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June 18th, 2009

How Will the New Financial Reform Affect You?

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If you follow the news, it’s inevitable that you’ve heard at least some mention of the Obama Administration’s massive overhaul of the country’s financial system. In what is being touted as the largest economic reform since Franklin Roosevelt’s New Deal, the “Financial Regulatory Reform: A New Foundation” has started out like many other reform proposals from the new administration: lengthy and with few concrete details.

The 89-page proposal is full of shake-ups, new regulations, regulators, rules, and changes. We’re going to concentrate on the portions which are likely to affect you the consumer the most.

Costs Expected to Rise

One aspect of the plan calls for the creation of the Consumer Financial Protection Agency (CFPA). The proposal notes “The CFPA should have a stable funding stream, which could come in part from fees assessed on entities and transactions across the financial sector, including bank and nonbank institutions and other providers of covered products and services.”

Given that all costs of making a product available (a loan, in this case) are generally built into the final cost of that product, and that the final cost of that product is paid solely by the end-user (consumer), the new entity would serve to raise the cost of consumer financial products, either in terms of interest rates, fees, or both.
The simple act of requiring a change in standard documentation, such as the forthcoming RESPA change, creates millions of dollars of costs across the industry, all which are ultimately paid for by the consumer.

Fewer Mortgage Products

Among other things, industry groups are also concerned about the new agency’s mandate to promote “plain vanilla” products. In whatever form, lenders would be required to offer such items above and before other choices. The proposal notes that consumers might have to pass some form of “financial literacy” test to have access “non-vanilla” products, and there might be considerable penalties and drawbacks for lenders who want to make them available — including possibly being required to hold 5% or more of the loan amount in reserves. With so much additional overhead, so many additional disclosure steps or requirements, many lenders will simply stop bothering to offer any “non-vanilla” products, and new product development — for good or bad — would likely come to a halt. Aside from making homeownership more costly, we may see the death of financial innovation in the name of consumer protection.

“Plain vanilla” loans already exist in the market, and are the dominant product today. With 30-year FRMs typically the most expensive loan in the market, how many potential future homebuyers won’t be able to qualify for a loan, and what would such a reduction in demand do to home prices and homeownership rates? Even if 50% of the ARMs originated over the past few years did go bad, 50% of them did result in a homeownership opportunity which might not otherwise have existed.

There are no doubt opportunities to streamline a messy, tangled regulatory mess strewn across a number of agencies, and a single regulator to manage them is probably a good idea, on balance. Improving documentation, improving disclosure and making financial products more understandable are all noble goals, but it’s important not to overreach — something the proposal seems to wish to do at its outset. As the “law of unintended consequences” remains in force at all times, completely overturning the market for mortgages and loans probably isn’t the best of ideas, especially given its already fragile state.

It’s also important to remember that the push to put more people in homes was as much a government-led effort as a market-driven one. Driving up the homeownership rate has been a social goal of the past few administrations. The policies and regulatory structures in place also served to help create the housing boom and bust, and products which developed during that time also served that goal.

The Financial Regulatory Reform proposal has been created to clean up after and to prevent another bubble. Yet, if this reform results in shrinking loan availability and raising costs, where will tomorrow’s borrowers turn when elected officials again start to beat the “homeownership is good” drum? The ‘homeownership at any cost’ mentality (lenders, borrowers and elected officials alike) is what helped create this mess in the first place, and with traditional lenders and banks restrained, it’s not too far fetched to think that a government ‘marginal borrower mortgage entity’ will be developed to promote “affordable” homeownership, probably at taxpayer expense. Expansion of the FHA anyone?

(Keith Gumbinger contributed to this article)

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5 Responses to “How Will the New Financial Reform Affect You?”

  1. Lucia Says: June 19th, 2009 at 1:24 pm

    From a real estate appraiser’s point of view, I expect cost savings to consumers to include a cap on appraisal fees. Already I’m being pressured by appraisal management companies to lower my fees despite the longer work hours needed to complete the new market summary form required by Fannie Mae. My lender clients pay only a third of the real cost of doing this new paperwork, so my production has decreased along with my income.

    The idea of gov’t making things simplier is an oxymoron. Gov’t is the god of red tape and bureaucracy is it’s creation. I expect impossible regulations, more strigent license requirements, increased liability and penalties, and loads of paperwork all for less pay.

  2. Tim Manni Says: June 19th, 2009 at 1:42 pm

    Interesting. We did hear that the new appraisal process with Fannie and Freddie were taking a lot longer. This is due to the deal constructed by New York Attorney General Cuomo with the HVCC (Home Valuation Code of Conduct) right? Why not contact Mr. Cuomo’s office, since you’re an appraiser, and tell him what his program has done to your business. Couldn’t hurt right?

    You know as far as the reform goes, I think everyone acknowledges that something needs to be done to shape up the system, but doing it all at once, and all very quickly, we need to be careful with that.

    -Tim

  3. Lucia Says: June 19th, 2009 at 6:01 pm

    Mr Cuomo has had an earful from appraisers, appraiser groups, and state appraisal boards across the country for over a year. He says we should adjust or get out (in so many words) because he was cleaning up the valuation environment. Many appraisers think they can reverse or revise the HVCC to lessen the damage it’s done, but I think the current political winds are blowing against them.

  4. Premier Financial Alliance Says: June 21st, 2009 at 1:34 am

    Nice reading sir. Expect some more.

  5. Tim Manni Says: June 22nd, 2009 at 10:40 am

    PFA,

    Thanks, hopefully we can provide some more articles on this topic.

    Thanks,
    Tim

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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