If there ever was a doubt that Dodd-Frank had unintended consequences the announcement that Ben Bernanke was unable to refinance his home clenched that argument for good. We know Mr. Bernanke recently lost his job as Chairman of the Federal Reserve, but we can rest assured he is capable of getting another high paying position. If Bernanke has a problem refinancing than what will face Joan Miller is Elmira, New York?
We recently discussed the state of the market with Richard Koevary. Koevary is President of Blue Sky Mortgage, Inc. in Arizona where he has been a licensed mortgage broker for 20 years. In Arizona, unlike other states like California, mortgage brokers are regulated by the Department of Financial Institutions which also regulates banks. He is also licensed by the Department of Real Estate as an Instructor for real estate agents. Koevary states that it is a fed requirement that states regulate loan agents and loan originators.
The problem with any omnibus law passed by the federal government is the significant amount of unintended consequences. Dodd-Frank is riddled with these detriments to the market and one area that is most affected is a basic element of buying or refinancing a house – the appraisal. It used to be that a mortgage broker or real estate agent would contact their reliable appraiser to get a timely and hopefully accurate evaluation of a property. The lawyers behind Dodd-Frank saw that as a means of manipulation and no doubt on some occasions that would occur.
The new system requires a third party service to be contacted that, of course, charges a fee to obtain an appraisal that is added on top of the appraiser’s fee. That means out of the box the cost of appraisals have been driven up. Koevary says it is worse than that. He and his fellow professionals used to be able to contact their friendly appraiser and get an idea whether the property will appraise at either the sell price or refinance price. That is no longer possible because of the requirement of using a third party service. Koevary states that often people will incur appraisal fees under the new system and find out the deal will not fly. Thus, his client gets stuck with significant appraisal costs which have done nothing but kill the deal.
He also speaks to the fact that the appraisal he now obtains is usuallyfor one lender. If the lender Koevary chooses moves their pricing or another lender becomes more attractive he must obtain a new appraisal for that new lender thus doubling the cost. Koevary told me that the big banks now control a lot of the third party appraisal procurement companies which ultimately gives them the control over the appraisers contrary to the laws intent. This is driving business to the banks and cutting out the brokers or other small players.
An additional;unintended consequence of a bill that was supposed to lessen the control of big lenders has shrunk the amount of lenders and greatly enlarged the share of the market for big players.
Another area that has been eliminated is the availability of loans for lower income people or people who have income from non-traditional sources like a w-2. There are significant new limitations for seller financing. One thing that is nearly eliminated is balloon payments. To a certain extent that makes sense because people were overbuying (paying more for homes than they could afford), but it has severe unintended consequences. People who want to buy starter homes are locked out of the market unless they have a rich, Uncle Ernie. Under the new rules they may not even be able to get by with Uncle Ernie’s money because their income may not sustain a fully-amortized loan. This has driven seller financing largely out of the market driving up loan costs as third parties need to step in to supply financing. The Pièce de résistance is that with seller financing the buyer has a three year right of rescission. No one in their right mind would assume such risks. Koevary stated this has chilled that market.
Koevary talked about how Dodd- Frank has eliminated the discounting of fees. It has made it illegal. Thus, if a mortgage broker wanted to gain your business by charging you less for their services they could be thrown in jail or certainly have their business license suspended or revoked for charging a customer less than the guy down the street. Koevary stated “If I were to try to discount my fee the wholesale lender would decline the loan.”
Koevary expressed that there are many good things that have been changed in the lending business by Dodd-Frank. The reality is that it has also made it more costly and more difficult for most people in the home loan market. More importantly, Koevary believes it has coalesced more of the business in the hands of the huge lenders. Once again, big laws causing unintended consequences.