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Posted by Jeff Strickland on November 2, 2007, 1:02 pm
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>
>>
>>>
>>>>
>>>>> FACTS
>>>>>
>>>>>
>>>>> Reps. Brad Miller (D-NC), Mel Watt (D-NC), and Barney Frank (D-MA)
>>>>> introduced The Mortgage Reform and Anti-Predatory Lending Act of 2007,
>>>>> which is intended to provide "comprehensive legislation to combat
>>>>> abuses in the mortgage lending market."
>>>>>
>>>>>
>>>>>
>>>>> Establishes "nationwide registration regime", prohibit Yield Spread
>>>>> Premiums (YSP), and will essentially make "No Doc" and "Low Doc" loans
>>>>> illegal.
>>>>>
>>>>>
>>>>>
>>>>> Requires all mortgage originators operating in any State "which are
>>>>> not depository institutions or institution-affiliated parties of a
>>>>> depository institution must meet effective minimum requirements and at
>>>>> all times maintain a minimum net worth of $100,000 or pledge a surety
>>>>> bond in the minimum amount of $100,000."
>>>>>
>>>>>
>>>>>
>>>>> Requires "all mortgage originators operating in the State which are
>>>>> not depository institutions or institution-affiliated parties of a
>>>>> depository institution are required to receive minimum training and
>>>>> undergo a background check before receiving a license, and receive
>>>>> ongoing training or continuing education as a condition for
>>>>> maintaining and renewing the license."
>>>>>
>>>>> In eliminating YSPs and overages paid to originators for closing loans
>>>>> at premium rates the legislation provides, "no mortgage originator may
>>>>> receive from any person, and no person may pay to any mortgage
>>>>> originator, directly or indirectly, any incentive compensation
>>>>> (including yield spread premium) that is based on, or varies with, the
>>>>> terms of any residential mortgage loan."
>>>>>
>>>>>
>>>>>
>>>>> The legislation also includes a provision that "no creditor may make a
>>>>> residential mortgage loan unless the creditor makes a reasonable and
>>>>> good faith determination based on verified and documented
>>>>> information." The legislation wipes away any qualifying benefits
>>>>> offered to consumers seeking adjustable or non-amortizing interest
>>>>> only loans by requiring creditors to qualify applicants at the fully
>>>>> indexed rate or a fully amortizing rate in the case of interest only
>>>>> loans. (OTOct252007)
>>>>>
>>>>>
>>>>>
>>>>> MORAL
>>>>>
>>>>>
>>>>> There are reasons to allow borrowers to come in at start rates. Among
>>>>> them is the fact the borrower qualifies now and under normal raises he
>>>>> reasonably expects to receive based on work history the increase can
>>>>> be paid when it increases thus allowing him to provide shelter for his
>>>>> spouse and children. Fully indexed prevents a lot of people from
>>>>> owning homes. It is like throwing out the baby with the bath water.
>>>>>
>>>>>
>>>>>
>>>>>
>>>>
>>>>
>>>> THE REAL MORAL
>>>> The real moral is that there is no way in hell that normal raises will
>>>> make a guy with a teaser rate qualify for the same loan after it
>>>> adjusts. The ONLY way out of these loans is through equity appreciation
>>>> through increased value. This allows the appreciation to outstrip the
>>>> neg. am. so the borrower builds an equity position. After a couple of
>>>> years, his appreciation lets him get a 70% LTV loan, that lets him get
>>>> a fixed rate that is lower than the adjusted rate that he is facing
>>>> when the teaser expires.
>>>>
>>>> The fix for the problem we have today is to stop giving teaser rates to
>>>> people that do not qualify of the home they are looking at. Sometimes
>>>> you just have to say, you do not qualify.
>>>>
>>>> To make matters worse, in my area it has been reported that 7% of all
>>>> loans are sub-prime, and that nearly 50% of those went to investors
>>>> with no equity position at all. An investor got a 100% note, and half
>>>> of them simply walk away.
>>>>
>>>>
>>> Just to be clear this was an email sent to me from a lender. I agree
>>> with most of what you are saying. How do you feel about all loan
>>> originators having a minimum net worth of 100k, and banning all no doc
>>> and low doc products?
