Monthly Archives: December 2013

The Perfect Storm

In January of 2014 provisions of Dodd-Frank will go into effect that define the “Quality Mortgage”. These provisions, many of which are still in the process of interpretation by the industry, will further tighten up lending guidelines and reduce the number of buyers that will qualify to purchase a home.

No one will argue that the lending industry has a fiduciary responsibility to prevent unqualified borrowers from being able to purchase beyond their means and ability to repay. New regulations have already tightened lending guidelines and brought about significant changes. Many of the people that caused the mortgage meltdown have left the industry. Those that are left, understand the need to avoid a reoccurrence.

Long before the mortgage meltdown, the Federal Government created several Equal Opportunity laws to protect against discriminatory lending practices. These laws shelter protected classes and closely monitor lending patterns to make sure that redlining does not occur. Redlining is generally defined as the practice of lending on a selective basis avoiding specific neighborhoods. Lenders are required to complete HMDA reports that are analyzed to determine lending patterns.

In the creation of the Quality Mortgage provision of Dodd-Frank, there apparently was little, if any, consideration of the socio-economic impact of those regulations. Without reflection or review of the characteristics of borrowers that fall on either side of the line of qualified and unqualified, the law may very well have created the unintended consequence of moving clients in protected classes, to the unqualified side of the line.

Anyone with experience in the mortgage business can list clients they have worked with that demonstrated an ability to repay but likely would no longer be able to obtain financing once the new regulations go into effect in January. Many of these buyers purchased in neighborhoods where the sales price was more reasonable. The effect was to create viable communities, of similar people, that took pride in their homeownership.

Under the new regulations, will these same communities become investor havens? Without the pride of ownership, will these communities become a blight with the associated problems for local government? Will workforce or blue collar employees (teachers, policemen, firemen, nurses, construction, etc.) be able to live in the communities where they work?

Where there is a need, often new financing options appear and that may yet be the case in this situation. But the sad reality is, that no one has evaluated the potential impact or effect of these regulations and that is very disturbing. The quality mortgage rules that go into effect in January are going to put lenders into a box that may make it impossible to comply with Equal Opportunity laws and redlining prohibitions. I could be wrong, but to my knowledge, there is no one with enough hard data to be able to prove that statement incorrect

A perfect storm is brewing in the lending industry. It’s predictable. The potential damage is predictable. No one is preparing. The clouds are on the horizon and closing fast.

The Cash-out Refi – A Grinchmas Carol

I got a call today, the day after Thanksgiving, asking if I was working and whether I had time to meet with a potential client about a refinance. The caller told me that he had been trying for months to refinance and could not find a mortgage company that could close his loan. He sounded almost despondent. He said that he had to find a financing option that would allow him to “cash-out” equity from his property. He wouldn’t go into detail, requesting that I sit down with him so that he could explain what he had been through. It was Friday with much to do, but business had been slow and it was looking bleak for my year end closings, so I agreed to meet him. We set the appointment for 1:00 p.m.
I arrived at my office about thirty minutes early so that I could set up my laptop and get all of the necessary preliminaries taken care of in advance of his arrival. My office faces the parking lot and I was keeping a watchful eye out for his appearance. At 1:00 I looked about the parking lot and saw nothing. I glanced at my phone and saw no in-coming calls from a possible lost client. Startling me, there was a noise on the roof. I walked out of my office and down the hall to the front door to check what had happened on the roof. Seemingly out of nowhere, standing at the front door was an older gentlemen, a little portly, with white hair and beard….nothing remarkable about him to this good little Jewish loan officer. He was dressed in blue jeans and a white shirt under a heavy coat with a Macy’s label still hanging from the sleeve. He was carrying a briefcase with papers sticking out of both sides.
I unlocked the door, extended my hand and asked him in. He made some comment about the unseasonably cold, blustery weather, and how he was hoping for a white Christmas as we made our way back to my office.
The old gentleman sat down, breathed a deep sigh, lifted his briefcase and opened it on my desk. Nervously, he fumbled through his pockets for his wire rimmed glasses. Noticing his anxiousness, I smiled and asked how I could assist.
“Need to refinance”, he replied. “Cash out….and I need to get it done quickly. I have some, uh, um, unexpected repairs to make to some of the important equipment I have in my home that I use for a few months out of the year. With all of the new technologies, there’s a lot that is functionally obsolete in need of replacement”, He continued to fumble through the briefcase. “Do you mean the heating system”, I queried. “Uh…um….okay, yes…….the heating system”, he said as if trying to hide something. I didn’t press him on the matter. It wasn’t too unusual for clients not to be completely forthcoming about the use of funds received from a cash-out refinance.
“You had mentioned that some of the other attempts that you had made to start this process with other mortgage companies had not progressed to closing. Do you know the reasons why……what has been the problem?”
The old man leaned forward and shook his head. “I’m not sure I understand what all of the problems have been. You guys seem to have a very complicated system for determining who has been naughty and who has been nice. I thought I was starting the process far in advance of when I needed to close when I made my initial call in June. It’s just been one thing after another.”

