Does Anyone Think These Things Through?
Courtesy of KCM Blog
Let’s start with an acknowledgement…the mortgage industry got messed up in the boom times. People will debate for years to come whose fault it was (loan officers, appraisers, the government, the secondary market, Wall Street, the Big Bad Wolf, Sasquatch and others). Today, we will ignore blame and look to how the Regulators are attempting to prevent it from happening again (besides creating a muddled appraisal process through HVCC) — go after the loan officer (LO).
Step 1 – Tighten Program Guidelines.
Basically, eliminate those “risky loans” (Negative Amortization, High Loan-To-Values, No Income Verification, etc.). In addition, institute risk based pricing, which penalizes weaker credit scores, higher income ratios, and higher LTVs. Make borrowing more difficult. Good conceptually, but the guidelines have probably gotten too tight.
Step 2 – National Licensing of LOs.
Creating standards and testing to insure competency and compliance, as well as, tracking of loan officer performance. An idea that was long overdue; however, was its implementation fair? LOs that had English as a second language did not fare well on the tests. The tests were not, in many cases, a true measure of the talent and ethics of the loan originator.
Results of the first two steps have resulted in the loss of close to 350,000 loan officers (from a high of 450,000 to about 100,000 today). Thirty percent of those who took the tests failed them. Many have argued that those who remain are the “best of the best” and that the majority of today’s loan officers are advisors to their clients, professional in their approach, and dedicated to their industry. Is that enough? Apparently, it is not.
Step 3 – Limit Loan Officer Compensation.
The Federal Reserve has taken a position that LOs get paid too much or that LOs need to have their income defined purely by loan amount with no regard to loan program or terms, regardless of the amount of effort or experience or talent it takes to structure and assemble paper work for these loans. While many industry players and government oversight organizations are disputing the Fed’s authority and/or demanding more clarity on the new rules, it seems to be falling on deaf ears. Therefore, effective April 1st, the mortgage lending world as we know it, will be transformed.
What this means to the consumer
Regulators make a logical argument that LOs should not profit for unethical steering to non-advantageous products. I’ll even concede that leaving rate lock issues to the last minute can lessen the borrower’s ability to shop around. But the new rules will punish the borrower:
- Say goodbye to most state loan programs. There will not be enough revenue to pay the LO a fixed number based on loan amount regardless of loan product (as compared to the percentage of revenue generated model most are paid by today). This results in higher rates and worse terms for many first time home buyers.
- Say goodbye to even more LOs. The pay cut they will incur will reduce the number of LOs further…to a dangerously low number. Who is going to write these loans? And, the new testing has raised the barrier of entry to new people…..recipe for longer application, processing and closing times.
- How about the under-served? We are speaking of those who buy in low and moderate income areas. They have smaller loan amounts. Because LOs will only get paid on loan amount, they will gravitate to higher home priced areas. Let’s face it, the lower loan amounts are less money and a lot more work (multiple borrowers, more documentation, etc.). So, the first time areas (which fuel every other home sale) are going to dry up significantly.
It’s a NIGHTMARE that the general population is unaware of. Politicians and bureaucrats looking for someone to blame are only on a path to drive out the good LOs to more lucrative careers. The people who need counseling and guidance the most will be left with overworked and underpaid people who will be incapable and unable to serve them.
I know there will be some disagreement on my point of view, but I know I am right. Bring it on!