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Guest Post: Fed Aims At Mortgage Fraud, Shoots Housing Market In The Gut

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

Fed Aims At Mortgage Fraud, Shoots Housing Market In The Gut

The problem with mortgage fraud wasn't broker compensation: it was the ease of the fraud and the incentives throughout the food chain for collusion. New Fed rules simply wipe out competitors to the "too big to fail" mortgage banks.

Why are we not surprised that the Fed took aim at mortgage fraud and ended up shooting the housing market in the gut. Here's a simple guide to what's good and bad for housing:

Things which makes it easier and cheaper to borrow money: good.

Things which make it harder and more expensive to borrow money: bad.

And that's the fundamental problem with the Federal Reserve's new regulations crimping mortgage broker compensation. Unless we expect mortgage brokers to take vows of poverty, then the system has to allow legitimate brokers to get paid in accordance with the amount of work the loan requires to get funded.

By severely limiting compensation, the Fed has basically wiped out small brokerages and lenders, reducing the availability of mortgages to a handful of--you guessed it--too big to fail banks, who already control the majority of mortgage origination.

the Fed's ill-advised "reforms" simply act to further consolidate an already concentrated market, creating what amounts to a mortgage cartel by snuffing out smaller competitors in the mortgage market.

The goal of limiting mortgage fraud is necessary and laudable--the point here is that limiting compensation is like chopping off a toe to fix a tooth ache: the problem was lax underwriting rules, inadequate/zero oversight, fraudulent appraisals and ratings of mortgage-backed securities, etc. etc.

The Federal Reserve Board says that its regulatory goal is to “protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.” The basic idea is to prevent loan officers from steering borrowers into riskier types of loans or a higher than average interest rate to make a higher commission.

Officially titled “Loan Originator Compensation amendment to Regulation Z,” The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by banks and other lenders.

Since most of us only deal with mortgage loan origination fees when we buy a home or refinance a mortgage, the average citizen will have a tough time sorting out the often-arcane issues at stake. But the bottom line is straightforward: the already-limited mortgage market is about to become more limited, as small mortgage brokers are being shoved out of business. Call it “unintended consequences” or a cloaked plan to channel more of the mortgage business to the “too big to fail” big banks, but regardless of the motivations, the rules end up limiting consumer choice and making it harder for home buyers to get a loan.

That's bad for housing in two ways: limited competition drives costs up, and marginal buyers will find nobody wants their business because it's simply not worth the compensation allowed by the Fed's new rules.

One size does not fit all--except in a Centrally Managed Economy (TM, Federal Reserve).

This is yet another case of closing the barn door after the horses have already left: the riskiest subprime-type mortgages that were the root cause of the problem have largely vanished from the mortgage market.

Since the rules largely apply to small lenders and brokers who must sell the mortgages they originate to larger banks--most banks and other direct lenders, including big mortgage companies that function like banks, are exempt from the new regs—then the limits will weigh entirely on smaller independent players.

Critics, including U.S. senators David Vitter and John Tester, observe that this will further concentrate a market which is already dominated by mega-large banks. According to the senators, two banks already originate 43% of the nation’s mortgages. (Can you spell "cartel"?)

What the regulations do is set some ground rules--consumers must be offered the lowest possible interest rate and fees for which they qualify, for example--and limit loan officer and broker compensation in several key ways.

“The loan originator may not receive compensation that is based on the interest rate or other loan terms.” In other words, a lender can no longer pay a loan broker a yield-spread premium, which is tied to the rate or terms of the mortgage. Currently, the brokerage firm and the loan officer typically split this rebate, which is typically stated in “points,” where each point equals 1% of the loan amount. Thus a loan origination might earn an $8,000 fee, $4,000 of which goes to the loan officer and $4,000 to the mortgage broker.

Under the new rules, the mortgage broker cannot pass on a part of the commission to the loan officer, who must now be paid an hourly wage or salary. The idea is to remove the incentive of the loan officer to push the consumer into a more lucrative loan, but the result is to remove the incentive to remain in the independent mortgage business.

Mark Helling, a licensed loan officer based in Ohio, summed up the view from inside the industry: “After April 1st, a Loan Officer will have to be paid the same rate whether it is an easy loan that takes two weeks to close or a foreclosed property in need of rehabbing for marginal borrowers that takes three months of work to close. Just when the country needs the most experienced and knowledgeable mortgage professionals to help liquidate the flood of foreclosed homes, the Fed is making it unprofitable for loan officers to accept these deals."

From the point of view of those in the mortgage industry trenches, what the rules do is increase the regulatory expenses of being in sales but eliminates the commissions that are the lifeblood of any sales enterprise.

“Prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party.” In other words a loan originator cannot collect payments from both the consumer and the lender in a single transaction. If a broker is paid a commission by the lender based on the loan amount, then the broker is barred from charge the borrower “points” or fees for the loan processing.

This prohibits loan officers from paying borrowers’ fees or issuing them a credit from their own commission. This has been a common practice within the industry, and from the inside perspective, it that has offered a flexible way to lower borrower’s costs.

These major regulatory changes are being made in the service of fair lending practices, but to those seeing their livelihoods threatened, it looks like a sledgehammer is being used where a flyswatter would have sufficed.

“As far as trying to protect consumers from those seeking to charge a higher interest rate, with all of the competition out there for mortgage loans,” Helling observes, “all a consumer has to do is check one or two other banks and they can quickly find out if they are getting a fair deal or not.”

The rules will also interact in potentially harmful ways with the massive Dodd–Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial regulation since the Great Depression.

At issue is section 1413 of the Dodd-Frank Act, which states that any violation of the loan originator compensation rules will offer the borrower a “defense to foreclosure” for the life of the loan.

In other words, if a delinquent borrower can go back and find some violation of the compensation rules in his/her mortgage origination, the lender is effectively barred from foreclosing on the borrower’s loan.

Given the risks this presents to banks, many observers, including the two senators, expect the large banks which typically buy mortgages from independent brokers and small lenders will shun these mortgages. Why buy a mortgage which could go sour via default that could preclude foreclosure as a remedy? Talk about putting a bullet in the housing market when it's already down: the new rules create huge disincentives for banks, too big to fail or otherwise, to buy independently originated mortgages.

