by Robert Franco Downsizing The Good
When an industry comes off a high, like the one we have experienced the past decade in the title industry, it is only natural to experience some downsizing. What bothers is me "how" some companies decide to downsize.
In the frenzy to hire more and more people, many companies neglected training, seemingly all together. I remember when I started, my clients were all very knowledgeable. Sure, you got the occasional new person on the phone that wasn't quite up to speed yet, but they were being trained and we knew that they would get there.
As time went on, it became apparent that training was something that just stopped; some caught on, most just didn't. We found ourselves trying very hard to explain simple concepts to clients' employees who didn't think it mattered.
One of my clients has downsized and one of the good guys has been let go. He was one of the few remaining who understood title, he understood the complexities of a thorough search and he appreciated our work. I was quite surprised.
I am afraid that in this slowing market, the title industry is going to downsize the good right out of the business. Decisions on who must go are probably being made based on factors such as cost and ideology, rather than knowledge and expertise. Those who have been around a while and have developed good title skills are probably making more money than the new hires who haven't realized "why" we do this job. That also means that they understand the importance of a thorough title search, marketable title, and curing defects. Those qualities don't fit in well with the new "master plan" of thin-title plants, outsourcing to India, current owner searches, indemnification, and insuring over known-defects.
What will this mean for the future of the title industry? When we experience the next boom, there won't be any "real" title people left to handle it. There won't be anyone there to train the new people of next round of "hire everyone." Of course next time, I'm guessing those higher-ups who make the decisions are banking on complete automation... instant title commitments that won't require anyone who really understands title. Fortunately for them, there won't be anyone around who cares enough when the instant products fail to do anything about it. The machine will be in high-gear producing fundamentally flawed title policies and when a claims arise there will be "rubber stamp" department to issue an indemnity to get the next deal closed.
Fortunately for me, this will create a demand for good title attorneys to sue title companies on behalf of homeowners who hold imperfect title. I'll be out of law school by then... and I'll have a lot of student loans to repay.
Of course, its not too late. Someone may understand that we need to keep the best and downsize the rest. The industry should take this time, while things are slow, to train and educate those who have slipped through the cracks. They need to start thinking about the next generation of title professionals who will be dealing with the problems that the refi-boom has created. There are a lot of title problems out there from short-searches, thin-title plants, and inexperienced abstractors, just waiting to be discovered. They may lie dormant until the next wave of business hits the industry, but they will surface. If we downsize the good out of the title industry, who will take care of them?
And, one last thought: if you are one of the "good guys" that has been around a while, and you know "why" what we do is so important to the industry, how safe if your job? What are your company's priorities for the future and how are they planning to downsize?
Robert A. FrancoSOURCE OF TITLErfranco@sourceoftitle.com
Thursday, June 14, 2007
Tuesday, June 12, 2007
Borrower Counseling: Where the Rubber Meets the Road
I thought we might look at some details in this piece in the New York Times by our dependable Vikas Bajaj, "Effort to Advise on Risky Loans Runs Into Snag." As usual, Bajaj pulls together enough information to allow us to get past the spin, without actually crossing the line into editorializing. But hey! I'm a blogger. About editorializing I have no scruples.
I strongly encourage you to read the whole thing. A few choice bits:
Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.
Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.
Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.
And while we're on the subject of brokers earning their fees by providing services to borrowers:
A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.
If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?
81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.
On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)
Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)
In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.
Back to the Times:
The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.
Delicious. Irony, with a touch of vermouth. My favorite cocktail.
But don't think those brokers are just anti-education:
John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”
You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.
Not that the local regulator comes off sounding that much brighter:
Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.
“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”
Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.
Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.
Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a prior problem, and the pieces might fall into place for you.
Posted by Tanta on the calculatedrisk.blogspot.com
I strongly encourage you to read the whole thing. A few choice bits:
Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.
Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.
Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.
And while we're on the subject of brokers earning their fees by providing services to borrowers:
A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.
If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?
81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.
On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)
Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)
In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.
Back to the Times:
The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.
Delicious. Irony, with a touch of vermouth. My favorite cocktail.
But don't think those brokers are just anti-education:
John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”
You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.
Not that the local regulator comes off sounding that much brighter:
Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.
“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”
Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.
Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.
Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a prior problem, and the pieces might fall into place for you.
Posted by Tanta on the calculatedrisk.blogspot.com
Sunday, June 10, 2007
What is lender pay title insurance?
