Thursday, November 15, 2007

House Votes in Favor of Bill to Rein in Mortgage Originators

Today The House or Representatives upheld the controversial mortgage bill by a vote 291-127. Details of the bill are in my post from earlier these week. In support of the wide ranging bill, House Majority Leader Steny Hoyer said, "Increasing loan rates on subprime mortgages have left thousands of American families close to foreclosure, and this crisis has led to the worst slump in the housing market in 16 years."

Although the House passed the bill, final action by Congress will most likely be pushed into 2008. It will be months before any final legislation comes to fruition. The Bush administration has said it supports parts of the bill, but it has not given an indication of what parts they are in most favor of. The administration has also not threatened a veto of the bill. Many Republicans opposed the bill, citing it is too harsh and would disrupt the free market for mortgages. California Republican Rep. John Campbell said, "What we are doing here is practicing medieval medicine. We are bleeding the patient. We are going to make the patient worse ... by drying up credit."

It is safe to say that reform is definitely on the Horizon for the mortgage business, something that those in the Industry have foreseen for a long time, with many welcoming the needed changes. It is unclear what the final outcome will be. Hopefully the changes enacted by Congress will be for the good of the people, and not too stringent, ultimately hurting borrowers in the short and long term.

The response has been mixed for the bill in whole, but many parts seem to be a step in the right direction. Its obvious the Industry has fallen on hard times, much of the problems are self inflicted with overzealous lending and fraud running unchecked at every level.

Tuesday, November 13, 2007

House Bill 3915 Could Kill Rebates and Eliminate Brokers

Sweeping Changes Proposed
HR 3915 The Mortgage Reform and Anti-Predatory Lending Act of 2007 was recently introduced by House Financial Services Committee Chairman Barney Frank (D-MA), along with Representatives Miller (D-NC) and Watt (D-NC) and proposes sweeping changes that would drastically change the face of the mortgage industry. Many believe it would practically eliminate mortgage brokers from the industry by raising capital requirements and reducing income streams. By enforcing a mandatory $100,000 bond for all originators, as well as outlawing ysp, aka rebates, the law would hinder many brokerages ability to open up shop and make money. Rebates are paid to brokers and in exchange for selling a higher rate to borrowers that may not have the ability to pay out of pocket to pay brokers commissions. This part of the bill, would not only cut broker's income, but would also automatically shut down the ability for many to refinance and purchase homes. Basically if you don't have the money to pay your brokers commission you would not be able to obtain financing.

Other aspects of the bill that I find to be more positive to the market include stricter requirements on disclosure of compensation, stricter education requirements for originators, and the elimination of higher compensation for risky loans like option arms. Parts of the bill are necessary to clean up the mess that has been created in the past few years, and if the correct steps are taken we can prevent future blow ups in the industry. on the flip side, if legislators go too far with bills such as this, they will ruin the free market for loans, and remove much of the options borrower's need to purchase or refinance their current residences.

Key points of the bill and their possible effects on the market:

Improve Quality of Originators
-Criminal background checks
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-National Registry of Originators

Improve Transaction Transparency
-Simple disclosure of broker role and compensation being received
-Increased continuing education requirements,
-Tests for originators to prove basic knowledge of loan products.
-Brokers would no longer receive monetary compensation for pushing risky variable loans such as Option Arms.

Reduce Borrower's Options and Ability to Finance
-Elimination of rebates, forces borrowers to pay closing costs out of pocket
-Elimination of rebates, causes the number of originators to drastically decrease, reducing the number of options for borrowers to obtain financing through
-$100,000 Net Worth or Bond requirement, reduces the number of brokers, further reducing borrower's options
-Federally mandated underwriting standards, remove the free market for loans, would further reduce borrower options in the market
-Large Banks would inevitably monopolize the market and borrower's would have less choices for good customer service and speed of transaction

Summary of the Bill outlined Here.

Credit Boosting - Credit Piggybacking

Credit Boosting - Credit Piggybacking

Websites like offer services like the advertisement placed here on the left for credit piggybacking services. Credit piggybacking is the practice of "renting" high-quality credit account histories to borrowers with bad credit. The add to the left came from . Piggybacking companies claim to raise scores by 100 to 200 points in 30 to 90 days. The scam works by letting borrowers with bad credit, become authorized users on accounts with long histories of good payments. Internet companies pay people with excellent credit to allow their account numbers to be used by others. Those looking to boost their scores are charged fees upwards of $1,000 to achieve the higher scores. A borrower with poor credit could conceivably rent tradelines from multiple others and boost scores from subprime score levels of the 500's to A-paper ranges in the 700's. This method is being used by loan officers and borrowers to basically build good credit for borrower whom do not deserve the great scores. Many are pointing to this process as weakening the housing market, yet it is not illegal and cant be stopped unless the credit scoring system is adjusted to account for authorized user tradelines in scores. Some lenders are combating the issue by changing their guidelines to not count authorized user accounts towards minimum tradeline requirements.

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