These rules will poison the housing market in several ways. If mortgage brokers can no longer make enough in commissions to stay in business, then the mortgage options for home buyers will shrink. The most productive loan officers will find reduced incentives to risk remaining independent, and so there will be less competition offered to the big banks which already dominate the industry.

What happens as mortgage sources and competition dry up? Mortgage costs rise, and marginal buyers will be shunted aside as unprofitable customers.

The need for carefully thought out regulation has been made painfully apparent by the excesses of the credit and housing bubbles, but squashing legitimate independent loan originators and further concentrating the mortgage industry into the hands of the “too big to fail” banks does nothing but hurt the housing market and eliminate the healthy competition to big banks offered by smaller lenders and legitimate mortgage brokers.


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Mon, 04/18/2011 - 11:35 | 1180583 Robslob
Robslob's picture

TBTF Rules!


Mon, 04/18/2011 - 11:54 | 1180663 Bearster
Bearster's picture

What?!?  A new government action sold on the claim that it will help the little guy actually ends up protecting large incumbents?!?

Quick, let's enact more regulation to protect the little guy!  These guys need more power and the little guy, er, I mean TBTF need more protections!

Mon, 04/18/2011 - 12:51 | 1180876 redpill
redpill's picture

All this achieves is crushing small brokers, and it can't possibly be a mystery to them that it does so.  For brokers who are large enough to get a warehouse line and become a correspondant lender, many of these hurdles disappear.

For those not familiar with how the process works, a broker is a third party that simply organizes the transaction, and charges a fee for matching borrowers to lenders and doing the paperwork.  These new regulations make it very difficult for brokers to make money because of absurd restrictions on what they are able to charge one borrower versus another.  It is essentially price fixing.  It would be akin to the government going to your local car dealer and telling them they have to make exactly the same amount of money on every single car they sell.  Well congrats, you just killed the jobs of every salesman on the lot.

Correspondant lending is when a loan agent has sufficient financial standing (read: a warehouse line) that they actually fund the loan themselves and immediately sell it to a bank.  From the borrower's perspective, there is no difference, apart from the fact that if the agent is a correspondant lender, they don't have to disclose nearly as many things as a broker would, and they don't have to adhere to the rigid price fixing called for in the recent legislation.

In the end, the borrower's loan is still provided by the same bank, the only difference is how the process plays out.  Small brokers get cut out of the sales loop and are forced to follow ridiculous rules, while correspondant lenders (or direct lender banks) don't have to.  Plays right into the hands of the large financials, AGAIN.

Mon, 04/18/2011 - 12:57 | 1180902 spelledwrong
spelledwrong's picture

This sums it up well!

This esp:

 "It would be akin to the government going to your local car dealer and telling them they have to make exactly the same amount of money on every single car they sell.  Well congrats, you just killed the jobs of every salesman on the lot."

No matter what you think of a mortgage broker, the fact that the FED has come in and told us how we can get paid and that we have to make the same on every loan no matter what the amount of effort is absurd...but that is what has happened. This after disclosing every last penny (gross) we make per loan.

Mon, 04/18/2011 - 15:36 | 1181507 nufio
nufio's picture

i think it works out well... mortgage rates should be higher than 5% for a 30 year loan.

if this makes it so and a bunch of salesmen lose their jobs... its worth it.

the big banks make their money anyway. and they stil have to compete with each other.



Mon, 04/18/2011 - 15:40 | 1181519 redpill
redpill's picture

You think a cartel = competition?

Mon, 04/18/2011 - 17:19 | 1181850 spelledwrong
spelledwrong's picture

Not much on capitalism, eh nufio?

Tue, 04/19/2011 - 16:20 | 1185531 nufio
nufio's picture

i dont think mortgage brokers should exist. I think anyone who gains out of the mortgage transaction in a % basis of transaction should hold a % of the risk.

I think this should also hold for real estate agents.. but their business model is dying with competition from companies like redfin.. hoooray!!!!


the govt should close down fannie and freddie and stop buying home loans.  If fannie and freddie did not exist i would support zero regulation for mortgage brokers or banks. this is the best case scenario. I doubt many mortgage brokers would want this scenario either.


Just carifying that I do support deregulation, but only if govt money is out of the picture in the first place.

Mon, 04/18/2011 - 19:22 | 1182152 FreedomGuy
FreedomGuy's picture

Good post, Red Pill. I enjoy knowledgeable posts like yours. I truly believe that as government encroaches on every industry that all of us in every industry could write similar posts about government interference in our industries. I have come to the belief that regulation overall is a large net loss, especially when you add in the costs of the monitoring and documenting.

Mon, 04/18/2011 - 20:11 | 1182272 Zero Govt
Zero Govt's picture

usual monopolist rot which is Govts very purpose

Tue, 04/19/2011 - 00:45 | 1182945 D1eeeeeNAHHHHH
D1eeeeeNAHHHHH's picture

redpill, I know it sounds that simple regarding old brokers transitions, but it's not.  The people I know who own their own companies are forced to work under bank charters or were forced to essentially becaome a bank. 

The banks eliminated nearly 100% of the competition in one swoop and got paid by the fed and the us government in the process.

According to them, all loan volume is waaay down, even for the loan companies that did survive.  When nearly everyone requires 20% or go FHA, there are only refinancing (near ly everyone already has done this) or purchases (most don't qualify and are afraid.)

Mon, 04/18/2011 - 11:40 | 1180598 TruthInSunshine
TruthInSunshine's picture

The truly scary thing is that only by allowing fraud can Ponzi-nomics in the U.S. & Europe delay (for how long, who knows) a depression, as housing is beyond burnt toast. This analysis is an admission of that.

 Bring back the NINJA loans!

And one just has to love that all these so called competent economists keep talking about housing as a cause of our economic pain, when it is jobs (or joblessness - unemployment and underemployment).

Jobs drives housing and all other consumption, not the other way around!

As we all know, the solution for high structural unemploment, underemployment and wage destruction is an easy fix....   /sarc

Mon, 04/18/2011 - 11:47 | 1180630 riphowardkatz
riphowardkatz's picture

And it is all about consumption. That is how we get more wealth by consuming more. 

