Fidelity Insurance for Mortgage Originators a Better Way to Regulate Quality Production
Homeowners and mortgage investors won't be the only ones with skin in the game if U.S. Housing Secretary Shaun Donovan's plan for revising the nation's consumer protection laws passes.
The HUD secretary states that fairness would be a fundamental principle that the Consumer Financial Protection Agency proposed by the Obama Administration would follow. This is the same visionary man that made an inappropriate statement on May 12th that the $8,000 Federal tax credit would be allowed to be used for home purchase downpayments, and the same person that was forced to retract the statement the next day.
HUD is also the thinktank that created the reverse mortgage program which will drain tax payers for decades to come and possible cripple the FHA program. These were the same people that locked out thousands of qualified brokers from the FHA forward home loan program- the impetus for investors to create private label mortgages such as Subprime loans so that Non-FHA approved brokers could compete with FHA lenders (limited participation sanctioned by HUD).
For each of HUD's actions there is a greater perverse reaction by the markets.
After the many years of destructive practices from all levels of the mortgage origination channel: Bank to broker to borrower including government sponsored entities Fannie Mae and Freddie Mac (which bought and sold 60% of the toxic mortgages in the nation from 2003-2008), HUD now scapegoats the small business segment of the industry- mortgage brokers. Hud now, in order to look potent, states the obvious, that brokers are owing a duty of best execution to avoid conflicts of interest between themselves and their borrower clients. How outrageous! There were consumer protection advocates inside and outside the broker community screaming for improved oversight for a decade and a half. What a bunch of bastards !!! See the realestateloans.com greenlining mortgages article as an example.
The government agencies create the loan programs, they create the regulatory environment, they oversee the SEC which totally dropped the ball on CDS's (the primary culprit of the financial crisis) and now they are blaming mortgage brokers?
Brokers don't underwrite, they don't approve, they don't set guidelines, they don't create rate sheets, their sole purpose is to pre-underwrite borrowers and secure a loan approval, not a possible loan approval and not a loan decline- AN APPROVAL for their borrowers looking at all loan programs available.
Anyone that has been through the loan process realises how unrealistic lenders can be, and how easily they can find fault with even the best borrowers. Bank underwriters break loans down, brokers build them up.
True example: An 800 plus fico borrower was putting down $100,000 on a $245,000 single family home purchase closing May 2009 to live in. The borrower was fully employed as a city librarian. This was a spotless borrower and transaction. The customer will tell you that the banks documentation inquiries and funding delays made them feel like second class citizens. Ask around and you'll find that this nonsense is not uncommon.
Here is a list of the top 25 most toxic lenders. Look at the names, most if not all national bankers NOT brokers.
If the government sanctions these loan programs AND BORROWERS WANT THEM, OF COURSE MORTGAGE PEOPLE WILL OFFER THEM.
Bankers will be able to earn yield and service release premiums but Donovan states that yield spread premiums would be banned outright for mortgage brokers. Unlike banks, brokers would be paid "over time" based on the continued performance of the loans they originate rather than at the closing table. Likewise, I'm going to ask my mechanic if he would take payments on my car repairs as long as the car continues to operate property but if I sell the car the payments will stop. I'm also thinking about asking my roofer to take 360 small monthly payments on the 30 year roof he is going to install.
I believe all originators should take resonsibility in the loans they originate and buybacks of faulty loans should be commonplace. Actually brokers must sign buyback agreements but the lenders have done such a poor job of quality control that they rarely activate those buybacks.
Compelling all originators to purchase an insurance policy somewhat to malpractice insurance that covers a 5% interest in the loans they originate would be brilliant. It could be also be a fund somewhat like the FDIC. Nah, too sensible for the government and it wouldn't create another "department". I'm trapped by unwise big government lunatics on the left and selfish greedy pigs on the right.
I'm mad as hell at both sides.
