I’m going to speak my mind and let the chips fall where they may. I know that in business, one avoids talk of politics and religion. But, this is only so that one might not erect barriers to the flow of income to one’s own wallet. Without telling you exactly where I stand on politics and religion (you can always visit my blog “Quantum Faith” at http://noelcookman.blogspot.com if you care to read what I write about religion and politics) I will leave to your speculation my political ideology. Recently, I didn’t know whether to be complimented or insulted when a paralegal told me that he had always pegged me as a liberal. I took it to mean that I didn’t fit the (inaccurate, I believe) stereotype of a judgmental, condescending, homophobic, hate-mongering conservative. In other words, he thought me a nice guy . . . I think. But, this is not an exercise in punditry. As always, it’s an attempt to give relevant information about how divorcing clients are affected by mortgage finance realities. Obviously, this has ramifications for nearly all settlements, especially for those wherein a house is in need of purchasing or refinancing. The Financial Landscape In America – It’s-A-Changin’
Charlie Gasparino was interviewing a hedge fund expert several days ago on Fox Business Channel. The $2 Trillion industry is set to come under new regulations from the Dodd-Frank Bill and they will be devastating, so says the interviewee. Average people don’t care because they are generally uninformed and imagine that since it only affects people with a lot of money (which is sort of the truth) they shouldn’t be worried – after all, let those damned rich people get what’s coming to them, so goes the popular ethos. The astounding quote to come out of that interview was what dawned upon Gasparino at the end. “We are about to experience a total transformation of the entire financial landscape in America.” The words alone are astounding enough. What caught my attention was the look on his face and the tone in his voice. Here, one of the highly informed people in America was just now (late March 2011) coming to this realization – and he was worried. Even stunned. The Fundamental Transformation of This Country
I must remind you that Barack Obama promised a “fundamental transformation.” It’s easy to pass this off as political pandering or sloganeering. You do so to your own peril. I do not know how talented Obama really is. But, if you cannot recognize the fundamental-ness of the changes taking place, you have your head in the sand. You might agree with the changes or not. Their merits are debated 24/7 on television, radio and in print media. But one thing is virtually indisputable – those changes ARE fundamentally changing this country and every system and institution within it. These changes are evident for now only to those within the various industries being affected. Loan Officer Compensation (Federal Reserve Rule beginning April 1), for example, affects me but isn’t much of a concern to the great majority of Americans. Not yet. Make no mistake. These changes have already affected every consumer and will continue to do so as they gradually work their way through society. The effect of regulatory changes over the past 3 years has been to raise the cost of doing business for mortgage lenders. Closing costs are about 37% higher as of September 2010 than they were at the end of 2009. And anecdotal evidence points to even higher costs ahead. As far as we know there is not a single cost reduction in sight, only increases. This means several things for divorcing clients.
1) Obviously, there are greater costs to financing that effectively diminish equity values in homes, leaving less to split between parties. 2) It will be more difficult to qualify for mortgage financing. Here’s how this works. Higher Costs = Higher Loan Amounts = Higher LTV (Loan To Value) Ratios = Reduced Likelihood of Qualifying. Sometimes the slightest change in numbers can tip the scales in favor of an approval or against it. 3) Divorcing parties need to understand that disagreement over perceived values of homes can be useless and pointless; these higher costs coupled with declining real estate values mean that there will be less room for negotiating buyouts in marital residences. Most importantly, 4) Pre-Planning with me (972-724-2881; mailto:email@example.com) is more important than ever. Nothing can serve family law attorneys and their clients as much as up-to-date and accurate information. Who’s To Blame?