Sunday, June 10, 2007
The most likely form of lender pay title insurance is lien protection only - with or without an underlying title search. It offers no protection for the consumer.
It's a very dangerous prospect for the real property business and the idea can only thrive in the absence of true recognition of what title insurers really do.
The traditional, honest, respectable, quality driven title insurer performs a thorough search of title, examines the data and makes corrections to the underlying issues BEFORE issuing a title policy. Traditional, honest, respectable, quality driven title insurers operate independently of Realtor and mortgage lender ownership or oversight and thus do not suffer from conflicts of interest.
Traditional title insurers guard the quality of land records, thus maintaining a stable, marketable inventory of real property for mortgage or sale. It's this function of title insurance which has become thoroughly misunderstood and forgotten and will no longer exist IF ignorance reigns supreme and so called lender pay title insurance is adopted as the new norm.
The title industry lost it's way after RESPA was altered to allow affiliated business relationships. This form of legalized kickbacks through profit sharing laid fertile ground and cover to those who bastardized the intentions of the new RESPA rules while at the same time encouraged a whole host of disreputable business practices wherein title charges to consumers continued to increase to cover gifts and kickbacks and sham profit sharing programs.
Consumers lost not only a competitive marketplace for fees and service, they lost the independent oversight of a quality title insurer motivated to protect the underlying transaction.
We have made much progress in these last few months shining the light of truth on the bad practices. Regulators and lawmakers are doing good work.
I am very concerned that the prospect of lender pay title insurance has been raised in the agenda and hope that regulators and lawmakers will understand that the concept is not grounded in principles which will protect the consumer. Rather, the products like Radian and TitleSmart, are children of the bastardization process that followed the RESPA reform of the 80s.
Remember, lenders will never absorb additional costs. It's economic law. The consumer will pay for whatever product comes with the mortgage, one way or another.
Lenders will be motivated to protect their interests only, not the consumers, so look for only a minimal lien protection, just enough to make the loans meet FNMA/FHLMC saleability standards. Those FNMA/FHLMC standards are likely to be ignorant of the underlying risk of losing the corrective forces in the title examination phase in which traditional, quality title insurers find and fix problems and so you must also expect over time, accumulation of title clouds and problems which WILL surface eventually and affect marketability of the underlying real estate.
Consumers, as layman, can't be expected to fully understand the issue and therefore depend on regulators and lawmakers to guard their interests at this time. Mortgage lenders, Realtors, and the title insurance industry at large have shown themselves collectively to be unable or unwilling to police themselves and work for the benefit of the consumer. Until we have order restored in the real property business and replace bad actors with responsible leadership, we must rely on lawmakers and regulators to make careful, thoughtful decisions with regard to systemic change.
Please, please, lay aside plans and considerations for a lender pay title insurance product which in the long run will cause much harm. Traditional title insurance as a product is not broken. It's the delivery system that needs fixing. The most favored course of correction will be found in competition - free from conflicts of interest mired in affliliated business and bundled services.
Independent providers not beholden to a single or few sources of referrals are your best chance of fair pricing with qualitiy of service. Release traditional title insurers from the legalized yoke and expection of affiliations and you will free a resource to the consumer. You will do more to restore order by clearly outlawing revenue sharing of any kind. Independent providers will then focus their attention on the true decisionmaker, the consumer, and fight for their business. Technology, product and pricing will naturally benefit the decisionmaker. YOU can decide who the ultimate decisionmaker will be - Realtors, lenders or consumers. I for one believe we are safer having the consumer in the decisionmaking role. Afterall, it's the consumer's home and money at risk. Let's give them back their power and stop this revenue sharing melee once and for all.
Posted by Diane Cipa, The Closing Specialists®
The most likely form of lender pay title insurance is lien protection only - with or without an underlying title search. It offers no protection for the consumer.
It's a very dangerous prospect for the real property business and the idea can only thrive in the absence of true recognition of what title insurers really do.
The traditional, honest, respectable, quality driven title insurer performs a thorough search of title, examines the data and makes corrections to the underlying issues BEFORE issuing a title policy. Traditional, honest, respectable, quality driven title insurers operate independently of Realtor and mortgage lender ownership or oversight and thus do not suffer from conflicts of interest.
Traditional title insurers guard the quality of land records, thus maintaining a stable, marketable inventory of real property for mortgage or sale. It's this function of title insurance which has become thoroughly misunderstood and forgotten and will no longer exist IF ignorance reigns supreme and so called lender pay title insurance is adopted as the new norm.
