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Will financial regulation help mortgage borrowers?

By Holden Lewis ·
Friday, June 25, 2010
Posted: 2 pm ET

The House and Senate have agreed on a financial regulation overhaul, which will impose some changes on the mortgage industry. Will it help consumers who get home loans? Lenders don't seem particularly happy about the compromise bill, and consumer advocates seem pleased.

I'm not so sure the financial regulation overhaul will help mortgage borrowers.

As I await details from the upcoming House-Senate conference report, these are my impressions of what we know so far:

It's simply wrong to call the Consumer Financial Protection Bureau "independent" when it resides inside the Federal Reserve. Proponents tout the independence of the bureau, whose chairman will be appointed by the president. But you're naïve if you believe the bureau's head won't be outmaneuvered bureaucratically by the chairman of the Fed and the president of the New York Fed.

Also, calling it a "bureau" is a savvy way of marginalizing it. People laugh when I tell them this, but I'm dead serious. "Bureau" is an old-timey word that conjures images of men wearing fedoras while listening to children playing the harpsichord in the parlor. Calling a new agency a bureau is like naming a newborn girl Buttercup. She ain't gonna be elected president with that name.

The bureau will write mortgage regulations, which the skilled bureaucratic warriors in the Fed will summarily gut.

From what I understand, the law will limit mortgage origination fees to 3 percent of the loan amount. This might make it unprofitable for lenders to underwrite smaller loans. I would guess that it'll be hard to borrow less than $80,000 under the 3 percent rule; the National Association of Mortgage Brokers says loans under $150,000 might become scarce.

Consumers could be affected by the law's treatment of compensation of loan originators. I need to get up to speed on the details. If I understand correctly, mortgage brokers won't be able to collect origination fees from borrowers if they also collect commissions from lenders for increasing the rate. On the surface, that sounds good. But it could take away flexibility.

I'll have more on that last issue later.

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July 21, 2010 at 12:38 pm

Originators no longer receive any part of the YSP. That was done away with at the start of this year. The new GFE2010 is the new law. So, if the Gov. worded this in a fashion that does not reflect the current law, then it will be business as usual or at least since 01/01/10. They (Gov) have been working on this reform before the GFE2010 went in to effect but, never updated the findings. The 3% rule will alomost eliminate consumer choices. They will be far less borkers able to originate these loans because of the cap. Which will mean that the big banks are sucessfully doing what they want. Eliminate the brokers and swallow up market share. Fewer choices means higher rates. Thank you GOVERNMENT. The math is pretty simple.
Sorry, low income borrowers.

June 27, 2010 at 11:09 am

that's not even close to how it works. The comment above assumes that the rate is increased by 2%, which is not true. Interest rates are offered in a range, with higher rates paying a rebate and lower rates costing a premium. The middle is called par. Originators earn their money ( on average about 1-2% of the loan amount) by first determining what rate the consumer wants, then checking to see if that rate 'costs' money, is at par, or is paying rebate. The borrower has the option to take the par rate and pay the originator 1-2 % of the loan amount in origination fees. Or, they may elect to take a higher rate and let the lender compensate the originator thru YSP or rebate. Or it could be a mix/combo ( some rebate, some origination fee ) The new finreg kills the idea of combining the two forms of payment, eliminating flexibility. It will also make smaller loans unprofitable, since costs are usually fixed.

A cap is not a bad idea, and would have been ok by itself, but they took this way too far. This will have far reaching implications in the lending business, and will cause a lot of pain.

June 25, 2010 at 5:39 pm

The origination is paid particularly to the loan originator and not the lender and is rarely over 3% even at the height of the industry. Most normal people will not let an originator get buy charging more than 3% due to common sense. The second point is disturbing. The lenders can allow the originator to charge you 7% if you qualify for 5% and they will pay he/she say 2% of the loan amount of 150000. Thats 3k to the originator for job well done, but don't you dare charge anything additional such as a 1% origination bringing the total to 3%. Do the math on how much money the lender made by allowing the borrower to sign up for 7% on a 30yr mrtg as opposed to 5%. All this reform does is make it harder and harder for the mortgage broker/wholesale sector to find competent representation and push the mortgage industry towards the salary incompetent driven retail bank industry which is desperately needing the help and lack of competition. This reform has nothing to do with protecting consumers as it is much easier to see someone charging you 3% on an origination fee and walking away as opposed to not knowing exactly what rate you qualify for and throwing away thousands of dollars in overpaid interest to the bank. Once again an entity using lawmakers and politics to compensate for their inadequacies.