Changes In The Mortgage Market And Transparency Since 2005

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The overview is simple: The government has made it take slightly more effort to lie to consumers, while adding layers of delays that add an absolute minimum of a week - an average of three weeks - to the time it takes to do a loan. Meanwhile, lenders have changed the market in ways to hinder competition and make it tougher for the savvy consumer to find the real best deal.

In short, while a complete chump might be happy that the con artists have to work a little harder while ripping them off, the consumer who makes the effort of understanding what is going on has far less ability to ensure a positive result.

First the good news: the change for the better is the new government forms. It's been almost 6 years since The new HUD 1 and Good Faith Estimate were approved, and they are more intuitive and easier for laypeople to understand than the old forms. There is also new verbiage on the forms that tells people that just because they applied for this loan in no way obligates them to actually complete it. That's also good

In exchange for that much good news, there is a litany of things that are worse. Let's start with the small stuff and build up to the most important.

First off, the Home Valuation Code Of Conduct (HVCC). Precisely how the Attorney General of one state used state funds to shake down Fannie Mae and Freddie Mac, provide cushy jobs for his political cronies and allies, and gain personal control over the way business is conducted in all fifty states should certainly be a subject for public scrutiny, but I'm mostly concerned with the impact upon the consumer. In exchange for allegedly freeing appraisers from "interference" by real estate agents and loan officers who want them to hit a specific number, consumers are now paying higher costs for appraisals, appraisers are getting less money for those same appraisals, an entire level of bureaucracy and political patronage has been created with control over the entire appraisal process. For our part, loan officers and real estate agents no longer have the ability to stop using a particular appraiser, no matter how terrible we know them to be - it's whomever the appraisal management company picks (i.e. the low bidder). As a loan officer, I am not allowed to so much as communicate with the appraiser except through an intermediary. And if they've chosen a really horrible comparable that unduly influences value in either direction, most of the appraisal management companies make it difficult or impossible to process that information into modifying the appraisal. I personally had an appraiser kill what should have been a perfectly good loan by choosing two trashed lender-owned properties as the prime comparables to a well maintained family home that was in a better location than either - and I couldn't choose another appraisal, another appraisal management company, or anything else. I had to tell the client I was real sorry about the money he wasted on the appraisal, but that was the limit of what I could do. Yeah, I could offer to pay for appraisals - by jacking my margin on loans enough to pay for the ones that don't work out. Lots of companies do that, with an added margin for themselves, of course - he who takes the risk always gets a reward, and when they set the terms they are going to set ones that result in a higher profit to them. But that's not the way I choose to do business. HVCC may eventually be repealed due to the problems with it being so blatant that they cannot be ignored. But it is a comparatively small issue in terms of real difference to consumers.

Yes, the others are more important than wasting several hundred dollars on a loan that now can't be done because the appraisal job was given to a bozo, despite whatever the loan officer may have wished. Oh, and it also delays the loan because I have to go through one Appraisal Management Company, and it takes as long as whomever they choose takes. Read on.

The elimination of stated income loans is not without its benefits. It was horribly abused, and those abuses are now a thing of the past. However, if you're a small business person or someone with a large amount in legitimate deductions, it means you may have to forego a lot of legitimate deductions on your income taxes in order to qualify for a loan, making it much more expensive to those consumers the stated income program was designed for. Especially if you bought the home you can really afford as opposed to the one your taxes say you can and you've got an adjustable loan. This elimination can, has and will continue to cost a noteworthy number of individuals who really could afford it their homes. It will continue to cost individuals who leave employment and go into business for themselves. It would have been better targeted by limiting it to people who are in the economic classes it was intended to serve. The cost of doing it the wrong but easy way isn't huge on a per capita scale, but it's highly concentrated in those consumers who are our best sources of economic growth.

The next issue hits everyone who applies for a loan. It lies with MDIA, an act put into place by Congress in 2009. It is allegedly to help the consumer by forcing the mortgage provider - broker or banker - to provide accurate information on their Good Faith Estimate and Truth In Lending forms. I say allegedly because that's not how it works in practice. I can't speak for their intent, but I can tell you what happens in practice. First, the mortgage provider tells the consumer whatever lie it takes to get the consumer to sign up, same as it has always been. Then, a week before final closing but too late for the consumer to actually get another loan that will fund in time for their purchase, they have to tell the consumer something resembling the truth. Even if it's only a refinance, the consumer has sunk the money into the loan for the appraisal and there is all the time and effort they spent getting the loan to that point, meaning that they are still unlikely to go look for another loan. Real difference to the consumer: not much. Difference to the unethical loan officer: They have to do one extra Good Faith estimate and Truth in Lending in order to get the money they that results from telling the lie. Forms that their computers are perfectly capable of spitting out. In practice, the amount of disincentive for lenders to lie about their loan to get people to sign up is zero.

(oh, I'm sorry, I meant "forget to tell the consumer about all the fees they'll be paying". Not really. These loan officers know about every fee that's going to get paid. If they don't, I sure wouldn't do business with them)

Furthermore, this delays the loan. I just closed a loan where everything I put down on California's version of the Good Faith Estimate, the Mortgage Loan Disclosure Statement was exactly the same from day 1 to the day we were ready to close - and I moved heaven and earth and gave up $1000 plus just so we could close it and get on with our lives - only to find that the lender I had placed the loan with calculated the APR by a different way - not compliant with Regulation Z which governs such - simply to cover their backsides. This forced a re-disclosure and a minimum waiting period of seven days just to get this loan about which absolutely nothing had changed from day one closed. Extensions of rate locks cost money - this one cost two tenths of a point, which the consumer ended up paying because the government wanted to "protect" them from the "Nasty Rapacious Loan Officer" who told them the truth in the first place. But the penalties on the lenders are enough that they want to force this re-disclosure, delaying the loan, even when the consumer has been told the exact truth in the first place. After all, it doesn't cost that lender any money to force the redisclosure and waiting period.

