I feel like a drug dealer ... Im horrified at the empire of debt were creating. Were enablers. Were just middlemen. In a sense, we profit from their foolishness.
- Christopher Cruise
Washington mortgage broker
The Washington Times has the last of their series on home loans. Federal banking agencies, concerned about the potential for abuses in mortgage lending, are going after the worst practices in the industry. A directive last month from the Federal Reserve and four other federal agencies targets the proliferation of loans offering interest-only payments for extended periods and adjustable-rate mortgages that offer the option of paying interest only, making a minimum payment each month or adding in principal. That includes about half of all mortgages made last year.
The regulators also expressed concern about the growing practice of layering risky mortgages on top of already dicey lending practices, such as requiring no down payment or proof of income from borrowers.
But many inside and outside the mortgage industry question how much impact the banking directive will have, because so many mortgage brokers operate outside the banking system. Only those that are subsidiaries of banks would seem to be affected. Banking regulators actually have fairly minimal control or even influence over a huge portion of our economy, said Christopher Cruise, a Washington mortgage broker. Im not saying were thumbing our nose at the regulators, he said. But if Im a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.
Mortgage companies such as Countrywide, the biggest nonbank lender in the country, appear to be unaffected, he said. I think they own a bank, I dont think the bank owns them. They sell their mortgages to Wall Street, he said.
Mr. Cruise noted that debt appears to be addictive for some consumers who simply cannot save or go without lavish things. Some will refinance their mortgage at Christmastime, for example, so they can splurge on expensive presents.
I feel like a drug dealer, he said. Im horrified at the empire of debt were creating. Mr. Cruise said some of his customers are so intent on getting loans, they wont take no for an answer. Were enablers. Were just middlemen. In a sense, we profit from their foolishness.
Most mortgage brokers today are in their 20s or early 30s and have not lived through a deep recession or other worst-case scenario in their adult lives, Mr. Cruise said. Im not sure the loan officers themselves know what could happen if rates rise precipitously or the economy plunges, he said.
Jack M. Guttentag, a retired professor from University of Pennsylvanias Wharton School of Business, said its not clear whether the guidelines will change anything. What a broker or loan officer tells a borrower is pretty much up to them, so long as they comply with the disclosure laws, which dont prohibit most current practices, he said. That is part of the market culture, and the regulators would have their hands full trying to change it.
Mortgage brokers also are right to question whether the directive applies to them, because the Federal Reserve has, at best, distant control over what the nonbank subsidiaries of bank-holding companies do, he said. Many potential borrowers are shocked to discover that there is no registry of bad apples, and no system to certify good ones, he said.
Some financial analysts say the banking directive will have a definite impact on banks as well as on investors who have been using interest-only loans to purchase property. David Lereah, chief economist with the NAR, says he expects the directive particularly to discourage speculators who flip properties in transactions that require minimal down payments and liberal loan terms. There will be fewer investors in the market this year, he said.
Deborah Lagomarsino, a Fed spokeswoman, declined to say whether or how the Fed would ensure that its directive is followed by the many mortgage companies not directly regulated by the Fed.
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