>>>
>>
>> I'm not in favor of any of that. I have an 800 FICO, and should not have
>> to give anything more than my name. For this privilege, I may pay a
>> premium in the rate, or pay some sort of point as a fee to to keep my
>> secrets. But I see no reason to pull the product, I do see a reason to
>> tighten the guuidlines if the banks wants to do that, but pulling the
>> product is not necessary.
>>
>> I do not understand what the net worth of the loan officer (origniator)
>> has to do with anything. There is no reason to suggest that an originator
>> with a small bank account will screw anybody, or own that has a large one
>> will be honest.
>>
>> If an investor owner -- a guy buying a rental unit -- comes along, I see
>> it as prudent business (banking business) that any such investor have
>> cash reserves and a 20% or 30% minimum investment to keep him from
>> walking when times get tough. And, if an investor will walk away from a
>> 20% or 30% pile of cash, then the bank has that equity on its books to
>> play around with before they start taking a loss.
>>
>> The problem becomes, you or I walk into the sales office and announce our
>> interest in a particular property, we make the necessary deposit and make
>> a contingency that our existing house must sell. It fails to sell, and
>> maybe it is never listed. This creates a sticky situation because the
>> contingency is not met by closing time, and if never listed then fraud
>> rears its ugly head. If the contingency is not met, then the deal falls
>> out, so a seller will not take a contingent offer unless there is a
>> listing inhand for the buyer's current property. Perhaps a contingent
>> sale will only happen in a slow market (such as we are in today) if there
>> is an open escrow, but this will demand the buyer have a buyer for his
>> existing property before he goes shopping for a new property.
>>
>> I think the problem we are facing today with the sub prime melt down is
>> two fold, one - the buyers are buying houses they can not afford and they
>> are using creative financing that demands equity appreciation for it to
>> work, and two - it appears that investor-owners were given loans that
>> were never meant for them, and when the market went south they simply
>> bailed out of a house they didn't even live in and had little if any
>> monitary committment. Buyers can and should get Option ARMs and other
>> teaser-rate products, but they should qualify at other than the Minimum
>> Payment, of course this will almost completely kill any demand for the
>> product, but nobody will be walking away from a loan. And,
>> investor-buyers should come to the table with a mountain of cash, strong
>> reserves and healthy FICO scores, and these atributes would keep them out
>> of the sub-prime/Option ARM programs anyway because with these qualities
>> they can get a 30yr fixed with the first 10 years as Interest Only so
>> they keep the payments down without going negative and they can then keep
>> the respective rent tables in line with other like properties in the
>> area.
>>
>>
> Also don't forget this bill intends to eliminate YSP.
>
YSP is required by RESPA to be disclosed. The consumer does not care what
the YSP is, they only care that they get a low rate with low fees. If they
shop properly, they will find a rate (let's say 6% for the sake of
discussion) they like with an APR the is competitive, why would they care if
a loan officer is getting a half point or a full point or whatever on the
back? If I offer you a 6% loan for no points because the YSP will pay them
and me, why do you care? In an environment like that, my 6% loan will be
competing against a 5.5% loan where the borrower has loan costs.
If the borrower will be keeping the loan for the full term, then it makes
sense for him to pay oll of the costs up front, even my commission, and take
the lowest possible rate because over time the reduced payment will cover
any loan cost + commission, then produce savings. But, one has to do the
math to see where the break even point comes; if it comes in the 7th year
but the borrower intends to refinance or sell in the 5th, then paying the
costs upfront might not make sense -- a higher rate that pays my commission
might actually result in lower costs to the borrower.
Dumping YSP because there is a concern for consumer protection is stupid. If
there is a push to protect consumers, then simply enforce RESPA and make
sure that all fees and sources of income to the loan broker/officer are
properly disclosed. The lender's underwriters can enforce the guidelines at
the local level by returning a disclosure form that does not disclose
accurately the YSP.
In a free market, the borrower is expected to shop for his loan, and when he
does this he will find that any loan officer offering a 6% loan will be
making a point on the back, and hye will take the loan t5hat gives him the
lowest cost on the front. He can simply tell his loan officer, "I have a guy
selling me a 6% loan with 6.024% APR, you need to give me a 6.015% APR to
get my business." Or whatever the numbers work out to be.
YSP is not a bad thing.
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