O's latest biz-killer

Buried deep inside the new "financial reform" law is a scheme to force affirmative action on small-business lending -- a "reform" with ominous implications for the US economy.

Aimed at curtailing supposed discrimination, the race-based lending mandate is guaranteed to have perverse effects -- just like the drive for "racial fairness" in mortgage lending paved the way for the subprime crisis and the 2008 financial meltdown.

The new Dodd-Frank banking law sets up a data-collection system to monitor small-business loans for racial bias. Lenders must report if a business that applied for a loan is minority-owned, and whether the application was rejected.

Bank examiners will use that data to enforce provisions of the Community Reinvestment Act -- the federal law that (after a Clinton-era rewrite) encouraged "flexible underwriting" and unsafe loans that fed the subprime bubble and bust. If a bank doesn't meet CRA standards, regulators make it impossible for the institution to expand or merge -- and in a competitive industry, that's a slow death sentence.

And the Obama administration plans not only to toughen CRA testing of lending to minorities and communities of color, but also to impose those tests on nonbank institutions -- independent mortgage companies, credit unions, insurers, securities firms and investment banks.

Here’s more about “Financial Reform” from my own real estate perspective:

“There’s no time like right now to buy or sell a home.” That’s a popular saying in real estate. Today, I believe it’s especially true, due to the fact that interest rates are incredibly low, but more importantly because of huge changes in mortgage lending which will take effect very soon. In my opinion, those changes mean big trouble for homebuyers, and will have an enormous negative impact, greatly reducing the number of people who are able to buy a home.

If you or anyone you know is thinking about buying or selling a house, I strongly advise taking action IMMEDIATELY! Some of these changes have already been implemented, and the rest are almost upon us.

The first item which will affect homebuying is the recently passed (so-called) financial reform bill. Of its 2,300 pages, about 300 pertain to mortgage lending, and spell disaster. What it does is impose a cap on the total fees lenders and loan originators can charge. Included within that cap are most of the general fees charged for a loan, so what’s left as income is drastically reduced. This means that on an average home purchase, a hardworking, diligent loan officer will take about a 45% cut in their gross pay. With the incredible amount of paperwork, regulations, and details which have been heaped upon loan officers, their compensation often, even now, is miniscule compared to the number of hours they put in to close a loan.

Smaller loans won’t be worth the effort, as they require the same amount of work but the compensation will be tiny, thanks to the new, government-mandated cap. Rural areas, where many fine houses sell for extremely reasonable prices, will be especially hard-hit.

Reports have already surfaced indicating that many loan originators are leaving the industry.

The net result of this is that homebuyers may someday soon have no place to get a mortgage except from large banks. Private lending could easily be forced out of existence, which is probably the ultimate goal. Banks are notorious for poor mortgage service, and are exempt from the full disclosure now required of mortgage brokers! In other words, these feel-good laws, passed to “protect” us and to insure that every borrower knows all about the loan they’re getting, are actually forcing people to be at the mercy of the government-backed institutions who can avoid that very disclosure. Banks make all sorts of “back-end” profits on mortgage loans, about which the borrower, by law, need not be informed.

Bank loan officers also are not required to meet the strict standards imposed on mortgage brokers. In fact, I’m not sure a license is even mandatory, at least in Louisiana. As a comparison: In addition to the massive disclosure requirements which reveal every penny a broker-based loan originator makes on every transaction, each year they have to pass 2 lengthy exams, and must also periodically get fingerprinted and pass a background check the same as those necessary to carry a concealed handgun!

This latest foolishness from Washington will have a devastating effect on home purchases and the real estate market. Yet, it is only the first of several new, and bad, changes.

Second on the list of bad news is the upcoming cut of allowable seller concessions from 6% to 3% on FHA loans. Currently a seller can pay up to 6% of the purchase price toward closing costs for the buyer, which helps many qualified but cash-poor people get a home. Very soon, that will be slashed to 3%. Such a drastic reduction will make homebuying impossible for a LOT of people, for whom FHA is their only option. There will be no other way for these people to get financing. Only those with a ton of money available for down payment and closing costs will be able to buy a home. Lower- and middle-class folks, even those with superb credit, will be well and truly out of luck. No time frame for this cut has been set, but it is definitely happening, and soon.

Third on the list, and just announced last week, is that the mortgage insurance premiums (PMI) charged on FHA loans are being restructured. This will take effect on October 4, 2010, less than 2 months from now! Currently, a homebuyer pays 2.25% of the loan amount as a lump sum up-front PMI payment. It is usually financed into the loan, but can be paid in cash. Then, each month, a PMI premium is added to the note. On an FHA loan with 3.5% down, which is typical, that payment is calculated using 0.55% of the loan amount per year.

The change is that the up-front PMI is dropping to 1.0% of the amount borrowed, BUT the monthly PMI factor will be increased to 0.90%, which is 63% higher than the current rate.

To give you an idea of the difference this will make, let’s assume a person is buying a house for $150K with the minimum down payment of 3.5%, at an interest rate of 4.5%, 30-year term, and is financing their up-front PMI.

Currently, the monthly PMI payment would be $66.59.
Under the new rate, the monthly PMI payment will be $108.56, an increase of $41.97.

The up-front PMI will be reduced by 1.25% of the amount borrowed, so that’s $1809.38 less to be financed. However, the monthly “savings” due to not financing this amount is only $9.17, making the net overall increase $32.80.

So, under the new FHA terms, the house note on the same $150K home will be higher by $32.80, due to the significantly higher monthly mortgage insurance (PMI) premium. This will factor into the monthly debt to income calculations, making it harder for buyers to qualify.

On FHA loans, monthly PMI must be paid for at least 5 years, and then until the owner has reached at least 22% equity in the house. These new, higher premiums will add up to a significant amount over the long term.

Again, this PMI change will be put into effect on October 4, 2010.

As bad as this increase is, even worse is the fact that the new regulation actually allows the monthly PMI factor to be increased to a maximum of 1.55%, almost TRIPLE what it is now! Should this happen, the monthly PMI payment on our $150K example home would be $186.97. Hopefully this never happens, but it’s frightening that the government has given themselves permission to do so.

Finally, changes are also in store for USDA Rural Development (RD) loans. Like FHA, these loans have an up-front PMI payment (called a guarantee fee) except it is 2.0% of the loan amount. RD loans require no money down, and currently have no monthly PMI premium.

The changes to RD specify that the up-front fee will be increased to 3.5% of the amount borrowed. They also MAY implement a monthly PMI premium, using a factor of 0.50% per year.

This means that on a 100% RD loan for a $150K house, the buyer will have to come up with an extra $2250.00 up-front, either to be paid cash or financed. It is also possible that a monthly PMI premium of $62.50 could be added to their note.

All of these changes will have an enormous negative effect, dramatically reducing the ability of homebuyers to secure financing. Some of these changes are already in place, and the rest will be shortly.

I’ll say it again: If you or anyone you know is thinking about buying or selling a house, I strongly advise taking action IMMEDIATELY! Once the full impact of these changes strikes home, I believe we will see disastrous results, and a far more difficult real estate market.

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