LENDERS MUST VERIFY BORROWER'S ABILITY TO REPAY - REALLY???
It seems housing recovery just can't get a break. There is a constant flow of new rules and regulations to "protect the consumer" increasing costs and reducing qualified borrowers.
The Dodd-Frank duo are busy at work writing rules for the latest dagger to the heart of real estate recovery.
The latest rule that Lenders Must Verify Borrower's Ability To Repay - would be an oxymoron to most of us in the industry. Isn't that what underwriting does - verify the borrower is apt to pay back the loan?
REALLY! It's long been a required of the lending industry to make sure the borrower has the capacity to repay the loan, it is called underwriting. The three "C's" of lending - CAPACITY, COLLATERAL AND CREDIT. However, now it is being closely monitored by BIG BROTHER himself, who is just waiting for a slip up so that he can effectively destroy companies and levy hefty fines.
Worse yet the two people (Dodd and Frank) who were at the helm while the financial collapse was taking place are still on the committees overseeing the rule writing.
The issue with many loans defaulting was not that underwriting did not do due diligence in approving the loan, Fannie Mae made loans with zero down, no docs, no appraisal, etc. freely available.
Late last month the federal reserve board finally released its proposed rules on exactly how to implement the "ability to repay"requirements from the Dodd-Frank bill. The guideline, which falls under the FDIC's Regulation Z, would force creditors to predetermine whether a borrower has the ability to repay a mortgage prior to origination.
Let's think about that a moment - the lender essentially is being asked to determine in advance if a borrower is likely to get sick, get a divorce, lose a job? How exactly can this rule be carried out?
Next up will be even tighter lending standards and higher costs as lenders price in even more risk. More borrowers will not qualify for loans. Look for continuing decline in housing equity due to fewer buyers. Look for lenders to increase down payment requirements.
Washington does not realize that they can't fix everything. They failed to enforce regulations on the books that would have prevented the housing collapse. With appraisals being a nightmare, fees to close increasing due to regulations, declining housing values, regulated income for originators, a constant flow of additional paperwork and fewer buyers, the cycle will not end any time soon.
As a broker, the borrower has my income explained to him/her multiple ways. The file folder now has about 50 more pages than it did a year ago; new forms have been introduced to be signed at application and at closing. The borrower is not any more informed than he was when we had a one page good faith estimate and brokerage agreement.
I've seen the Consumer Protection bill referred to the Consumer Nanny bill - makes sense. Washington is saying we cannot trust the consumer to make a decision for himself - the answer seems to be, limit what is available.
