As Promised

Very hard to blog at this point in the year. We are busier than we’ve been for months, and this without all the other obligations that Christmastime brings with it.

However, the Fed just proposed some new mortgage lending rules that I have to comment on.

First, most of the rules that are proposed are already law, at least in Utah. It’s already illegal to put pressure on an appraiser to reach a particular value on a property. It’s already required that mortgage brokers disclose their yield spread on the Good Faith Estimate as well as at the table. None of these sorts of changes will make any difference here, except perhaps to level the playing field a bit.

Second, many of the rules, such as “don’t deceive people with low teaser rates” are welcome, and though they won’t change anything here at all, because we already extensively educate our clients about neg-am, pay-option ARMs before we agree to do one, it will make it easier for us to compete with the other fellows in the industry that don’t go though that education process. That sort of rule is long overdue, and I’m happy to see something done about it, though I strongly wish it weren’t the government doing it.

Third, and sadly much worse, is the insistence of the Fed that subprime borrowers now qualify at the eventual adjusted rate instead of the initial payment rate. For the uninitiated, subprime loans are almost entirely what we call 2/28 loans, with a fixed 2-year period followed by the loan becoming adjustable. The new rules would require that our clients qualify for the loan using the eventual adjusted rate (as if you can know what that will be 24 months in advance) instead of with the payment they’ll actually be making for two years. What it means in practice is that many of our borrowers – some 1/3 of our clients are subprime borrowers – will be unable to qualify for any financing at all. This rule is not just harsh, it’s also unnecessary – more than 90% of subprime borrowers refinance out of their subprime loan before 3 years is up.

Fourth, and unfortunately worst of all, is that the new regulations will do away with stated-income loans altogether. And I mean all together, no more available, at any credit score, no matter what. If you are self-employed, one of two things is now true: one, you will have to pay to yourself (and therefore be taxed on) money for expenses that once were paid for and deducted by the business; or two, you will have extreme difficulty – enormous difficulty – getting a loan at all. For me, where I run a small business and deduct aggressively everything I can, using the business to pay for every allowable expense, and where as a result my personal taxes show a relatively small amount of income, I just lost my ability to get a home loan, or else I just gave myself about a 15% pay cut. Something like 20% of my clients are in similar situations.


Once, several thousand years ago, I was a stockbroker of sorts, and one of the reasons I left was the extreme difficulty of helping someone navigate all the arcane and ridiculous disclosure regulations the NASD and SEC put on purveyors of securities. The Potty Post, for instance, our most effective communication, would be impossible for a small securities firm to publish. They simply wouldn’t be able to get it by Cerberus at the Fed in time to send it out with any relevance. The mortgage industry is getting to where it’s much the same. There really doesn’t seem to be anywhere anymore that a fellow can just do his job in peace.

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