Senate Bill 203, Mortgage Broker licensing, is making its way around the Colorado state Capital. This bill, which carries a list of prohibited activities, licensing requirements for mortgage brokers and some education (wow, educate those who educate the consumers..............novel) remains a bit of a mystery to almost everyone, including me (and I just read it). Even the Colorado Mortgage Lenders Association(CMLA) doesn't have a position on the bill because it has been reworked so many times!
While on one hand it is good to require the licensing of mortgage professionals, I am unclear why bankers seem to be removed from the act? Again, leaving a large group unregulated simply because of what office they work at seems to me to be counter-productive towards the end goal.
And what is the end goal? Curb the foreclosure problem. If you look on-line you find countless pundits talking about, even harping about, the foreclosure problem. Let's call it what it really is. This is simply a market correction. Wait, no, that's the old line from six months ago. Right, now it's a problem.
That's the real problem I think, that nobody really understands the problem. Why? Because we all have our own problems. Mortgage Brokers either close loans or they go out of business. Real Estate Agents either sell houses or they go out of business. Appraisers.........by this time they are already out of business.
If you listen to the Division of Real Estatecatching all of the real estate appraisers who are over-valuing the real estate and thus causing inverted (we'll come back to that term later) loan to value ratios will lower the foreclosure rate. Problem with that theory is simply economics. If I'm willing to pay you more for your house than it is worth, shouldn't I also be able to find a way to borrow 103% of that amount? OK, maybe not, but that's the idea behind certain loan products. Ahhh.........loan products............now we're getting somewhere!
OK, if the Yield Curve on interest rates is going to continue to be flat or inverted (there's that word again), then the yield spread for lenders will drive basis point after basis point of lost revenue. So I want to buy a house on a 1- 3- 5- or 40-year loan, my rates gonna be about 6% right now. Product doesn't matter, right? Wrong! If I have a credit score of 556, D paper money says I'm going to have to pay 3-4 points and a rate at about 9% just to get into an ARM! Sound good? Sure. I'll borrow a little more and buy down that rate to 8% and go with the 3-year ARM so that my payments are fixed for a while before the rate goes up. Lenders need higher yield spreads, so they need sub-prime loans!
The trap is set. Foreclosure awaits. Listen, I'm a huge proponent of licensing mortgage professionals, but let's educate all of them without regard for the office they work at or the products they sell. And let's put some teeth into the licensing act itself, require qualifying education and create some value in the marketplace. Let's cover Sub-Prime lending in the required education, and let's require anyone selling sub-prime loans to take the course twice. Maybe at least then they won't be foreclosed on.