), (3) no negativeamortization, (4) other requirements that may be established by regulation, AND (5) one of the following: (i)fixed payment for at least 5 years, (ii) for variable-rate loans, APR that varies less than 3% over the interestrateindex, OR (iii) DTI not greater than a percentage prescribed by regulation.
Adds an Office of Housing Counseling, established within HUD an Office of Housing Counseling that will conduct activities relating to homeownership and rental housing counseling.
Bad amendments:
Nationwide Mortgage Licensing System and Registry (NMLSR) for the residential mortgage industry to be established by the States through the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.
Mortgage Bank Loan Originators may not have to undergo education requirements (language is vague)
Consumers may still not be able to finance closing costs
YSP not allowed on Sub Prime Loans
View the Summary of Amendments. View the Full Amended Bill 3915.
CALL TO ACTION, CALL TO ACTION, CALL TO ACTION, CALL TO ACTION, CALL TO ACTION, CALL TO ACTION
********Please forward the following to as many Industry Professionals as possible***********
The U.S. House of Representatives Financial Services Committee is considering a bill that will fundamentally change the way we are paid. While we agree that consumers should not be steered into a particular loan, the bill leaves unclear whether consumers can finance their origination fees and other costs inside the interest rate. Therefore, it is unclear whether you can be paid YSP. Additionally, we fear that all subprime lending will cease to exist due to the increased scope of the high-cost mortgages section (Title III) of this bill.
We are calling upon our Industry Professionals to respond as never before. To save our industry, we are asking you to IMMEDIATELY contact your Congressman.
TIME IS CRITICAL. The bill became public last week. We have been working with Congressional offices in good faith, but our concerns have not been fully addressed in the newly, revised version released just hours earlier today. The U.S. House of Representatives Financial Services Committee will be debating and voting on this bill on the morning of Tuesday, November 6, 2007.
YOU MUST ACT NOW.
We are asking you to call your Congressman and to communicate with their Congressional office by letter.
- A. To call your congressional office, click here and enter your zip code or other search options. The phone number will be listed to Washington DC. Please call and express your concern as follows:
- I am an Mortgage and Real Estate Industry Professional. House Bill 3915 is being considered on the morning of Tuesday, November 6th. We support licensing and improved standards for all originators. We oppose outlawing the way we earn our living, and urge that indirect compensation be allowed as part of the interest rate. Consumers should be able to finance fees and costs and creditors or investors should be able to pay such fees and costs to mortgage brokers as is industry practice today.
- We do not support Title III. The standards are so strict and the liability so great that it will prohibit loans being made in the subprime market. It will act as a federal usury statute denying access to credit for deserving borrowers.
- B. Please write your Congressman by e-mail. The vote is scheduled for the morning of November 6th. Please customize your message (see above) or send our pre-posted letter. Whatever message you wish to send, please respond with your concerns.
Now is the time that you can individually participate in saving your livelihood, saving your business, and protecting your industry. It is only through your efforts and answering this call-to-action that we can avert disaster.
AGAIN, PLEASE FORWARD THIS EMAIL TO YOUR FRIENDS AND CO-WORKERS THROUGHOUT THE INDUSTRY.
Update 11/07/2007:
COMMITTEE PASSES H.R. 3915 45 - 19; GOES TO FULL HOUSE NEXT WEEK.
Check back soon for more details!
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Rey "Steak Dinner" Gallegos
Senior Loan OfficerFive Star Mortgage
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Very interesting, thanks for keeping us informed.