The Obama Administration introduced sweeping financial regulatory reform late Tuesday through a “Consumer Financial Protection Agency” to oversee consumers in credit and financial markets.
Mortgage brokers will be obligated to sell the best available mortgage loans to avoid conflicts of interest between themselves and borrowers while also determining the mortgages they sell are affordable to borrowers.
Remember, most toxic private label securities have disappeared. Is it the mortgage broker that only offers programs that are created by Fannie Mae and Freddie Mac (GSE's). Fact is loan officers only originate loans they do not create loan programs, larger entities like Fannie Mae and Freddie Mac actually create the program guidelines.
Much of our current mess was GSE i.e. government sponsored entity endorsed. Fannie Mae and Freddie Mac bought and sold trillions of dollars worth of mortgage loans consisting of stated income loans, high debt to income zero down loans, interest only, option arms, etc. In addition to the government (GSE) sponsorship of these toxic loans, the government also mandates pages and pages of loan disclosures that very few consumers can and want to read.
Is the government realistic when looking at the retail mortgage channel or are they ignoring history and facts? Again, loan officers only sell loans that the GSE's create. If the GSE's produce conservative and prudent loan programs, loan officers and mortgage brokers must/will comply.
In the 90's our industry produced a great deal of low down payment loans but never experienced the level of foreclosures and defaults that we have today. Back then, lenders required prudent debt to income ratios and full income and asset documentation.
Starting in 2003ish Fannie Mae and Freddie Mac drastically loosened their requirements in order to increase revenue and subsequent bonus payouts to GSE executives. Prudent qualification measures on fundemental safeguards such as those on debt to income ratios were eliminated.
Those of us in the industry that wanted to provide safe FHA programs years ago were not permitted to do so because of regulatory constraints- hence the invention of FHA look alikes through private label securitization. The lack of intelligent regulation of private label securitization programs are an additional reason we are experiencing this crisis. The Fed knew about these programs but were not astute enough to intervene.
The government is at the center of these problems. They were not only deficient in their oversight but were also profiting from the revenue generated by these securitization processes.
In the new regulatory regime, yield spread premiums will also be banned and mortgage brokers will be paid over time based on loan performance rather than a lump sum at closing. It’s unclear how compensation will be treated for retail loan originators. Would a home contractor install a new kitchen and accept payment over years and only as long as the owner owned the home? Deferred compensations models won't work. Consumers may eventually be required to pay additional fees up front in order to bridge the service providers income shortfall.
Regulation: Proceed with caution.
