March 30th, 2015 5:56 PM by Gregg Mower
You might be in the middle of a loan transaction right now and are wondering why it is so difficult to get it done. Those of us in the business are feeling the same aches and pains our clients are trying to get, an otherwise great loan, through the system. The lenders seem to running scared more so than ever before when it comes to making underwriting decisions and the collection of documents. I personally have been in the mortgage business all my life and started to originate loans in 1985, and back then we did not have computers, and credit reports were done by hand, and so were appraisals. In those days it did not seem that hard to make a decision on a loan. I do understand that people lost their homes as a result of the mortgage Melt-Down of 2006-2011, and out of that was born a whole new government agency to regulate the industry called the Consumer Finance Protection Bureau or the CFPB. This giant government agency was tasked with policing the industry for fraud, misrepresentation, and to impose new rules and regulations on the industry. It also brought Mortgage Loan Originator licensing as a standard for loan originators to obtain before they could deal with the public. The creation of the CFPB brought a whole new fear to the industry of being accused rightfully or wrongfully of industry wrong doings.
We should understand that the mortgage industry has always been a privately controlled industry with self-policing. When I say self-policing I mean that if a lender, loan officer, underwriter or someone in the industry was doing something to harm the industry or the public they were generally dealt with by the loss of their job and banishment from the industry or were prosecuted and imprisoned. We did see this happen profoundly in the years of the mortgage Melt-Down, in fact, hundreds of companies and people were essentially run out of the business during those years. The largest mortgage servicer, Countrywide, essentially was put out of business by the fact they made poor business decisions on loans which lead to their demise. Other companies such as big banks that did the same practices, but were bailed out by the government, deemed “to big to fail”. In a pure economy the fear of losing one’s business, or job, is sufficient enough to warrant good business decisions. This apparently was not good enough for our elected officials in our Government. So the trillion plus dollar CFPB was born to protect the consumer.
This concept of protecting the consumer is a relatively new one. We have heard the phrases “Consumers Beware”, “Shop Around”, “look before you leap” and many other coined phrases by those who have been burned by a person or company. In a free society it should be up to the consumer to decide what products or services he or she would like to consume and in the manor of their choosing. If the Government regulates what products or services you can have or how you get those products or services you a no longer in a free market economy. With the rise of the CFPB they have made such rules that limit the types of products a private lender can offer to a consumer in the form of loan types and qualifying criteria, documentation and much more. Some of the changes are as follows; it has become no longer legal to offer negatively amortizing loans, in addition, a borrower cannot qualify for a loan if the debt to income ratio is greater than 43 %, furthermore, you must be sent new disclosures if any terms of your loan changes while in processing whether you ask for changes or not, and list goes on and on. In the past those decisions were left up to the lender and if they made a bad decision they would lose money, personal, and in some cases their company. The CFPB has set the rules and are coming down hard on those who do not follow them, all under the guise of consumer protection.
This is what you are now seeing happening in the mortgage industry. The industry is so regulated in the products and services they can provide, and the way they have to provide it, that your personal freedoms have been compromised all in the guise of “Consumer Protection”. I read an interesting book in the 1970’s written by a well know author George Orwell called “1984”. This book was written in the 1930’s about a futuristic society where everyone was controlled by the government in the name of protecting the people. Although, we are not quite to that extreme we have definitely seen the losses of personal freedoms under the guise of Consumer Protection, “double speak” was this term referred to in the above referenced book.
The CFPB has set out to protect consumers against bad lenders with bad practices among other things. Their set task has been to impose stringent rules and regulations on all who originate loans, fund the loans, and those who buy the loans. The rules they have imposed on the industry and the consequences of not following the rules are so stringent it has ended up hurting the consumer. This is seen from the point when a consumer tries to obtain a home loan to the closing of a loan and the selling of that loan by the lender. As I have written in several previous blogs, the rules that have changed, and are many, from the way a lender must verify income and qualify a consumer to the way a lender has to sell the loan or securitize that loan into the secondary mortgage markets. Accountability has also changed, so much that an underwriter can be held liable for his or her decision on a loan, so with every loan an underwriter approves and closes they hold the liability on their decision for the life of the loan and so does the Loan Officer. So by having this increased liability an Underwriter and a Loan Officer has to be extra diligent in how they process a loan, thus taking more time to get the job done.
Back to you, the consumer, all of this trickles down to the actual person trying to obtain the loan as to how they will be evaluated and scrutinized. With the increased rules and culpability lenders have tightened their internal rules so tight that it makes obtaining financing for a home quite stringent on potential borrowers. This is true for all types of borrowers from the perfect borrower with perfect credit and large down payments, to borrowers that might have more challenges. In addition, with low interest rates today borrowers will be holding on to their loans longer, thus making the liability extend further into the future, so that is another reason you see the extra tightening happening on loans today. Loans done in today's environment will be on the lender’s books for a longer period of time, due to low interest rates, underwriters and their staff have tightened their requirements to the point where all “I’s” are dotted and the “T’s” are crossed before a loan will be funded. In the past lenders would or could obtain “follow up documents” from borrowers after the loan has closed, in today’s world this practice is gone.
So where does that leave the consumer; I think unless our elected officials are persuaded to change the laws we will continue to see lenders being tight with underwriting and documentation. The over-regulation of the lending industry will continue to hold back the real estate markets as consumers will be less likely to qualify for home loans. You will see this exaggerated in the mid to high range homes, where you have more self-employed borrowers with large down payments and good credit but hard to verify income, being pushed out of the traditional loan markets. Even with some visionary lenders that are trying new and different ways to work within the rules with private money offerings we are still going to see tight underwriting for no other reason than the laws set forth by the CFPB. If one of these new visionary lenders are deemed by the CFPB as doing things out of the ordinary they will not only be shut down but also fined heavily, which will scare off any other visionary lenders that may wish to enter the market. So in the end the very regulation that is supposed to protect the consumer ends up hurting the consumer in so many ways. The consumer is hurt in their ability to borrow money, in increased costs of government (the deficit), and enviably higher taxes as well. So if you wonder why it is so hard to borrow money and your loan officer is asking for ridiculous explanations about things. That is the big picture and the only way all this madness will change is by a change in laws, and that will only happen if a Legislator or Congress person tries to get a loan and is pushed into the system they created and they feel it firsthand. I am all for accountability, but I truly believe that this system is overkill and is costing consumers and our economy more than I can quantify in this blog.
Here at MAE Capital Mortgage we strive to educate our Clients about the process and how to make it smoother for themselves. We explain the steps that are required and documents required and why they are required. We also explain that there probably will be more documents and explanations needed as we go through the process. Most importantly we explain the need to be patient with us and the process. We can be reached through our website www.maecapital.com or call us we would love the opportunity to work with you. Our office number 916-672-6130 Thank you again and your comment are always welcome.