Mon, 04/18/2011 - 11:59 | 1180680 TruthInSunshine
TruthInSunshine's picture

A society can begin consuming less, and even considerably less, than it has in past decades and generations. Hell, one doesn't even need to study Empire Fail to understand this, as lesser sovereigns succumb to this trend with enough time and expansion built on debt. We've just begun a great cycle of consumer deleveraging in the U.S. & Europe (we're probably in inning 2).

Savings coupled with sound fiscal policy leads to true long term wealth and higher SUSTAINABLE consumption.

Jobs are always first and foremost as the foundation for sustainable economic growth. Consumption based on central bank drugs is a fleeting high that leads the user more susceptible to debt illness and death.

Mon, 04/18/2011 - 14:52 | 1181329 duo
duo's picture

How many people were talked into NINJA loans with cherry-picked appraisals by mortgage brokers?  Too many.

Mon, 04/18/2011 - 20:36 | 1182276 Village Idiot
Village Idiot's picture

"How many people were talked into NINJA loans with cherry-picked appraisals by mortgage brokers?  Too many."

How many people -

  • had agents who knew prices were inflated;
  • worked directly with banks who were just as complicit as "brokers" by offering "NINJA" loans and "cherry picked appraisals";
  • had those products securitized by knowingly complicit markets;
  • etc, etc, etc,

Everyone was complicit, including the prospective homeowner.  This site promotes truth.  Look for "advisors" who are willing to put your success ahead of their's. Hard to get shafted when people are telling you the truth.


Mon, 04/18/2011 - 11:43 | 1180611 dark pools of soros
dark pools of soros's picture

just outsource the job for pennies.. like the rest

Mon, 04/18/2011 - 11:48 | 1180636 apberusdisvet
apberusdisvet's picture

What this means is that the median home price will eventually fall below $100K; real estate/mortgage brokers need to learn a new trade; nominal wealth goes poof for the middle class, if it will exist at all in the next 5 years.

Mon, 04/18/2011 - 12:20 | 1180753 WonderDawg
WonderDawg's picture

I don't think there is any doubt the median home price will fall below $100K, before it snaps back to the long term trend. If you can wait until the overcorrection plays out, you'll be able to buy your favorite McMansion for pennies on the dollar.

Mon, 04/18/2011 - 11:49 | 1180650 FreedomGuy
FreedomGuy's picture

This is a perfect example of the law of unintended consequences. In an effort to write enough rules and laws to make/force all of us to be "good" you actually end up doing more harm. I see it all the time in my profession.

For those who always believe every problem is a lack of regulation/rules and rule enforcement: How many laws will it take before all human interactions are perfected? Can we know them all? The companion question is: How many regulations will it take until we are all miserable and depressed as it becomes impossible to do anything? I think you know that the answer is that the second will occur long before the first.

When you are a non-socialist/collectivist as am I, the question of any product is so much easier. I simply have to ask myself, "Is the price and hassle of the product worth it?" If the answer is "Yes." then I buy it. I can research the fees and reasons and how something is made or done but I don't have to know it all. Entrepreneurs can capture a market, including home loans with better, simpler, clearer, more reliable and less expensive methods. However, they have to have the ability to innovate. Regulation removes innovation and the ability to tell the better players from the poorer players. Let laws about fraud and negligence more widely applied give pause to the shady operators. BTW, how many have been prosecuted under our current plethora of regulations? Hmmmm?

As a libertarian let me ask the final question, too. Under what Constitutional provision does the Federal government set the fees and procedures specifically of the housing market? Where is the right to make loan originators hourly wage earners instead of commission? Can they do that to you and I, as well? Are we then free if we cannot agree to our own wages and terms of employment?

Mon, 04/18/2011 - 12:08 | 1180715 Birddog
Birddog's picture

Sounds like we are becoming serfs.  Or maybe we are already.

Mon, 04/18/2011 - 12:08 | 1180716 dark pools of soros
dark pools of soros's picture

since you are what you are you won't be able to see anything besides things directly interacting with you;  but you will still be slammed by all the indirect nonsense like everyone else.  How about we just bring back monopolies completely and then you can have a great choice right?


Mon, 04/18/2011 - 13:05 | 1180926 OldTrooper
OldTrooper's picture

Seems that in this case it is the government that is actively encouraging monopolies.  And I couldn't help but notice that you avoided the question of where the government derives its alleged power in this area.

Mon, 04/18/2011 - 16:45 | 1181738 dark pools of soros
dark pools of soros's picture

I was replying to his slant in the beginning of his message..  when someone rambles it isn't the listener's responsibility to remark on every tangent.


You do know that the 'hourly wage' can be loop holed away right? Or will this be the first time ever in history that the intent will be followed with no gaming of the system?

Mon, 04/18/2011 - 18:20 | 1181995 FreedomGuy
FreedomGuy's picture

There is no rambling Soros. There's a consistent set of challenges that you don't seem to understand. I understand very clearly the loop-holes of hourly wages. I am in a class action lawsuit over that issue. That doesnt' change a thing about this article or my point. I submit to you that if you are free you own yourself and therefore you and your employer negotiate how you will be paid. Government has no standing in those negotiations. They do not own you and they do not own the business, so you are free to make whatever agreements you wish.

The Constitutional part suggests that the government actually has no legal authority to even regulate these things as an added challenge. Make more sense, now?

Mon, 04/18/2011 - 18:12 | 1181977 FreedomGuy
FreedomGuy's picture

Hard to make sense of what you write about indirect nonsense. You missed the point of the article and my comments. This will become a state monopoly. They are the worst of all monopolies. These rules LEAD to a monopoly of state favored and larger institutions. Look at the earlier comments of someone who actually knows the broker business and you see how the little guy is put out of business. BTW, that is a part of how large business eliminates and prevents competition. You get regulatory and cost hurdles, even favorable legislation that makes the bar too high for smaller competitors and new entries.

Perhaps you favor state monopolies or even nationalizing industries? How has that worked out historically? Maybe the Constitution doesn't matter either. There is no authority for these types of regulations. Even if you think there is then you have to conclude we are all in fact servants of the State as it will set our wages, terms of employment, abrogate all contracts and voluntary interactions and essentially run all industry at will. That's not a plan or idea I signed up for.

