Legislative Good Times Roll

There are several bills and proposals, both on the national level and here in our own state, designed to cull and corral those nasty predatory lenders. It seems that with all the press about the sub-prime market collapse, legislators are rushing to prove they have solutions to the current housing slump this precipitated. But the problem is if these laws are enacted as drafted, not only will they not fix that problem, but they will probably make it much worse. A prime example of this sort of folly is HR3915. Currently in excess of 50 percent of the home loans made in the United States are produced my mortgage brokers. While I am not one of them (I am a mortgage banker), this bill alone could eradicate this segment of my industry effectively, dramatically reducing the number of loan programs and price competition well-qualified consumers currently enjoy. Further, new laws enacted by our own state selectively exclude loan originators who work for federally chartered banks. Yet these banks are the same banks that coerce unsuspecting consumers into Pay Option ARMs, which is the preferred product by real predatory lenders everywhere. This product is so bad for the average consumer that the state of Minnesota recently outlawed it, except for use as a reverse mortgage.

So what is the problem and how can it be fixed? Well, here is where the rub comes in. You see, many years ago, these same politicians said that we in the mortgage and banking industry were not making enough loans to minorities (read as: "those with poor credit") and thus were depriving them of one of the primary tenets of the “American Dream.” We were told we needed to “reach out to the community” and this underserved segment of the population. The BIG idea was that if these poor credit risks were just given a chance, they too could succeed and the percentage of home ownership in the United States would go up dramatically. So they created a lot of legislation then to encourage the banking and financial industry to cater to that “underserved” segment specifically.

However, this social experiment has obviously proven no such thing. As it turns out, if you can’t qualify for credit at Kmart, you really are not likely to succeed at paying back a $400,000 loan either. So yes, everyone in my industry “technically” made loans to people that we knew had no hope of paying them back. Not because we were predators or we committed loan fraud, but simply by virtue of the fact that we made 100 percent loans to people who had 500 FICO scores. You see, you really have to work hard to get a score that low. You have to miss paying every bill you have by at least 30 days and repeat that behavior for an extended period of time. But even that probably isn’t enough. Next, you need to blow off some obligations entirely so as to create a pattern of collections and judgments to add to the mix. Finally, you very likely have to have had at least one bankruptcy filing in the last six years. So I am not talking about the relatively small percentage of average people who experience an “act of God” type of financial crisis. I am talking about that massive and growing segment of the population with habitually bad credit, most of whom have adequate jobs and income, but for whatever reason make consistently bad decisions.

So as usual, politicians are now looking for a scapegoat to blame the high rate of foreclosures on nationwide, and they certainly don’t want to start pointing fingers at themselves. Instead, they want to demonstrate their disgust with the scapegoat de jour, by creating a batch of new laws on a topic they know nothing about, which is how this all got started in the first place. Likewise, they are late to the party as usual. The market has produced an answer to most of the problems that have already occurred. The sub-prime market is defunct in essence, and guidelines have already changed back to preclude people with awful credit from getting a home loan. The foreclosures you see now are a consequence of that correction, because now that these sub-prime borrowers’ ARMs are adjusting, they have nowhere to refinance them.

The bottom line: There will be one more year of foreclosures ahead to clean out the remaining glut of sub-prime borrowers from the system. The next generation of first-time buyers (with decent credit) will reap the benefit of lower-priced entry homes for another couple of years after that. And God willing, the politicians will not destroy another perfectly functioning industry with their current tinkering.

For honest advice from someone who really cares, call the professional. Dan Smith can be reached at (303-674-0201), or visit his Web site at www.ColoradoHomeLoans.com and check out his complete consumer library today!