My friend Matthew Shadbolt alerted me to this editorial by Ken Harney, a columnist for the Washington Post, that was published on The Real Deal. Harney believes that the not-yet-fully-formed Consumer Financial Protection Bureau can’t get here fast enough, and that the days of wine and roses will soon dawn upon us:
The financial reform bill signed into law by President Obama may look like a giant cornucopia of helpful changes for homebuyers and loan applicants — not the least of which will be the creation of a powerful Consumer Financial Protection Bureau to ride herd on the mortgage lending industry.
Well, forgive the snark, but… a giant cornucopia of helpful changes for homebuyers and loan applicants?Really?
Let’s see what the wondrous benefits of a $500m federal agency we’re about to receive are.
Harney lists the following as tangible benefits of the new law and the $500m bureaucracy it spawned:
- Replacing the HVCC (Home Valuation Code of Conduct)
- National hot-line system for “aggrieved mortgage borrowers and others to lodge complaints and alert the bureau to unfair and deceptive practices.”
- Rewrite of the existing home purchase disclosure rules under RESPA
- Rules requiring loan officers to verify borrowers can actually pay.
Let me see here…
#1: HVCC was and remains a problem… but uh… I do believe it was Fannie Mae and Freddie Mac, two supposedly private companies, that promulgated those rules? Why yes, yes they were. And in fact, FHA and FHLB (Federal Home Loan Bank) loans are not covered under HVCC?
So the problematic HVCC rules exist only because Fannie Me and Freddie Mac have a stranglehold on the American mortgage market?
#2: Although Harney doesn’t define what “unfair and deceptive practices” mean, presumably such practices stop short of fraud. Because if such practices do constitute fraud, we have this whole branch of the government — local, state, and federal — that deals with fraud known as the courts. And of course, banks are regulated by state and federal entities, and mortgage brokers are also licensed and heavily regulated. So what this hotline will actually do, beyond provide government jobs to thousands of civil “servants” is beyond me.
#3: Rewriting RESPA disclosure rules seems sensible. Do we really need a $500m per year bureau to do that? How often are we going to rewrite those rules? Couldn’t we just pay some smart lawyers at some law firm somewhere to write the damn rules one time and revisit it every few years for say $250,000 per rewrite?
#4: Requiring loan officers to verify the borrower’s ability to pay sounds like a grand plan. But I can’t help but ask why this wasn’t being done during the bad-old-days.
Harney thinks it was because there were no regulators looking over the loan officer’s shoulders:
Not only did they not worry about who could afford what. There was no federal watchdog on the scene to make sure they did. Now there will be.
Wooha! Problem solved.
But… it doesn’t make sense to me. If I’m loaning my money out to someone, why in God’s name wouldn’t I check and doublecheck that the guy I’m lending money to is able to pay me back? A banker that doesn’t do that is unlikely to stay in business for too long, no?
Turns out, mortgage bankers haven’t had to do that because Fannie and Freddie were buying up their mortgages. It’s only my money that I’m lending out for a short period of time, after which, it becomes Fannie and Freddie’s problem. See how that works?
And now that Fannie and Freddie have been taken over by the Federal government, the banks aren’t lending their money to borrowers — they’re lending your money to borrowers. And my money. And my kids’ money. So yeah, I guess we’d better have ourselves some federal watchdogs.
Here’s a thought.
Rather than doing all that heavy lifting, why don’t we just get rid of Fannie Mae and Freddie Mac and get the taxpayers out of the business of financing mortgages? Wouldn’t that achieve Harney’s goals and benefits just as well?
No Fannie/Freddie = no HVCC. Banks, sellers, buyers, realtors — everyone would have to go find themselves an appraiser that all parties could trust to render an expert opinion.
No Fannie/Freddie = banks risk their own capital. How likely will loan officers be to pay extremely close attention to the borrower’s ability to repay when that’s the case?
New disclosure rules are fine; in fact, they’re wonderful. But I’d be willing to find a top notch law firm in New York or Washington DC that would write those rules for a fraction of the $500m we’re talking about here. And instead of a national aggrieved mortgage borrower hotline, just let attorneys file class-action lawsuits against banks that have committed fraud or abuse. The courts — and the market — will take care of that problem in short order. The banks and mortgage brokers will naturally find it in their best interest to have disclosure forms be as clear as possible, written in 4th grade English, and explained in a variety of languages to potential borrowers.
Oh, and by the way, this future is probably where we’re headed anyhow in some form or fashion.
Sorry for the snark. Or not.