For all the talk of reform on Wall Street, a quicker and easier way to assure that big banks don't fail and small borrowers don't get screwed is to simply fix the mortgage origination system.
Fixing the mortgage system is crucial if we're to prevent another financial meltdown. If the mortgages are done right than mortgage-backed securities will also be right -- and that means there won't be worries regarding securities ratings or insurance. Lenders will not be stuck with overvalued properties and undervalued paper.
No less important, if we fix the mortgage origination system we will also protect borrowers. No more toxic mortgages which are at the heart of our financial problems.
Here are six steps the borrowers, lenders and government officials can take now, this week, to revamp the mortgage system.
First, in the past year a Nationwide Mortgage Licensing System supported by state regulators and the federal government has begun operations. In essence loan officers now have unique registration numbers even if they move from state to state. This means the name and registration number for a loan officer can be included in mortgage documents -- and loan officer performance can then be graded in the same way that we have credit scores. It may well be that prudent investors will not want mortgages included in a mortgage-backed security from loan officers with a score below a certain level -- and it may also be that lenders will not want to hire such poor performers. Of course, the same concept of registration and responsibility should be extended to mortgage underwriters.
Second, lending rules must be changed so that loan officers have a fiduciary obligation to borrowers, in the same way that lawyers have an obligation to clients and doctors have an obligation to patients. The creation of a fiduciary obligation for loan officers would mean that aggrieved borrowers could take loan officers and their lenders to court in the event of abuse, a system which seems to work well for virtually every other type of business. Members of the UpFront Mortgage Brokers Association already have adopted this standard and promise that they "will endeavor to act in the best interests of the customer," disclose their fees up front and credit the borrower for cash they receive from third-parties.
Third, require that all loans be fully documented and that income and employment are verified. This would do away with "stated income" loan applications where lenders do not verify borrower income claims.
Fourth, have HUD set the interest rate and points for FHA loans -- and post that information daily online. There's no reason this can't be done. In fact, until 1983 HUD actually did set FHA mortgage rates. Borrowers would then have an easy way to follow the market by using FHA rates as a benchmark.
Fifth, predatory lending is NOT a federal crime. Loan fraud -- where a lender is abused -- is very much a federal crime but predatory lending where a borrower is overcharged by a lender is entirely ignored by federal laws. The next time you hear a politician yammer about "predatory" lending ask if he or she would support a specific federal law against such activities.
Sixth, every mortgage-backed security which has a high level of foreclosures should be audited by the FBI to assure that all loans were properly underwritten. When that's not the case then appropriate action should be taken against the lender, the loan officer, the underwriter and the Wall Street securities packager who were paid for such work.
Would these ideas work? You bet. Toxic loans would be impossible and there would be real penalties for abusing borrowers and investors.
(Peter G. Miller is the author of The Quick & Dirty Guide To Successful Mortgage Modifications. For more real estate news and commentary, visit OurBroker.com.)
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