The title industry lost it's way after RESPA was altered to allow affiliated business relationships. This form of legalized kickbacks through profit sharing laid fertile ground and cover to those who bastardized the intentions of the new RESPA rules while at the same time encouraged a whole host of disreputable business practices wherein title charges to consumers continued to increase to cover gifts and kickbacks and sham profit sharing programs.
Consumers lost not only a competitive marketplace for fees and service, they lost the independent oversight of a quality title insurer motivated to protect the underlying transaction.
We have made much progress in these last few months shining the light of truth on the bad practices. Regulators and lawmakers are doing good work.
I am very concerned that the prospect of lender pay title insurance has been raised in the agenda and hope that regulators and lawmakers will understand that the concept is not grounded in principles which will protect the consumer. Rather, the products like Radian and TitleSmart, are children of the bastardization process that followed the RESPA reform of the 80s.
Remember, lenders will never absorb additional costs. It's economic law. The consumer will pay for whatever product comes with the mortgage, one way or another.
Lenders will be motivated to protect their interests only, not the consumers, so look for only a minimal lien protection, just enough to make the loans meet FNMA/FHLMC saleability standards. Those FNMA/FHLMC standards are likely to be ignorant of the underlying risk of losing the corrective forces in the title examination phase in which traditional, quality title insurers find and fix problems and so you must also expect over time, accumulation of title clouds and problems which WILL surface eventually and affect marketability of the underlying real estate.
Consumers, as layman, can't be expected to fully understand the issue and therefore depend on regulators and lawmakers to guard their interests at this time. Mortgage lenders, Realtors, and the title insurance industry at large have shown themselves collectively to be unable or unwilling to police themselves and work for the benefit of the consumer. Until we have order restored in the real property business and replace bad actors with responsible leadership, we must rely on lawmakers and regulators to make careful, thoughtful decisions with regard to systemic change.
Please, please, lay aside plans and considerations for a lender pay title insurance product which in the long run will cause much harm. Traditional title insurance as a product is not broken. It's the delivery system that needs fixing. The most favored course of correction will be found in competition - free from conflicts of interest mired in affliliated business and bundled services.
Independent providers not beholden to a single or few sources of referrals are your best chance of fair pricing with qualitiy of service. Release traditional title insurers from the legalized yoke and expection of affiliations and you will free a resource to the consumer. You will do more to restore order by clearly outlawing revenue sharing of any kind. Independent providers will then focus their attention on the true decisionmaker, the consumer, and fight for their business. Technology, product and pricing will naturally benefit the decisionmaker. YOU can decide who the ultimate decisionmaker will be - Realtors, lenders or consumers. I for one believe we are safer having the consumer in the decisionmaking role. Afterall, it's the consumer's home and money at risk. Let's give them back their power and stop this revenue sharing melee once and for all.
Posted by Diane Cipa, The Closing Specialists®
Friday, June 8, 2007
Mortgage rates on the rise.
The bond market meltdown continues ...
There's no rest for the weary in bond-land this morning. Treasuries continue to get whacked, with the long bond off 22/32 at last count. 10-year T-Notes were recently yielding 5.18%, up about 5 basis points from yesterday. Obviously, what we're seeing is wave after wave of forced selling -- the kind of liquidation you don't see very often, but when you do, it can get ugly.
I looked back at the last several years of trading in long bonds and found three similar selling squalls --the first began in November 2001, when a big run-up (sparked by the government's plan to abandon 30-year bond sales) was followed by an even more powerful sell-off. Then we had the big run-up in the spring of 2003, spurred by deflation fears, followed by an even more powerful sell-off. Finally, in early 2004, we had a sharp plunge on the belief the economy was finally regaining its footing.
The magnitude of those declines, price-wise, from high to low? Roughly 12%, 16.6%, and 12.7%. We also had a sharp rise in bond prices, followed by a plunge, in 1998 during the time of the Long-Term Capital Management scare. That decline, peak to trough, was about 7%.
How do things look this time around? Well, from the most recent peak in early May, we're only down about 6% in price. In other words, there could be more ugliness ahead -- though we are closing in on what I'd call pretty solid technical support in the low-to-mid 105s.
posted by Mike Larson at 7:50 AM
There's no rest for the weary in bond-land this morning. Treasuries continue to get whacked, with the long bond off 22/32 at last count. 10-year T-Notes were recently yielding 5.18%, up about 5 basis points from yesterday. Obviously, what we're seeing is wave after wave of forced selling -- the kind of liquidation you don't see very often, but when you do, it can get ugly.
