Posts Tagged ‘regulation’

Last post I discussed the excellent book Everything I Want to Do Is Illegal, by Joel Salatin, and this time I want to extend the analysis a bit.  In the book, he describes a situation where he is instructed by some federal food police to alter his pricing for his beef such that his business becomes not a beef producer, subject to sales tax, but a service provider, subject only to income tax (which every farmer has more than enough deductions to offset).  This is a compromise to avoid shutting down his operation for a phantom infringement of some obscure and destructive regulation.

See what happens here.  Someone complains to his representative about beef being prepared in unsanitary conditions.  The representative gets a law passed forming an agency to inspect beef packing to make sure it’s sanitary.  Then the agency promulgates a gigantic mess of regulation, ostensibly to make sure that if the regulations are followed, the beef will be safe.  Businesses then bear the cost of complying with the regulations, even though they are of necessity made to fit operations that are massively different from theirs.  This cost is least easily borne by small businesses, many of which close.

Thus the original complaint, focused on getting safe meat to the table, closes the businesses most likely to provide it.  That’s consequence #1.  It also raises the cost of the meat.  That’s consequence #2.  And then, best of all, it encourages those businesses which are accidentally now the focus of regulatory scrutiny, to cheat and evade not only the regulation but the taxes that they were happily paying before.  That’s consequence #3.

How much of the US economy is in the gray and black markets now?  10%?  20%?  I’m not talking about the hiring of illegal workers, which absolutely fits into consequence #3 above, but other things like the evasion of labor law by paying under the table, or the changing of business classification from for-profit (taxpaying) to not-for-profit (non-taxpaying), without changing the nature of the business at all, simply to avoid regulation that makes it increasingly impossible for the business to make money.

Salatin’s book describes a situation where the cheese police came and shut down a small cheese factory because it was selling uninspected (though perfectly safe) cheese at a farmers market.  So the enterprising woman called the bureaucrats and asked what the restrictions were on fish food.  They said there weren’t any.  So the next week she labeled her product “Fish Bait Cheddar” and “Fish Bait Swiss”, and nobody could touch her.  Until someone decides to regulate fish bait.  Which someone inevitably will.

Leia Organa famously once said, “the more you tighten your grip, the more star systems will slip through your fingers.”  This is a terrific commentary on the current US government.  There is already no theoretical way that all the rules and regulations we have could ever be enforced.  Life would come to a grinding halt altogether.  So we are reduced to cheating, lying, and turning a blind eye, running our economic activity in the gray areas, inside the house, but in the walls and the crawl spaces, in order to get anything done at all.

I hate it.  And I think it’s ridiculous.  And I’m now thinking, after reading this book, that I might finally have to give in and run for office.

Sigh.

This is my 300th blog post, as counted by WordPress.  I really wanted it to be about something happy.

Not to be.

Tomorrow, one of the biggest regulatory changes in the mortgage industry goes into effect. It will alter the process, increase costs and processing times, and add a layer of bureaucracy to all but a handful of mortgage applications, affecting almost every borrower in the US.

And you have never heard of it.

It’s called the Home Valuation Code of Conduct (HVCC). It’s the result of a lawsuit initiated by the State of New York, which was settled last year by Fannie/Freddie. The settlement establishes the HVCC, and it has a number of provisions that are significant, expensive, and almost invisible to the general public.

First, and probably most significantly, the days of getting an appraisal yourself, or of having your loan officer arrange one, are over. Any contact whatever between your loan officer, his processor, or any member of the originating staff, and the appraiser, invalidates the appraisal. You, the borrower, can no longer pay for your appraisal at the door, as has been done for centuries. All appraisals have to be arranged through an appraisal management company (AMC) like this one. They take the order from the LO, transmit it to the appraiser, collect it when completed, and send it to the underwriter. At some companies, the LO never sees the appraisal at all. No kidding.

Second, the appraisers have to deal with AMCs now, and not with LOs. This is supposed to provide a level of insulation, so that the LOs can’t put undue pressure on appraisers to raise the value of their appraisals. Sounds great, right? Well, as with so many government “fixes”, this one causes more problems than it solves. True, as an LO, I can’t influence my appraiser to artificially raise the value of the appraisal. Neither, however, can I ask for additional comparables when I know that they exist. I can’t go out, search for non-disclosed sales (Utah, and many other states, do not require home sales to be reported to any central database), and get documentation so that those sales can be used for comparison purposes. I can’t even call the appraiser to get “E” changed to “East” so that the appraisal and the title report match. Nope. I have to call the AMC for that. Then they have to call the appraiser.

Naturally, this takes longer, too. I don’t even have to mention this, do I? A whole new company has to handle the request in between the initial order and the acceptance. Every piece of communication, no matter how small, has to be funneled through the AMC. The guys I use are fast. But no company can possibly be as fast as a direct phone call.

And of course, the AMC doesn’t do any of this for free. They charge. Frequently, with very few exceptions, they charge the LO (which means the borrower gets charged most of the time) AND they charge the appraiser. If an appraiser was used to getting $350 for an appraisal, AMCs are routinely offering $300 or less, while charging the LO/borrower $450 or more, and keeping the spread. It’s quite a thing to see.

Finally, the HVCC is, well, impotent. It creates more paperwork, which we’ve addressed, and it creates higher loan fees, which we talked about as well, but the kicker is that it does all this without impacting real mortgage fraud in any significant way. Sure, there are LOs that used to really put strong pressure on their appraisers to edge up, but now will not be able to do that. There are a few of those, which I freely admit. But the real fraud, the fraud committed by appraisers and LOs in concert, either by inventing fake comps or by appraising mythical houses, etc., that sort of fraud won’t blink at having to pass through an intermediary. These guys already involved title companies and large numbers of third-party helpers; what’s one more? It isn’t as if those kinds of safeguards aren’t easily circumvented. There’s an AMC next door. Do you think I don’t know the guys that run it? Do you seriously think I couldn’t bribe them to cheat for me, if that’s the sort of fellow I was? When I stand to make tens of thousands of dollars by doing so?

So here we are again, with the mortgage industry reeling, costs spiraling upward and home values declining, and credit restrictions getting so tight that the Apostle Paul would be denied a loan, and the regulators’ response to this is…add some more costs, more bureaucrats, and more time. Well, okay then! That will fix it!

One of the problems we have in the mortgage industry, and everywhere else that I can see, is that we think that we can make dishonest people straighten up and fly right if we just throw enough regulations at them. This is ridiculous. IT NEVER WORKS. All it does is cost the honest people money and time, while increasing the inconvenience of cheating a very, very little.

Born of decent intentions, the HVCC is just one more thing to add to the pile.