The only way to truly understand what caused the housing crisis is to break down the mortgage financing process and understand it’s complexities; both upon consumers and amongst the industry participants needed to get financing in place.

The number of people, documents, & steps required to complete a transaction in order to obtain home financing makes the mortgage process one of the most complex transactions a consumer will face in their lifetime.  The process has remained difficult despite advances in technology. Increased workflow complexity is stifling production.

As with anything not understood & studied, incorrect conclusions have been drawn about the true cause of our housing malaise.  Mortgage brokers have been singled out as the primary culprit for the current state of affairs. I agree that some mortgage originators (bank-employed originators included) abused the system. Low professional standards, limited educational requirements, & fragmented regulatory governance allowed our ranks to swell with those only looking to make a fast buck.

However, other factors like cheap money, non-existent appraisal regulatory enforcement, irrational lending standards, and an industry challenged with sharing data are not receiving enough attention and scrutiny.

Why is this happening?

The media is ill-equipped to understand what has happened and exacerbates the misappropriation of information. Non-profit agencies, regulators, legislators, and the public-at-large are often influenced by these reports and react with haste. This results in additional well-intentioned but misguided burdens that inhibit lending activity.  For example, rules like HVCC, have decimated the independent appraisal industry and added millions of dollars of expense to consumer’s financing transactions. People want action. Unfortunately, they take action before understanding. Fire first, aim later.

Perhaps the biggest tragedy, large lenders, including many that profiteered from irresponsible mortgage loans (like negative amortization Option Arms), are now capturing market share at the expense of small less capitalized mortgage professionals. This independent class of originator, many of whom, did not participate in selling unsavory mortgage products are under pressure and quickly disappearing.

I’ve spoken to some industry watchers that believe mortgage broker numbers have shrunk by 65%. The problem, well financed banks, backed with taxpayer money, have large budgets for media campaigns & lobbyists. These folks work tirelessly to perpetuate the placement of blame squarely on the backs of small independent mortgage brokers for the US housing crisis. This strategy accomplishes two things. It removes the scrutiny of the media and public from the bank’s role in the crisis. It also increases the burden upon a once thriving class of originators as they are subject to an increasing set of special rules that bank-employed originators avoid.

It’s important to note, mortgage brokers didn’t create, incentivize, or securitize any mortgage products. Mortgage brokers didn’t benefit from the bailout when these bad loans went sour. Mortgage brokers aren’t buying up these bad loan assets at rock-bottom prices on Wall Street. Lending needs an overhaul. The mortgage process is unnecessarily complicated. All origination parties should be subject to and governed by an equal set of rules. Anything less and consumers lose.

Already, we are seeing signs of this. On any particular day, The J. Berman Group pricing on a 30 year fixed mortgage is .25% lower than Wells Fargo. With reduced competition, bank margins grow and it becomes easier to pass on higher rates and fees to unaware consumers.

I believe the subprime housing crisis can be summed up by one word, greed. Unbridled greed. We are all to blame. The crisis cannot be attributed to one group; the blame should be borne by realtors, appraisers, mortgage originators, and home owners alike. Pointing fingers at any group in particular is an unsophisticated approach that prevents diagnosing and correcting the real underlying problems.

It’s not rational to blame car dealers for global warming, and mortgage brokers are not the root cause of the foreclosure crisis. The lending industry is in danger of an entire production channel undeservedly disappearing. If this happens, consumers will pay more for their home financing and the US housing market will take longer to recover.

The opportunity to perform an exhaustive common-sense reform of standards & workflow is now. What do you think?

Excerpts from IMMAAG’s most recent alert:

It is no secret that IMMAAG has opposed HVCC since the first time we had a chance to read the agreement and the code.

We continue to share the belief with thousands of others who now know – HVCC was a poorly conceived, misdirected, inappropriate response to circumstances that were not the result of the causes identified by the New York Attorney General.

For months, IMMAAG has joined others in the industry in advocating grass roots action to tell Congress about the real problems caused by this policy. We have been suggesting to everyone with whom we communicate to ask their congressional representatives to co-sponsor H.R. 3044, the moratorium bill.

During all of this, there have been many who at least felt some comfort in the fact that HVCC only extended to agency loans and FHA had not adopted the same misdirected policies.

Well, so much for that! Two FHA mortgagee letters published yesterday make FHA appraisal management almost identical to the program mandated by HVCC.

Effective with FHA case numbers on or after January 1, 2010, for all intents and purposes FHA mortgagees and their employees will be operating under appraisal rules almost identical to HVCC. Some of the wording looks to be lifted directly from the HVCC.

