Beware the government that’s here to help
May 4, 2014
Residential mortgage lending is down almost 50 percent nationwide from the same time last year. The primary reasons are, first, dramatically fewer refinances, because most of the qualified borrowers have already secured new, lower rate loans, and second, significantly less inventory, especially of new homes, for sale.
It's interesting, but coincidental, that this downturn came at almost precisely the same time as the much-heralded "Qualified Mortgage," as defined by the Consumer Financial Protection Bureau, went into effect.
Real estate practitioners, from home builders to Realtors to lenders, roundly predicted the new regulations governing mortgage lending that became mandatory in January of this year would severely decrease the amount of money available for home loans.
This very likely could happen, but not for the reasons many may have expected. Much concern was voiced regarding more stringent underwriting and loan qualification guidelines being required at the beginning of this year.
However, the fact is that these rules are pretty much the same as were in effect in, say, 1980, when I taught real estate finance courses for adult education at CMC. In fact, some of today's rules are actually more lenient.
But there are some very important differences, as mandated by the regulations promulgated by the CFPB, and they've turned mortgage lending on its head.
There's a classic story from the heyday of real estate development back in the late '70s of the builder that sued a bank that foreclosed his loan, saying that the bank should have known he couldn't repay the loan, and seeking damages from the lender. Reportedly, he won. Back then, it was a joke. Today, by an act of Congress (the Dodd-Frank Act), it's, well, the law of the land.
It used to be that a borrower was responsible for demonstrating acceptability for a home loan. Today, it's up to the lender to show that the borrower, and the loan itself meet all the criteria of a "Qualified Mortgage" under the law. Failure to do so can have some very unpleasant consequences for the lender, including jail time, if it's determined that the lender deliberately ignored the regs. It's literally against the law to make a bad loan.
This definition is vitally important to a lender. If a loan does meet the Qualified Mortgage Test, then the lender has a "Safe Harbor," a legal term meaning that it's protected from a suit by a borrower to block foreclosure, or prosecution by the government.
Lenders will gravitate to cookie cutter guidelines that assure that the mortgage is securely anchored in that safe harbor. For instance, any loan that is purchased by Fannie Mae or Freddie Mac, or any loan that is insured or guaranteed by FHA or VA, gets the lender off the hook. Obviously, there will be far few mortgage capital sources that will risk forgoing these seals of approval.
The cost of doing mortgage business will go up, and any time that cost increases, you know who pays for it: the customer.
The foreclosure process will become more complex and time consuming. For instance, Colorado and a lot of other states are public trustee jurisdictions, which means that a foreclosure doesn't go through a lengthy court process, but is streamlined by the use of a trust deed. Already, some lenders in some trust deed states are going through the courts anyway, seeking a judicial foreclosure, so that a judge approves every step of the process. More time and legal fees are involved, and you know who pays for that as well: the customer, either the homeowner, when seeking to redeem the loan out of foreclosure, or the ultimate buyer of the foreclosed property.
Of course, the sentiments of Congress and Messrs. Dodd and Frank were laudable in their motivation to address egregious abuses in mortgage lending, but one can't help but be reminded of that classic bureaucratic phrase:
"We're from the government, and we're here to help you."
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He'll be happy to answer your questions or hear your comments. His e-mail is email@example.com.