Mortgage Brokers, Lenders: Regulations Could Hurt Consumers
Mortgage brokers and lenders concerned about a regulatory backlash by state officials are warning that weightier rules may force them to turn their backs on many consumers.
But their threats may be empty.
From Maine to the Oregon housing market, states have been awakened to poor mortgage practices by surging delinquencies and home foreclosures and are drafting rules that increase the responsibilities of lenders and brokers as they deal with consumers, especially those with spotty credit records. The momentum for regulation has created anxiety for the mortgage industry, which claims it’s already treated with a heavy hand.
A recent discussion between mortgage professionals, led by Kenneth Logan - head of NovaStar Mortgage’s warehouse lending before the company cut the program this year - was dominated by complaints about keeping up with laws that vary by state, county or even city. The worst case scenario isn’t inconceivable: mortgage lenders could stop providing credit in some locales, Logan said.
“Capital (investor money) will leave” if regulation goes too far, he said, echoing others on a panel assembled by the Mortgage Bankers Association.NovaStar and more than 50 other lenders threatened to do just that a year ago in the Montgomery County, Maryland housing market, home to nearly 1 million people, according to the Maryland Association of Mortgage Brokers.
A county ordinance passed in 2005 aimed at discriminatory lending created an uproar among mortgage lenders and brokers, claiming the language was too vague and would spark a firestorm of lawsuits, said MAMB’s executive director, Tom Shaner. Lenders - including Wall Street-owned First Franklin and Aurora Loan Services - informed the county that they would cease making mortgage loans due to unquantifiable risks.
The law, which never took effect, was overturned in November after a court ruled the county lacked the authority to enact such legislation.
“This mortgage industry is already regulated so much, it’s just incredible,” said Douglas Davies, a Seattle-based lawyer who represents brokers and lenders. “The effect is it’s driving out funding for borrowers” who are on the margins, he said.
But that hasn’t curbed stabs at the industry by state mortgage regulators. More than half the U.S. states have passed or are considering legislation to prevent predatory lending practices, according to the National Conference of State Legislatures.
Anecdotes of consumers losing houses to foreclosure because of aggressive or deceptive lending practices have also fueled a push for Congress to rein in lenders and bail out owners.
Industry warnings about regulatory damage to homeownership haven’t slowed Oregon’s efforts to pass legislation, said Angela Martin, the economic fairness coalition director at nonprofit Our Oregon. Among new rules, Oregon wants lenders to qualify borrowers’ ability to pay based on the highest rate that could be incurred over the life of the loan instead of the low, initial teaser mortgage rate typically used.
Mortgage lenders, including Countrywide Financial Corp., the United States’ largest, have complained about similar guidelines proposed by federal regulators, claiming that more than half the borrowers receiving their bad credit mortgage loans in 2006 wouldn’t have qualified.
Damage to mortgage businesses from regulation “is not substantiated at all,” Martin said. “Can you craft bad public policy that shuts down an industry? Of course. But is that what Oregon is doing? No.More than 80 percent of lenders in Oregon are also operating in North Carolina and New Mexico, states recognized as having some of the most stringent mortgage laws, she said. The meltdown in subprime loans today is commonly seen as a result of poor underwriting, not regulation.
Lenders and industry officials, recognizing the errors of their peers, actually played an instrumental role in writing Minnesota’s tougher predatory lending law, which, like the proposal in Oregon, requires repayment ability be judged based on future mortgage interest rates instead of teaser rates, said Jordan Ash of ACORN, a community organization.
Lenders made no threats of pulling their businesses out of the state, he said.
The bill before Oregon’s House would impose regulatory requirements and restrictions on at least 75 percent of all loans in the state, according to local broker blogs. Borrowers under the bill would also gain the power to sue brokers for loans they can’t afford.
“We will lose good products that help when correctly used, and many of us will have to turn down customers because we will not want to be liable for their ability to repay the loan in the future,” said Marvin Von Renchler, a veteran broker in Oregon. “It’s a mess.”
SOURCE: Reuters