Question of the week: Have new regulations, and those coming in, cause mortgage costs to increase for borrowers?
Answer: This question was part of a lunchroom discussion in our office this week, involved in the discussion besides myself were three others, one participant a colleague with as much experience on the origination side as myself and the other two processing personnel with many more years in the industry that me.
The conversation started as sort of a reminisce about “the old days,” in this case five, six years ago when mortgage origination and processing were fairly simple given the lax underwriting standards and policies of Fannie Mae and Freddie Mac. Comparing the time frame from circa 2000 to 2007 to the current standards and environment is akin to comparing the course load for middle school with that at a four year university—while related they are completely different as to what is required to pass, which in our case means fund loans.
2010 saw a tremendous number of loans being sent back to lenders from Fannie Mae and Freddie Mac that the agencies feel do not meet their underwriting guidelines, many of these loans were originated prior to 2008. Fannie/Freddie are trying to turn back to lenders mortgages that may go bad before they do, and therefore “save the taxpayers” for the costs of the defaulted mortgages. While admirable on behalf of the tax payers, which have provided about $135 billion in relief to keep agencies functioning, the sending back of mortgages has had the effect of a giant pendulum swing by lenders that has resulted in ever tightening underwriting standards with many guidelines seemingly changing by the day.
Further pendulum swings have occurred by the regulatory agencies, all of whom have felt compelled to put their stamp on the mortgage industry with new disclosures and policies. The net effect of which has been a confusing set of new disclosures and what appears to be higher costs for consumers.
Looking forward new guidelines that will regulate compensation for mortgage originators will most likely result in higher mortgage costs for applicants due to the elimination of hybrid-pricing for mortgage products. As is typical, government reaction to “solve” a problem to “protect” the consumer will most likely result in the consumer paying more for the same product and service than they did before they were protected by the friendly Feds.
On the current regulations, in December 2009 and January 2010 I wrote about the new Good Faith Estimate that HUD required all mortgage originators to provide to applicants. As part of the regulations tolerances were established for fees disclosed by the originator for settlement costs, title costs and fees paid by the seller. If the actual fees were outside the tolerances then the originator, or lender, has to reimburse the borrower for the differential. Once the initial disclosure is made there is very little opportunity to adjust fees for the borrower estimate.
For instance if I disclose that a certain escrow company will charge $850 and the actual charge is $1250, the charge is outside of tolerances and therefore you will have a principal reduction made to your loan from our company for the amount beyond tolerances. Same is true of the transfer tax, paid for by the seller and not the borrower. If I disclose the transfer tax is $1.10 per thousand, standard for L.A. and Orange Counties, but the property is located in Los Angeles and the transfer tax is $5.50 per thousand, that difference must be paid by our company to reduce your principal balance.
As a result of these tolerances and the costs to originators a study conducted by the company that is the primary provider of mortgage processing software, Calyx, shows that over 80% of mortgage originators purposefully over-estimate costs for a transaction. By over-disclosing the costs involved the originator is protecting him/herself from paying any restitution at closing. In many cases, not all but enough to be a valid concern, settlement agents and other companies upon seeing the over-estimated charges to the borrower go ahead and charge those fees, resulting in the borrower paying higher fees as a result of the GFE disclosure completed to not only provide an estimate to the borrower, but also to protect the originator.
Typically the intentions of the policies are solid, in the case of the GFE look to eliminate the bait-and-switch tactics many in our profession used for decades that harmed mortgage applicants and enrich themselves. Often the victims of such tactics were able to be taken because they were looking for the best deal and did not understand why one company or originator could be quoting so much lower than everyone else in the market. The new GFE does not prevent this from occurring any longer since it need not be signed, but hopefully it has reduced the occurrences.
With the new compensation rules coming into effect later this year originators can no longer charge points and also receive rebate, or yield spread premium from a lender. This will greatly reduce the opportunity for borrowers to choose between a zero point, half-point, one point, etc mortgage. The standard retail mark up on mortgages in the local industry is about one point, or one percentage point of the mortgage. With the sliding pricing of higher rate and lower cost, we can determine the right rate and cost to meet a borrower’s needs and wants. Perhaps 5% at zero points to the borrower with a point in rebate from the lender, or 4.875% at a half point to the borrower and the originator getting another half point from the lender, or 4.75% at a cost of one point and no rebate.
Since the rate-to-price ratio is not exactly one-half point in fee to one-eighth in rate, there are opportunities to achieve a better APR by combining points from the borrower and rebates from the bank. With the new policy these opportunities will no longer exist. Since I can only charge points or receive rebate the borrower will ultimately pay more for a mortgage since we can no longer mix-and-match our revenue sources.
The biggest step to protecting consumers, and again this policy is only a half-baked protection, was the implementation of the National Mortgage Licensing System. The system allows consumers to search for their mortgage originator in a national database to ensure they are licensed and so is there company. The system is only half-baked since originators for banks, savings and loans and credit unions are exempt.
The new policies have and will increase costs for the average mortgage applicant and have done little to protect them from fraudulent and dishonest originators. As with most regulations that are in reaction to an event or series of events, the law-abiding pay for the errors, mistakes and dishonesty of the those most responsible.
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New Year starts normally. Mortgage Backed Securities (MBS) have started the year with a common theme of an early week drop and then a late in the week rally. MBS prices are significantly off their mid-December lows, but well below early December.
Jobs? Some confusing numbers this week on employment—perhaps the primary segment of the economy that will impact rates. ADP came out with a report that companies increased payrolls by 297,000 workers last month. Today the Labor Department said payrolls increased by only 103,000 in December and the unemployment rate fell to 9.4%. The decline in the unemployment rate however is not due to the added jobs but rather to a decreasing workforce, or those actively looking for work. December employment numbers are also skewed by the high number of seasonal workers in retail stores.
Jobs. Today Federal Reserve Chairman Ben Bernanke told the Senate that he expects the labor market to take four to five years to “normalize fully.” What is “normalize fully?” Five percent unemployment? Six percent? Because of this long term outlook for fully normalized employment the Fed is standing by their QE2 program of dumping $600 billion more of new money into the economy and recirculating approximately $350 billion of MBS as purchased under QE1.
Caution is the word for rates. Floating a rate may pay off but the downside risk is very great. We are at technical trading point on the MBS securities that if they do not rise about 50 basis points in the next five to ten days we should see an adjustment upward of our range.
Rates for Friday Janaury 7, 2011 The question last week was if the downward trend would continue, and for this Friday the answer for conventional mortgages is “yes.” Conforming rate is down a quarter percent from its high on Christmas Eve after nice rallies yesterday and today.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.5% Down 0.125%
30 year conforming-jumbo 4.75% Down 0.125%
30 year FHA 4.25% Flat
30 year FHA jumbo 4.625% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
Back to action after a very restful week in Northern California. As part of my goals and business plan for 2011 I am bringing aboard a new business development specialist. While new to working with me on business development and in the mortgage industry, she is someone I have known for quite some time and have an excellent relationship with, as do many in the local community and real estate industry. Her name is Leslie Smith and she will be active in promoting my business and lining up strategic partnerships. Welcome Leslie!
Happy New Year,
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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