(Originally published May 1, 2010.)
Whenever the Government promises to “fix” a problem, it’s usually cause for concern. Recent changes to the real estate industry have all been implemented with the best of intentions, in an effort to “protect the consumer.” But it seems that most politicians are unfamiliar with the Law of Unintended Consequences.
May 2009: New York’s Attorney General Andrew Cuomo strong-armed Fannie Mae, Freddie Mac, and therefore, the entire mortgage industry, into accepting the Home Valuation Code of Conduct. Mortgage lenders and brokers were no longer allowed to utilize proven and competent appraisers.
INTENTION: Cuomo claimed this would “protect” consumers and homeowners from unscrupulously inflated market values.
RESULT: Local appraisers and small appraisal companies have seen their revenue plummet due to unnecessary middle-man Appraisal Management Companies taking their cut. The quality of appraisals has declined tremendously with suppressed values and blatant errors now commonplace.
BOTTOM LINE: Consumers are paying more money for shoddy appraisals. Since appraisals are no longer portable, consumers must often start over with a new lender and another appraisal, thus, incurring additional expenses.
January 2010: The newly designed Good Faith Estimate is implemented.
INTENTION: Congress claimed this new GFE will “benefit the consumer” by preventing over-charges and making the GFE easier to understand. They claimed the new GFE will “save consumers an average $700” by making it easier for borrowers to compare fees.
RESULT: Most consumers are dumbfounded by the new forms and even many attorneys are having difficulties interpreting the fee schedule.
BOTTOM LINE: Mistakes and inaccuracies have caused closings to be adjourned and at times, cancelled altogether, resulting in more delays, cost, and stress on borrowers. And guess what? Unscrupulous mortgage salespeople have found new ways to circumvent the GFE and overcharge borrowers.
Present Day Congress: In their effort to pass financial reform, the Senate Banking Committee recently approved a bill requiring issuers of mortgage backed securities (MBS) to retain 5% of the credit risk. In effect, it would force lenders and even loan officers to have “skin in the game” and personally invest in each loan!
INTENTION: The Senate Banking Committee claims this will “protect the consumer” by preventing lenders from making loans homeowners can’t afford.
RESULT: A study completed by JPMorgan Chase predicts that if this bill were to become law, it could potentially increase mortgage rates by as much as 3%, thus destroying the revival of private-label MBS markets and the fragile real estate recovery.
BOTTOM LINE: Committee Chairman Christopher Dodd (D-Conn.), has so far turned a deaf ear to all industry concerns. Although every Republican voted against the bill, it passed the Banking Committee on a party line vote of 13-10.
Will the bill become law? It’s too soon to tell. But you can be sure of one thing: Government cures quite often miss their target. Instead of curing the disease, they kill the patient.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.