Mortgage Lending in 2008 - Higher Costs and More Regulations?

Two things are for sure in 2008 for the mortgage lending industry; higher borrowing costs and more government regulations. While many say these are the necessary reforms needed to deal with the mortgage debacle of 2007, we see them as the consequences of an industry unwilling to regulate itself. The problem is, the only ones who will truly pay for an industry that ran amok, are the people looking to borrow money to buy a home.

So, in order to right the ship, here are some of the things that will happen, or, are proposed to happen to the industry in 2008. Some are sound changes and should be welcomed. Others are onerous or shortsighted as are most new regulations when the government has to intervene to correct abuses in the marketplace.

Higher Mortgage Costs:

• Fannie Mae and Freddie Mac are imposing a .25% surcharge on the loan amount as an adverse market condition delivery fee to ensure there is enough liquidity in the mortgage markets. In an early response, most mortgage wholesalers are adding the fee to the rate, which means a rise in the interest rate to borrowers of 1/8 to 1/4 of a percent. If it is charged as a fee, it means a charge of $250 per $100,000 of loan amount. This will affect all conforming loans of $417,000 or less that are not subprime, FHA insured or VA guaranteed.
• Borrowers with credit scores below 680 and LTV's higher than 70% will also be paying more. The expected range in fees will include a .75% fee for a credit score of 660 to 679, 1.25% for 640-659, 1.75% for 620-639 and 2% for scores below 620. Essentially, it is risk based pricing and the implications are obvious, either higher out of pocket costs or higher interest rates.
• The continued removal or limitation of loan programs including stated income for self employed professionals, no incomes for retirees and Alt-A programs for those with only minor credit issues.
• Private Mortgage Insurance companies are also tightening requirements based on credit scoring and LTV guidelines.
• States are also enacting their own guidelines ranging from outright bans on some loan programs to requiring home and credit counseling courses before you can even apply for a loan.

The list of changes is growing daily and in some circumstances seems endless. How these changes are expected to help the sagging housing market, first time homebuyers or those who have had a bad stretch including job loss or an unforeseen medical crisis, no one wants to comment. In essence, what is happening is Fannie Mae and Freddie Mac, and federal and state legislatures are saying they are going to price in risk, restrict credit and making new borrowers pay for yesterday's mistakes. The result will be a self perpetuating event for the declining housing market as we move forward.

New Lender Regulations and Penalties:

Depending on whether or not there are new individual states' laws that have already gone into effect, many of the following are proposals that Congress and the Federal Reserve have proposed in order to help rain in questionable mortgage lending practices throughout the country.

• Required National Mortgage Lender Registry.
• Mandatory cancellations of the loan and loan buybacks for fraudulent lending practices.
• Full repayment of down payments, closing costs, principal and interest to duped borrowers.
• $5,000 cash penalties per offense.
• Removing arbitration rules to allow borrowers access to recourse through the courts.
• Banning the use of pre-payment penalties or allow for a 60 day penalty free window before the rate can increase on subprime and nontraditional loan programs.
• Fines for the churning of loans without substantiated interest rate benefits.
• Requiring escrow accounts for real estate taxes and homeowner's insurance on all subprime loans.
• New guidelines for proof of borrower's income.
• Additional required disclosures prior to the collection of any fees by the lender other than for credit reports.
• Prohibiting deceptive and/or misleading advertising including providing the fully indexed interest rate for all ARM loans.
• Hold loan officers accountable for steering borrowers to high interest rate and high fee mortgages.
• Making both loan officers and appraisers accountable for fraudulent market evaluations.
• Eliminating Servicing Release Premiums.
• Mandatory loss of licensure.

In addition, the Fed has been silent so far with regards to another player in all this mess, Wall Street's investment bankers. Congress hasn't done much better. The House of Representatives did pass some legislation that seeks to hold securitization companies such as Morgan Stanley and others liable if they don’t do enough due diligence, but the bill has languished in the Senate.

While these new proposals sound great, some are silly and will most likely never be enacted. For example, eliminating servicing release premiums has already been shot down by the Congress and will most likely never see the light of day. Many others would provide welcome relief, however, only by enforcing them will they actually make a difference. Having to buy back a loan due to fraud has been on the books for years, but has rarely been enforced. Cleaning up an industry means more than just mugging for your constituents and the press. It means putting legitimate regulations in place with enough manpower in the oversight agencies to see that violators are held accountable. Putting more than a few lenders out of business through strong enforcement procedures would send a clear message to the industry that questionable practices will no longer be tolerated.

Metro Mortgage Company is a federally regulated Mortgage Banker specializing in Conventional, Jumbo and FHA/VA mortgage loans throughout Florida.

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