August 1, 2007

Regulatory Overkill?

Mortgage pros say proposed rules from Fed and Congress unnecessary.

By Pat Curry

Mortgage professionals have mixed emotions on recent discussions by the Federal Reserve - and now by Congress - to create more regulatory control over the industry.Testifying before Congress in June, Federal Reserve governor Randall Kroszner told lawmakers that the Fed was looking closely at restrictions on stated-income loans and pre-payment penalties, as well as a requirement that annual fees, such as property taxes and homeowners insurance, be included in the monthly mortgage payment.

Then, in July, Rep. Spencer Bachus (R-Ala.) introduced the Fair Mortgage Practices Act of 2007, which includes a requirement for escrow accounts for property taxes and insurance on subprime loans, a restriction on pre-payment penalties on hybrid adjustable rate mortgages, and simplified disclosures, as well as a national registration and licensing standard for mortgage brokers.

Industry professionals say that market conditions already have dealt with many of the issues the Fed and Congress are seeking to address, and the proposed regulations do more harm than good.

"I don't think it's the government's role to regulate the details of commerce," says Gregory A. Krauza, president of the New York Association of Mortgage Brokers. "The industry itself has already taken some of the measures they're talking about taking. Lenders have changed guidelines and increased requirements for achieving some of the loans. Let's face it -- the delinquency and foreclosure rate is more of a business problem than a political problem. Lenders aren't going to stay in business too long if they keep making these loans."

As for pre-payment penalties, they have their place as a way to offer borrowers a lower interest rate, says Michael LaCour-Little, professor of finance at California State University at Fullerton. Stated-income and low documentation loans also fill a valuable role for some buyers, he says. His research found that the borrowers who want stated-income loans are self-employed and have income that is difficult to substantiate. He cited himself as an example.

"I have a regular paycheck from the state of California, but I have some consulting work on that side and that's very erratic," he says.

Borrowers should be told, however, that if they can document their income, they can probably get a loan with a lower interest rate. "It doesn't make sense if you have a borrower with a regular job and a W-2 to put them in a stated-income loan," he says.

LaCour-Little rejected the notion of requiring lenders to escrow taxes and insurance, saying it would create a barrier to entry for small lenders who couldn't bear the expense of collecting and dispersing those payments.

Some industry professionals are more willing to accept a requirement for escrowing taxes and insurance on mortgages with subprime loans or on those with loan-to-value ratios above 80 percent. Those buyers typically are stretching to make the monthly mortgage payment as it is; a large insurance or tax bill could force them into default.

"If a person has a 100 percent loan, absolutely, they should have an escrow," says Steve Jacobson, president of Fairway Independent Mortgage Corp. in Madison, Wis. "But at 75 percent or 60 percent [loan to value], you shouldn't have to do that. It should be the consumer's choice."

Krauza agrees that borrowers with good credit should be able to make the choice themselves about escrowing the fees or paying them on their own.

"If I'm an investor with a 700 credit score and I have four mortgages, don't force a mandatory escrow on me that drives up my costs," he says. "It's a personal preference once you earn the right."

For complete text and the latest status of the Fair Mortgage Practices Act of 2007, visit www.thomas.gov and type in HR 3012 at the Search Bill Text field.