I looked back at the last several years of trading in long bonds and found three similar selling squalls --the first began in November 2001, when a big run-up (sparked by the government's plan to abandon 30-year bond sales) was followed by an even more powerful sell-off. Then we had the big run-up in the spring of 2003, spurred by deflation fears, followed by an even more powerful sell-off. Finally, in early 2004, we had a sharp plunge on the belief the economy was finally regaining its footing.
The magnitude of those declines, price-wise, from high to low? Roughly 12%, 16.6%, and 12.7%. We also had a sharp rise in bond prices, followed by a plunge, in 1998 during the time of the Long-Term Capital Management scare. That decline, peak to trough, was about 7%.
How do things look this time around? Well, from the most recent peak in early May, we're only down about 6% in price. In other words, there could be more ugliness ahead -- though we are closing in on what I'd call pretty solid technical support in the low-to-mid 105s.
posted by Mike Larson at 7:50 AM
Thursday, June 7, 2007
Section Eight
Section Eight
by Robert Franco
We all know Section 8 as the anti-kickback provision of RESPA. However, Section 8 is more commonly known as a military discharge for being mentally unfit for service. I think that is more than a little bit ironic, since Section 8 of RESPA is an absolutely insane provision after the exceptions for Affiliated Business Arrangements (AfBAs).
Section 8, in its current form, merely prohibits small agents from competing with AfBAs. If an AfBA can effectively share fees with a non-title partner, what sense does it make to prohibit an independent title agent from doing the same thing? Section 8 recognized that allowing such behavior to occur would cause the consumer to pay increased fees that would be used by the title agent to "buy business" from referrers. That danger seems even more likely when there is an AfBA.
When an affiliated business arrangement is created, they have to maintain a separate company which adds to the overhead of the operation. If a non-affiliated entity were allowed to effectively do the same thing, pay referral fees, they could do it without the added cost of maintaining a separate entity and, therefore, could do it without raising costs to the consumer - at least easier than could an AfBA.
If the argument is that competition keeps the fees in check for AfBAs, wouldn't the same theory prevent non-affiliated businesses from over-charging their consumers to pay referral fees? Competition is actually more likely to prevent the non-affiliated business from gouging their customers because the referrer is not tied to the non-affiliate. It would be easy for the referrer to go to another provider willing to pay the kick-back that would charge the consumer less. However, with the AfBA, the referrer has an investment in the new entity to protect. They have more control over the fees charged and they could just as easily increase the consumers fees to create a larger split of the profits. Because they are the main source of business for the AfBA, there is little threat of competition to protect the consumers from unnecessarily inflated fees.
Call it whatever you want... referral fees, fee-splitting, profit sharing... its all effectively the same thing - A BAD IDEA. It seems that the original drafters of RESPA realized this, which is why they included Section 8. I don't understand the logic that its okay to share fees if we make the referrer and the provider MORE beholden to each other by requiring them to enter a more official business partnership. In my opinion, that makes matters even worse.
Maybe I'm crazy (pun intended), but the AfBA exception to Section 8 creates an uneven playing field, deters real competition, and threatens the future of small agents. How can any of that be good for consumers? But then again, it wasn't the consumers that lobbied for the changes.
Banks, mortgage companies, and Realtors wanted to get their hands on some of the title fees generated from the orders that they were referring. Section 8 prevented that, so the answer was to create the AfBA and get HUD to except them from the anti-kickback provision. In their lobbying efforts, they convinced everyone that consumers were demanding "one-stop shopping" and that more companies (AfBAs) meant more competition. I just can't believe that anyone
bought into that line of bull*!#*. Perhaps I'm not the crazy one ofter all.
Robert A. Franco
SOURCE OF TITLErfranco@sourceoftitle.com
by Robert Franco
We all know Section 8 as the anti-kickback provision of RESPA. However, Section 8 is more commonly known as a military discharge for being mentally unfit for service. I think that is more than a little bit ironic, since Section 8 of RESPA is an absolutely insane provision after the exceptions for Affiliated Business Arrangements (AfBAs).
