Frustration bubbles over

Monday, March 1
Written 9 a.m. EST

A MORTGAGE MAN SPEAKS: In a few paragraphs, you'll read a cry of frustration from a mortgage banker.

People in the mortgage industry are anguished. From the loan officer who files your application to the loss-mitigation specialist who asks why you have stopped making payments, the complaints never end about high-handed and clueless regulators.

Here's Alan Rosenbaum, president of Guardhill Financial, an independent mortgage bank and brokerage in New York City. There are a couple of things that he mentions -- RESPA reform and bank consolidation -- that you might not be familiar with, and I'll furnish the context afterward. On to Alan:

Demand is waning due to rising mortgage rates and the fear that rates will move higher after March 31, which is the deadline for the Treasury's program of purchasing mortgage backed securities. There is still a concern that mortgages are too difficult to obtain for the average consumer. To make matters worse, HUD's new RESPA guidelines, intended to aid consumers, are actually backfiring and driving up the rates and costs due to huge compliance expenses and the fear by the mortgage lending industry that the fines will make mortgage lending too difficult.

Mortgage lending needs to be easier for both the consumer and the mortgage specialists who focus exclusively on mortgage lending. This does not mean loose underwriting guidelines, which we saw during the rise of the subprime market, but the relaxing of current underwriting guidelines and overregulation.

Many politicians are continuing to look in the rearview mirror for people to blame and punish when they should be focusing on the future by helping the mortgage specialist, which will ultimately help the consumer.  The guilty have already been punished and/or have gone out of business.

Current policy is trying to push all competition out of the mortgage industry so that the big banks can have a monopoly. This will present significant concerns for the consumer and the economy. Banks have many avenues to earn profits, where the mortgage banking industry specializes on providing the lowest rates and costs to the consumer.  The subprime industry is dead and everyone should realize this and move forward to protect the industry and the economy from falling back into recession. Intelligent, prudent lending by mortgage specialists is the simple solution.

This is the kind of thing you would hear if you talked with a mortgage broker or banker who doesn't work for one of the Big Four banks: Bank of America, Chase, Citi and Wells Fargo. I sympathize or agree with most of what Rosenbaum says here. The exception is RESPA reform.

RESPA is the law that covers the mortgage application and closing process. There's a bulky set of regulations that specify exactly how RESPA is enforced at the application desk and at the closing table. Those regulations were overhauled in the waning years of the Bush administration, and went into effect at the beginning of this year, after lenders and settlement providers were given more than a year to prepare for the changes.

For consumers, the most important change is a requirement that lenders provide accurate estimates of rates and fees. Lenders have to estimate their own fees with complete accuracy; they have some wiggle room when it comes to the accuracy of estimates of third-party fees. One consequence, intended or not, is the disappearance of preapprovals. You can no longer get a good faith estimate of rate and fees for a mortgage with a dummy address.

If a lender underestimates third-party fees by more than 10 percent on the good faith estimate, then the lender can't pass the difference on to the borrower. When Rosenbaum talks about "the fear by the mortgage lending industry that the fines will make mortgage lending too difficult," that's partly what he's talking about.

On balance, I think RESPA reform is a good thing, even if it makes work more difficult for mortgage originators and even if it increases costs. But ... (Yes, you knew there would be a "But.")

But the burden of the lost time and money falls more heavily on mortgage brokers and independent mortgage banks than on the biggest players in the industry, chiefly the Big Four banks. I don't think the intent of RESPA reform was to crush the little guys and help the big guys. Even if that's not the intent, it is the result.

The Home Valuation Code of Conduct, or HVCC, a legal settlement that was cooked up last year in a smoke-filled room by New York attorney general (and gubernatorial candidate) Andrew Cuomo, also helps the big banks at the expense of smaller players. Maybe Cuomo got snookered and maybe not; I look forward to the inevitable investigative reporting on his campaign finances. The HVCC allows the big banks to use appraisals as a competitive weapon against brokers and independent mortgage banks.

The consolidation of the mortgage industry has been a problem since the housing market began to crumble. According to, the four biggest lenders were responsible for more than 78 percent of mortgage origination dollars in the third quarter of last year. In the same period two years before, they had 67 percent of market share.

DEDUCTION UNCHANGED: The Obama administration wants to shrink the mortgage interest tax deduction for people who earn a lot of money. But the proposal is going nowhere in Congress, according to The Wall Street Journal's James R. Hagerty.

The tax deduction disproportionately helps richer homeowners because a lot of middle- and working-class homeowners aren't eligible to itemize income tax deductions. So they can't deduct mortgage interest. This means that the mortgage interest tax deduction redistributes money upward, from the middle class to the rich. The deduction also drives house prices upward by lowering monthly mortgage payments, the same way pay-option ARMs led to house price inflation.

The tax deduction doesn't help renters, homeowners who can't itemize tax deductions or would-be homeowners who want to buy houses as cheaply as possible. But it benefits high earners and owners of McMansions. Guess who wins that political battle.

CALENDAR: On Friday, we get the most important economic report of the month: the February employment report. According to, the consensus is that the unemployment rate will creep up to 9.8 percent from January's 9.7 percent, and that the economy shed 20,000 jobs in February. If the numbers are substantially worse than that, mortgage rates could fall again. If nonfarm payrolls rise instead of falling, you'll probably see an increase in mortgage rates.

Either way -- whether the overall economy lost jobs or gained them -- the unemployment rate is likely to go up, as the formerly discouraged get off their couches and start job-hunting again. So the unemployment rate won't have much effect on mortgages. The nonfarm payrolls number matters more.

Another important item on this week's economic calendar has been released already. The core PCE deflator -- the Federal Reserve's fave inflation yardstick -- was up 1.4 percent in the 12 months ending Jan. 31, and was unchanged from December through January. Yet another sign that the Fed won't raise short-term interest rates anytime soon.

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