Orange County Mortgages

Stephen Mader is a 21 year expert in the Mortgage Industry. He is a Senior Loan Originator with Trust One Mortgage. You can reach Stephen at 949.292.3160, smader751@aol.com or www.stevemader.com.

What does the new Consumer Finance Law mean to you the consumer?

On April 1, 2011 the Dodd/Frank bill adjusting loan officer compensation goes into effect. This bill states, that loan officers and mortgage originators can only offer loans to the consumer in which they get paid exactly the same amount of money as a market priced fixed rate loan. In theory, this bill is designed to prevent loan officers from steering consumers to loans which pay them more but maybe aren’t in the best interest of the consumer. In short, this is supposed to make the loan officer always offer the best loan available to the consumer.

Sounds great? The reality of what is spelled out in over 1700 pages of regulations/requirements and new restrictions is a mass of confusion that ties the hands of what loan officers can offer to the consumer. In the past, the loan officer had literally hundreds of different ways they could adjust the rate up or down to either give the client more money to help them close (at a higher rate) or have them pay a little more up front to reduce their payments over the life of the loan (lowering rate), now they can only offer 2-3 options.

In a sense, this does somewhat protect the consumer from the unscrupulous, lying, thieving loan officer; but the Fed is penalizing all for the improprieties of a few.

The Nuts and Bolts:

Loan Officer Compensation: “if a consumer pays a mortgage broker in a transaction, the broker cannot pay its loan originator employee who worked on the transaction any amount other than a standard salary or hourly wage that is not tied to the transaction”. What does that mean: You will either pay your lender a fee for the loan, or the lender will cover the fee (higher rate creating Yield Spread Premium). There can not be a combination to cover the costs.

Mortgage Underwriting Standards: “the Law requires the creditor verify income and documentation to make its determination. A creditor is also required to make a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the obligation, including all taxes, insurance, assessments, and any second loans extended simultaneously. The determination must be based on verifed and documented information, and the creditor must look at a number of factors…”

The borrower may be provided the “safe harbor” option where they receive three loan options that must be presented from a “significant number of creditors”. These three options must include the following:

1. The loan with the lowest interest rate.

2. The loan with the lowest interest rate without a negative amortizing feature, a pre-payment penalty, interest only payments, a balloon due within 7 years, a demand feature, shared equity, or shared appreciation; and

3. The loan with the lowest total dollar amount for origination points or fee’s and discount points.

This requires extensive analysis and documentation of the options and criteria they satisfy.

New Disclosure Requirements: This is still a work in progress area but we are looking at a minimum of seven new disclosures for your viewing enjoyment.

I find this to be a very far reaching solution to a very simple problem. As a 21 year professional in this industry, I am now required to offer solutions to my clients that may not be in their best interest. If you are an investor, looking to hold a property for a short time, your acquisition costs just went up. Transaction costs for all borrowers will rise by over 40%. If you are a first time buyer, your out of pocket costs just went way up. If you are a lender, you just realized a pay cut, increased regulation, fewer funding sources, and an absolute accounting nightmare among other things. The Government has spoken through 1700 pages of confusion, now we are left to figure out how to implement this mess with the rules not clearly defined.

In looking at the most recent edition of Origination News, it seems very clear as to who the big winners are - Top Residential Correspondent Lenders through First 9 months of 2010 -

1.  Bank of America

2.  Wells Fargo

3.  Chase

4.  GMAC (Ally/ResCap)

Lo and behold, who was at the table when the new laws were created.  In my over 20 years in this business, I have never seen a climate of such pessimism amongst my peers.  Come April 1, 2011 when the new compensation requirements of the new kick in, the industry will be less than 20% of what it was only a few years ago.  It is a shame.    All I would ask for is an even playing field where I can work hard and provide for my family.

You are not alone.  Over-reaction on the part of Fannie and Freddie in response to industry adjustments have made getting your loan approved and funded a very difficult process.  The process has become so difficult for lenders and borrowers alike that per Think Big Work Small, the number of originators currently licensed and able to originate has reduced by over 40% since last January.

April 1, 2011 the rules will change again.  With no clear cut direction on how to respond to these new laws, look for total inconsistency in the industry.