Can the Government do more Harm than Good to the Aspiring Homeowner?
It is widely known that of the 44 million outstanding mortgages in the United States, 10% are in some status of delinquency. They may be 30, 60, 90, or more than 360 days behind (the average loan modification applicant hasn’t made a mortgage payment in over 12 months), are presently in default, in the process of a short sale, or facing imminent foreclosure. Whatever the case may be, the American dream appears to be slipping away for these borrowers. Accordingly, various members of our government have witnessed this national tragedy and have made it their personal cause to right the wrongs. In this quest to correct the ills against the borrowing public, a perceived “corporate witch hunt” is taking place. Banks are settling, paying punitive damages, rewriting loan origination and foreclosure processing policies and procedures, but at what cost?
Kamala Harris, the Attorney General (AG) of California and 28 other AGs have wrested $25 billion from the nation’s largest mortgage lenders. Bank of America, Wells Fargo, Citibank, Goldman Sachs, US Bank, MetLife and others have written multi-billion dollar checks to right their wrongs for faulty foreclosure procedures. The FHA also got involved in the lawsuit game by haranguing over $1 billion out of the coffers of Deutsche Bank, Flagstar Bancorp, Citibank and others for various forms of fraud for originating FHA loans. In spite of the success in the courthouse, much fallout has ensued since the settlements.
For example, shortly before the announcement of the $25BB settlement, Goldman Sachs sold its mortgage unit for a measly $600 million. Right after the announcement of the FHA lawsuit, MetLife stated that it was exiting the mortgage business as well. Wells Fargo recently told its correspondents lenders (direct lenders who sell mortgages to banks) that it will no longer purchase FHA-insured loans with credit scores below 640 from third party originators. (It is interesting to note that while Wells Fargo will continue to originate sub 640 FHA loans directly to borrowers at its retail branches, even though 40% of all of its mortgage originations come from direct lenders and mortgage brokers). So while the AGs of the country celebrate their wins with press conferences at the courthouse steps, the American homeowner is getting pummeled at the bank.
Since the advent of the settlements, the exodus of competition has hurt the American consumer. At one time, Goldman Sachs (through its various affiliates) and MetLife were amongst the top 10 lenders in the nation. Their presence reduced commitment fees, secured appraisal waivers, and most importantly, lowered rates for consumers. With particular emphasis, Goldman Sachs’ presence strengthened the marketplace, via the fact that it already had the infrastructure in place to pool, price, and distribute not only conventional loans, but also Alt-A financing pools quickly and effectively to put fresh capital back in the street. Sadly, the idea that Wells Fargo is cutting off third party originators from certain FHA loan sales is equally disheartening. Most people don’t know that Wells Fargo originates 30% of all mortgages. Simple math states that 12% of all mortgages won’t get a fair audience because Wells Fargo won’t buy a direct lender’s or a broker’s FHA loans. Consequently, as competition dissipates, fees increase, rates rise, and service falls. If Wells alone accounts for 30% of all mortgages, this doesn’t bode well for the American people. This is the backside of the story that the AGs won’t discuss at the news conference. They can win a short-term battle but lose the long war.
In the end, the settlements were great storylines for news outlets. It gives the American consumer reason to believe that all is well and that “we are finally able to stick it to the bailed out banks.” In the short-term, it was a win indeed, as $25 billion and $1 billion settlements are large sums of money. However, if millions of future homeowners end up paying an additional .25% – 50% in their mortgage rate (direct lenders and brokers can offer better rates due to less overhead), pay more in fees, and suffer due to less service, over the long haul, the $26 billion will look like 5% down payments compared to the profits that the banks will earn long term.
In sum, I believe that the banks will modify as opposed to changing their ways. Financial institutions will use any settlement as motivation to expand their profitability plans. The AGs got their fanfare, notoriety, and promotions. The borrowing masses have less competition, higher fees, and higher rates. At the end of the day, who is the real winner?
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at firstname.lastname@example.org.