Last week, I wrote a column about e-closing in which I speculated that perhaps, just perhaps, not all of the actions taken by the industry's new federal regulator, the Consumer Financial Protection Bureau, were bad for the future of our industry. As you can imagine, I got a fair amount of feedback, ranging from the thoughtful to critical. How could I, they asked, side with the federal government on an issue as critical to the future of our business as the CFPB? Actually, I don’t think of it that way.
The need to choose a side may have started on the playground, where every kid hopes to be on the team with the big kids, or at least those who are really good with a murder ball. In fact, I have bad memories of the elementary school playground, and actually experience horrible PTSD flashbacks of the big kids hurling red rubber balls at my head. At least my parents did not have to go into debt to afford that wonderful public school experience. But picking a winning side often seems like all that is important in Congress, and they play with objects far more dangerous than rubber balls.
Increasingly, the work our elected officials seem to be doing has less to do with the common good and more to do with making sure their side wins. In many ways, the absence of good policy can be an even bigger driver of unintended consequences than bad policy is. Last week, this partisan view of the political game killed a bill in the Senate that might have made it more likely that more young professionals would pursue the American dream. Instead, one side claimed a great victory and may have cut their noses (or students' noses) off to spite their faces. Let me explain.
Or better, let me turn to Susan Dynarski, a professor of education, public policy and economics at the University of Michigan, who recently published a column you might have read in The New York Times. (Note: I will have a lot of references to Big Blue in all future columns so I can support Michigan with more than just my daughter’s tuition). She pointed out that student loans have now joined mortgages and car loans in the top three largest sources of credit, eclipsing credit cards.
In fact, recent statistics show that student loan payments can be up to 20% of a graduate's current monthly debt obligations. Based on current housing ratios, that does not leave a lot of room for mortgage payments.
The article also compared the student loan business to the pre-crash mortgage business. First, it's not easy to know who owns the underlying loans, so student loan borrowers find it very challenging to modify or even consolidate their loans. In many cases, the federal government is the investor and the bank simply services the loan, with little incentive to respond to borrower requests for information or help.
After all, every extra body hired to talk to students or concerned parents impacts the servicer’s bottom line since the servicing fees are a fixed percentage of the loan balance.
Secondly, as borrowers work to refinance or consolidate their loans, the paperwork is lost, the contact person changes and the rules change. It’s like looking back in time at our own servicing business and is probably occurring for many of the same reasons it occurred here: lack of staffing, insufficient training and inexperience with reoriginating these loans.
Finally, reports indicate that some banks are not signing documentation in an orderly process, which is raising fears that the robo-signing specter will rise again. It sure seems like what we have experienced that in the mortgage industry, as servicers spent years with strict cost control and an expectation of low delinquencies, and then saw that model fail when delinquencies went up and the people, processes and technology were not there to deal with it.
The result, according to Dynarski, is that consumers need protection. It can come as no surprise that long-time consumer advocate Sen. Elizabeth Warren, D-Mass., agrees. After all, Warren was the original proponent of the CFPB and a frequent critic of banks and servicers, once commenting publicly that bank disclosures seem like the word barf. Of course, some of the new mortgage "disclosure barf: is due to new regulations, so perhaps there were some unintended consequences that are making us all feel queasy. Anyhow, Warren trained her progressive eye on the student loan issues, and even took action, introducing the Bank on Students Emergency Loan Refinancing Act, a bill that the Obama administration estimated would have saved $2,000 for up to 25 million borrowers. Republicans killed the bill last Wednesday, before it made it out of the Senate.
Now, I didn't read the entire bill, so I can't say I would have voted for it either. But I doubt many of the politicians read it either. What I do know is that $2,000 goes a long way toward the down payment on an FHA loan for a starter home for a first-time homebuyer. Last time I checked, the industry was desperate to find more of these buyers, many of whom are settling down into the renting lifestyle because they just can’t qualify for a loan.
I know I’m on dangerous ground here. No one in our industry wants to end up on the wrong team when an important bill is introduced in Congress, much less when the resulting law empowers an agency with unprecedented might and a mandate to turn our business on its head.
On the other hand, it might be time for us to start thinking carefully about empowering future home buyers if we want to plant the seeds for a robust purchase money mortgage business in the future.
Next week, I'll give you more thoughts on why this matters to the mortgage industry. In the meantime, feel free to give me your views. Meanwhile, I will be calling Elizabeth Warren for advice on how I might handle my daughter’s University of Michigan out-of-state tuition.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience.