Senate Bill 1090: a knee-jerk political reaction to…nothing?
Readers, SB1090 is being hotly debated in this February’s special session. In it’s current form, it is over-reactive and highly unfair to Oregon-based banks. Read this letter I sent to my Representative and Senator earlier today to understand why:
Dear Senator Gordly,
As a business owner and mortgage broker in Oregon and a resident of Portland, I strongly oppose SB1090 and its amendments. This bill does not solve any real issues nor does it help the consumers of home loans here in Oregon. Furthermore it is just unfair and somewhat worthless to regulate Oregon based mortgage providers while national lenders in the same markets such as Wells Fargo, Washington Mutual, and Bank of America would not be under the same regulations. Please take the time to review these points and understand what this bill is not doing for Oregonians!
The mortgage lending landscape is very complex – this bill has not been well thought out. Industry participants can’t agree to any of the sections of the bill because it has not been well crafted or thought out. The passage of this bill, even a hastily watered down version, could very quickly send Oregon slipping and sliding into a housing related economic recession.
It promotes discrimination – in fact, it requires that state regulated institutions discriminate against borrowers subjectively and in doing so violates Title VI of the Civil Rights Act of 1964, Title VIII of the Civil Rights Act of 1968 (the Federal Fair Housing Act) and the Equal Credit Opportunity Act of 1974, among other Fair Housing and Fair Lending laws and initiatives.
It creates an unlevel playing field – the Subprime lending problems were created by large, out of state national financial institutions and their loosened underwriting guidelines. State regulated mortgage brokers, mortgage bankers, community banks and credit unions working Oregon’s communities are the solution to this problem, not the root. Federally regulated financial institutions will not be subject to the requirements of this bill. The very people that are best suited to meet Oregonian’s needs would be put into an impossible disadvantage and effectively be carved out of the marketplace. Ultimately, less competition will result in higher rates and fees, and fewer loan choices, for Oregon’s consumers.
Oregon will end up regulating less of the mortgage industry, not more! – the passage of this bill would cause many if not all state chartered banks and credit unions to be forced to convert their state charters to a federal charter. State licensed mortgage lenders and brokers will simply be forced to align themselves with national banks. In the end, consumers will lose a lot of their access to credit. The state will lose revenue and, more importantly, the very ability it seeks to regulate Oregon’s mortgage lending activity.
Please write your Senator and/or Representative as soon as you can to express your opposition to SB1090. This bill in its current form would decimate Oregon’s lending industry while imparting no effect on Federally-regulated institutions. You can look up your Senator and Represenative here - http://www.leg.state.or.us/.
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Ann said:
I shouldn’t be surprised that a mortgage lender would protest this bill, which is designed to protect citizens from people like you. I’m currently in a subprime loan. I have excellent credit and a decent job, and easily qualified for a fixed rate loan with a good interest rate. However, I did not know this at the time because the mortgage broker I used lied to me about what I qualified for as well as the terms of the loan. Lenders are getting rich by preying on people who are poor or who have bad credit, and brokers are getting kickbacks by directing people into these loans that are high-profit for the lenders but dangerous for the borrower. The borrowers are (usually) misled into these loans that they will NEVER be able to pay back. It is really irresponsible that these lenders are allowed to trap people into these impossible loan terms, and we need to take immediate action to stop this abuse.
So, since you don’t like SB 1090, what is your proposed solution to teh problem?
Greg said:
Hi Ann,
Thanks for taking time to write, and for allowing me the opportunity to offer a different solution. I am truthfully very sorry to hear that you were taken advantage of in that way. I do believe mortgage abuse is a very real problem, and I didn’t mean to imply otherwise by my post. However, I think the problem is more a function of poorly educated advice-givers than it is of intentional malfeasance.
I am ashamed to admit that receiving licensure in Oregon as a mortgage originator is far too simple. Only 20 hours of online coursework are required, followed by a 100-question pass/fail exam. The online education focuses on RESPA, TIL, FACTA and other important legal precedents, but little attention is given to the matters that create a truly good mortgage broker/advisor. Things like how to calculate the APR, or the mathematics required to amortize a payment and calculate/explain savings over time, etc.
I can’t imagine another field that you could literally quit your job on Friday and have an entirely new career by the following Friday. This is why my proposed solution would be to stringently tighten the requirements for becoming a mortgage broker in the first place. Most people spend more money on their mortgages than they’ll ever spend on insurance or investments, yet the insurance and investment fields are highly regulated by multiple governing bodies and the qualifying “series” exams are quite difficult to pass. Why not a similarly difficult exam for stepping into the mortgage industry?
Now, for the real reasons I oppose SB 1090. The biggest deal here is that it creates a disparate impact between mortgage brokers and mortgage bankers. Bankers (WaMu, BofA, Wells Fargo, etc) are regulated at the Federal level whereas brokers, like me, are regulated at the State level. Thus, any action taken by the state to regulate the industry creates an unlevel playing field – with the advantage going to bankers. SB 1090 would cripple 13,000 mortgage brokers state-wide, while allowing bankers to carry on business as usual. I believe the problem is more systemic than our Oregon legislature is going to be able to solve for us, unfortunately.
