Is Congress Working to Create Yet Another Potential Hurdle to Real Estate Recovery?
To preface this post, I should probably state that it's not strictly political in nature. For those of you who read my blog regularly, you know that I don't often write about politics, and I don't strictly define myself as a Democrat OR a Republican. However, I do think and hope there's a bit of self-preservation in all of us. Call it instinct. This issue I will write about here has the potential to further damage our industry, so I felt compelled to air it for discussion/action. My ideas are my own, and I don't claim any level of economic expertise other than my business degree and my own experience running a small business since 1996. Now that we have that out of the way, read on...
Not long ago, President Obama gave his State of the Union address. At one point, he was talking about regulating the banking industry and the rest of the financial sector. There was an irony that I saw there, when it occurred to me that in their zeal to do something about the financial mess which they likely helped to create, Congress is now looking at the possibility of passing measures that could further damage the housing and mortgage industries.
Over-regulation probably won't solve our problems, at least not as I see it.
So, what am I referring to here, anyway?
Well, I had lunch with a good friend of mine not too long ago, and he brought to my attention that a number of Senate Democrats recently sent a letter to the Federal Reserve Chairman, Ben Bernanke (on Christmas Eve, no less), urging him to adopt new regulations which would ban yield spread premiums for mortgage brokers. The letter was headed up by Sen. Merkley, and it was co-signed by about 18 other Democrats. To read it yourself, visit https://www.namb.org/images/namb/GovernmentAffairs/Senate%20Letter%20to%20Fed-YSP%2012242009.pdf. The National Association of Mortgage Brokers has been working overtime to keep their members informed on this.
If you aren't familiar with yield spread premiums, or YSP's, here's one definition from Wikipedia, "the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs." This means that YSPs can often help to defray costs for buyers. I won't claim to understand all of the requirements therein, and it won't really matter for the purposes of this post.
I did take some time to read through the actual regulations that they are considering instituting, and some of the language there was disturbing to me:
To address the concerns related to loan originator compensation,
the Board proposes to prohibit payments to loan originators that are
based on the loan's terms and conditions. This prohibition would not
apply to payments that consumers make directly to loan originators.
The Board solicits comment on an alternative that would allow loan
originators to receive payments that are based on the principal loan
amount, which is a common practice today.
If a consumer directly pays the loan originator, the proposal would prohibit the loan originator
from also receiving compensation from any other party in connection
with that transaction.
Since the Board is soliciting comment on this, I would be happy to oblige.
Why does this proposal bother me as a real estate broker?
Well, it seems to me that this hinders the free enterprise system as it exists now. By removing YSPs completely, you will effectively remove yet another viable option for consumers who are short on cash. Over the past few years, we've all watched helplessly as mortgage options for Joe Average have dwindled. Truthfully, the loan approval process was too loose before. I get that, believe me. There were people who got approved for loans who were truly risky propositions. However, I've seen the pendulum swing too far in the other direction now. I have told many friends and potential clients that roughly 1/2 of the marketplace was vaporized with the tightening of the credit markets and tougher loan guidelines. For every 10 home buyers that I could assist before, I now have 5 or 6. I hear the same thing from my colleagues across the country.
The subprime mortgage crisis was certainly part of the problem, and it did seem like all you really needed was the ability to fog a mirror and you could buy a home. That being said, the removal of subprime, most zero-down programs, stated-income loan products for self-employed individuals has made being a Realtor or a mortgage broker a very tough job indeed.
None of us could ever have foreseen how different our world could become in a couple of short years. Fear has replaced reason when it comes to the world of banking. Melodramatic? Not really. I am trying to feed a family of six with my income. Thankfully, I've survived some difficult years, and, along with most people I speak with these days, I am hoping to see a sincere turnaround. This proposal won't help.
Another concern that I saw in the language is that this lays the groundwork for the government to step into the real estate arena as well, perhaps prohibiting OUR commission from being tied to the sales price of a property. Again, I see this as inhibiting the free market.
On the surface, I see how this could be perceived as helping consumers, but the more likely scenario is that mortgage brokers will now have two paths to choose from:
- Charge a lot more directly to consumers to originate loans, since they can't get paid by banks, or
- Go out of business
Clearly, neither of these outcomes would be beneficial for any of us.
In fairness, there are some other parts of the proposal that make sense to me, mainly with regard to consumer disclosures, but this portion would be foolish. You can see the whole thing here if you're interested: http://edocket.access.gpo.gov/2009/E9-18119.htm
It's my understanding that the Federal Reserve already has the authority to monitor and regulate mortgage brokers, so any legislative action would be overkill and probably just plain unnecessary.
From my own research, I was happy to see that this issue wasn't split strictly along party lines, unlike so many other things we hear about from Washington. Although none of the Republicans on the Senate Banking Committee signed the letter, I was pleasantly surprised to find that a handful of Democrats also abstained. Kudos to Johnson of South Dakota, Benett of Colorado, and Tester of Montana for not just toeing the party line here. I applaud the members of the committee who didn't sign this pressure letter. You can see a list of all the members here: http://en.wikipedia.org/wiki/United_States_Senate_Committee_on_Banking,_Housing,_and_Urban_Affairs
I'm hoping that the highly paid lobbyists for the financial institutions that actually caused the problem don't manage to shift the blame to the little guys. While there were certainly predatory lenders that played a part in creating the mortgage crisis, most of these people are just business owners who are trying to provide an honest service and get paid for their work.
If this bothers you as much as it does me, I would encourage you to contact the members of the committee and let them know, especially if any of them are in your home state.
I welcome your input. :)
UPDATED: Jeff Belonger wrote a post today that gives more detail on this matter, including the fact that it will affect mortgage brokers AND mortgage bankers. He also re-iterates the notion that consumers will end up with fewer choices, since brokers and bankers might not be able to charge enough to make loans worth their while: