This bill moved through the Oregon Senate this month as a result of the subprime mortgage meltdown. It’s now moving through The House for ratification.

A friend of mine who owns an above-prime mortgage brokerage in Eugene sent me an article. Below is a snippet from that article:

Copies of the current bill, SB 965, and the UFL-proposed amendments are enclosed as attachments. Though the current bill (prior to the possible inclusion of those amendments) does not specifically ban programs, it has a broad definition of “non traditional mortgages”, which may even include any traditional fully amortizing agency ARM loan, if the DCBS so chooses, in addition to all low doc/no doc loans, interest only loans, option ARMs and negative amortization loans). Though the guidelines on which the bill was based used language like “should consider” when discussing underwriting approaches to those products, the bill says “shall”, which legally means “MUST”. On all of those products, originators (funding lenders and brokers) will be subject to re-underwriting scrutiny by DFCS auditors, and suffer major fines and penalties if the DFCS considers their underwriting decision to be unacceptable. Most troubling, in recent meetings with DFCS leadership, they have indicated that they would not accept automated underwriting findings and the documentation that the AU systems allow through the government/GSE systems (DU/LP and others). For example, they would require that income be verified, even if DU called for a verbal VOE only on a fixed rate traditional loan. And, the DFCS would not allow higher-than normal –guideline debt to income ratios permitted by AU findings if their auditor considered them excessive. This would preclude us from serving many borrowers .The need to educate the DFCS on our business and the harmful effect their decisions would have on our ability to help people buy and finance homes is great, but this bill may go into effect before we have that chance. Thus, many wholesalers who are not owned by or part of national banks (de-facto exempted under the Wachovia case, if not so already) and mortgage brokers may choose not to do any of these loans, or at least not do them in Oregon.

What’s important for you to remember and focus on in the communications we send to our legislators is the effect these changes will have on consumers, not just the impact that it will have on our businesses. If the bill passes as is, consumers in Oregon will be harmed by:

• Reduced ability to qualify for home mortgages on the purchase or refinance of homes.
• Reduced availability of mortgage credit. Borrowers would experience unacceptable service levels due to the inability of remaining providers to provide mortgage credit, should mortgage brokers and the majority of those wholesalers who fund loans no longer be capable of providing their services if the uncertain risk of DFCS review and penalties made continued business an unacceptable risk. According to an independent study conducted by the National Association of Mortgage Brokers (NAMB) in 2005, mortgage brokers originate two out of every three loans nationwide. Most loans are funded through wholesale lenders not exempt from this bill (though bank owned servicers who eventually purchase over 80% of those loans themselves, simply require adherence to the AU guidelines).
• Higher interest rates, due to reduced competition. Only national banks and their affiliates (all of whom will be continuing to use the automated underwriting vehicles, as they do now) will have the ability to make Non Traditional and/or Traditional home loans as they have been done nationally for nearly ten years.
• Increased likelihood of discrimination in underwriting of home loans (one of the main reasons AU systems were adopted was to provide for objective loan underwriting that is “blind” to any possible discriminatory factors). AU has been credited for the increase in nationwide homeownership … particularly among minority, inner city, and rural market borrowers.
• Loss of the benefits of the underwriting standards used in our industry. Those standards have been developed by the federal government, government sponsored enterprises, and/or our largest banking institutions utilizing more than 30 years of empirical loan performance data, and encompassing literally millions of mortgage loan transactions. Ignoring such superior information, and relying on the subjective opinions of the DFCS, reverses decades of progress in establishing sound underwriting guidelines that have unquestionably and positively expanded home ownership. It has further saved Oregon home owner/consumers literally millions of dollars in lower interest rates, lower closing costs, and availability of more financing options from which to choose.
• Declining home values, which almost certainly would be reduced as credit availability is restricted. Many potential home buyers, particularly those using first time homebuyer programs, would find such financing severely limited, or only available through national banks. Trickle down effects of such an occurrence would include reduced property tax revenues for other important social programs, like school funding and public services.
• Failure of this bill to focus on protection of Oregon consumers from “Predatory High Cost Home Loans,” and most specifically, Predatory High Cost Home Loans that include loan features listed as Non Traditional. Approximately 4 weeks ago, this bill was amended to now encompass both Prime or traditional as well as High Cost home loans. This bill will NOT focus on curbing abuses in the Sub-Prime markets, but WILL substantially restrict the normal and positive functioning of the Prime mortgage markets.

The intent of those supporting this bill in its current form was undoubtedly good: to protect the consumer. Unfortunately, it does more to harm than help homebuyers of the state.

Being naturally distrustful of government’s need to over-regulate, I recommend that you look at the government’s bottom-line incentive for regulating a sub-prime industry that the economy and market has already reshaped. Like…

How many people have been affected by the crisis? Who is benefiting and who will lose? Will people with money management skills, people who need a second chance, now lose the ability to get into homes?

What did the “buyers” do themselves to cause this? To assume riskier loans than they themselves knew they could repay? How does this educate people to learn more about money management, financial diligence, etc.

I can see the value in relieving some of the pressure for sub-prime buyers by giving them a get-out-of-bankruptcy-free card, the problem is that that card has already been played by so many, so often, that there’s probably little the government can do there.

A bill made in haste, without considering the relative economic impact, is not a wise bill. It’s a knee-jerk reaction to previously unwise business practices. Business practices that the market is no longer going to tolerate.

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