Anyway, I know that was a pretty verbose response but I hope it helps you understand better where I’m coming from. I’ll try to be more cautious in the future about the tone of my posts. Thanks again for taking time to write.
Brad Oaks said:
Greg,
It’s unfortunate that all mortgage brokers are being painted with this broad brush.
The biggest benefit of using a mortgage broker is that a borrower can shop for many products under one roof, and this is a valuable benefit to the consumer.
I believe you are correct in saying that the real answer is in education, and not in more regulation.
Some of the education is simply caveat emptor. A consumer should be aware that just like any merchant with a product to sell, the merchant (or lender’s) first directive is to maximize their own profit in a transaction. This is not evil, but if the consumer is unaware of this fact, they can feel taken advantage of. If a borrower is trusting a broker to find them the “best deal”, they should be aware that this could just be the “best deal” for the broker. The answer to this dilemma is for the borrower to know what he is buying and learn about the products available.
Self education in mortgage types and products available is seen as a boring topic and endeavor when they have finally found the perfect house and made a deal on it. The mortgage is seen as just one more hurdle in the escrow process to closing.
The subject of mortgage terms and knowledge of the clauses contained in the document they signed months or years ago (often without even reading it) becomes an exciting topic after they find themselves with an increased payment or behind in their payments.
People shop hard for electronics or lawnmowers, trying to garner the greatest feature set for the price, and yet, in obtaining financing for what is the most major purchase of their life, do very little homework or even bother to learn what terms might be important to them.
I think part of the reason is that they have just found a house that they just “love”, probably after looking for quite a while and shopping hard for the purchase, making an offer, and having it accepted. In their mind, the major effort is behind them.
People who fall in love with a piece of real estate, or anything, are already set up to make bad investment decisions in order to get it. This includes agreeing to the terms of a loan that may be unwise for them to take on, based on their personal circumstances.
The decision of whether or not a person “can handle” the payment terms of a loan that they qualify for is up to the borrower, not the lender. Lender criteria is based on MINIMUM qualifications. Many times, a combination of unforeseen financial stresses will crop up after the agreement is made. It is not uncommon for a borrower to have an inadequate reserve for these situations, and fall behind in the mortgage, triggering an interest rate hike or penalty that just compounds their problem.
People used to enter into a home purchase with the idea of eventually paying off the mortgage and owning their property. The situation today is that most people are buried in debt, unsecured consumer debt being the most costly and unwise. Regardless of income level, too many folks live paycheck to paycheck, maxed out on their credit lines and then mortgaged to the hilt.
When the government removed the interest deduction on credit cards, while leaving it in place for home mortgages, this encouraged people to look to their home equity for the financing of consumer goods purchases, resulting in people living beyond their means.
It also meant that their mortgage would not be paid down, much less be paid off. The “mort” part of “mortgage” is Latin for “death”. It used to mean that the debt would eventually die as the loan is paid off. Today it means the death of financial security and home ownership dreams for the borrower, primarily resulting from bad financial decisions, or lack of financial discipline.
Teaser loans with interest or payment balloons are particularly deadly to a consumer who has found the dream home that costs more than their financial circumstances warrant. A lot of self-delusion or wishful thinking can occur in the mind of a home buyer in this process.
There is another factor conspiring against the home buyer. It’s a psychological trap. I call it “the greater fool theory”. This comes into play in a “hot market” when an auction-like frenzy occurs. People see prices going up up up, and get very anxious to buy while prices are still “reasonable”, and with the expectation that prices will continue to go up up up. This ignores the fact that while prices are going up, incomes are not, or not at the same rate. It also ignores supply and demand economics.
The “greater fool theory” of a hot market says that “yeah, I’m paying too much” and “boy these payments are going to be tough”, but “next year, I’ll be able to sell it for ten, twenty, or thirty K more than I paid for it”. Well, sooner or later, the pool of fools dries up. What goes up…
I have more sympathy for the borrower in this situation, even though they acted irresponsibly and foolishly. A lot of their plight can be explained by ignorance.
However, the secondary market and mortgage lenders should have known better. They made risky loans with 100%+ LTV amounts, buying in to the up up up greater fool theory themselves.
The mortgage brokers job is to sell the products on his shelf to a willing buyer. This system works, and is “fair” to both parties in a transaction when both are informed and knowledgeable. Sadly this is not the case today. Is this the broker’s fault? Not really. It is the consumer’s responsibility to inform themselves of the features and benefits of the product they’re buying, and if they aren’t capable of understanding the terms or conditions of something they are signing, find someone who is at arms length to the transaction and understands the product who can inform and advise them.
An advisor might be someone in real estate who is a trusted friend of the person, an attorney, or a professional financial advisor, or a CPA.
Sometimes the best advice a person can get is not how to do it, but rather, just don’t do it! Making a wise choice might be to find a property that is more within one’s means, or to wait until that anticipated raise or promotion actually comes to fruition.