Mortgage Broker Regulation

The mortgage brokerage community is taking the brunt of the blame for the mortgage crisis. Currently, there is no way to track a closed loan back to the actual originator. This makes it difficult, if not impossible, to identify the individual who originated the mortgage application in the first place. Without the ability to identify each position in the origination, processing and closing process there is no real way to identify the trouble spots. This prevents regulators from focusing in on specific issues that need to be addressed.

In attempting to respond quickly and effectively, the regulators and well as the legislators are revising the laws and regulations that govern the way we conduct business. The revisions are broad in scope. Some of the proposed changes are long over-due and others will result in un-intended consequences that may actually cause more harm than good.

I want to review what has already been enacted as well as what’s being proposed as it relates to the mortgage brokerage business. Mortgage Brokers originate over 50% of the mortgages in the country. Because of their small size (the average business has 7 employees) they are located throughout the various communities. These small community-based businesses are able to offer a wide array of mortgage products to the consumer, as well as keep the consumer informed throughout the mortgage process, in a more personal and efficient manner.

Mortgage Brokers have operated over the years with minimal supervision and nominal educational and experience requirements. If anything good should come out of the mortgage crisis, it is that the supervisory agencies have exposed this weakness in the system. We just need to be careful that, in their haste to address problems in the industry, they don't hinder a broker’s ability to supply the quality of service the consumer deserves.

In 2006 New York State finally acknowledged the weakness in their mortgage relations and passed a law requiring all mortgage originators to submit to a background check, complete mandatory ongoing education and register with the State. The New York Association of Mortgage Brokers had been pressuring the State for nearly 20 years to implement these requirements. Any reputable broker welcomed this long time in coming revision.

Ten years ago, the National Association of Mortgage Brokers, in conjunction with the Mortgage Bankers Association, attempted to implement these requirements on a National level. Although we were successful in gaining a consensus of the majority of the industry participants, we couldn’t move forward with implementation because of the resistance received from Citibank. With Citibank opposed to the idea, full implementation would be impossible.

One of the responses from Washington to the mortgage crisis is a Bill mirroring New York State’s Law, taking the new standards for originators, National. This is a concept that should have been in place years ago. We may finally see accountability on a National scale.

Several years ago laws were passed, on the Federal level as well as on each State’s level, addressing high-cost mortgages. These are mortgages that carry very high rates and/or fees and are given to borrowers that are not qualified for conventional financing because of particular circumstances in their profiles. There could be credit issues, income issues, the condition of the property or a time constraint. Lenders wishing to do high-cost mortgages would be required to issue additional disclosures, including a recommendation that the applicatant go to counseling, before taking on the mortgage. It also gives a greater range of consumer protection once the mortgage closes. The end result was that, only a handful of banks do high-cost mortgages.

We’re not seeing consumers that need to utilize a high-cost mortgage complain that their financing needs aren’t being met. This verifies that there still remain enough lenders willing to originate this type of product to meet the needs of the consumer. This legislation has done what it was designed to do, increase consumer protections without shutting off the availability of mortgages to the public.

Currently, there is legislation pending, both in Washington and Albany, that will create another classification of mortgages. The Washington version calls it “higher cost mortgages” and Albany is using the term “non-conventional home loans”. Both versions are creating a category of mortgages that are perceived to be more expensive than a prime or conventional mortgage but less than that of a “high cost mortgage”.

The theory here is that additional disclosures and consumer protections would be beneficial for consumers to have when they are outside prime lending. Upon closer examination you find that not only will it cover consumers that need additional protection, it also covers a large percentage of prime jumbo mortgages. Should mortgage rates increase from where they are today, all conforming mortgages will also be reclassified as “higher cost” or “non-conventional”. This is an example of legislation that results in creating more problems than it is intended to solve. Before passage, it needs to be revised in such a way that it does what it was intended to accomplish.

The New York State Attorney General, Andrew Cuomo opened an investigation into inflated value appraisals performed by eAppraiseIT, under the direction of Washington Mutual several months ago. The result of this investigation was an agreement that lenders, as well as brokers, would no longer be able to select the appraisal company when ordering an appraisal on a conforming mortgage. The idea is to keep the appraisal as independent from underwriting as possible.

The effective date of this new policy is January 1, 2009 and the details haven’t been worked out yet. The repercussion of this new policy will be longer turnaround times for appraisal reports and many small appraisal companies will be forced out of business. It’s ironic that eAppraiseIT will end up with a larger market share when they were the reason for the investigation in the first place.

The mortgage industry is going through major changes. More and more regulations will be written in an attempt to prevent another lending crisis in the future. Tighter regulation and more thorough oversight is definitely called for. It’s important to be careful not to over-regulate an industry that, for most if its existence, has functioned well. More people own their own homes in this country than in any other country in the world. Without a vibrant mortgage industry that wouldn’t have been possible. Mistakes have been made over the last few years. Lending standards became too liberal and greed motivated too many people. We are now suffering the consequences.

Through all of this we can’t lose sight of the risk in over-compensating for these mistakes. It is very easy to force too many businesses to close and to write underwriting standards that are too restrictive. This will result in allowing this crisis to last longer that it should. Liberal underwriting policies allow people who can’t afford to be homeowners buy houses and end up in foreclosure. Conservative standards discourage qualified individuals from buying a home. The net result in both cases is the same. Houses don’t get sold; inventory increases and prices are driven down.