02/06/2013 02:33 pm ET Updated Feb 06, 2013

Qualified Mortgages From the CFPB: Buyer Beware!

Misrepresenting oneself to oneself has to be the lowest form of self-flattery. Not only does it breach the mother of all truism -- "know thyself" (written on the walls of Delphi at the Apollo Temple) -- it gives oneself a false sense of security, but more revealing, a true sense of narcissistic stupidity.

That is not the warm and fuzzy feeling that bodes well for the economic real estate recovery that many are starting to think is around the corner and a stone's throw away. Case and point, with the recent hoop-la and hooray from the banking industry over the Consumer Financial Protection Bureau's recent set of rules that imposes restrictions on what loans lenders may make to consumers, one should be cautious in viewing the series of CFPB's edicts that have been released over the past month.

The type of loans to be outlawed, which essentially means the banks have no legal protection if the loans they lend go belly up and end up underwater -- include the follow restrictions:

No loans that exceed 43% of the borrowers total monthly income. No so called "liar loans," which went by the acronyms NINA (No Income, No Assets), SISA (Stated Income, Stated Assets), and finally, the dreaded NINJNA loan (No Income, No Job and No Assets). No "interest only" loans, in addition to no "exploding" 2/28 loans. These loans were known as 2/28s since the interest rate would re-set at an exponentially higher rate after the first two years of a 30-year amortization. Default and foreclosure were a near certainty for borrowers who stepped on an exploding 2/28.

When you think that these loans were conceived by wing-tip wearing, college educated, cuff-link sporting WASPs who must have known that many recipients of these loans would be consumers whose skin color was several shades darker than their own, then the sickness of what occurred on Wall Street is even worse then what one thought.

Shotgun Wedding
If you're a pro-consumer advocate in an ole' school Upton Sinclair type of way, then press the pause button and let your brain think for a moment to dissect the consequences when a major lender, such as Wells Fargo, fully supports -- and even co-chaired the same panel with the CFPB at a recent symposium held in Baltimore, MD.

Viewed as a forced marriage -- they didn't seem to be arguing that much. In fact, Wells Fargo and the CFPB seem to be enjoying themselves and/or each other as comrades in this post-Dodd-Frank Act inspired policy guideline world. Strange bedfellows would be an understatement. An adulteration of common sense, most definitely. And when you factor in the four major banks still standing after this financial apocalypse, it's a match made in heaven that would even make a Jack Mormon polygamist blush.

However, attempting to triangulate the self-interest of the CFPB and the four major banks (i.e., Wells, BofA, Chase and Citibank), who stand to benefit from these new guidelines, it's game theory at its financial best. But ultimately, it's very simple when you look at a key piece of the CFPB guidelines, in what is referred to as the "safe harbor" provision.

As an example, safe harbor refers to the following scenario. If a lender made a loan to a consumer that was later foreclosed upon, that lender has the loan insured by the government for repayment via insurance proceeds that banks pay into that protects "qualified mortgages." If however, it was shown that the loan was not in fact a "qualified mortgage" as a bank will surely insist upon -- after the consumer has lost their home and will be fighting the bank to avoid paying the balance of the loan back, then one can see how the major banks view the inclusion of a "safe harbor" provision into the CFPB new guidelines as welcomed legalese

"The safe harbor the Bureau has afforded for prime loans provides absolute shelter to lenders who knowingly make unaffordable loans, in direct violation of Congressional intent," said Alys Cohen, a staff attorney with the National Consumer Law Center.

Why Banks Will Love the CFPB
It's the best deal in town. Although lenders are certainly entitled to underwrite loans outside of the suggested "best practices" as mandated by the CFPB, they will have to sell their wares to anybody but the GSE's. That leaves two options: Hold the product in portfolio or sell it to the Chinese. Although self-serving one's own mortgage portfolio is not quite self-immolation, a form of self-expression that Buddhist monks are sadly famous for, at the end of the day, it's certainly not as bad when compared to a monk who has chosen cremation as his final act.

The Path of Least Resistance
The preferred route is as follows: Sell to the GSEs (Fannie, Freddie and Ginnie), and accept the mark up as already built-in. At a near-zero interest rate from the Fed (thanks Bernie and Timmy), the banks are still making a 300+/- percent return on the money they lend to consumers on a 3.00% to 3.50% interest rate, 30-year fixed loan. (Thanks again, Bernie and Timmy).

In short, without the CFPB's gold stamp of approval as a quote, unquote "qualified mortgage," then the four major banks that control the mortgage market will be forced to hold on to their own product and eat their own costs if the loans don't perform. Even though those costs are absorbable, it's still not in the best interest of their shareholders. Hence, that's the rub, and that is way the four major banks and the next ten largest banks behind them will learn to follow the code.

Learn to Follow the Code
In short, since no one likes to shit in their own backyard, you can bet 'dollar to donuts' that most major lenders will be compliant with the new set of rules that the CFPB has promulgated. This moment almost seems "cowboy-like," in that there's a new sheriff in town and it's the CFPB -- but the sheriff got a sweet heart deal on his employment contract, that was underwritten and paid in full by the four horseman (biblical reference) -- excuse me, small typo -- I meant by the four major banks.

The tentative definition of the CFPB, is Can't Friggin Protect Bipedals. For the nominal illiterate, bipedal does not stand for a sexually confused bicycle. Per Wikipedia (no relation to Bi-Pedal), here is the definition: bi-pedal, noun; two feet, walking in upright position, aka: most humans, except for the Neanderthals that don't know that a Webster Dictionary is not a meal.

Since most Americans firmly believe everybody's entitled to a fair chance to prove themselves, many are hopeful that the CFPB is more Roosevelt-like in its scope and intended effect, vs. oh Christ -- where have we seen this movie before, as the CFPB fails to meet the expectation of its potentiality.