It now looks like HUD has trumped whatever victory the industry and consumers might have achieved with the passage of H.R. 3044 (which seems unlikely after this FHA move). Looks like after January 1, 2010; everyone will have to learn to live with the cumbersome, costly, negative changes forced on us in May on FHA loans. Will VA and USDA follow suit? Who can predict?

IMMAAG, an information clearing house for independent mortgage brokers, monitors legislative & regulatory activity, mortgage industry events & emerging trends in small business management.

Here is the substantive portion of the new rule clarification:

1. All licenses set to expire at any point in 2009 will be administratively set to expire on December 31, 2009. The Division of Real Estate will change the expiration dates for this group of affected licenses on October 1, 2009.

2. All licenses set to expire at any point on or after January 1, 2010, will be administratively set to expire on December 31, 2010. The Division of Real Estate will change the expiration dates for this group of affected licenses towards the end of 2009.

The license renewal process begins November 1st of each calendar year. The renewal process ends December 31st of each calendar year. In this instance, The J. Berman Group license renewal deadline is March 2010. So our deadline has been pushed back to the end of 2010. ‘To-Do’ list reprieve!

The proposed legislation, The Mortgage Improvement and Regulation Act of 2009 actually offers tremendous opportunity for consumer and industry confusion in spite of its “mom and apple pie” objective to create national standards.

This legislation, if enacted, references and brings back many of the negative provisions of HR-3915, it adds conflicting definitions for things such as qualified mortgage and high interest loans, and it generally promotes the control of independent mortgage entities in the name of consumer protection.

In its 20+ pages:

• Yield spread is once again attacked.
• Mortgage brokers will have to prove net worth of $150,000 & have a bond of $75,000
• Four (count’em – 4) new agencies are formed.
• Federal depositories are not included in the regulation.
• It appropriates $32,000,000 for Department of Justice employees and the Interagency Fraud Task Force
• Offers additional changes to RESPA, TILA and the SAFE Act (Before these acts have even been implemented).

On a positive note it does suggest that the new agencies coordinate RESPA, TIL and the GFE and HUD-1. But, even an objective as laudable as taking a fresh coordinated approach can’t be justified in the context of all of the negative implications of the rest of the proposed changes.

Between 2008 and 2009, at the national and state level the mortgage industry has been the subject of possibly more legislative and regulatory scrutiny and action than any other industry in recent history. It seems that before one new piece of law or regulation can even be implemented; new, modified and often conflicting alternatives are proposed. MIRA is simply another in this line of never-ending assaults on a segment of the industry that has been blamed beyond reason for some of the problems being experienced by thousands of people.

There is one thing for sure; if the pace of such “consumer-protection” continues, consumers and tens of thousands of independent businesses will suffer the consequences. Someone needs to fight back. Will it be you?

Stay tuned for continuing information on this, HR-1728 and other activities such as the HVCC.

Reprinted with permission from Impact Mortgage Management & Advisory Group

The one size fits all plan is gone.

Here are the changes that consumers need to know. These apply to both purchase and refinance loans. They do not apply to the FHA’s Reverse Mortgage program (HECM) or Title 1 loans.

• If the Loan to Value is 95% or less, the annual premium is 50bps or .5% x the loan amount. If the LTV is higher than 95%, the annual premium is 55bps.
• The upfront premium, a financeable non-refundable fee, is now determined by a combination of the credit score and the loan to value.

Since consumers with less money to put down and/or with less than perfect credit are bigger risks to default, they will be required to finance additional fees into their final loan amount. They will also pay slightly higher monthly payments.

The best advice for future homebuyers, save 5% for a down payment and keep your credit clean. Pretty simple huh?

I don’t expect reduced demand for FHA loans as a result of these changes. Interestingly, FHA business is booming as many sub-prime originators are now selling FHA loans as a replacement product.

I applaud FHA for introducing the risk-based premium schedule. By embracing this pricing structure, FHA is creating a marketplace for higher risk loans. However, I believe it took the agency far too long to act. If the bureaucratic agency had implemented these changes back in 2004 or 2005, the damage from the subprime collapse might have been mitigated.

This delay has come at a price.

Many of the high LTV, negative amortization loans in default, would be performing better with a traditional mortgage product. I believe FHA is partially to blame for some of the problems in the credit markets. Their inaction to push for these reforms sooner allowed the sub-prime market to flourish. Hopefully FHA will be more proactive going forward. These latest changes are a good start.

What do you think?