It's likely (and appropriate) that 90% of your professional attention is on originating loans. But federal regulatory oversight has already significantly altered the mortgage marketplace, and you would ignore its potential to threaten your  livelihood at your own peril.

In this new article, I attempt to provide some perspective on how much more complex mortgage lending has become since the enactment of Dodd-Frank, and why loan originators  need to stay informed about this particular elephant in the room.

I think you'll find that much of the information in this article can be shared with your colleagues, clients, and Realtor partners, and that doing so will help them all better understand why the job of helping people finance their home purchase has gotten so much more frustrating and difficult in recent years.
You can read the full article here.

If you were a fan of the 90's show The X-Files, you might remember that Agent Mulder kept a poster hanging in his work cubicle that said, "I want to believe".

And while we might not all want to believe in little green men, all of us in the real estate and mortgage industries want to believe that the housing market is on a strong path to recovery.

There are plenty of encouraging signs, too. But one claim that is being trumpeted is a bit premature: that we have entered a Seller's Market.

While home prices have been rising consistently lately, and inventory is declining, there is one necessary ingredient for a seller's market that we don't have yet: a strong and growing pool of buyers ready, willing, and eager to buy a home.

The fact is, we're running about 1.3 million units a year behind the average number of homes sold between 2001-2009 (which includes pre-boom, boom, and bust years).

And there are some fairly significant headwinds in our economy and real estate market that are pushing against the creation of enough buyers to raise those sales figures.

As just one loan officer, you may not be in a position to impact the national real estate market, but you can certainly have an impact on your local market, and in the process, you can build a reputation with both Realtors and Consumers as the go-to lender for the home purchase market -- which will put you in a very good position when we finally do fully recover from the disaster that struck in 2007-2008.

For a full analysis, and my recommendations for productive action, see my latest white paper, The Phantom Seller's Market -- which you can read on this site or download as a PDF.

According to today's Wall St. Journal, The Fed plans to continue buying long-term mortgage-backed and Treasury bonds well into 2013.

But the folks currently running the Fed -- who have never been what you would call students of the Law of Unintended Consequences -- are disappointed that mortgage lenders -- especially the big banks -- aren't using the lower borrowing rates (created by Fed policy) to lower rates for consumers, or even to make more mortgage loans.

From Inside Mortgage Finance:

I'm sure you all see the problem here. With one hand (the Fed), the government is reducing the cost of money to lenders. With the other hand (the former GSEs and the CFPB -- and soon, FHA too), the government is raising the risk level for doing any mortgage lending at all -- unless those loans are cookie-cutter deals that are documented to the hilt, and buyback-proof.

I've written before about who caused the housing bust and the financial crisis, so I don't need to go into all that again. It really shouldn't take a genius to figure out that if you make money cheaper for the lending industry, and make it simultaneously  dangerous to lend to any but the absolutely safest borrowers, you create the conditions for exactly what is happening -- fewer loans being made, little competition or incentive to make more loans, and bigger margins for lenders on smaller volume of loans.

Here's the silver lining for originators: these are the kind of market conditions that will put a premium on the services of highly professional and extraordinarily competent loan officers who build their reputation on the fact that they don't take on bad loans, and they close every loan they submit -- because they know what they're doing and they don't take "no" for an answer.

Have you been tracking your success rate at closing the loans you turn in? If not, you might want to start, and I would take the opportunity presented by the time of year to go back through at least all the loans you submitted this year. Below, you can download a free spreadsheet/form you can use to track your proficiency in this important metric. And the next time a Realtor or prospective client asks you what makes you better than the next LO, you'll have something to show them that I'm willing to bet 95% of your competition won't.

According to the Mortgage Bankers Association, the average rate on a 30 year fixed rate mortgage hit 3.53% last week, the lowest rate since at least the 1950s. But thousands of people who want to buy a home are unable to get financing due to credit overlays and burdensome documentation standards for new mortgages. Home purchase activity, as measured by the MBA index, has fallen by 50 to 60% since 2008.  

"Qualified" Mortgages

The Dodd-Frank Act includes a provision known as the "qualified mortgage", and it imposes stiff penalties on lenders who make loans without enough evidence that the borrower can afford the loan. In principle, the concept of a "qualified mortgage" can easily be defended. The problem is that, so far, what constitutes a "qualified mortgage" has not yet been defined.

The job of making that definition has been delegated to the Consumer Financial Protection Bureau, one of a number of new regulatory agencies created by the Dodd-Frank Act. The CFPB has missed the deadline imposed by the legislation for completing this assignment, but not to worry – they have also missed deadlines for other important assignments, like new rules for loan officer compensation and new bank capital rules. In their wisdom, the eminent crafters of the Dodd Frank legislation have made provisions for all kinds of penalties for mortgage professionals who violate the law (whatever the law turns out to be, as defined by the unelected bureaucrats serving on the CFPB and its sister agencies) – but there will be no penalties of any kind imposed on the various boards and bureaus for missing their deadlines. Because, after all, those folks are all public servants.

It's hard to measure the impact that this particular obstacle has had on the willingness of lenders to lend, because there are also a number of other constraints on that willingness.

Multiple Layers of Regulation
The Wall Street Journal reports that on Friday, Federal Reserve Governor Elizabeth Duke said she was "really, really worried" about the cumulative effect of having one mortgage lending regulation on top of another: "I'm worried that you'll get to the point where the only loans that get made are the loans that fit in every single angle of the box, and that's going to be a very small number of loans." She added that policymakers should "find ways to make sure that you can still make the irregular loan, the one that doesn't fit exactly in the box."

Want to know an interesting fact about Federal Reserve Governor Elizabeth Duke? She is the only member of the Federal Reserve Board of Governors who has actually worked in private sector banking. There are 7 members of the Board; three of them are academics (economists) who have also worked in government, and the other three are lawyers.

Buy-Backs/Put-Backs
The Wall Street Journal also reported in the same article (Tuesday, October 9) that, in a survey  conducted by the Federal Reserve, senior loan officers said "the biggest concern keeping lending standards tight right now has more to do with banks' fear that they'll have to buy back delinquent mortgages from Fannie, Freddie, and other investors." 25% of respondents cited "put-back" risk as the most important factor in keeping lending standards tight. An additional 33% said it was a "very important" factor.

At a Senate hearing in July, Treasury Secretary Timothy Geithner admitted, "Mortgage credit is tighter than it should be, and the main reason for that is because banks… feel much more vulnerable now to what people call 'put-back'."

According to Inside Mortgage Finance, Fannie and Freddie have already asked banks to repurchase $66 billion in mortgages made between 2006 and 2008, and the balance of outstanding demands from both of the former GSE's at the end of July was up 37% from a year earlier.

It used to be a loan officer's job to determine that a borrower could reasonably repay a loan. Today, our job is to protect ourselves and our employers from put-backs, and we do this by requiring borrowers to produce reams of documentation so that we can deliver loans that cannot be questioned by regulators who, it could be argued, don't know enough about mortgage lending to qualify for a job as a loan officer.

Remember this the next time you get frustrated with your underwriter or your company. Prepare your clients and Realtors for the experience -- don't sugar-coat it. Let them know you will have their backs all the way, and that you will fight for their loan. And try to help them understand who the real culprits are in all of this.

People (including loan officers) have a tendency to expect things to remain more or less the same. It's understandable; you're busy going about your day-to-day business and you don't have a lot of time to be thinking about where the major trends may be leading us. Call it the Black Swan effect, or the triumph of hope over experience, but when seismic shifts happen, they tend to take most people by surprise.

In my Sept 13th webinar, I said the following about the future of the mortgage business as it affects originators:

The other day, I came across this website, created by a new division of Peoples Bank, out of Kansas City. Check it out:

http://www.closeyourownloan.com/

It's aimed at people looking for a mortgage loan, and the headline says, "Skip the salesman, Keep the Commission!"

I was talking to a client yesterday who works for a well-established lender in a major city. He told me that his company, in anticipation of the CFPB's proposed rule changes on compensation (all 369 pages of it), "is preparing for a radically different business model for the coming years. They are gearing up for a massive internet presence, with salaried type originators (The new compensation expectation). They don’t feel that they will be able to keep their current producers based on what they have heard will be the coming comp plans. Their plans call for lots of small offices that will feed a very cost advantaged internet processing and delivery system."

If you'd like to be out in front of the next big wave of change in your career, you might want to consider pre-registering for the next group of The League of Extraordinary Loan Officers.