Exotic Mortgage Deals May Be Gone Forever
Congress is poised to make fixed-rate mortgage the norm despite warnings that it'll slow the housing recovery.
By Renuka Rayasam, Associate Editor, The Kiplinger Letter
April 17, 2009
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Consumers will soon find that buying a house means getting a 30-year fixed rate mortgage, whether they like it or not. Legislation moving through Congress with enough support to ensure enactment would all but eliminate the subprime lending and exotic loans blamed for the housing bubble, making it harder for marginally qualified borrowers to buy their own homes. And that, of course, is the intent.
The tighter rules are almost certain to slow a housing recovery. "As we go back to a period where lenders are going to want to innovate, this is the kind of legislation that will limit them," says Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications Inc. Still, Congress seems willing to accept that as the price for long-term housing stability.
The collapse of the housing market and the ensuing economic crisis has given House Financial Services Committee Chairman Barney Frank (D-MA) the political support he needs to pass sweeping mortgage loan measures. Lenders will try to water down the bill, but they don't want to kill it -- they agree that steps are needed to restore confidence in the housing market. "The proposal could serve to rebuild trust in the mortgage profession," says Francis Creighton, chief lobbyist for the Mortgage Bankers Association. "It would make consumers feel confident there are real standards."
A final compromise is likely to keep low-income buyers who can't afford the payments out of the market. Qualified buyers would still be able to get variable rate loans, but with more hurdles. "The bill might cut out some borrowers," says Creighton. "It could lock in tight underwriting standards."
Right now Frank's bill would prohibit borrowing to lenders who lack a "reasonable ability" to pay and restrict mortgage broker commissions based on loan type and rates. So brokers won't make more income for putting borrowers into exotic loans. Borrowers put into contracts that violate these terms would be able to cancel the loan and get refunds on fees.
One measure that won't make it through: forcing mortgage originators to hold 5% of the loan until it's paid off in its entirety. "It is an old idea that issuers need to keep some skin in the game," says Cecala. "But I'm not convinced that makes for better loans." It would also make it impossible for small- and medium-sized mortgage writers to stay in business. They don't have enough volume to set aside such large amounts of capital.
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Reader Comments (5)
Posted by: Todd Hawkins at 04/17/2009 02:06:43 PM
This "solution" to restrict product is so dumb, like blaming guns for murder. What would cure the ills is national registration AND certification for ALL mortgage originators (brokers and loan officers)with no grand-fathering, fewer loan documents and guaranteed Good Faith Estimates (or something better to take it's place). Borrowers must also take responsibility. You're not going to be able to eliminate greed and irresponsibility by restricting products.
Posted by: Tracy Cavanaugh at 04/17/2009 05:59:23 PM
I'm responding to Todd Hawkin's comment on the article - Todd, you so get it! I couldn't agree with you more and it is absolutely refreshing to read commentary from an individual who is clearly practical, responsible and knowledgeable. The trust can be restored back into the mortgage provider/consumer relationship when fiscally literate mortgage advisors are delivering educated loan recommendations to borrowers based on their specific needs. All the regulation in the world will not protect people from unscrupulous individuals. Let's remove the cloak and dagger for once and all in this industry by having skilled professional educate borrowers. Could it be more of a no brainer?
Posted by: Sandy St.John at 04/18/2009 01:26:41 PM
While I favor the LEAST amount of government intervention in our lives, tighter rules for ALL buyers who don't know how to budget, save, and patiently wait until they can friggin pay for what they want is always a good idea!
Posted by: BL at 04/19/2009 10:02:54 AM
I have worked in investment banking related to mortgage securitization for 20 years. I agree with the notion that we must get banks issuing mortgages to keep skin in the game. 5% isn't even enough. This notion that it would keep small/medium lenders out of the business is ridiculous. Why should we have lenders with NO CAPITAL ? Whose money are they lending ? Investor's money is who, and they have been irresponsible with other people's money. No suprrise there. Let them go out of business or merge and get the capital they need. There is no need to have every street corner with a mtg lender. Second, placing restrictions on consumer lending is justified, both to protect consumers from themselves as well as protect banks from themselves. Nobody wins when you have a var rate loan that is suddenly unaffordable to the consumer. Maybe qualify them at the historical highs for the index in question, rather than at current rates. That's all that needs to be restricted. The gov is overcomplicating this.
Posted by: Mark at 04/19/2009 11:37:51 AM
I don't think there is anything wrong with setting basic underwriting standards. If one makes X amount they Y is the maximum he can borrow. We have learned that if you don't establish responsible borrowing standards, dumb consumers and greedy mortgage originators can and will put the whole system in peril. This will stop someone that makes $35,000/year from borrowing half a million dollars to buy a house.