The complexity of underwriting standards has skyrocketed. Can't force anyone to make a loan, or dictate conditions under which it is made. Nonetheless, it seems every week there are more baroque little curlicues to the loan process trying to reassure nervous investors. Every one of these means trouble for some people, and at this point it's well-qualified people. All the government can and should do is what it has: provide an alternative in the form of FHA loans. They're intended for first time buyers, but you don't have to be a first time buyer to take advantage. If someone can't qualify conventional but can qualify FHA, they will pay the extra cost. Unfortunately, the lenders are adding their own little curlicues to FHA loans in order to short circuit this natural process - and it's not like FHA loans aren't baroque enough already.

This segues into the elimination of everything that isn't straight A vanilla loans or government insured loans. Actually, conforming A paper loans are essentially government insured now that the government owns Fannie and Freddie. But subprime is gone, Alt A is gone, and A minus is essentially gone. Fannie and Freddie have eliminated all but the first tier of their expanded approval programs for people who almost but don't quite fit their ideal models of who qualifies. I personally haven't had an expanded approval loan since but I understand they're not funding in the real world. The impression I get is very strongly "We don't want to do these any more, but we have to leave the possibility open as a political fig leaf. Good luck getting us to actually fund one."

This has implications for home ownership and home retention. Bad things happen to good people. Identity theft, illness, job loss, business failure. All of these now have a much higher probability of costing you your ability to buy a property, and of costing you the ability to retain that property for years after you work your way through the main problem. I really like hybrid ARMs and have done them for myself for a long time, but the probability of having something happen which completely sabotages any ability to refinance has become unacceptably high, in my opinion. You can save a lot of dough by using hybrid ARMs, but what happens if you can't refinance at all before the fixed period ends? Net result: consumers who would have been comfortable and saved money with hybrid ARMs are now forced to reconsider and choose fixed rate loans at higher rates of interest. Net result: higher costs to consumers and more income to lenders and investors.

All this increased complexity adds to the time it takes to do loans. When I started this website I could reliably get a purchase money loan funded in about two and a half weeks, and a refinance done in under 30 days (Right of Rescission basically adds a week to the time it takes to get refinances done). Until and unless things change, the thirty day escrow for purchases is history and the 45 day escrow is becoming increasingly difficult. Add a week to that time for refinances. I know loan officers who won't accept less than a sixty day escrow for purchases any more. This extra time costs consumers money, especially if they are buying or selling a property. If you're just refinancing, your living situation really isn't going to change - but if you need to move, the extended escrow period makes things more unsettled and more costly. If you don't believe me, you haven't bought or sold property recently.

All of these pale in comparison to something that has drawn precisely zero scrutiny from outside the mortgage industry: lenders are now charging brokers for loans that are locked and not delivered. It's not a figure in dollars charged immediately - it's a differential in the form of higher costs to get the same rate that the brokers and all of their future clients have to pay. The practical upshot to this is that those brokers who were working in favor of consumers can no longer lock the rate and cost upon application for the loan, which means they can no longer stand behind what they tell you when you sign up for the loan with a Loan Quote Guarantee. Lenders rationalize this by saying the failure to deliver on the lock costs them money - but they don't charge their own "in house" loan officers this differential.

The effect is to limit competition and make brokers unable to guarantee their quotes. Good luck getting that sort of guarantee from a traditional lender. It also makes it impossible for consumers to get a backup loan in case they have been lied to. Because I can't lock my loan until we're actually sure it's going to close, I certainly can't guarantee to beat the other guy when it comes to the final push - and if the rate cost tradeoff declines, a quote that's pure nonsense today may become realistic. On the flip side, a quote that's conservative today may become impossible if that rate/cost tradeoff goes up. Guess what? Each one of these events happens about fifty percent of the time. So another practical upshot is that there's no way to really know what's going to be delivered at closing unless we can lock the loan. Under these circumstances, people tend to take flight to the big comfortable names with lots of advertising, not the small broker doing the right thing with no overhead who really can deliver a better loan. Cost to consumers: High, as in multiple thousands of dollars. If lenders could and would really compete with brokers on price, there would have been no economic niche for brokers in the first place.

One by one, changes in the lending environment has demolished the usefulness of pretty much all of the concrete "do this, not that. Require this from your loan provider" type help that I have been trying to disseminate since day one on this website. The softer, contextual stuff still stands well, but the concrete step-by-step instructions, not so much. The practical upshot is that while the situation for the complete babes in the woods applying for a loan has improved slightly, the ability of the well-informed consumer to influence the lending process for a positive result has been severely eroded. Now more than ever, it comes down to the individual loan officer and their intentions. I'm not happy about it, but that's the business as it is today. I can adapt or I can get out of the business, and it's not like me getting out of the business would change things for the better.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on June 2, 2014 7:00 AM.

Real Estate and the Four Levels of Competence was the previous entry in this blog.

What If A Title Search Misses a Lien? is the next entry in this blog.

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