It’s complicated. And to blame the big banks, “corporate greed” and “risky lending practices” is convenient and easy for amateurs. Thoughtful folks should know intuitively that such analysis is sophomoric and really, irresponsible. For those who care to be informed, I recommend Thomas Sowell’s The Housing Boom and Bust. It’s classic Sowellian cogency and clarity. In the year since I’ve read it, I have found no material fact to assail his thesis. Here are the factors Sowell counts as the causes of the current real estate and financial malaise:
1. Government initiated land-use restrictions. These drove real estate prices up. 2. The Community Reinvestment Act and specifically how it was wielded, more than a decade after its enactment, by activists and ultimately the Clinton Justice Department. 3. Real, tangible pressure from the government on banks to create certain loans that are now being labeled as “risky” and “unable to be repaid” (as if banks intentionally make loans which they know in advance will not be repaid) produced this pariah-turned-scapegoat known as subprime mortgages. 4. This pressure was accompanied with tacit guarantees from Fannie Mae and Freddie Mac which effectively meant tacit guarantees from the government which, of course, means a real guarantee from the tax payers. It was a vicious cycle that was denied by Barney Frank in 2006 when he declared Fannie Mae “sound” and all those who were blowing the whistle on his scam were marginalized as “extreme.” 5. The general heading for this pressure from government, politicians and activists was “affordable housing” and it was championed by Republicans and Democrats alike. It is the typical euphemism for a socialism impressed upon an otherwise free market. Now this is my opinion. Mass psychology was as much to blame for the widespread default in mortgages as anything. When the news of British banks failing in early 2007 hit airwaves, subprime mortgages were not in massive default. Their default rate was somewhere around 5%, barely above their normal average default rate. Consider the following quotations from 3 of the world’s foremost experts on finance and economics: “There is always a prevailing bias [in markets]. I’ll call it . . . optimism/pessimism. And sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now.”
George Soros (October 10, 2008) “. . . a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.”
Alan Greenspan (2009) “Value is what a designated person or group of people thinks it is. And they are likely to think something different a minute earlier or later.”
Noel Cookman (2010) Okay, I slipped in one pretender . . . George Soros. In my view he is the devil. Greenspan is obviously a putz and the third “expert” is the only one who might be trusted. [We might as well enjoy a bit of levity here.] These are astounding statements. Read them again if it didn't sink in the first time. What these men (some would say they are manipulators on the grandest of scales) are saying is the the stock market, the real estate market, the currency market, all markets - everything that can be bought or sold - is subject to being "spooked." It's not rational. It's not a simple matter of intrinsic values. It's mostly the neurons firing between millions of peoples' ears that drive values. The greatest minds have not plumbed the mysteries of the human mind and we are no closer to understanding why people do what they do than we were millennia ago, modern bio-chemical sciences notwithstanding. Obviously, it’s important to me to assign blame. This is not the body of work magnanimous men are given to. But, it’s important if we are to solve the problem. Equally obvious is the fact that our congress (in 2009) did not understand who was at fault for they have given us a cure that is worse than the disease. The Dodd-Frank Bill addressed none of the abuses that led to the crisis nor does it provide the first bit of reform for Fannie or Freddie; and, it shackles the very industry that had brought competition, better pricing and superior service to the mortgage industry – the independent mortgage broker. And, Thursday March 31, a court granted a stay to stop the implementation of the Fed Rule on Loan Officer Compensation. The Fed is required by law to provide a clear definition of what non-compliance looks like. They have not done this and steadfastly refuse to do so. Nevertheless, the stay was lifted Tuesday April 5 and the rule is in effect. The Dirty Little Fed Scam
The Fed relied on 4 reports to guide them in their creation and implementation of this new compensation rule. Two reports recommended the new rule change but used flawed data and methods to support their contention. The two which supported brokers and would have resisted changing compensation rules were ignored; but, MOST SIGNIFICANTLY, their authors were placed on the payroll. I deal with these a couple paragraphs down. One report from the Center for Responsible Lending, a partisan, non-profit activist group (with a biased agenda in my view) weighed in to state that brokers were bad for consumers. No data supported this claim and the report centered on the subprime industry and inaccurately equated subprime loans with brokers. Even if subprime mortgages were in themselves flawed and harmful products – a contention that I steadfastly resist – brokers are in no way responsible for the quality of these products; most importantly, brokers are hardly responsible for the poor credit rating their potential customers had when said customers called the broker asking for help in obtaining a mortgage for them. Nevertheless, the Center for Responsible Lending frames their scholarly-appearing papers in flawed premises. For example, their paper on the effect of foreclosures nationwide upon the various racial populations (“FORECLOSURES BY RACE AND ETHNICITY: THE DEMOGRAPHICS OF A CRISIS”) portrays homeowners as victims to predatory lenders that seek them out because of their race and puts them at risk. Rather than conclude that blacks as a group pay their mortgages more poorly than Hispanics and that Hispanics