The Dodd-Frank mess

The Dodd-Frank legislation, as it relates to mortgage loan originations and originator compensation, creates a quagmire of confusing and conflicting regulations that erode a borrowers' ability to shop effectively for loans. Part of the problem is that the Dodd-Frank bill is too broad, and it imposes new regulations on multiple compenents of the financial system, like banks, insurers, securities traders, mortgage bankers and mortgage brokers. I am a Mortgage Broker and I will discuss the implications of the bill as it relates to mortgage financing below.

The rule, while intended to provide consumer protection to borrowers involved in mortgage transactions, shows a lack of understanding of common (and beneficial) pricing methodologies that borrowers and their loan brokers can employ to obtain the loans they desire with favorable interest rates, loan terms, and limited fees and expenses. By working together, loan originators and borrowers can achieve mutual benefits by essentially sharing commissions paid by lenders.

Under current regulations, borrowers involved in brokered mortgage transactions receive a credit from the lender based upon the rate that they choose. This credit is known as Yield Spread Premium or YSP, and is paid to the borrower by the lender as a percentage of the loan amount. In these transactions, the borrower will receive a higher credit amount if he obtains a loan above a par rate. This YSP can be used by a borrower to pay broker origination fees, pay closing costs, pay interest, and establish impound accounts for property taxes and homeowners insurance, all without adding to the existing principal balance of the loan or paying out-of-pocket fees.

By prohibiting variable YSPs, paid based upon the interest rate of a loan, the type of loan, or other terms of the loan in favor of a uniform commission schedule based strictly upon the dollar amount of the loan; and by eliminating a loan originator's ability earn less than this predetermined commission percentage, the Dodd-Frank legislation will have the unintended effect of stifling competition and raising the overall costs of obtaining a mortgage.

The bill, which is slated to go into effect on April 1, 2011 attempts to limit a mortgage originators ability to earn excessive commissions on loans by steering borrowers into loans that have unfavorable and often misrepresented terms for the consumer. Under closer review, however, the Dodd-Frank bill fails in this regard. For one thing, gone are the days of the exotic and confusing loans that are widely acknowledged to have been a lynchpin for the financial and housing crises that we have seen in the last few years. These loans were pushed by the lenders that now stand to benefit from the Dodd-Frank legislation. Now, by attempting to establish a compensation ceiling for all loan transactions, Dodd-Frank actually creates an artificial floor that eliminates a broker's ability to charge less, and provide superior service, for the exact same programs and rates that big banks offer.

Any broker shop that has survived the last few years in the mortgage business has done so with thin margins, low overhead and high efficiency, all while offereing better rates than its Too Big To Fail counterparts. The Federal Reserve Board, which will oversee the rollout of the new compensation model, has failed to provide clear directions as to how the the rules should be implemented, which has led to multiple conflicting interpretations of the law. The only beneficiaries of the new legislation, if implemented as it is written, will be the big banks. With only a few weeks to go until Dodd-Frank is slated to be rolled out, the government needs to take a step back and examine the far reaching implications and unintended consequences of this bill.

The end result of this legislation, which is supported by the Too Big To Fails, will result in higher rates and loan costs to consumers. While I am in favor of reasonable and prudent regulations within our industry, I simply cannot understand the logic of this bill.

Many factors are keeping downward pressure on home prices and making home ownership less attractive. The obvious ones include high unemployment rates and perceptions that the real estate market has not yet bottomed out; but several underlying and less obvious factors implemented by the big banks and in Washington, DC, are cuffing the invisible hand of the housing and mortgage markets, and causing significant roadblocks on the road to economic recovery.

There is a consensus that exotic and risky loans that were peddled by big banks and resold on the secondary market in years past have had a significant impact on the today's housing market and mortgage environment, but the banks' secondary marketing campaigns for these loans has proven to have been much more damaging. In the aftermath, mortgage brokers, appraisers, and real estate agents have taken the brunt of the criticism, and are now the subjects of supposed "consumer-protection" legislation that will further erode potential borrowers'/purchasers' ability to obtain competive loan products and pricing.

In addition, banks have badly mismanaged their foreclosures and caused more apprehension in the population of potential homebuyers through the "robo-signing" scandal, their unwillingness and/or inability to offer relief to underwater homeowners, and new underwriting policies and guidelines that are keeping qualified borrowers away from the closing table.

Currently, legislators are slated to implement the Dodd-Frank Act, which will cause commissions for loan transactions that secure real property to be set by loan amount only, and not influenced by rate. If implemented, these proposed mortgage regulations will eliminate a loan originator's ability to charge less for the exact same loan products offered by the big banks, which will cause consumers to pay more for services. The banks are behind the legislation because it will shift the competitive balance of power in their favor. On its face, the Dodd-Frank Act may seem like a good idea, but when you look into what the law would require and what the actual consequences are, if implemented, its is exposed as more double-speak and smoke and mirrors.

Instead of eliminating competition, and driving the costs of obtaining financing up, the government needs to take a step back and let the housing market correct itself without artifical market restricitions.

FHA 203(k) Streamline Loans

In many home purchase transactions where the subject property is in need moderate repairs, borrowers, and their Realtors, find themselves in a Catch-22 situation - banks won't lend money to buy the house without the repairs being made, and the repairs can't be made until the home has been purchased.

Enter HUD's 203 (k) Streamline Program. This loan will enable the borrower, with a down payment as low as 3.5%, to obtain financing that will cover the acquisition cost, plus the costs of making necessary repairs and improvements. In most cases, the work will need to be performed by a licensed contractor, and the plans need to be prepared and approved by the lender during the loan approval process. The borrower can obtain up to $35,000 for these repairs, and draw funds from an escrow account established by the lender at the close of the transaction to pay the licensed contractor at the completion of the repairs. This loan affords the borrower up to 6-months to complete the work, and the final disbursement will only be made after a HUD-approved inspector verifies that the repairs stipulated in the contract have been completed. These repairs must meet HUD's Minimum Property Standards, and all necessary permits must be obtained to meet all applicable building codes.

Under the right circumstances, these loans can be a real benefit to borrowers who are unable to cash flow needed repairs. The final loan amount is based upon the After-Improved Value of the property. Feel free to contact me to discuss the benefits of these loans. I can be reached at 888/627-2002 or kkertin@gmail.com

Outlook for 2011

The mortgage industry has undergone significant changes during the last year, and will continue to see change in the early part of 2011. The industry, as a whole, has experienced a significant reduction in the number of licensed loan originators and independent brokers, due to stricter licensing guidelines, real estate market conditions, and other factors.

Business models, like my own, in which I try to pay borrowers' closing costs with a portion of my commissions earned on the deal, are again under pressure due to proposed new regulations that are slated to go into effect on April 1, 2011. Like many other regulations that have evolved after the mortgage crisis, these regulations will have a negative impact on a borrower's ability to obtain competitive rates, by eliminating a mortgage broker's ability to offer superior rates and fee structures at a lower cost than the big banks would charge for the same loan products. The competitive advantages that I have had, due to lower overhead and more efficient operations are being eroded as an unintended consequence of new regulations. Nevertheless, I remain committed to offering my customers a better deal than anyone else.

Moving forward, I will continue to provide exceptional customer service and the lowest possible rates.

Loan modifications are failing fast

Recent reports have shown that low percentages of people that have entered into loan modifications under HAMP have successfully managed to get past the probationary period, and that up to 75% of those that have obtained permanent loan modifications under the program have dropped out.

There are many factors at play here, but the primary one is that people will not continue to make payments on a house that is worth significantly less than they owe. We can all agree that loose underwriting standards, and exotic loans that are now frowned upon, have contributed heavily to the price accelerations that we witnessed during the period from 2002 through 2006. By making cheap and easy money available to almost everyone, without considering whether borrowers had the capacity to repay their debts created a huge demand for housing, which caused prices skyrocket, even in markets that have been relatively consistent over the years.

Unfortunately, it appears that there will be downward pressure on housing prices for the next few years, as additional homes enter the market through short sales and lender REO portfolios.

Thankfully, rates have remained low, and for qualified borrowers that have good equity, and for those who are looking to buy who can bring sufficent cash to purchase transactions to establish equity, it is a good time to consider their financing options. Trusted mortgage professionals can answer your questions, and can give you guidance regarding the financing options that are available to you.

I have access to FHA and conventional financing and can lend in 17 states. Please feel free to contact me to discuss your options and to get your loan in process. My contact information is below.

Kristi Kertin
888/627-2002

Where will housing values go?

With all that has gone on over the last couple of years, it is becoming a great time to purchase a property, or refinance your existing mortgage.

In the real estate market, I would expect that we will see an increase in supply with the expiration the tax credits for homebuyers (which caused a short-term spike in demand), and in increase in the numbers of homes that are being released into the market by lenders that have foreclosed properties on their books. With declining numbers of showings, and increased competiton/supply, some of which will be from "distressed" properties, sellers will be inclined to consider lower offers to get their properties sold.

This is occurring at a time when mortgage rates are low. While qualifying for a mortgage has become more difficult, stable rates are available for qualified borrowers with reliable incomes, good credit scores, and the ability to bring cash into the equation.

Refinances are also an attractive option now, with fixed and adjustable products available at very attractive rates.

Protect Your Financial Information

As we all know, protecting our personal financial information is important, and identity thieves are always on the lookout for names, social security numbers, bank account numbers and the like. Because of the increasing complexity of firewalls and other data protection software at banks, insurance companies, and other traditional repositories of financial information, identity thieves are increasingly turning the hacking efforts to other less-secure spots, like restaurants, retail outlets and social networking sites.

You just can't be too cautious in your handling of your financial information, and we should all be vigilant about not divulging that information to others over the phone, through emails, or in other communications. One way to ensure that your information is safe is to place a credit freeze on your account through the three credit repositories, and/or to obtain and review your credit report on a regular basis. The website www.annualcreditreport.com will allow you to obtain a free credit report from each Equifax, TransUnion and Experian every twelve months. If you stagger your requests so that you request a report from one of the bureaus every four months, you will have up-to-date information all year long. If there are any discrepancies on your report, address them immediately.

Maintaining a strong credit profile will enable you to obtain the best rates for mortgages, car loans, and other financial products.

If you need help refinancing your mortgage, please feel free to contact me at 888/627-2002 at any time.