Democrats Weigh In On Solutions to Cleaning Up Mortgage Industry

The Democrats are now diving into the discussion about cleaning up the mortgage industry and subprime lending. I’ve written quite a bit about the importance of avoiding the curse of being house poor. The rising foreclosure rate is due to two major factors. Mortgage lenders are loosely regulated and consumers made uneducated, selfish financial decisions. So now it’s the democrats to the rescue! I read the article from CNN Money, and i was a little surprised to see that I actually liked some of their ideas. I am definitely about capitalism, but financial agents need to have a fiduciary duty to their customers. It should not matter if it’s an insurance agent, mortgage lender, or stock broker. Christopher Dodd proposed these ideas to help regulate the subprime industry:

  • End prepayment penalties – the fees paid if a borrower chooses to pay off a mortgage early.
  • Tighten underwriting standards so that borrowers are judged on their ability to repay the loan at fully indexed rates rather than at low teaser rates.
  • Require lenders to escrow for taxes and insurance and disclose those expenses to borrowers
  • Cut down loans that require little or no documentation proving a borrowers’ assets or income – the so-called “liar loans.”

The prepayment penalty is ridiculous. I don’t think their should be a financial incentive to lock you into a mortgage for a specified amount of time. The proposed idea about tightening up underwriting standards is the most important in my mind. Mortgage companies would save a great deal of money on foreclosure costs if they would tighten up their guidelines for qualifying for a mortgage. The argument is that less people will be able to pursue the American dream of owning a home. Let’s think about this for a minute. Buying a house with a mortgage payment that goes up $300 a month in one year which causes more fights with your spouse, less food on the table, more credit card debt, and more stress in your life is the American dream? I’ll say this slowly: W-A-I-T U-N-T-I-L Y-O-U H-A-V-E S-O-M-E M-O-N-E-Y. If you don’t have an emergency fund when you buy a house, something will go wrong. It’s not a negative outlook on life, it’s just life. Life happens, and life is expensive sometimes.

The Money Crashers Solution:

There should be negative consequences for mortgage lenders that sell a mortgage to a consumer. The mortgage industry should follow the mold of the insurance industry. Independent agents of insurance companies own their own companeis but they act as agents for the carrier. The carrier can drop an agent at any time if their loss ratios become too high or they do not cooperate with their underwriting guidelines. If mortgage lenders start depending on keeping the business of a certain mortgage lender, then they will start thinking twice about “creatively” finding a way for anyone to qualify for a mortgage. How about taking away the commissions of a mortgage broker for every loan that defaults? That would teach the bastards not to find a way to loan $400k to a family with a $50k household income.

That’s my take. What’s your take? What’s your solution to cleaning up the subprime mortgage lending industry?

  • Amber Yount

    The only thing I don’t agree with is the tightening of loans that require little documentation. I think that if you have great credit you shouldn’t have to prove your income – or more importantly, we’re self-employed and make over $120,000 a year, but can’t get a traditional mortgage, because according to our tax returns, we only made $8,000 that year! So we have to wait until our credit goes up enough to be able to qualify for one of those no doc loans.

  • Eric

    I’ve heard of mortgage lenders that slam clients with ARM’s, knowing they will be in over their heads soon. They wait for a few weeks after their adjustment, then contact them again to get them in a fixed or interest-only note. They keep playing these shells games to continue to swindle money out of their marks.

  • author

    yeah, something needs to be done. I don’t know if the Dems have the answer, but at least it’s on their radar.

  • JD Wilson

    1) You need an editor before you post publicly. Trust me on this. 2) The “teaser” rates on ARMs are actually based on a wholesale buydown rate, or reduced initial rate, and the pre-payment penalty is in place to make sure that the investor who provides the funds receives an equivalent return in the initial years. The borrower gets a significant savings in the early years and they only choose this loan because they need it to qualify for too-much house (whose fault?), they expect increased earnings in the future, or they plan to sell, move or refinance at the end of the buydown years. They sign a mountain of disclosures about how these loans work and agree that nobody is holding a gun to their heads when they eagerly sign up, drooling over their below-market rate and HUGE savings. 3) Wholesale lenders can and do recoup commissions paid to retail loan originators for failed loans, AND they cease to offer funds to wholesale banks and brokers who are guilty of unethical actions and/or have an inordinate number of loan defaults. 4) Wholesale lenders would love to operate with stricter underwriting guidelines; the relaxed-guideline loan programs exist ONLY because the consumer and all other parties invested in real estate transactions (Realtors and hundreds more) demand them. 5) Suggesting that lenders should have negative consequences for issuing mortgage loans to the public is moronic — the sado-masochist crowd is not in the loan biz or is spending their money on whips and dog collars — so who will finance your home purchase for pain without gain? That said, you got your wish. The lenders are failing rapidly now and you will soon have to save up the full purchase price under your lumpy mattress if you want the American Dream. Better buy a gun to defend your funds though, because millions of Americans that used to make a living in the real estate and mortgage industry are hungry and desperate to save their families.