Section 8, in its current form, merely prohibits small agents from competing with AfBAs. If an AfBA can effectively share fees with a non-title partner, what sense does it make to prohibit an independent title agent from doing the same thing? Section 8 recognized that allowing such behavior to occur would cause the consumer to pay increased fees that would be used by the title agent to "buy business" from referrers. That danger seems even more likely when there is an AfBA.
When an affiliated business arrangement is created, they have to maintain a separate company which adds to the overhead of the operation. If a non-affiliated entity were allowed to effectively do the same thing, pay referral fees, they could do it without the added cost of maintaining a separate entity and, therefore, could do it without raising costs to the consumer - at least easier than could an AfBA.
If the argument is that competition keeps the fees in check for AfBAs, wouldn't the same theory prevent non-affiliated businesses from over-charging their consumers to pay referral fees? Competition is actually more likely to prevent the non-affiliated business from gouging their customers because the referrer is not tied to the non-affiliate. It would be easy for the referrer to go to another provider willing to pay the kick-back that would charge the consumer less. However, with the AfBA, the referrer has an investment in the new entity to protect. They have more control over the fees charged and they could just as easily increase the consumers fees to create a larger split of the profits. Because they are the main source of business for the AfBA, there is little threat of competition to protect the consumers from unnecessarily inflated fees.
Call it whatever you want... referral fees, fee-splitting, profit sharing... its all effectively the same thing - A BAD IDEA. It seems that the original drafters of RESPA realized this, which is why they included Section 8. I don't understand the logic that its okay to share fees if we make the referrer and the provider MORE beholden to each other by requiring them to enter a more official business partnership. In my opinion, that makes matters even worse.
Maybe I'm crazy (pun intended), but the AfBA exception to Section 8 creates an uneven playing field, deters real competition, and threatens the future of small agents. How can any of that be good for consumers? But then again, it wasn't the consumers that lobbied for the changes.
Banks, mortgage companies, and Realtors wanted to get their hands on some of the title fees generated from the orders that they were referring. Section 8 prevented that, so the answer was to create the AfBA and get HUD to except them from the anti-kickback provision. In their lobbying efforts, they convinced everyone that consumers were demanding "one-stop shopping" and that more companies (AfBAs) meant more competition. I just can't believe that anyone
bought into that line of bull*!#*. Perhaps I'm not the crazy one ofter all.
Robert A. Franco
SOURCE OF TITLErfranco@sourceoftitle.com
Wednesday, June 6, 2007
The Subprime Mortgage "Crisis" Will Fix Itself
"Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to 'predatory' lenders and mortgage brokers."
By Steve Berger
Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. Legislators at all levels of government are contending for ownership of the most destructive idea.
Finalists in this legislative race to the bottom include punitively stiff lending standards, foreclosure holidays and taxpayer-financed bailouts. I would like to propose a far simpler, fairer and effective course of action: let free people sort it out for themselves.
Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn.
Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to "predatory" lenders and mortgage brokers. Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level? Is entrusting a solution to Washington putting a fox in charge of the chicken coop?
Regardless of where blame resides, the legislative options being considered are bad economics and ethically flawed. A bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers. A bailout postpones hard choices into the future and props up faulty credit. Individuals facing default or delinquency have less reason to curb spending habits or make other sacrifices. Lenders have less incentive at the margin to tighten credit standards if a bailout is imminent. Bailout logic is perverse, especially in light of growing evidence that a not-insignificant number of subprime defaults involve so-called "liar's loans", i.e., loans to borrowers who falsified information about their financial condition and income. Bailing out such borrowers is akin to rewarding them with a one-way free option on rising home prices.
Foreclosure holidays are equally flawed. Such laws in one fell swoop eviscerate contractual agreements and contravene the impairment of contracts clause of our Constitution. Unfortunately, that constitutional protection has been stripped of its teeth for generations.
Putting aside these legal quibbles, foreclosure holidays will lead to more foreclosures. Borrowers on the verge of delinquency will be less motivated to exercise fiscal discipline if they know that foreclosure rights are honored more in the breach than the observance. Lenders, less secure about their ability to take hold of collateral, will be less willing to lend, narrowing the refinancing options available for stretched borrowers. Ergo, foreclosure holidays will lead to more delinquencies and foreclosures just as banking holidays in the 1930s led to more bank runs.
