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Have Lenders Just Dodged A Bullet, Or Was It Borrowers?

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

Supporters of the Dodd-Frank Act of 2010 are crying foul and claiming  Lenders have just dodged a bullet, but Have Lenders Just Dodged A Bullet, Or Was It Borrowers?   The answer to this question depends on a few things.

  • Your understanding of the Lending Industry, and their present risk.
  • Are you a supporter of the Dodd-Frank Act or not?
  • Do you think the Lending Industry still needs more regulations?
  • Do you agree or not agree the components of the Dodd-Frank Act which have been enacted by the Consumer Financial Protection Bureau (CFPB) accomplished what they were intended to do?

Depending on how you answer the questions above, will determining whether you believe the Lending Industry just dodged a bullet last week, or whether Borrowers dodged a bullet.

The bullet I am referring to is the defeat of the 5% risk retention the Dodd-Frank Act proposed imposing on Lenders who securitized residential mortgage loans. Which really means a 5% risk retention on all Lenders, because they all securitize residential mortgage loans.  The inclusion of the 5% risk retention into the CFPB QRM Rules was defeated last week, leaving supporters of the Dodd-Frank Act very unhappy.

Under the Dodd-Frank Act if a Lender wanted to securitize a mortgage, the Lender would have to retain at least 5% of the loan amount on their books, in other words they could only securitize up to 95% of the mortgage loan.  The theory for this provision in the Dodd-Frank Act was that Lenders do not retain any risk for the mortgage loans they originate, so they do not care if the mortgage loan perform well or not.

This theory shows how little understanding supports of the Dodd-Frank Act have of how the Lending Industry works.  The fact is when a mortgage loan fails to perform, and the Lender forecloses, everyone losses.  The homeowner losses their home, and the Lender incurs costs far beyond what they will receive from the sale of most foreclosed properties, especially those properties purchased in the last decade.  Also if the mortgage was an FHA Mortgage the Lender is at risk of losing their Direct Endorsement if enough mortgages fail.  So the theory of Lenders not having any "skin in the game" if a 5% risk retention was not imposed, does not hold water.  Several Lenders are out of business today because of bad loans they originated.

The reality is if Lenders were mandated to assume more risk they would further tighten the lending guidelines to reduce their risk.  Tighter guidelines only mean one thing, less risk for the Lender and fewer loans for Borrowers.  This is why several consumer groups, joined Lenders, Homebuilders, and Realtor Associations in fighting this provision from being implemented into the CFPB QRM Rules.

Mr. Frank and all those who think the Lending Industry needs more and more government regulations, are upset that a little bit of the Dodd-Frank Act was chipped away.  Supporters claim Lenders have once again avoided having any "skin in the game".  On the other hand those who have been living the nightmare of mountains of additional documentation, and guidelines which have excluded more and more Borrower, know the opposition of the 5% risk retention is not and attempt by Lenders and consumer groups to cry wolf, but a very real concern.

Have Lenders Just Dodged A Bullet, Or Was It Borrowers?  In my opinion it depends on the understanding the person answering the question has of the Lending Industry, and the impact increased rules and regulations have had over the last few years.

 

 

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

Posted by

George Souto
NMLS# 65149

C (860) 573-1308
CALL 7 Days/Wk
Fax (860) 760-6891

Email Me
About Me
My Blog

I am a Mortgage Loan Officer who can assist you with all your mortgage & refinancing needs in
CT, and RI

I can assist you with your Conventional,
FHA, CHFA, VA, USDA, & 203K loan programs.

I reside in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Haddam. E. Haddam, Higganum, Chester, Essex, Deep River.

 

Comments(43)

Thomas McCombs
Century 21 HomeStar - Akron, OH

I think that we all (Frank)ly  (Dodd)ged a real bullet. There are some that feel that this original set of laws contributed hugely to the mess we found ourselves in when lenders almost stopped lending a few years back.

Oct 31, 2014 04:48 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

It seems to me this is just another rule to favor the big banks.  Big banks cannot compete with small lenders in terms of service or quality of the programs.  they have to rig the game.

Oct 31, 2014 04:49 AM
Dick Greenberg
New Paradigm Partners LLC - Fort Collins, CO
Northern Colorado Residential Real Estate

Hi George - Thanks for an interesting analysis of how that rule would have played out, and I think you're right - it was the borrowers who won this skirmish, but the war is still definitely on.

Oct 31, 2014 04:50 AM
michael zuren
Schmidt Mortgage Company - Willoughby, OH

That is good news for lenders and borrowers. Hopefully, lending guidelines will start to loosen up.

Oct 31, 2014 04:55 AM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

This was meant, or so is my understanding, to have some loan originators have some skin (left) in the game.  The ability to sell off huge loan portfolios which were backed my HUD, Fannie, Freddie, et al on to the secondary market was the reason for this.  

Oct 31, 2014 05:43 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

George... Dodd-Frank reminds me of Obama Care... lots of stuff got passed with no one reading it and now everyone is backtracking.

Oct 31, 2014 06:09 AM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

I think that certainly changes and restrictions were needed, but many just feel like busiwork now without a lot of purpose to them. 

Oct 31, 2014 06:12 AM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

I can't say I'm in favor of the rules as I think it's stifled lending more than helped consumers.

 

Oct 31, 2014 06:13 AM
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

I agree with Nina - and those regulations were passed by people who have ZERO understanding of the mortgage industry. Just as it did with some other regulations that affected real estate, their regulations tend to make matters worse, not better. 

However, I was in agreement with lenders needing to be transparent and with putting a stop to predatory lending. Of course - those fat cats who perpetrated much of it should have been put in jail, not just given fines that their companies paid for them. 