likewise pay their mortgages more poorly than whites and that whites pay their mortgages more poorly than Asians as the data suggests, the CRL’s assumption is that mortgages are animated beings that seek out and swoop down upon groups of people because of their racial makeup. The more accurate analysis is politically incorrect while the other one is permissible in our tip-toe-through-the-daisies world and makes for political fodder and, unfortunately, bad policy. Another flawed report was authored by Michael LaCour-Little of California State University, Fullerton who stated in the abstract that “Results suggest loans originated by brokers cost borrowers about 20 basis points more, on average, than retail loans…” When asked by Brian Stevens of www.thinkbigworksmall.com where he obtained his data, he responded that he had talked with a few banks which names he could not disclose for confidentiality purposes, that the information was “out there” (man is it ever “out there”) and that he checked on a couple “rate sheets.” To a mortgage professional this is code for he didn’t do his due diligence, that his conclusions were reached before he examined any data if indeed he actually looked at data but he nevertheless cash the check he received from our taxes to fund his report. I will not bore you with all of the problems with LaCour-Little’s statements except to say that one cannot tell any more about broker’s prices (rates and fees) from a rate sheet any more than one could tell which hardware store gave the best price on screwdrivers by examining a couple of screwdriver manufacturers’ wholesale price lists. Home Depot might buy the screwdriver for $1 and sell it for $2 while Mom-n-Pop might buy the same screwdriver for $1.25 but sell it for $1.75. But, the wholesale price list might falsely lead to the conclusion that Mom-n-Pop’s Hardware was charging more for the same product. The more reliable research was done by the other two reports and by a gentleman whose work isn’t as readily available (it costs $5,000 for each annual report), Tom LaMalfa of Wholesale Access. But, Mr. LaMalfa has consistently discovered that independent mortgage brokers have given consumers better deals than the big banks and that their customers are more satisfied with their service than customers of big banks are. One report’s author was Gregory Elliehausen who, at the time, was with George Washington University. His conclusion was that “the results provide little evidence that most consumers obtaining mortgages through brokers pay higher prices than consumers obtaining mortgages directly from lenders.” He goes on to say that “this finding does not support the hypothesis that brokers generally steer customers into more costly than those they could obtain from lenders.” In other words, brokers create competition and an environment that saves consumers money. Rational people might conclude that since it ain’t broke we ought not fix it. But, the Federal Reserve isn’t satisfied with this simple data and has forged ahead to restrict, regulate and stifle the broker and independent loan originator. Why isn’t Mr. Elliehausen screaming at the top of his lungs, you ask, insisting that the Fed not institute its broker-hostile rule? *Since he released his paper, the Fed has hired him as, get this, an economist in their Household and Real Estate Finance Section Division of Research and Statistics. Now just ain’t that cherry! When interviewed about the matter, he simply replied “that’s for Mr. Bernanke to decide.” * (http://www.federalreserve.gov/research/staff/elliehausengregoryx.htm) his new job. The last study was conducted by Morris Kleiner Richard M. Todd. Their report entitled “Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers” (http://www.ftc.gov/be/workshops/mortgage/articles/kleinertodd2008.pdf) is profoundly complimentary of the broker industry and conclude that the free market in which brokers and independent originators work yield lower costs and more benefits for consumers. Now, this is beginning to sound stranger than fiction. Where are these guys now? Why are they not screaming objections to the new Federal Reserve rule? Did you guess? They were hired by the Fed as well, Mr. Kleiner as a “visiting scholar” even though he has another job at the University of Minnesota. Hmmmm. I wonder how that works. And what about his co-scholar, Mr. Todd? Well, he was likewise hired by the Fed. Check it out for yourself. http://www.minneapolisfed.org/research/economists/staff_display.cfm?id=397 http://www.minneapolisfed.org/research/economists/staff_display.cfm?id=320
How outspoken do we think these gentlemen will be about the Federal Reserve’s new compensation rule and its deleterious effect upon the consumer? I’m not suggesting that any of these authors are evil or indigent. I am charging the Federal Reserve with improperly manipulating the market to the detriment of consumers not to mention an entire industry of mortgage professionals who ushered in an era of unprecedented competition and access for these consumers; and, the result inures to the benefit of the large banks while edging out the stealth competitors. Afraid, Prepared or Both?
The good news is that I can say without equivocation that a financial collapse is not coming. The bad news is that it’s already here. Do you really think that if a tsunami takes out half of the homes in your neighborhood but leaves yours standing that your life and home value will not be affected? You cannot be unaffected. And neither can divorcing clients. The real issue is our response. I am not one to be motivated by fear. But rational fears are good if one is able to respond properly. It’s the irrational ones that do us in. In my next article, I will outline steps that we must take in order to save the financial system from sure implosion. And I will show you the road map to the future of home-ownership. As always on this blog, my solutions and strategies center on those affected by divorce. But, many of the principles will be helpful to every citizen. So, pass it on and get the word out. Peace.