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Financial reform will change mortgage world

By Holden Lewis ·
Thursday, July 15, 2010
Posted: 3 pm ET

The Senate has passed the financial reform act, and the president will sign it into law within hours or days.

Over the next few days, Bankrate will have extensive coverage of the law -- who the winners and losers are, hidden gems within the law and what it means to you. Soon we will run a Hummer-size opus I wrote about how the law will affect the way consumers get mortgages.

And you will read it and you will enjoy every word and punctuation mark.

Here's the irony that I enjoy most about the financial reform law: Congress is forcing banks to be more financially responsible. Few are the days when Congress has the moral high ground when it comes to financial responsibility. But I think Congress had the moral high ground here.

When it comes to mortgages, the law's main goal is to make sure that banks give loans only to people who can afford to repay them. During the boom, mortgage originators didn't care if you could afford your loan payments. Now they do, and the law tries to keep permanent that state of affairs.

The law also creates a category of plain-vanilla "qualified mortgages" that can more easily be bought and sold on the secondary market. Eventually, when the regulatory apparatus is set up (years, not months), these plain-vanilla home loans will dominate the market. They'll be commodities, like gasoline.

Because qualified mortgages won't be especially profitable, the biggest banks will dominate the industry even more so than today, because they'll make money in volume. And the big banks will use mortgages to shoehorn you into other banking relationships -- checking accounts, credit cards, retirement planning. Banks already do this. They'll do it even more.

The odds are better than even that your next mortgage will be from either Wells Fargo or Bank of America. They dominate the market and this law is likely to let them dominate the market even more. I don't think that's healthy. Members of Congress probably have little notion about this law's unintended consequences, including the further concentration of the mortgage industry into fewer lenders.

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July 16, 2010 at 4:16 pm

I understand the policy of make sure the borrower can afford to pay back the loan. What about the poor guy who has a high interest mortgage who only wants to lower the interest rate to lower the payment. He has already lost his job, had to rely on Credit Cards and cannot afford anything. Wouldn't a program allowing interest rate reduction only seem a reasonable solution. Even so they probably can't afford the payments but they might see a little light at the end of the tunnel. No one seems to want to help the little guy.

Holden Lewis
July 16, 2010 at 10:03 am

I was wrong about one thing in this post, and possibly wrong about another.

First, I implied that two banks have more than half the market share. Actually, it's three: Wells with 23.9 percent in the first quarter of 2010, B of A with 22.18 percent, and Chase with 10.16 percent. The top 5 lenders (the above three, plus GMAC and Citi) owned almost 64 percent of the market in the first quarter.

Second, maybe Congress knows that the law will further concentrate the banking industry. Maybe the politicians think that's healthy for us, or maybe it's healthy for their campaign fundraising. Or maybe they don't realize it, and the Fed and the Federal Housing Finance Agency want to keep them ignorant, because market concentration makes the agencies' jobs easier.

FHFA -- the agency that oversees Fannie and Freddie -- seems to have a strong preference for big banks, and to actively seek market concentration. Same with the FHA. They don't have an incentive to warn Congress that they're supporting market concentration.

July 16, 2010 at 9:50 am

Here's the number 1 thing you can do: Join & bank with a Credit Union - chances are you live near one and are eligible, if not simply go online (and no, I don't work for or have any prof. affiliation with one). Despite the conglomeration of big commercial banking, I believe that with the continuing internet / online revolution banking will be about WHO not WHERE. So moving your money will be like shopping for gasoline - you'll cross the street to save $ .03

Holden Lewis
July 16, 2010 at 8:50 am

Christy, you sound like one of my editors!

Occasionally, just once in a while, I want to describe, not prescribe. Tell readers how it is, not what to do. What can you do to stop a bank oligopoly? I don't know. But it's worthwhile for me to point out that the big banks will gain even more market power as a result of this law.

July 16, 2010 at 8:22 am

You say that Congress has "little notion about the unintended consequences", as it relates to 2 Big Daddies possibly holding most mortgages. If I understood, from reading your article, that there are such unintended consequences, how is it Congress can't understand that? Are they that clueless? Can this be further pointed out to them and thus, looked at further? I will be contacting my Congressman about this.

July 15, 2010 at 8:05 pm

What, if anything, can we do to stop a banking monopoly? How is it that knows that this will kill all other banking competition but Congress is in the dark? Be very afraid! (ha)