Oct 31, 2014 06:15 AM
Gail Robinson
William Raveis Real Estate - Southport, CT
CRS, GRI, e-PRO Fairfield County, CT

George - Thank you for explaining this in a way the public can understand.  The mortgage industry did need to tighten its standards after the housing bubble, but the pendulum has swung too far and it is affecting our economy.  Housing has a huge impact on our national economy and when lending standards are too tight, our economy suffers. 

Oct 31, 2014 06:40 AM
Nevin Williams
Fairway Independent Mortgage Corporation - Cary, NC
Senior Mortgage Advisor

Ha ha ha.  Banks never incur losses.  They are the epitome of an efficiently run money machine. Sure the media portrays banks and Wall Street as being sloppy but don't be fooled.  Ratings and ignorance to how banks work for most people who are not in the banking industry.  

Dodd Frank financial reform act definitely had some good intentions and made some positive changes.  It also has many flaws.  Ben Bernanke can't even refinance his home.  A sign of the stupidity that came from these folks.

 

A lender who has to retain 5% does several things in my opinion:

  • Puts smaller lenders out of business.  Great now we have only 5 big banks to choose from.  No thank you.
  • Medium sized banks wil find a way to make up that 5%. Let's see, hmmm let's all broker instead and then only the top 5 banks will take on all of the risk.
  • Banks raise our fees to offset the 5% requirement.  We'll raise our servicing fee and in turn it will pass down to the consumer.
  • Most lenders get their money from commerical banks with expectation of repayment within 30 to 60 days otherwise they are subject to pair off fees and late fees for non delivery.  This means mandatory delivery will shrink and best effort will dominate.  This equates to higher rates for everyone, except the bank of course.
  • Dodd Frank will do nothing more than restrict banks with new rules in which the banks will  find another way to avoid the lost revenue.  
  • Example of how banks always win - Shadow inventory still exists and is being held. My conspiracy theory is that they are reducing supply to increase demand thereby raising real estate prices.  Once they think they can sell this real estate to offset their losses from 2008 they will slowly sell the shadow inventory at a nice profit.

A lot of this could have been avoided if

  1. People read their documents
  2. Common sense guidelines had remained and stayed in force in the early 2000's.

 

Oct 31, 2014 07:29 AM
Ginny Gorman
RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate - North Kingstown, RI
Homes for Sale in Southern RI and beyond

Seo important for all to understand what it truly is all about, George.  You did a fine explanation... If people don't get it they better go back to school.

Oct 31, 2014 09:42 AM
Praful Thakkar
LAER Realty Partners - Burlington, MA
Metro Boston Homes For Sale

George Souto - this is complicated for borrowers (and at times, to us also.)

They are interested in getting money for the home they are buying.

Oct 31, 2014 01:05 PM
Claude Labbe
RLAH / @properties - Washington, DC
Realty for Your Busy Life

All I want is the perfect world, where the balance between lender risk and the community itself are equally shared and the economy prospers. There is no such thing as greed and everyone is happy.

Sure, that's a nirvana, but clearly we can get closer to that than where we've been in the past decade of so, where it seems we've been too risk-averse to the new too stringent.

Oct 31, 2014 02:54 PM
Trent Dalrymple (248) 854-0625
Home State Bank - Bloomfield Hills, MI
Allowing Mortgage Professionals to Lend Nationwide

Not that this rule would have affected our lending model but when you mention hurting the borrower, yes it will.  As private lenders we decided to send in our licenses and get out of the lending business due to the restrictive regulations that would have put a bullseye on our backs.  Now we can't help those potential borrowers that have been turned down by banks and mortgage brokers but need a private lender.  The risk is not worth the reward.

Oct 31, 2014 11:29 PM
Kathleen Daniels, Probate & Trust Specialist
KD Realty - 408.972.1822 - San Jose, CA
Probate Real Estate Services

Stupid is as stupid does, right George Souto?  I think we have enough regulations ... thank you.  I don't claim to fully understand the lending industry. I do feel that regulators are generally clueless.  That's all I have to say about that

Nov 01, 2014 07:06 AM
Debbie Reynolds, C21 Platinum Properties
Platinum Properties- (931)771-9070 - Clarksville, TN
The Dedicated Clarksville TN Realtor-(931)320-6730

George, Everytime the government intervenes it gets screwed up. The public has suffered too much by the tightening. Thanks for the explanation of this law that got defeated.

Nov 01, 2014 01:15 PM
John DL Arendsen
CREST "BACKYARD' HOMES, ON THE LEVEL General & Manufactured Home Contractor, TAG Real Estate Sales & Investments - Leucadia, CA
Crest Backyard Homes "ADU" dealer & RE Developer

George Souto No, I'm definitely not a supporter of The Dodge Frank Act or any of the pathetic buearucratic entanglements that have arisen as a result of this destructive debacle. This is definitely worth a repost, like and I will following you from now on. Thanks!

Nov 02, 2014 11:12 AM
Myrl Jeffcoat
Sacramento, CA
Greater Sacramento Realtor - Retired

As hard as the banking industry lobbies for less restriction, I don't trust them with less oversight.  We saw what deregulation got us in the years ramping up to the housing meltdown in 2008.  I don't want to ever relive that again.  Your sentence that states, "When a mortgage loan fails to perform, and the Lender forecloses, everyone losses," is so very true!

Nov 02, 2014 11:48 PM
Winston Heverly
Coldwell Banker Access Realty - South Macon, GA
GRI, ABR, SFR, CDPE, CIAS, PA

Hi, I really enjoyed coming across your blog among the many archieves. Thanks for being apart of Active Rain.

Apr 05, 2015 01:02 PM