The real estate blog.

It was announced today the Federal Reserve Board will change a number of rules when it comes to policies and procedures made by lending institutions.

After reading through the proposed changes, I find myself disappointed, for the Fed has missed the target. Most of the new rules should be directed at mortgage brokers and lender compliance officers. The remainder of changes are already law, or will require significant restructuring of the broker system.

Let’s take a look at the key changes and see how they figure into my assessment.

Since the subprime meltdown began, both Fannie Mae and Freddie Mac have changed their debt to income ratio requirements to factor in the higher payment. FHA already had this policy in effect. What this means is if the introductory

rate is 4%, the borrower must qualify at the rate of the first reset. During the housing boom, except for FHA, borrowers could qualify at the intro rate as an affordability tool. This was a poor lending practice and has already been addressed.

Of all the changes on the list, this is the one I have the biggest problem with. Stated income loans are not necessarily liar loans. If you’re working a part-time job, you have to have been doing it for two years for it to count. If you have been self employed for less than two years, forget about getting a loan. If you’re self employed for two years, but you write off a lot of expenses, it’s your net tax return income plus depreciation that’s considered on a mortgage. Liar loans are a broker creation, with lax vetting from a lender compliance perspective that became a problem. Stated income loans are a needed product in the marketplace.

The Fed’s change only applies where a pre-payment penalty period exceeds the start rate…i.e. a 2/28 with a three year pre-pay. This is a broker problem. The lenders need to examine this during underwriting. We don’t need an extra law/policy to deal with this. These instances are a great example of broker greed.

Specifically being addressed is the yield spread premium - a commission paid by the lender. It’s already law that YSP is disclosed on the settlement statement. Do you know who doesn’t have to disclose YSP? Banks and lending institutions that fall under FDIC authority. If YSP is removed, the upfront cost of mortgages will increase. The other option is if brokers adopt a fee based service to search for better rates for borrowers. Of course the broker would have to enter into a fiduciary agreement with the client, and the client would have to enter into a contract with the broker. I’m not sure either party would concede these issues.

Great idea. Borrowers already get a discount for doing this. Again, this is a broker issue.

Absolutely! This has more to do with brokers than lenders. The whole concept of an appraisal is entirely subjective. Ask three appraisers what a property is worth and you’ll get three different answers. There have been instances where mortgage brokers have blackballed appraisers who didn’t bring in the numbers they wanted. I’ve consulted additional appraisers if a value doesn’t come in within parameters, but I’ve never blackballed anyone. In my stable of appraisers, I know who’s conservative, and who’s liberal. When I buy a property, guess which one I consult?

Again, I say absolutely! Servicers are not always lenders. Countrywide for example does both, but SPS (Select Portfolio Servicing) formerly Fairbanks Capital only does servicing. Fairbanks settled a class action lawsuit and has turned the corner when it comes to customer service. I positively agree loan servicers should be held accountable for providing good service and not creating fee gouging policies.

This category refers to the misleading ads we receive in the mail every day. Not one, but two laws already exist to cover this concern. Regulation Z of RESPA covers misleading advertising and the Truth in Lending Act (TILA) covers accurate representation of interest rates. Adding another unenforced law won’t solve the problem.

The problems in lending have been turned into a political hot button for an upcoming election year. As you can see, the Fed totally misses the target by applying new regulations. More scrutiny needs to be applied to mortgage brokers and enforcement of existing laws and policies will go a long way in preventing some of the excesses that took place in the past few years. The proposed Fed regulations place a band aid in the wrong place.

Unfortunately, there is little we can do to prevent it from happening.