House Passes Key Mortgage “Reform” or, the “No Loan For You” Bill

soup-naziThe US House passed the Mortgage Reform and Anti-Predatory Lending Act (HR 3915). It’s being called as the “anti-predatory” bill, but I’m going to call it the “no loan for you” bill.

For those not familiar with the bill’s key provisions, below is a summary from MSNBC :

The bill would create a licensing system for residential mortgage loan originators, and establish a minimum standard requiring that borrowers have a “reasonable ability” to repay a loan.

It also contains an “anti-steering” provision that would prohibit mortgage originators from steering consumers to a loan that the consumer lacked “a reasonable ability to repay” or had “predatory characteristics”.

The bill also attempts to bring thousands of largely unregulated mortgage brokers – responsible for more than half of the mortgages sold in the US in the past two years – under a nationwide system of licensing and registration.

Lets review:

Licensing: Maybe it will help, but I’m not so sure. Currently brokers have to be licensed even though the individual loan officer do not have to be.

Reasonable ability to re-pay: Has Congress ever heard of the debt to income ratio (DTI)? This is one of the fundamental metrics used to qualify a borrower. The reason why the DTI is so important is because it tells you exactly whether the borrower can repay the debt or not.

Anti-steering: I do agree that the current system is wide open and vulnerable to abuse. However, I wouldn’t ban the compensation which wholesale lenders provide brokers. I would cap it at 1% or 2%. In case you are wondering this compensation is required already disclosed on the settlement statement.

Predatory characteristics – This is too hard to define but I think we need to limit the use of stated income loans.  Also I’d start with cracking down on those insanely crazy ads you hear on the radio. You know the one where the guy claims you can have a $200 payment on a $500,000 loan.  And you must be stoooopid to pay closing costs! So, here’s a radical thought, how about we enforce current laws first?

My disagreement on this bill is philosophical:

1. It makes the lender responsible for the borrowers actions. It treats every borrower as a victim and personal responsibility is substituted for lender responsibility

2. With lenders subjected to greater liability I am pretty sure obtaining a mortgage in the future will be more difficult. Get used to additional documentation, longer processing time and a greater stack of paperwork to sign.

3. It interferes with the free flow of credit and the consequence will be a smaller pool of lenders with a narrower set of loan programs. It will be harder for lower income and lower credit families to buy a home. Homeownership will suffer.

Your comments are welcome.

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