A state monopoly can never be defeated. All monopolies historically have been through the state and/or protected by the State.  Private monopolies have never really existed and are theoretical problems that have never happened. In reality they cannot exist long without government protection.

Tue, 04/19/2011 - 00:25 | 1182905 StychoKiller
StychoKiller's picture

No worries!  Because:

"Dreams Come Due, Government and Economics as if Freedom Mattered", ISBN: 0-671-61159-3, by John Galt
The book is dated, but many of the things it talks about are still valid today.

What do you give the Govt that's taken everything?

Mon, 04/18/2011 - 13:20 | 1180986 Vertical Drop
Vertical Drop's picture

My only quibble is the idea that TBTF's consolidating an ever greater percentage of the market is "unintended".

Mon, 04/18/2011 - 18:24 | 1182010 FreedomGuy
FreedomGuy's picture

Lol! Well, I may grant you that possibility given the crony-capitalism or fascism we are experiencing now. It is not unthinkable the bigger players lobbied for these exact changes. However, my general point remains about regulation and the "good" it does us.

Mon, 04/18/2011 - 11:53 | 1180660 Piranhanoia
Piranhanoia's picture

can you say, monopoly?  As long as they get a free ride from the cities they will buy the little local tics, wipe out the small business and eventually become the only one stop spot. Empty, but your one stop spot all the same!

Mon, 04/18/2011 - 12:02 | 1180684 ghostfaceinvestah
ghostfaceinvestah's picture

The Fed is actually doing the country a favor by putting brokers out of business.

Mon, 04/18/2011 - 12:11 | 1180717 Mercury
Mercury's picture

Right, and when borrowing directly from the government remains the only legal way to get a loan we will have achieved a state of maximum financial liberty and fairness.

Mon, 04/18/2011 - 12:50 | 1180871 spelledwrong
spelledwrong's picture


Mon, 04/18/2011 - 12:53 | 1180878 ghostfaceinvestah
ghostfaceinvestah's picture

Hate to tell you but brokers are only originating loans that are ultimately owned by the government.  By definition brokers don't put any private capital into the mortgage financing market.

But they do a great job putting unqualified borrowers into government loans using fraudulent loan application information.

Mon, 04/18/2011 - 12:58 | 1180900 redpill
redpill's picture

Correspondant lenders and many banks do the exact same thing.  And claiming all of them are frauds is ignorant.  There's less fraud in the mortgage business than there is on Wall Street, imho (if you can find a way to separate the two anymore).

Mon, 04/18/2011 - 13:12 | 1180952 spelledwrong
spelledwrong's picture

"But they do a great job putting unqualified borrowers into government loans using fraudulent loan application information."

I know that is still out there and probably always will be, bank LOs are as guilty.

With all the checks and balances and background checks now I really don't see how anyone can get away with loan fraud. I'm sure it happens but now the bank does a verbal verification of employment the day before closing, which has to be a publicly listed phone number, the credit is re-ordered within a week of closing, the tax trancripts (4506) are ordered on EVERY file to make sure the income submitted matches the income submitted to the IRS, the lender now orders the appraisal from an appraisal management company who then randomly selects the apprasier and we are not allowed any communication with them, all deposits over $1,000 need to be documented (which sometimes leads to a papertrail nightmare) and on and on.

On the GFE we are now married to the charges for not only the our fees but the transfer taxes that are quoted.


I think most of these are good esp the GFE, but IMO, most of the problems with fraud and unethical LOs are gone (but will never be gone completely just like any any business).

Tue, 04/19/2011 - 00:28 | 1182918 StychoKiller
StychoKiller's picture

...but now the bank does a verbal verification of employment the day before closing, which has to be a publicly listed phone number, the credit is re-ordered within a week of closing, the tax trancripts (4506) are ordered on EVERY file to make sure the income submitted matches the income submitted to the IRS, the lender now orders the appraisal from an appraisal management company who then randomly selects the apprasier and we are not allowed any communication with them, all deposits over $1,000 need to be documented (which sometimes leads to a papertrail nightmare) and on and on.

After all that, the bank then trashes the note and makes an entry into the MERS database -- go figure!

Mon, 04/18/2011 - 13:17 | 1180970 waylon153
waylon153's picture

Not entirely correct.  Lenders have an underwriting department to review the borrower qualifications and an Appraisal Review department to review the property.  If there is fraud it is the job of the lender's employees to find this -  and they do, all the time.  The underwriters call everyone on the application and verify addresses, call creditors, call banks/401k accounts, etc.  


If there is fraud then the lender has not done their job. Why?  They look the other way because they want/need the fees.  Or, the loan qualifications (from the government) are not clear and are open to interpretation.  The loan standards are about 30 pages long even for a "simple" 30 year fixed loan. 


The lender loans the money and gets it back in about 30-60 days from the investor (basically the US government now).   The lender gives the money to the borrower not the broker.  If you were giving money to a stranger, wouldn't you do a thorough job with due diligence?

Mon, 04/18/2011 - 13:07 | 1180929 DropOutEconomist
DropOutEconomist's picture

Jamie? is that you?

Mon, 04/18/2011 - 12:05 | 1180695 SwingForce
SwingForce's picture

 Everything Obama, Geithner, & Bernanke do, they do it all for The Banksters. EVERYTHING!


Many people have lost their homes. Many more are paying inflated rates on inflated properties which the banks refuse to refinance. Savers are getting lousy rates on CDs, but are charged 10%-24% on a credit card. From the top of the credit menuboard to the bottom, The Banksters have FREE REIN to suck as much blood out of the middle class as they possibly can. It’s a criminal plan that TARP was paid for by The Taxpayers to save the banks from extinction, only for them to revive and viciously attack the hands that feed them. Henry Paulson should be charged with Treason for using The Taxpayers' Money to re-arm The Banks of Mass Destruction. Everybody is a victim, even the homeowner without a mortgage, his equity is dropping in its entirety; he's  losing more than the guy with a mortgage. Condos sit empty because banks don’t want to pay associations’ maintenance fees, while those fees rise for the rest of unit-owners to make up the shortfall. The Banking Cartel is waging a war against every American Citizen, and it won’t be happy until every savings account is drained, every homeowner is broke & evicted, every credit card holder is “paying” 24.9% + $88/ mo. in overlimit and late fees, and every house is in their possession. Even the foreclosure process is financially draining for the owner, with insurance and electric payments continuing until property is taken out of owners’ name, an average of 2-3 years. (Upon repossession, the bank doesn’t book the loss until resale, artificially covering-up insolvency issues). Wake up people, its not us against each other, its Us vs. The Banksters who run their operation with impunity.


Further details of the covert TARP program, “Where the Bailout Went Wrong”, by Neil Barofsky:

Mon, 04/18/2011 - 12:08 | 1180708 AldousHuxley
AldousHuxley's picture
Lower Real Estate Values is great news!
Mon, 04/18/2011 - 12:06 | 1180710 Stuck on Zero
Stuck on Zero's picture

We should eliminate mortgage tax deductions and government guaranteed mortgages.  The result will a drop in home prices and an increase in home affordability and ownership. 

Mon, 04/18/2011 - 12:16 | 1180734 FreedomGuy
FreedomGuy's picture

Not sure if you are being humorous/sarcastic but you are correct. Housing and property in general should have its own natural market value which would have been much cheaper over time. I would support this with a concurrent reduction in income taxes so the tax burden does not increase.

Mon, 04/18/2011 - 12:25 | 1180763 Dr. No
Dr. No's picture

Ive stated this before.  Just look at housing prices in countries without subsidized 30-year mortgages.  Homes which are bought from the owner for cash or on owner finacing terms.  I have seen builders offer condo units a large discount in the early phases of construction in order to presell the homes.  Terms such as 50% down and the rest over 5 years.  Whats wrong with this?  Gone is the corruption from GSE's. mortgage brokers, TBTF.

Mon, 04/18/2011 - 15:10 | 1181406 robobbob
robobbob's picture

That would be great. With jobs being outsourced, remaining wages stagnate and being destroyed by government sponsored inflation, growing taxation, how does the average person come up with a 50% deposit before the age of fifty? and what happens to all of those construction and RE related jobs?

know where that ends up in statistville? justification for unlimited public housing. which I guess solves the problem of what the gov plans to do with all of those toxic loans they bought up. a regular win/win........... for statists

Mon, 04/18/2011 - 15:46 | 1181535 nufio
nufio's picture

you are assuming that the re prices will remain the same.. in that scenario prices will drop to a point where the sheeple can afford houses at an earlier age.

Mon, 04/18/2011 - 15:47 | 1181538 Dr. No
Dr. No's picture

a 50% deposit before the age of fifty


If the house cost $20-$50k, its doable.  How is it statist for housing not to be propped up by federally subsidized 30-year mortgages?  The current system is statist:  It lets people to pay for a house on a 30-year plan. Therefore people bid up the price of the home based upon monthly cash flow.  If there was no 30-year mortgage, home prices would be bid much lower.

Mon, 04/18/2011 - 19:42 | 1182190 FreedomGuy
FreedomGuy's picture

The statist part is the tax deductability of the mortgage interest. The State is favoring one asset class over another. They could do the same for auto's, HDTV's or anything else if they chose. A 30yr mortgage is not statist but you are right in that the availability of these does indirectly drive up the prices of houses by making more money available. Cars would cost more if they had 30yr or 10yr loans as the amount of money to finance them increased.

Mon, 04/18/2011 - 12:13 | 1180722 Missiondweller
Missiondweller's picture

It alaways amazed me that to sell securities you had to be licensed, get fingerprinted and pass background checks as well as consider "suitability" for the client.


The mortgage broker is not encumbered by any of these things (in the US) and can/could recommend any type of financial scheme/mortgage irregardless of whether its suitable for a potential homeowner.


After three years, have there been any reforms? No.

Mon, 04/18/2011 - 13:07 | 1180939 OldTrooper
OldTrooper's picture

No doubt the regulators for the mortgage industry would be just as effective at sniffing out fraud and malfeasance and bringing perpetrators to justice as the SEC is.

Mon, 04/18/2011 - 17:08 | 1181813 spelledwrong
spelledwrong's picture


I find it interesting that you speak on this as fact and you really have no idea what you are talking about. None. Have you read any of the other posts? You are 100% wrong, not 99%.

A mortgage veteran I know told me there has been more rules, laws and guidelines for the mortgage business (esp brokers) in the last 3 years than the previous 20 combined and I believe it (I have 13 years in the business and it sounds right).

Mon, 04/18/2011 - 12:11 | 1180724 silvertrain
silvertrain's picture

hold still little fish we are going to gut you..

Mon, 04/18/2011 - 12:14 | 1180727 Bob Sacamano
Bob Sacamano's picture

The government is just doing what it likes to do -- create regulations that hinders. 

Although after too many years in which it was way too easy to get a home loan, I can probably think of worse things than making it harder to get a home mortgage.  

We still do not know what the market clearing price is for houses -- the government does not want to find out. 

Mon, 04/18/2011 - 12:16 | 1180739 Dr. No
Dr. No's picture

This article is written from the wrong point of view.  What is wrong with falling house prices?  This makes homes more affordable.  In my view, falling home prices is a more sustainable method of putting people in houses rather than giving everyone free money to pump up a bubble.

Mon, 04/18/2011 - 12:29 | 1180781 TruthInSunshine
TruthInSunshine's picture


And we can extend falling home prices to falling 'everything' prices.

This is not 1933. Bernanke, assuming he's even being candid, is fighting the wrong battle if he views deflation as a threat rather than curative process.

Healthy recoveries should follow equilibrium of markets based on healthy, normal supply/demand curves, not supply/demand curves and prices totally distorted by Central Bank Frankenstein-omics.

Bernanke would have us believe consumption and savings can increase when wages are sticky or falling, and in this environment, inflation is preferable to deflation...

I have trouble even articulating Bernanke's contradictory and non-sensical logic.

Everything is relative.

If unemployment is high and wages are flat or falling in real terms, why would it not be preferable to have some deflation rather than inflation, as the former will encourage both consumption and help savings, while the latter will do the opposite in each case?

Deflation has been set up by Keynesians as the great enemy, and they highlight the example of 1933, whereupon the world and global economy were a much different place, as their warning on its alleged hazards.

In reality, we need the exact opposite of what The Bernank has stated. We need falling real prices (so long as wages are flat or falling and unemployment/underemployment are high) in order to allow for an increase in the savings rate and greater real levels of consumption.

Bernanke has already failed.

Mon, 04/18/2011 - 12:54 | 1180882 WonderDawg
WonderDawg's picture

To understand Bernanke's logic, you have to look at it from his owners' perspective, because it isn't really his logic, he is only executing the orders of his owners. His owners being, of course, the shareholders of the Federal Reserve Banks, aka, the TBTF. If you're a Rockefeller or a Lehman or a Rothschild, etc., he's doing a great job.

Bernanke doesn't make the Fed policy, he is just the public face for it.

Mon, 04/18/2011 - 14:25 | 1181225 Financial_Guard...
Financial_Guardian_Angel's picture

+1. Benny is the face, the wizards behind the curtain are your primary dealers, TBTF banks, and rich titans of the world. They loosen and tighten policy making money on the way up and down. Like a trader, it takes market movement to make money or like a sailor it takes wind from any direction to move.

However, this time they have miscalculated. Universal greed has distorted the playing field to the point it is not recognizable to them or to us. Too many moving pieces and everyone wanting their slice. They have gone too far in an attempt to save their kingdom as currently constructed and are past the point of no return. The only policy choices at this point are either catastrophic or worse. The goal now is to extend this as long as possible and protect themselves and their buddies along the way.

They did not want it to go this far because in the long run riots, looting, and marshal law aren't in their best interest either. But until that happens, they will funnel as many dollars into their pockets as possible. We are still some distance from that, but we are all seeing it peak above the horizon.

i really wish to be wrong about this... But the good news is that my daughter wants to be a vet. I imagine animal husbandry will be one of the "new" growing fields in years to come.

Mon, 04/18/2011 - 14:29 | 1181250 WonderDawg
WonderDawg's picture

I agree, they've miscalculated. They've painted themselves into a corner where now the options are: stop QE and allow the markets to collapse, or continue QE and allow the dollar to collapse. The only thing we know for certain is they are planning their next moves and whatever the plan, saving themselves will be the goal.

Mon, 04/18/2011 - 14:43 | 1181293 Financial_Guard...
Financial_Guardian_Angel's picture

You're dawg-gone right! Think of it like crowd behavior in a packed theater when someone yells "fire!". In an effort to save themselves, people will trample to death those unfortunate enough to be underfoot.

Tue, 04/19/2011 - 01:59 | 1183057 FreedomGuy
FreedomGuy's picture

Good points and I think the answer is that deflation is the enemy of net debtors. When money gets more valuable and expensive then creditors do better and debtors less well. Our government now as opposed to the 1930's is the largest debtor in the world.

I think deflation is actually the natural course of events if governments did not intervene in currency and rates. I say that because manking keeps improving technology and productivity so things should cost less, e.g. a modern bakery can put out 1000 loaves of bread today vs 200 at the turn of the century (ficticious data) or it now takes only 20 men to build a car as opposed to 80 60 years ago. Likewise, without constant additions to the money supply dollars remain constant while the number of products to buy increases. Dollars should increase in value.

Our whole society for my whole adult life has been based on inflationary assumptions...high inflation, low inflation, but always inflation. That's good for consumption and debtors.

Mon, 04/18/2011 - 12:22 | 1180749 Capitalist10
Capitalist10's picture

Let's face it, a lot of mortgage brokers were involved in fraud - they knew better than anyone else how to successfully game the system and, motivated by the compensation, weren't shy about doing so.

The business didn't police itself so, predictably, we get heavy handed and poorly targeted regulation.

Mon, 04/18/2011 - 12:46 | 1180861 spelledwrong
spelledwrong's picture

Yes, a lot were. IIRC in 2005 around 65-70% of originations were by brokers and today that is <15%. Most if not all of the bad eggs are gone.

I do agree that we didn't police ourselves properly....and really the entry was much, much to easy. That has all changed now and the bus-boys turned LOs for a quick buck are back to cleaning tables (not that there is anything wrong with that).

Business has done what it has supposed to do and the toxic products are long gone and since it took the brainpower of a flea to originate a no-doc loan the fleas died.

I am glad we are now tested and I hear 30% are failing these easy tests. However, the bank LOs are still not tested and still don't have to disclose nearly at the level we do.

Bank LOs are just as guilty and broker LOs. I remember the WF CEO coming out and saying that WF didn't originate sub-prime. We had our WF rep (and other bank reps) coming into our office touting how they could close just about any file we had.


Mon, 04/18/2011 - 12:53 | 1180889 ghostfaceinvestah
ghostfaceinvestah's picture

Wells Fargo Financial was nothing but subprime.

Aren't bank LOs now required to pass some sort of licensing test?

Mon, 04/18/2011 - 13:01 | 1180914 spelledwrong
spelledwrong's picture

Last I heard bank LOs were not required to take a test (although that may have changed recently).

Mon, 04/18/2011 - 13:08 | 1180933 DropOutEconomist
DropOutEconomist's picture

No they are not...they are required to have an NMLS number but zero testing at all. 

Mon, 04/18/2011 - 13:06 | 1180932 Capitalist10
Capitalist10's picture

Most of the bad eggs may be gone now, but unless something serious is done in the meantime, they will come flocking back if and when the housing market ever recovers.

I'm not defending these particular regulations, just saying something has to change.

Mon, 04/18/2011 - 13:16 | 1180966 spelledwrong
spelledwrong's picture

Although I thought the national and 3 state tests were pretty easy (+92% on all 3), there is a 30% fail rate nationally and I do think anyone who has been out of the business for a while and really didn't know a 1099 from a W-2 will have problems passing. That and there are now criminal and credit checks for broker LOs (not bank LOs).

Actually when NMLS started up many broker LOs went to work for banks because of the new standards for brokers. That and they don't have to disclose at the same level. 

Go figure.

Mon, 04/18/2011 - 14:51 | 1181337 ghostfaceinvestah
ghostfaceinvestah's picture

That "something" is risk retention, which all the community banks and mortgage banks are crying about.  God forbid they have to live with the consequences of their lending decisions.