“The first place…..big company…..well, we were proceeding nicely, and then they ordered the appraisal. First, the guy that they assigned to do the appraisal took more than a week to call me to schedule and then when he found that I was not local to his area he increased his fee dramatically and scheduled his inspection for two weeks hence. They sent some fellow from the South Pole to inspect my home. He didn’t seem to be too familiar with the neighborhood or the market in my area. Said something about there being no comps to my 30,000 square foot home that had sold in the last six months. He was concerned when he saw an out building that housed animals….reclassified the property as a “farmette”. He was also concerned about the number of people living on the property. He thought it was too communal. Finally he made notes about the rooms full of toys and assembly lines and said that he was concerned that too much of the home was being used for commercial purposes. He left in a hurry and the next thing I know, I’m being told the property is unacceptable.”

“My next call went to a smaller, correspondent lender…..I think you call them. With a twitch of my nose, I scheduled an immediate appointment!” I looked at him a little peculiarly and laughed to show him I was listening. “We started the application and when we got to the employment section things fell apart. I told him that my job was primarily as a self-employed toy maker and that I had been doing that for…..well…..many decades. He asked me to show him my last two federal tax returns. I told him that my company was a 501C(3) and that my efforts were well rewarded….but the loan officer reviewed the returns and said that my income was as real as Santa Clause and that was the end of that discussion.”

“My next stop was with a mortgage broker. The first thing he did was to pull my credit report. He said that none of the suppositories”……”repositories”, I corrected him…..”okay, repositories…..suppositories, there really is no difference in my opinion…..they both are a pain in the butt. I had no active accounts show up, had no credit score, and the report advised that my social security number was fictitious and the date of birth I had given would have made me centuries old. The broker accused me of fraud…..can you imagine that?……A mortgage broker…..accused ME of fraud” I thought the old man said something about a lump of coal but I wasn’t sure I understood his mumblings.

“The last guy I tried to talk to wanted to know about my assets. Since when does livestock and inventory not count as assets?”

“You’re my last hope”, the old guy pleaded. “If I am not able to close on this loan and quick so that I can make the repairs I need to make to my property……well the result could be a worldwide calamity.” I laughed and told the old fellow that everyone that came into my office thought their loan was the beginning and end of life as they knew it.

“Have you heard of Dodd-Frank?” I asked. I dropped my pen and reached under my desk to retrieve it, continuing as I did so, “I’m afraid they’ve made it impossible to finance someone with your financial circumstances. Now, if you have a vehicle that’s paid for I might be able to hook you up with a friend that can”….… the time I looked up again the old guy was gone… a flash, and strangely enough, so were the holiday cookies out on the front desk. The earlier noise on the roof repeated itself……”strange” I thought.

I stood at my desk, lost in thought, in a trance
The old guy had gotten quite a song and a dance,
He needed a loan, with a small cash advance,
And then it struck me…..could he be…. just perchance,
I ran to the door, gave the lot one last glance,
There was no one around in the blacktop expanse,
As I walked to my car I heard far-away rants,
No Christmas this year, I can’t refinance!!!