What about adopting regulations that provide for uniform disclosure, loan-to-value ratios, rate caps, or otherwise stiffen lending standards? How can one cavil against such seemingly logical attempts to enhance disclosure and level the playing field? The problem with regulation is that it is impossible ex ante to determine whether its costs outweigh benefits. How can one abstractly agree on the right lending rate or disclosure standard? Any regulatory solution is one imposed from above by parties far removed from pricing risk on a day- to- day basis.
A regulatory solution is a one size fits all mentality that consequently stifles the free market's innovation and creativity and in the process restricts competition by raising entry costs. Friedrich Hayek, 1974 Nobel Laureate in Economics, referred to this as the "pretense of knowledge" syndrome infecting central planners. More order and fairness comes out of the spontaneous interaction of thousands of voluntary free market transactions.
We are not asserting that the market is perfect; as long as men aren't angels, perfection is not the measuring rod. However, the market at least is based on the voluntary, consensual decisions of thousands of individuals rather than on the arbitrary dictates of politicians. Mistakes ex post are surely and quickly redressed. While painful, it is normal that businesses and individuals make errors, that unsound investments are liquidated, that new covenants for lending are set by the interplay of supply and demand.
In their rush to do something, legislators ignore that the market is a dynamic, ever-adjusting process. Credit agencies are reviewing their standards, shareholders are voting with their pocketbooks, new sources of capital are trying to provide liquidity on revised terms, mortgage insurers are recalibrating premiums and required documentation, etc.
One's ardent support of the free-market process does not mean that one is an apologist for big corporations or turns a blind idea to subprime lending fraud or malfeasance. If anything, big corporations often have a far-too-cozy relationship with Washington. Grandiose pronouncements about a public/private partnership are often thinly disguised means to create regulatory barriers of entry for smaller competitors. The free-market system can only thrive if private property rights are honored and enforced. If loan contracts were entered into via force or fraud, the court system is the appropriate forum for redress and restitution.
In short, legislators at all levels should resist the urge to meddle. Doing nothing requires discipline and intellectual honesty and will hasten the recovery.
Editor's Note: Steve Berger is an investment manager based in Boston, Massachusetts.
By Steve Berger
Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. Legislators at all levels of government are contending for ownership of the most destructive idea.
Finalists in this legislative race to the bottom include punitively stiff lending standards, foreclosure holidays and taxpayer-financed bailouts. I would like to propose a far simpler, fairer and effective course of action: let free people sort it out for themselves.
Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn.
Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to "predatory" lenders and mortgage brokers. Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level? Is entrusting a solution to Washington putting a fox in charge of the chicken coop?
Regardless of where blame resides, the legislative options being considered are bad economics and ethically flawed. A bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers. A bailout postpones hard choices into the future and props up faulty credit. Individuals facing default or delinquency have less reason to curb spending habits or make other sacrifices. Lenders have less incentive at the margin to tighten credit standards if a bailout is imminent. Bailout logic is perverse, especially in light of growing evidence that a not-insignificant number of subprime defaults involve so-called "liar's loans", i.e., loans to borrowers who falsified information about their financial condition and income. Bailing out such borrowers is akin to rewarding them with a one-way free option on rising home prices.
Foreclosure holidays are equally flawed. Such laws in one fell swoop eviscerate contractual agreements and contravene the impairment of contracts clause of our Constitution. Unfortunately, that constitutional protection has been stripped of its teeth for generations.
Putting aside these legal quibbles, foreclosure holidays will lead to more foreclosures. Borrowers on the verge of delinquency will be less motivated to exercise fiscal discipline if they know that foreclosure rights are honored more in the breach than the observance. Lenders, less secure about their ability to take hold of collateral, will be less willing to lend, narrowing the refinancing options available for stretched borrowers. Ergo, foreclosure holidays will lead to more delinquencies and foreclosures just as banking holidays in the 1930s led to more bank runs.
What about adopting regulations that provide for uniform disclosure, loan-to-value ratios, rate caps, or otherwise stiffen lending standards? How can one cavil against such seemingly logical attempts to enhance disclosure and level the playing field? The problem with regulation is that it is impossible ex ante to determine whether its costs outweigh benefits. How can one abstractly agree on the right lending rate or disclosure standard? Any regulatory solution is one imposed from above by parties far removed from pricing risk on a day- to- day basis.
A regulatory solution is a one size fits all mentality that consequently stifles the free market's innovation and creativity and in the process restricts competition by raising entry costs. Friedrich Hayek, 1974 Nobel Laureate in Economics, referred to this as the "pretense of knowledge" syndrome infecting central planners. More order and fairness comes out of the spontaneous interaction of thousands of voluntary free market transactions.