Mon, 04/18/2011 - 12:25 | 1180759 Rodent Freikorps
Rodent Freikorps's picture

Bullish for tent and Weber grill sales?

Default on your mortgage and make everyday a tailgate party.

Mon, 04/18/2011 - 12:38 | 1180823 spelledwrong
spelledwrong's picture

I’ve been lurking (and probably spending too much time) on ZH for about 7-8 months and am finally compelled to comment on an article. First just another compliment to Tyler and the contributors for all they do and also the comments which are both often insightful and hilarious. Over the past few years I’ve been less and less inclined to take anything at face value from CNBS but the obvious slant against Ron Paul in 2008 really got me interested in looking for non-MSM information and news. Also since the meltdown the slant against mortgage brokers (some of it very much deserved, but much of it not) has really angered me and most recently some of the articles in the MSM on this new rule for mortgage originators.


I’ve been a loan officer for a mortgage broker since 1997 and have averaged between $10m-$30m per year for the last 5 years. Not a superstar but I write a fair amount of business and only do this by referral so no junk mail, no TV and no advertising anywhere (except our crappy website). Meaning I have to give good deals, excellent service and deliver with no surprises at closing or I will be out of business.


Although we will take a hit with this new rule I do think in some ways we will have an advantage. What I am pissed about is how the rule came to be and the FED implementation. If you have the time and are even slightly interested I urge you to watch these two videos on this FED rule and the study leading up to it, you can’t make this stuff up!:


-mortgage brokers didn’t develop/invent any of the toxic products or underwrite any toxic loans (by definition)

-mortgage brokers have been disclosing “yield spread premium” (YSP) for years now and banks still don’t have to dislcose their “service release preimums” SRP. This means if we get 1% YSP in rate or whatever we have to disclose that to the borroewer. Can you think of any other business where the exact amount made is disclosed to the customer on every transaction?...yet banks don’t have to.

-mortgage brokers have to now pass national and state tests (this is a good thing) as well as criminal background checks (meaning fingerprinted) and credit report checks and be registered in the NMLS system. Bank loan officers do not.


Apparnetly Elizabeth Warren said that the CFTB is going to spend HALF of it’s budget going after non-depository institiutions…meaning mortgage brokers. She went on this crusade against mortgage brokers years ago writing about the “evils” of YSP….which is the money we make through the lender with a higher rate. This allows us to do 0 point or even 0 cost loans.


If I offer 5.00% with no points and WF and Chase are offering 5.25% with a point who cares how much I am getting compensated. I have the better deal.


I could go on much, much longer, but will try to wrap this up: Mortgage brokers certainly played a part in the meltdown, but I would venture to say that most of the unetihcal loan officers worked for sweat shops that depended on heavy mail and TV campaigns and are LONG gone. It is a true PITA to get a loan closed now and you really need to know what you are doing. Loan officers for brokers AND banks were the drug dealers, the borrowers the users, the banks were the drug cartels and the rating agencies and the GOV turned a blind eye. Stated income/stated asset loans were at one time Fannie / Freddie programs with no rate or point penalty if the credit score was >720!


Over the past few years we have had the housing crash, guidelines tightened to the Nth degee, HVCC, new TIL laws, NMLS and now the Gov is telling us how we can get paid. It is a miralce any loans get closed. My faith in this country (meaning the Gov, not the country itself) has been waning over the past few years but I’ve about given up. The playing field about as level as the rockies with corruption run rampant.


This is to benefit the big banks and cut competition.


Thanks again ZH!

Mon, 04/18/2011 - 12:59 | 1180907 ghostfaceinvestah
ghostfaceinvestah's picture

You can bet that any rule from the Fed is meant to benefit the big banks.

That being said, I am glad there are now some rules governing brokers, that industry deserves the bad reputation it now has.

But I agree, the same rules should be applied to retail originations.  Plenty of abuse there as well.

Mon, 04/18/2011 - 20:56 | 1182384 FreedomGuy
FreedomGuy's picture

Nice post. I particularly like the part about choosing between the 5 and 5.25% point. That is my point about not having to know who makes how much in any transaction...whether I'm buying mortgage or a burger.

After getting taxed at about 40% this year, watching government strangle my industry and watching Atlas Shrugged Part I...I am about to give up, myself. I am getting tired of it all.

Good luck to you and thanks for providing excellent service to your fellow man...the core of the capitalist system.

Mon, 04/18/2011 - 12:44 | 1180839 topcallingtroll
topcallingtroll's picture

Government regulation is almost always backward looking and procyclical, making both the severity of the upside and downside worse worse in any market.

Lets take housing. We loosened standards during the mania and we are tightening standards now?

I get more and more pessimistic about the length of this down cycle the more the government intervenes.

Mon, 04/18/2011 - 12:48 | 1180860 TruthInSunshine
TruthInSunshine's picture

Why invest capital in the U.S. anymore unless you are one of the TBTF, with a taxpayer guaranteed backstop against any possible losses?


If you're not an insider with that TBTF guarantee, you are basically going into battle with all four limbs missing from the start.

There's very litttle incentive for true capitalistic endeavors in modern day Amerika under Bernanke/Geithner, unless one is a true massochist.

Mon, 04/18/2011 - 12:51 | 1180881 Commander Cody
Commander Cody's picture

Default, rent, fuck TBTF.

Mon, 04/18/2011 - 13:22 | 1180983 sweaty7
sweaty7's picture

The New RegZ requirements also hinder community banks and customers in other ways as well. The new disclosure requirements and timing issues put a strain on the flexibility that community banks are able to operate under. in essence they take a significant competetive advantage from the small bank. also the escrow requirements put a significant strain on the back end operations of small community banks. the 35-month and balloon mortgage has almost been regulated out of existence. ideally that would be fine but that leaves a whole segment of the population on the outside looking in when financing a home. for instance, Joe the mechanic had an illness and no helath insurance and as a result had some slow payment history in his past. His 605 beacon score wouldn't be touched by any of the large banks but small town banker Tom has known him all his life and knows his character and work ethic are excellent. traditionally Banker Tom could justify lending a riskier customer like this by getting a rate of 8.25% and setting in up on a 3-year balloon to insulate against rates going up. Now, the hurdles and requirements involved with making this type of loan mean that a majority of community bankers are just saying the heck with it. 4 of 6 local community banks in my area are discontinuing this type of loan entirely. the other 2 are experiencing major regulatory pains.

