Mortgage Industry Grapples With New Regulation
If you’re planning to buy or sell a house, changes are on the way. The creation of the Consumer Financial Protection Bureau and the tightening of mortgage lending rules mean the industry is in the process of being turned upside down. WNPR’s Harriet Jones reports.
It’s been a turbulent period for the mortgage industry and four years after the financial crisis, the debates are still going on.
At New Haven’s Lawn Club, the Connecticut Mortgage Association met to discuss the latest regulatory changes. The financial crisis had at its heart mortgage backed securities – bundles of hastily arranged, poorly underwritten mortgages on loans that went bad, and for which no-one in the system would take responsibility. And here’s the new bottom line for mortgage professionals. If a loan is considered to have been originated improperly, Freddie Mac and Fannie Mae are having increasing success in forcing mortgage lenders to buy back that bad loan. Gil Ginsburg of Avistar Capital Group, headquartered in Wallingford.
“Part of what is the underlying problems is the fear of buybacks, and so everybody is running, if you will, a little scared, maybe justified, maybe not, about the potential for buybacks.”
That’s lead to big changes in the way mortgage companies deal with loans. Whereas before the crisis, he says a mortgage originator might touch a client’s file two or three times, now it’s six times or more as paperwork is sent back and forth, checked and rechecked.
“The unintended consequences for the consumer is the time delay – takes much longer to do everything – and in many cases it can become more costly, both for the consumer and for the company.”
Ginsburg says many smaller mortgage lenders have gone out of business, and the new climate has further inhibited the recovery in the housing market. Changes for appraisers meanwhile, began even before the financial crisis, as concern rose about the effects of a too cozy relationship between lenders and the professionals who set home values. Denny Maisano began his career as a residential appraiser and he says some of that reputation was justified.
“There definitely was pressure in the good old days, where the broker or the lender would call up and say ‘Den, if you kill one more appraisal, you’ll never….!’ And ‘I need another $20,000’ and those types of abuses.”
While he says they were much less prevalent in New England than in hotter parts of the market elsewhere in the country, he acknowledges that things needed to change. But, he says the way changes have been implemented, makes no sense.
“It’s forced appraisers out of business, it’s hurt borrowers because values have been lowered, it’s let incompetent appraisers stay in the business and its really had very little positive effect.”
The reforms placed a firewall between lenders and appraisers, so that banks originating a loan can no longer do business with a local appraiser that they know and trust. They must have the process managed by a third party – an appraisal management company. Maisano, who now runs appraisal management for his company, Strategic Information Resources says while that stops the cronyism, it also in some cases leads to worthless valuations.
“Let’s say you have a national appraisal management company, that will send an appraisal out to bid, and they will give that to an appraiser that meets a timeframe criteria and a fee criteria – no real determination as to whether he’s the most qualified for that property.”
Maisano also says the system has led to a drastic cut in fees for appraisers, which is in turn leading to a contraction of the industry. But what of the consumer – the home buyers and sellers that these changes are designed to protect? Real estate attorney Jay Hershman from Baillie and Hershman based in Cheshire says he’s heartened by the new focus of the Consumer Financial Protection Bureau.
“They’ve really honed in on trying to make the consumer experience a much better one, in the sense that there won’t be any surprises from the time that a consumer applies for a loan to the time the consumer closes the transaction.”
But even as a fan of the process he says some of the new rules could have unintended consequences. For instance, it’s proposed that if any last-minute change is made to loan documents, it must trigger a new three day waiting period before the sale can close. It’s supposed to give consumers time to review and agree with the change, but it may also be a huge inconvenience.
“A number of times we’ll have people buying and selling a home on the same day. Their moving truck may be backed up in the driveway waiting to unload, kids need to get into school, and they find they can’t close for another three days. Well now if they’re buying a house and their seller has to wait three days, now they have to wait three days, it’s a chain effect that could be tremendously complicated to figure out when everybody’s three day period will match up.”
And as home sales begin to pick up in Connecticut and elsewhere around the nation, the drastic changes to the mortgage industry and the uncertainty over some of the rule changes may start to become much more apparent.
For WNPR, I'm Harriet Jones.