We all heard quite a bit of news coverage about mortgage derivitives after the foreclosure crisis had its stranglehold on the country a few years ago. It was, and is, terribly difficult to understand. I listened to countless stories on NPR and read articles until my head was swimming with mortgage industry buzz words. The gist of it was that banks figured out that they could get groups of people to buy into groups of mortgages so that they could liquidate the mortgages faster and make more loans. So, your pension fund might decide that the 6% interest paid on home loans was a better investment than the 4% they might earn in a mutual fund. So, the pension fund pools together money and buys a bundle of mortgages from Bank of America. The pension makes money on the interest, Bank of America made money on the origination charges. And now the pension has a steady stream of income on its investment and Bank of America has fresh cash to use to make new loans. This system allowed cash to be infused into the mortgage lending industry so that big banks could keep making more and more loans. And all was great, until it wasn't.
There has been considerable coverage and multiple documentaries about the mess that was created in the housing market when the foreclosures started mounting. The domino effect of rising rates, falling values, increased foreclosures, and ultimately blighted neighborhoods. But, there has not been sufficient coverage about what is going on now in the housing market. We are supposed to think that the housing market is not rebounding and that the overall economy is still sluggish. But this simply isn't true. In the last eight months, existing home sales are up dramatically. Many realtors in my area say that they have more properties under contract right now than they had at any time during the great boom in 2005-2008. The key is that they have contracts, but not closings. It would be easier to build a house by hand yourself than to try to get a mortgage loan right now, and there are several reasons why.
The first is that in response to public outcry, the federal government under Obama implemented rigorous new regulations for the mortgage lending industry. These regulations were intended to insure that consumers were well informed about their loan and the costs associated therewith before they sat down at the closing table. Lenders are now required to provide a Good Faith Estimate (GFE) with expected closing costs broken down item by item. The fees paid by the consumer directly to the bank, called Origination Charges, cannot increase between the time the quote is given and the actual closing. The lender also has to estimate the fees that will be charged by vendors or other third parties in connection with the closing and there are limits on the increases for these. The paperwork behind these regulations is cumbersome for the lender, the borrower and the closing attorney or title company (depending on your state). And frequently they do not serve the purpose intended. The problem 5 years ago was not that borrowers were not adequately informed about their loans, but that there was no policing of mortgage brokers or lenders who were not conforming to the similar and less cumbersome regulations that were in place at the time. There were plenty of borrowers who didn't understand the loan they were getting or the implications of an adjustable rate, interest-only mortgage, but that wasn't because they weren't given a disclosure ahead of time, it was because they were financially uneducated. They didn't know what the disclosure meant and no one was making sure it was appropriately explained to them. What was needed was not more regulation, but smarter regulation and better enforcement.
The GFE requirements are a pain, but we can live them. They are not the crux of the problem. The real problem stems from the interindustry fallout associated with the foreclosure crisis. During the boom, loans were closed with such speed and so little attention to detail that just about any transaction could find its way to the closing table, no matter how poorly documented the borrowers income or how terrible the title problem. As foreclosures began mounting and attorneys and title insurance companies once again began searching title with more care, the lenders found themselves stuck holding the bag on some pretty undesireable properties. And the pendulum swung in the other direction, grossly over-correcting. The process of obtaining loan approval for a conventional residential mortgage has become as complex as the mechanics of a BMW, as frustrating as trying to get a colichy baby to quit crying, and as tiring as running a marathon!
Folks, I have seen it all over these last eight months. A widow told she needed a death certificate for her late husband dated within 60 days of submission to the lender. Perhaps this particular lender believed in the possibility of a zombie virus raising the undead from their graves and sending them scrambling for home loans? A client whose lender's unnecessary hard pull on a credit report mid-way through the application process sends his credit score tumbling an unbelievable 4 points! Evidently a significant enough drop to cost him an 1/8th of a point on his interest rate and $800 in origination charges. Too late to back out of the loan since the lender has delayed closing more than two weeks past the contract deadline and the seller is ready to walk. Another client this week is being asked to make her way through three years of bank records spread among three banks to dig up every single cancelled rent check she has written for the last three years! Are you kidding me!? You have seriously got to be kiding me! And client, after client, after client calls me up to say, "I just sent them three more bank statements, explained the change in my address for the third time, provided documentation to support the loss on my income taxes from three years ago, and now they want WHAT?!" And time after time after time I spend hours of my day reassuring sellers that its not that the buyer isn't creditworthy. "No, Ms. Johnson. Honestly I don't think there is anything to worry about with Mr. Smith's loan. I know it is two weeks past the contract deadline and he still doesn't have loan approval, but please believe me when I tell you they are all like this now." And repeating that same conversation for buyers and agents.
All of this exuberant verification is being done, not to satisfy Washington regulators, but to satisfy the requirements of the inter-bank mortgage trading industry. If Bank A can't show to Pension Fund D that all of these mortgages were really and truly made to highly qualified and vetted borrowers, they might not be able to package them up and sell them off. So, instead of formulating reasonable requirements that would allow money to keep moving through the economy and spur on the housing market and associated parts of the economy, lenders are perfectly happy to delay a closing by several months, ask borrowers to resubmit the same documentation over and over, and ultimately continue to hold the rest of the economy hostage so that they can continue to sell their mortgages in the secondary market.
I know that the loan officers I work with routinely are sick of me. They are tired of me complaining. They are tired of me insisting that they get on with it, that they not rewrite the contracts of our clients since they themselves are not lawyers, that they act with reasonableness, and, heaven-forbid, that they return my phone calls and e-mails. And clearly my frustrations are directed at entirely the wrong people. It is not my local loan officer who should bear the brunt of my nagging and derisive voicemails and repeated e-mails. If I wasn't spending so much time trying to get just ONE of my 25 currently open property files to the closing table, maybe I could spare a few moments to tell my President and my Congressmen precisely what I think about their poorly thought-out and terribly executed mortgage lending regulations and offer them a few suggestions for how they might wrangle our economy out of the death grip of the mortage lending industry.
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