Mon, 04/18/2011 - 13:22 | 1180987 Augustus
Augustus's picture

The real deal is that whatever major bank eventually ends up with the loan, all of the home loans are going to fannie or freddie.  Keeping that in mind, why does this prohibition in fees not also apply to the BAC or WFC originations that they sell on?  those two are simply pipelining the business to another final funding source.  Can they actually be allowed to make a point spread from that under this new form of protecting the consumer?

Mon, 04/18/2011 - 13:27 | 1181021 spelledwrong
spelledwrong's picture

I wrote this as a reply above, but think it is worth repeating:

No matter what you think of a mortgage broker, the fact that the FED has come in and told us how we can get paid and that we have to make the same on every loan no matter what the amount of effort is absurd...but that is what has happened. This after disclosing every last penny (gross) we make per loan.

If we have a complicated construction-perm loan for a self-employed borrower with multiple business and bank accounts with many account transfers that takes many months to work through or an easy refi for grandma on social security, we have to charge the same and make the same. If the borrower pays our compensation then we also have to be paid salary or hourly (vs. the lender compensating us). However, if you receive your compensation from any loans that are borrower paid then you have to be paid hourly or salary on all loans.

This means the high producer who busts his but 12 hours a day gets paid the same as the guy who plays solitaire all day until someone walks in the door.

It sounds like for some, their resentment for mortgage brokers are missing this point that the FED have over-reached their authority and this will also mean less competition for the banks….which is why I think this article was published on ZH.


Mon, 04/18/2011 - 13:38 | 1181057 ghostfaceinvestah
ghostfaceinvestah's picture

This article boggles the mind in some ways:

Here's a simple guide to what's good and bad for housing:

Things which makes it easier and cheaper to borrow money: good.

Things which make it harder and more expensive to borrow money: bad.

Huh?  So offering NINJA loans to unqualified borrowers was good?

Mon, 04/18/2011 - 21:00 | 1182402 FreedomGuy
FreedomGuy's picture

Nice thought. Here's how it works:

Free people in voluntary economic relationships make things cheaper, easier and better.

Government with involuntary relationships makes things harder, more expensive and lower quality.

What are your preferences?

Tue, 04/19/2011 - 06:23 | 1183191 TheEternalTriangle
TheEternalTriangle's picture

Ah, the simple beauty of the ideal. "Free people in voluntary economic relationships" implies people in a relationship of equals with both parties having equal freedoms to choose.

That is very rare in the real world, you generally have a weaker party and a stronger party and the stronger party will always tip the scales of the transaction in their favor.

Tue, 04/19/2011 - 16:04 | 1185470 FreedomGuy
FreedomGuy's picture

Actually, it doesn't assume equal leverage or power. What it does assume is choices and those choices change with time. If I don't like the one phone company in my area with outrageous prices...somebody invents the cell phone and now my choices are better. I don't like the one car dealership in my little town and somebody...maybe me opens another or I travel to the big city where there's more choice. The key is the voluntary nature of the relationship.

Mon, 04/18/2011 - 13:50 | 1181099 Geoff-UK
Geoff-UK's picture

"Feh" on CHS having posting privileges.  Is there no standard at ZH?


Mon, 04/18/2011 - 14:36 | 1181278 Crummy
Crummy's picture

This sort of goes in lockstep with the FTC's paradoxical regulatory mandate that the only way to prevent monopolistic behavior is to create a monopoly.

Mon, 04/18/2011 - 15:11 | 1181421 Eireann go Brach
Eireann go Brach's picture

The Big 4 banks who own already over 70% of the mortgage industry have already increased rates on their ratesheet since April 1st when this ruling went into place. This ruling was created by the banks and ram rodded through by the Feds. Ultimately it is consumers who will pay higher costs as competiton will decrease. Bernanke has once again succeeded in destroying the livelihoods of thousands of mortgage brokers and many small broker shops will be shutting down because of this rule. This ruling now brings the beheading of Ben Bernanke just that much closer to happening, how this man can walk the streets is beyond me?

Mon, 04/18/2011 - 15:37 | 1181511 mcarthur
mcarthur's picture

Tough titties.  Mortgage brokers aided and abetted the mortgage boom and subsequent bust.  These guys should be outlawed completely for their actions. 

Mon, 04/18/2011 - 17:25 | 1181869 spelledwrong
spelledwrong's picture

@mcarthur, then you should also outlaw banks, appraisers, the rating agencies, Fannie / Freddie, realtors, Congress, title companies and last but certainly not least the borrowers themselves who (many) knew damn well they were getting a mortgage they couldn't afford.


Mon, 04/18/2011 - 15:42 | 1181528 bbaez
bbaez's picture

Previously it was very rare for a Big Bank or even a Correspondent to beat my Broker Offerings

Mon, 04/18/2011 - 20:32 | 1181760 cjhoward71
cjhoward71's picture



Mon, 04/18/2011 - 17:19 | 1181839 Diogenes
Diogenes's picture

I can't believe the big boys let this pass. It will kill their chance of selling their foreclosures.

Tue, 04/19/2011 - 07:27 | 1183245 TheEternalTriangle
TheEternalTriangle's picture

The protestations that the really abuses and problems come entirely from other branches of the finance industry rings rather hollow.

By tackling how Mortgage Brokers can be compensated they are tackling their incentive structure. Many of the now restricted forms of compensation created serious conflicts of interests for Mortage Brokers.

Now I would definitely agree that the Mortgage Brokers seem to have been unfairly singled out in this case. This is far more stringent than any actions taken again other contributors to this mess.

Has anything actually been done about how Rating Agencies are compensated? That was one of the most glaring issues out there. (Amongst so many others...)

Ultimately I would just say is. Has the service provided by a Mortgage Broker become less valuable just through the intoduction of these rules? The renumeration has to be structured differently but if the googd provided is the same then renumeration levels should not neccesarily drop. That is of course unless mortgage brokers were routinely gaming the incentive system.

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