We are not asserting that the market is perfect; as long as men aren't angels, perfection is not the measuring rod. However, the market at least is based on the voluntary, consensual decisions of thousands of individuals rather than on the arbitrary dictates of politicians. Mistakes ex post are surely and quickly redressed. While painful, it is normal that businesses and individuals make errors, that unsound investments are liquidated, that new covenants for lending are set by the interplay of supply and demand.
In their rush to do something, legislators ignore that the market is a dynamic, ever-adjusting process. Credit agencies are reviewing their standards, shareholders are voting with their pocketbooks, new sources of capital are trying to provide liquidity on revised terms, mortgage insurers are recalibrating premiums and required documentation, etc.
One's ardent support of the free-market process does not mean that one is an apologist for big corporations or turns a blind idea to subprime lending fraud or malfeasance. If anything, big corporations often have a far-too-cozy relationship with Washington. Grandiose pronouncements about a public/private partnership are often thinly disguised means to create regulatory barriers of entry for smaller competitors. The free-market system can only thrive if private property rights are honored and enforced. If loan contracts were entered into via force or fraud, the court system is the appropriate forum for redress and restitution.
In short, legislators at all levels should resist the urge to meddle. Doing nothing requires discipline and intellectual honesty and will hasten the recovery.
Editor's Note: Steve Berger is an investment manager based in Boston, Massachusetts.
Tuesday, June 5, 2007
Bernanke: Subprime fallout hurts housing demand
Tighter standards, bad news keep some from borrowing
Tighter standards in subprime lending -- along with bad publicity that may keep eligible borrowers from applying for loans -- will continue to restrain demand for housing, Federal Reserve Chairman Ben Bernanke told international bankers Tuesday.
Speaking via satellite to bankers and policy makers attending the International Monetary Conference in Cape Town, South Africa, Bernanke said it's unlikely that troubles in subprime mortgage lending will "seriously spill over to the broader economy or the financial system."
Bernanke said that while a leveling-off of sales late last year hinted at a possible stabilization of housing demand, more recent readings indicate demand weakened further over the first four months of the year.
"As you know, the downturn in the housing market has been sharp," Bernanke said. "From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent."
Home prices "decelerated sharply" last year, Bernanke said, after appreciating at a rate of 9 percent from 2000 to 2005. Prices continue to be "quite soft" so far this year, although outright price declines have been concentrated in markets that showed large increases in earlier years.
Single-family housing starts are down by one-third since early 2006, knocking 1 percentage point from growth in gross domestic product over the past four quarters. Despite the drop in home building, the inventory of unsold new homes has risen to more than seven months of sales, well above the average for the past decade, Bernanke said.
The adjustment in the housing sector is still ongoing, "and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," Bernanke said.
Decelerating house prices, higher interest rates and slower economic growth have contributed to an increased rate of delinquency among subprime borrowers, Bernanke said.
The rate of serious delinquencies for subprime mortgages with adjustable interest rates -- mortgages in the foreclosure process or with payments 90 or more days overdue -- has risen to about 12 percent, roughly double the recent low seen in mid-2005
The problems are showing up almost entirely among borrowers with adjustable-rate mortgages, with delinquency rates for fixed-rate subprime mortgages remaining generally stable.
As a result, investors who fund mortgage lenders are scrutinizing subprime loans more carefully, and lenders have tightened up their underwriting standards, Bernanke said.
"Tighter lending standards in the subprime mortgage market -- together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying -- will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify," Bernanke said.
Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period. But originations of subprime purchase mortgages appear to have peaked in late 2005 and declined substantially since then, Bernanke said.
That means some of the impact problems in subprime lending have had on housing demand has probably already been felt, Bernanke said. Key indicators such as the gross issuance of new subprime and near-prime mortgage-backed securities suggest that the supply of subprime mortgage credit has been reduced, but "has by no means evaporated."
Nevertheless, "the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead," Bernanke said. "We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets."
Bernanke said that eventually, fundamentals like growth in incomes and relatively low mortgage rates should prop up demand for housing.
But the problems in the subprime sector are "causing real distress for many homeowners," and the Federal Reserve and other regulators are encouraging lenders to work with borrowers who may be having trouble making their mortgage payments.
