A few rotten apples...

Remember the famous saying, "A few rotten apples, spoils the bunch?"  Well the saying holds true for more than just apples.  In Colorado like much of the US, we have had our share of "predatory lenders." 

Predatory lenders are the bad actors who come out and tell people less than the whole truth and nothing but the truth.  They give loans to people who have no business getting a loan.

Yuck. They make me ill.

Now the Department of Regulatory Agencies, Division of Real Estate has issued a position statement on Tuesday, July 3rd with respect to House Bill Section 12-61-904.5 (1)(b) C.R.S., requires mortgage brokers to make a "reasonable inquiry" concerning the borrower's current and prospective income, existing debts and other obligations. The Division of Real Estate does not prohibit specific mortgage products or documentation types.  Rather, the Division views this provision as a responsibility of the mortgage broker to recommend appropriate products.  Mortgage brokers may only recommend appropriate products "after reasonable inquiry has been made in order to understand borrower's current and prospective financial status."

As a result most major investors, including GMAC, Wells Fargo and others, have translated that a "reasonable inquiry" cannot be determined on documentation types in which the borrower's income is omitted from the application. As of immediately there will no more "no stated income loans."  Additionally lenders are suspending funding of certain documentation types with buyers who are currently under contract.

How many contracts will fail?

No income loans are nothing new nor are they all bad.  There are good people who use no income loans who actually should be allowed to do so.  Thanks to the bad apples in the bunch the good will get thrown out with the bad.  Sellers who thought their homes were sold, will be finding out otherwise very soon.  Hopefully the buyers will be able to rewrite the loans and close as planned.

The legislature is acting in a response to years of abuse by bad mortgage brokers and  some irresponsible  borrowers.  Some were genuinely  wronged, but many knew exactly what they were doing. They cheated the system, now the  rest of us have to pay.

Bandaids are only good for scraped knees.

Colorado mortgage brokers will now have to register with the state in order to do business.  This registration is not a proficiency test, it's a background check.  Well that's good, we can eliminate the really bad apples with criminal records etc. but who's to say they actually know how to prepare a loan?  Do they subscribe to a code of ethics? Do they use reasonable skill and care protecting the borrower's personal information?

The next question is, "Will Mortgage Brokers be Responsible for Predicting the Future?"

Making a reasonable inquiry into a borrowers debts, obligations and income should be part of the process of preparing a loan to a borrow.  But I must ask the question, if this is now law, what if the mortgage officer makes a loan to a borrower that defaults?  Is this mortgage broker at fault too?  Can the borrowers come back and sue the mortgage broker for giving him the loan he asked for?  Somehow this just doesn't seem right.

The Bad Apples Change the System, we all lose.

So at the present moment there are honest buyers and sellers scrambling to keep a deal together.  There are honest, career-minded mortgage brokers considering changing a career because of the undue risk.  Then there are the bad apples out there rotting and smelling and going about their business as usual.

What is the solution?

Comments

[Ines]

kk - I had a Mortgage Broker visit one of my open houses today and ask me if the price was negotiable because loans were very difficult to make happen - She said this in front of other prospects. I told her that good Mortgage Brokers that do things correctly have no problems getting loans for customers.
It's those bad apples that need to be placed in the recycling bin.