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May 10th, 2010

Update1 PART 2: Mortgage Pros React to “Ways to Fix the Mortgage Mess”

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Update1: We received more comments the other week from Steve Hoogerhyde, Executive Vice President & Chief Lending Officer at Clifton Savings Bank. See Steve’s comments below:

As promised, in part two of our ‘Mortgage Pros React’ series, we’re going to explore the reactions of mortgage professionals to Peter Miller’s “six ways to fix the mortgage mess.”

“Fixing the mortgage system is crucial if we’re to prevent another financial meltdown,” writes Miller.

Several experts not only gave us their immediate reactions to Miller’s ’six ways,’ they offered their own viewpoints on how the mortgage system could be improved.

Gut Reactions to Miller’s Solutions

None of Miller’s ideas would prevent another meltdown, argues Vernon Appenzeller, Senior Loan Officer and 40-year veteran of the mortgage industry.

“This fellow doesn’t recognize the fact that ‘do good’ legislation to expand homeownership promulgated by Congress several years ago created the dragon that they are now trying to slay. Businesses self regulate or perish. Government intervention over regulates and destroys.”

“I think the author’s suggestions may be helping the trial lawyers and the law enforcement more than the ordinary borrowers,” said Kris Taraz, Managing Director of Inhouse Capital Inc.

Mortgage Pros: What’s Wrong With the Current Mortgage System?

Political Influence

“I’ve been in the mortgage biz for 40 years and have seen all manner of ups, downs, crises, mayhem and meltdowns…but none to equal the cause/effect and knee jerk overreaction of this,” said Appenzeller.

“My one overreaching observation would be that the system (devised by private industry over decades since HUD & Fannie/Freddie) worked very well…until political pressures were brought to bear to coerce the system to accommodate risks that it was not designed to bear. Even with that, if the newly introduced risks were slowly adapted and servicing portfolios properly monitored for performance, instead of the wholesale embrace of all manner of bizarre lending practices/programs (with a little self monitoring and restraint from the industry) the outcome would have been, at worst, quite muted from what we’ve witnessed.”

“After over 30 years in the business, it has indeed become more difficult and more tedious to help customers, and the reason for that has been the proliferation of government-imposed ‘consumer protections,’” said Hoogerhyde.

The “Bad Actors”

“The loan officers who have no morals and were in the business for the money only, now have hurt the long term good people just trying to survive these times with laws that make no sense and have created total HAVOC in the industry,” said Mary Boyer, of Heartland Mortgage in California.

What Would You Like to See Changed?

Credit Scoring

“Credit scoring can be arbitrary and negate a study of the patterns inherent in credit reports,” said Appenzeller. “Trying to condense someones history with credit with no circumstantial review to a digit (a digit that now affects nearly every aspect of your life…auto and life insurance rates…even your job) is inherently arbitrary regardless of the mathematical model used to produce it.

“A skilled underwriter can dissect a credit report and reveal patterns of chronic delinquency, simple oversight or circumstantial (job loss, divorce…the human condition) delinquencies, and render a more holistic ’score’ than the FICO model and determine acceptable risks much more accurately without blocking an applicant’s access to certain mortgage programs simply because of a machined score. The flaws in FICO scoring will be greatly magnified by the current economic circumstances that are forcing many to sub satisfactory scoring as a result of forces beyond their control. It’s difficult to have a housing recovery hampered by a scoring model designed to operate in a completely different environment than today.”

The New Good Faith Estimate (GFE)

“Have you even worked in the business to see what everyone is struggling with right now, just trying to stay afloat because of the new rules regarding the GFE & HUD 1?” asked Boyer of Miller.

“Simplifying the process is the key to make it easier for borrowers to comprehend things than presenting them with a large stack of paperwork,” said Taraz. “For example, the new version of the Good Faith Estimate and other disclosures immensely confuse the borrowers. I can guarantee that 90% of borrowers do not understand the new version.”

“I could go on about the newly convoluted GFE that makes originators responsible for 3rd party fees over which they have little to no control,” said Appenzeller. “And the fact that the new form is more tedious to complete and more confusing to the borrower and does not even indicate the vital ‘cash to close’ despite 3 pages of math gymnastics.”

“How on earth is a customer to understand and benefit from these convoluted new forms, if professionals who spend their days working with the forms can’t understand them, or get clear and unambiguous answers from HUD,” asked Hoogerhyde. “And perhaps most distressing of all (at lest to the lenders) is that, because of an inadvertent error in disclosure or calculation, or because a third party settlement services provider charges more than they indicated they would, the lender could be guilty of a tolerance violation, and be required to reimburse a borrower–for a cost that the borrower did not overpay or possibly even pay! Can you say ‘unjust enrichment’?”