Bernanke outlined four approaches being considered by regulators to prevent a repeat of the problems the lending industry is currently struggling with. Regulators can bolster required disclosures by lenders, beef up rules to prohibit abusive or deceptive practices, implement principles-based guidance with supervisory oversight, and launch less-formal efforts to work with industry participants to promote best practices, he said.
Regulators and lawmakers "must walk a fine line" in drafting new rules, Bernanke said. "We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."
Bernanke made similar warnings last month after coming under fire from lawmakers who complained regulators haven't done enough to stop the most abusive lending practices.
One area that needs to be addressed is the patchwork nature of enforcement authority in subprime lending, Bernanke said. Rules issued by the Federal Reserve Board under the Home Ownership Equity Protection Act apply to all lenders, he said, but are enforced by the Federal Trade Commission, state regulators, or one of the five federal regulators of depository institutions, depending on the lender.
Tighter standards in subprime lending -- along with bad publicity that may keep eligible borrowers from applying for loans -- will continue to restrain demand for housing, Federal Reserve Chairman Ben Bernanke told international bankers Tuesday.
Speaking via satellite to bankers and policy makers attending the International Monetary Conference in Cape Town, South Africa, Bernanke said it's unlikely that troubles in subprime mortgage lending will "seriously spill over to the broader economy or the financial system."
Bernanke said that while a leveling-off of sales late last year hinted at a possible stabilization of housing demand, more recent readings indicate demand weakened further over the first four months of the year.
"As you know, the downturn in the housing market has been sharp," Bernanke said. "From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent."
Home prices "decelerated sharply" last year, Bernanke said, after appreciating at a rate of 9 percent from 2000 to 2005. Prices continue to be "quite soft" so far this year, although outright price declines have been concentrated in markets that showed large increases in earlier years.
Single-family housing starts are down by one-third since early 2006, knocking 1 percentage point from growth in gross domestic product over the past four quarters. Despite the drop in home building, the inventory of unsold new homes has risen to more than seven months of sales, well above the average for the past decade, Bernanke said.
The adjustment in the housing sector is still ongoing, "and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," Bernanke said.
Decelerating house prices, higher interest rates and slower economic growth have contributed to an increased rate of delinquency among subprime borrowers, Bernanke said.
The rate of serious delinquencies for subprime mortgages with adjustable interest rates -- mortgages in the foreclosure process or with payments 90 or more days overdue -- has risen to about 12 percent, roughly double the recent low seen in mid-2005
The problems are showing up almost entirely among borrowers with adjustable-rate mortgages, with delinquency rates for fixed-rate subprime mortgages remaining generally stable.
As a result, investors who fund mortgage lenders are scrutinizing subprime loans more carefully, and lenders have tightened up their underwriting standards, Bernanke said.
"Tighter lending standards in the subprime mortgage market -- together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying -- will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify," Bernanke said.
Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period. But originations of subprime purchase mortgages appear to have peaked in late 2005 and declined substantially since then, Bernanke said.
That means some of the impact problems in subprime lending have had on housing demand has probably already been felt, Bernanke said. Key indicators such as the gross issuance of new subprime and near-prime mortgage-backed securities suggest that the supply of subprime mortgage credit has been reduced, but "has by no means evaporated."
Nevertheless, "the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead," Bernanke said. "We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets."
Bernanke said that eventually, fundamentals like growth in incomes and relatively low mortgage rates should prop up demand for housing.
But the problems in the subprime sector are "causing real distress for many homeowners," and the Federal Reserve and other regulators are encouraging lenders to work with borrowers who may be having trouble making their mortgage payments.
Bernanke outlined four approaches being considered by regulators to prevent a repeat of the problems the lending industry is currently struggling with. Regulators can bolster required disclosures by lenders, beef up rules to prohibit abusive or deceptive practices, implement principles-based guidance with supervisory oversight, and launch less-formal efforts to work with industry participants to promote best practices, he said.
Regulators and lawmakers "must walk a fine line" in drafting new rules, Bernanke said. "We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."
Bernanke made similar warnings last month after coming under fire from lawmakers who complained regulators haven't done enough to stop the most abusive lending practices.
One area that needs to be addressed is the patchwork nature of enforcement authority in subprime lending, Bernanke said. Rules issued by the Federal Reserve Board under the Home Ownership Equity Protection Act apply to all lenders, he said, but are enforced by the Federal Trade Commission, state regulators, or one of the five federal regulators of depository institutions, depending on the lender.
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