“May you live in interesting times.”
This ominous Chinese proverb can certainly describe the credit implosion and subsequent recession we’ve weathered. It could also describe the government’s rush to find scapegoats, pass judgment, and subsequent ill-conceived regulatory “solutions,” all claimed to protect consumers. However, like many government “solutions,” the recent rush to reform the mortgage industry has produced many unintended consequences.
There were a great many reasons that lead to the 2008 financial crash (a topic for another article). There were contributing factors from numerous industries, financial sectors, and government policies (from both parties and at least two administrations). However, the government’s “cure” has been to reform Fannie Mae and Freddie Mac, further restrict lenders on how they lend, and to place absurd limits on loan officer compensation. Let’s briefly discuss each of these below:
- Reforming Fannie Mae and Freddie Mac:
While Fannie and Freddie have worked effectively for generations (Fannie was created in 1938 and Freddie in 1970), the federal government has decided to phase them out, replacing them with a totally private (non-government-sponsored) secondary market. But in order for this to happen, there must be ample profit to attract private investment.
To increase profitability, the Federal Housing Finance Agency has mandated increases in “Guarantee Fees,” or G-Fees, which are added to the price of mortgages, thus raising rates for mortgage borrowers.
- Restrictions on Lending:
The Dodd/Frank financial reforms implemented a slurry of new financial regulations, including the “Qualified Mortgage,” which basically penalize lenders for offering residential mortgages more complicated or exotic than basic vanilla, chocolate, and strawberry. (No more 31 flavors). New government agencies with HUGE Unchecked Powers were created, such as the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council.
As a result, all mortgage companies large and small now face dramatically increased compliance and regulatory burdens. As one industry authority put it:
“Who in their right mind would want to start a mortgage company when the first group you must hire are compliance attorneys rather than loan officers? Faced with the possibility of penalties from an unchecked entity (The CFPB) which can make up rules tomorrow and apply them to yesterday’s lending activities, why would anyone want to lend at all?”
Therefore, lenders are socking away cash to prepare for what they believe are inevitable (yet unsubstantiated) lawsuits from the federal government. So while the cost of money this past year has dropped, lender margins have doubled to record levels, resulting in record profits and cash reserves.
- Loan Officer Compensation:
In every industry I can think of, salespeople are paid a percentage of the revenue they generate. This is true in real estate, insurance, investment houses, medical supplies, even car sales. Yet, as per the 2011 financial reform laws, mortgage loan officers are banned from being compensated based on the revenue they generate! But while the average loan officer is now earning significantly less than before, don’t be fooled into thinking that the revenue generated is any less than before!
Mortgage originations continue to generate healthy revenue for lenders. The difference now is that, despite the government’s call for clarity and transparency, most of the revenue is generated post-closing. It is invisible to the borrower, undisclosed, and rather than compensating their employees, the banks are keeping the profits!
While some regulation is required in most any industry, unless these regulations are well thought out with the participation of industry experts, the unintended consequences can be disastrous.
The mortgage industry financial reforms we’ve seen over these past few years were communicated wonderfully by politicians to their constituents as the solution to all of our country’s problems. As a result, about ten thousand new bureaucratic positions have been created while over half a million industry jobs have been lost! Countless small to mid-sized mortgage companies have shut down. Consumers have fewer choices as much of the industry has been consolidated into the Big Banks. And these Big Banks are generating record profits.
Tell me how this serves Main Street America and protects the consumer?
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.