Lending Restrictions

“Presently however, there are many good low risk borrowers who are unable to get a loan,” said Taraz. “We are losing a large segment by making it more difficult for them to borrow with overly restrictive lending guidelines.

“On the other hand, there may be a bubble being created by lending to borrowers with 3.5% down payments for loans up to $600K with credit scores as low as 620 and sometimes lower.”

The Mortgage Pros didn’t Disagree with Miller on Everything

Number one on Miller’s “six ways to fix the mortgage mess” is the implementation of the Nationwide Mortgage Licensing System (NMLS). This national system will prevent the “bad actors” in the mortgage business from taking their bad practices from state to state.

Appenzeller says the current regulation of licensing “is worthy of preservation to eliminate some of the opportunists…”

Final Thoughts

Boyer regrettably explained that after 30 years in the mortgage business, her love of helping customers is beginning to be overshadowed by the stress brought on by the current system.

“In short, a refinement (and some restrictions) of the old lending model that worked so well for so many decades is preferable and less traumatic to all involved,” said Appenzeller.

“I agree with the fact the every loan officer should have his or her client’s best interest in mind first,” said Taraz. “The problem with the mortgage industry as a whole is that whenever the regulatory bodies try to protect the consumers, they in fact make it much more difficult for consumers to understand the process.”

“If you think things are bad now, just wait until the financial restructuring bill gets passed by Congress,” said Hoogerhyde.

We want to hear your reaction — especially if you’re in the industry! Don’t hesitate to share what you think of the reactions you’ve read as well as your own.

Missed out on Part One? Click here to get caught up.

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2 Responses to “Update1 PART 2: Mortgage Pros React to “Ways to Fix the Mortgage Mess””

  1. Steve Says: April 30th, 2010 at 9:20 am

    I have to agree with most of what has been said so far. After over 30 years in the business, it has indeed become more difficult and more tedious to help customers, and the reason for that has been the proliferation of government-imposed “consumer protections”. I put that term in quotes because, in my estimation, the protections don’t protect the consumer so much as they protect the future income stream of compliance consultants, the continuing employment of the government staff–and lobbyists–who write the legislation, and the reelection prospects of the legislators who vote for the legislation.

    It has reached the point where I actually wrote on a banking web site early this year, “Our primary responsibility is not to help the customer; it is regulatory compliance.” I expected to get criticized, and instead all manner of people in the industry agreed with me! The example cited earlier of the new GFE and HUD-1 requirements of RESPA are perhaps the most egregious example. The HUD regulation, and the constantly issued “clairification” and “guidance” from HUD, are so difficult to understand and implement that, almost four months after they went into effect, RESPA compliance is still by far the #1 concern of bankers, according to a recent survey.

    How on earth is a customer to understand and benefit from these convoluted new forms, if professionals who spend their days working with the forms can’t understand them, or get clear and unambiguous answers from HUD?! And perhaps most distressing of all (at lest to the lenders) is that, because of an inadvertant error in disclosure or calculation, or because a third party settlement services provider charges more than they indicated they would, the lender could be guilty of a tolerance violation, and be required to reimburse a borrower–for a cost that the borrower did not overpay or possibly even pay! Can you say “unjust enrichment”?

    I could go on, but I think you see my frustration. There are legions of community banks and ethical mortgage brokers who are out there day after day trying to help customers, and trying to make a profit at the same time, and we’re painted as the scourge of Western civilization. If banks lose money, we’re derided as incompetent; if we make money, we’re castigated as rapacious.

    And if you think things are bad now, just wait until the financial restructuring bill gets passed by Congress. The paper suppliers and lawyers are probably licking their chops already. In fact, when the bill gets passed, I’ll probably play that old Warren Zevon tune: “Send lawyers, guns, and money: the [censored] has hit the fan.”

  2. Tim Manni Says: April 30th, 2010 at 12:42 pm

    Hey Steve,

    Thanks so much for adding to the conversation! I would encourage you to prompt your colleagues to do the same! I’m going to add your opinions into the post when I get a chance. And by the way, I just love your Zevon reference — a classic, and quite fitting, tune.

    Again, thanks for your contribution, we hope to hear from you again soon. And if there’s a topic that you think would make an interesting post on this blog, please don’t hesitate to share it with me.

    Thanks again,
    Tim

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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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