Sunday, March 29, 2015

Dodd-Frank Quietly Killing American Dream; Small Business

Implementation of Dodd-Frank quietly continues. The newest change will take place this summer when the TILA and GFE forms are modified. Most Americans will barely notice it. Should we be concerned?

The pros and cons of Dodd-Frank spawn endless debate, with no outright winner. Depending on one's perspective, it's difficult to find a consistent right or wrong answer.

The left proffers a need for increased regulation with a closer eye on Wall Street, banks and the finance industry in general. Their "gift," the "Consumer Finance Protection Bureau" is funded by the fines of offenders. In the eyes of Elizabeth Warren and other "reformers," it is the medicine necessitated by greedy, opportunistic villians who have made their fortunes preying on vulnerable Americans.

The right counters, accurately contending that the casualities of Dodd-Frank are not so much the big banks, but the community banks. The is due to the costs of accountants and attorneys. Both are needed to "interpret" Dodd-Frank and defend against unknowing infractions. Legal and accounting fees are more easily assorbed by the larger institutions.

There is no easy asnwer to this "clash of perceptions!" It will come down to the 2016 election. If Americans believe that the regulations are worth the extra time, money and paper, they will elect Hillary Clinton President. It depends on how the merits and downsides of the law are positioned. Thus far, Republicans have done a poor job showing how Dodd-Frank impacts the average American.

To see Dodd Frank is to see it as an industry person. Few Congressmen or Senators have ever originated a mortgage loan! Even fewer have counciled average borrowers on "types" of loan. There are members of the far right who contend that people shouldn't be borrowing money to begin with!

In a perfect world, we would pay cash for everything. Nobody would have a mortgage on their home. Everyone would have a job. Everyone would pay a simple flat tax with no deductions. Certified Public Accountants would become non-essential. Unfortunately, that's not the world we live in!

To listen to the President, those "dirty mortgage brokers" caused the banking meltdown! Let's eliminate them and the problem will be solved!

This type response demonstrates Barack Obama's depth on the issue. Those "dirty mortgage brokers" were the end result of a Wall Street gone insane with greed. "Greed" resulted in the large banks creating sub-prime loans that carried high(7-8%) margins on adjustable rate mortgage loans. These loans were then sold to borrowers who ordinarilty did not qualify for a loan.

Specifically, a borrower with a 560 credit score, unable to verify income, with no money for a down payment was given a mortgage loan. A loan may have started at 5.5%. But, it could potentially rise to 13.5%. If you are borrowering $200,000, you are talking about your mortgage payment more than doubling.

The margin was based on the L.I.B.O.R.(London Inner Bank Offered Rate), a measure between the dollars relationwhip with the Euro. With a margin that often exceeded 7%, a sudden rise in the L.I.B.O.R. could spell disaster for borrowers who had taken out a "2/28 or 3/27 ARM" loan!

Why did rates rise? Then head of the Federal Reserve, Henry Paulson contended that rates needed to increase in "bite sized" increments to prevent possible inflation. Then Kentucky Senator, Jim Bunning blasted Paulson's approach, stating it was "like giving medicine to someone who wasn't sick!"

Industry textbooks today suggest that the entire meltdown was premeditated. The goal was to create permanent renters within the population. When noting that Paulson himself is a C.F.R. member, the argument gains credence! After all, a tiny segment of the population benefited enormously from the meltdown. The investment class has since rebounded. Only what remains of the middle class remains stuck, still trying to understand what went wrong!

Wall Street and the big banks' animosity toward independent financial consultants
(AKA mortgage brokers) is easier to fathom. By 2005, better than 70% of mortgage loans were done by these parties. Many specialized in gaining financing for customers initially turned down by their primary bank or credit union.

To be sure, a huge number of those working as independent financial consultants were not suited for the position. Most of the industry resisted mandatory licensing. As late as 2008, only members of Mortgage Broker business' were required to hold licenses.

The S.A.F.E. Act emerged. Unfortutely, it introduced distinctions known as "Licensed Mortgage Loan Originator" and "Registered Mortgage Loan Originator." The latter are not required to take the rigorous S.A.F.E. exam. Guess who employs "Registered Mortgage Loan Originators?" If you guessed "Charter Banks and Credit Unions," you are correct!

The newest element of Dodd-Frank that came into law earlier this year prohibited Brokers from making more than 2.5% on a loan. Sounds good, except for one detail: "Title fees must be paid from the 2.5%," making the maximum earnings on a $100,000 loan $2500. Title costs run roughly $1000 on a $100,000 loan. Thus, the broker must pay his expenses of doing the loan from $1500. The number simply doesn't work!

Should we be concerned with the loss of these Independent Mortgage Brokers? If you seek a small loan, you might be? A perfect example lies with the Kentucky Housing Corporation. These are low interest loans requiring little or no down payment. They are designed for low income borrowers.

Unfortunately, Dodd Frank stipulates that Originators may be paid on overall "volume," not fees per loan. Charter Banks pay on volume. An Originator may have an annual volume objective of Ten Million. Small loans take as much time as large loans. By 2011, most of the large banks had ceased to do Kentucky Housing Loans.

Up until recently, Brokers filled the need. Under the new law, to do a $75,000 loan amounts to the Broker having to personally bring money to the table. This they won't do. The end result: those seeking small loans lose their primary facilitators!

The good news for Dodd-Frank Advocates is they can say that they "protected" the innocent from potential predatory lenders. True, they are unknowingly excluding these "innocents" from homeownership; while killing off thousands of small business' in the process.

To be sure, there are no more 2/28 or 3/27 ARM loans with 7 or 8 % margins. Creating such products and targeting the kind of borrowers who endured them should never have happened. But, to blame Mortgage Brokers for them is shortsighted. A Mortgage Broker is a salesman, a "straight commissioned, on collection salesman," working for large banks, such as J.P. Morgan Chase, Wells Fargo and Countrywide. We should never forget that ALL THREE banks authored such loan products.

Dodd-Frank was written under the pretense that some banks are too big to fail. While, there are inconveniences such as losing their cheap labor force and contending with C.F.P.B., they continue to enjoy clear favoritism.

Meanwhile, the biggest losers are those attempting to become homeowners. Getting that first home is always the trick. Even more difficult is getting it with minimum income. Yet amazingly, the mortgage payment on a $75,000 loan is far less than the rent that the person is likely paying.

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