Posted on 11/16/2014 7:52:14 AM PST by Kaslin
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.
It should be intuitively obvious that any law named after those two Richard heads is going to be a disaster.
No doubt about it.
It is also driving appraisers out of the business, as the bulk of the appraisal fee goes to the banks, who rake off a piece of the fee, then the appraisal management company (owned by the banks) rake off another 50-60% of the fee. Appraisers who used to charge the lender $300-350 for an appraisal now are paid $175-200 with the borrower charged $450-650 for the appraisal fee.
So the appraiser is now working on an income of $25-30K after expenses. So experienced appraisers are retiring. And the requirements to become an appraiser are draconian, so no new appraisers are coming into the business. Especially when they see what it takes and the probable income.
This stuff about the appraisals is absolutely true. I was a licensed mortgage broker for 17 years and my appraiser who I had an established relationship with would comp houses for me for free to see if it looked like the value was there on a prospective property. It many times saved my clients $350 for an appraisal that would not have come in at the sales price. In addition the new Dodd Frank law says that the broker cannot have any one on one contact with the appraiser so you can’t even get vital information to the guy like maybe a comp he does not know about etc. Its a nightmare.
As soon as the new appraisal procedures started the banks put out the word to the appraisers that they wanted the most low ball appraisals possible so all the appraisers now are scared to stick their necks out and make the kind of decisions their experience and knowledge is supposed to equip them for. They basically take the 3 most recent comparables and then use the value of the lowest one to come to a value on your client’s house.
All the new fees, regulations etc have finally driven me and most of the small brokers out of business. It has not done the clients any good that I am able to see.
I have posted about how long it took my wife and I to get Refi last year and a home equity loan this summer.
The first loan in spite of a FICA credit rating well over 800, a secure 6 figure retirement income with every monthly/quarterly check from those retirement sources deposit in our bank account at the same branch for over a decade. It took about 3 months to get processed.
This summer, still with an excellent FICA rating, we applied at the same bank branch for a home improvement loan. It took over 3 months. This time we had to hard copy document every income source inspite of years/decade of the income deposits sent directly to our bank.
In spite of having a good appraisal for the loan last year, we had to have a hard appraisal. It took the appraiser and his wife 3 hours to photograph and walk around our home and every room inside. The result was over 40 pages.
With that hard appraisal, our property value had a significant % increase since the appraisal last year.
Our land value by itself was appraised about 3 times our total loan potential.
It still took 3 months to process this loan.
What took so long is the requirements of the Feds now.
Who’s to say the articles targeted’ Dodd-Frank topics are “unintended consequences”? The BIG guys win, and the little guys lose sends a message that perhaps NOT.
The Obamacare of lending/real estate financing.
Yes...
The Appraiser pool can FUBAR a deal. It has happened here in SE MI, a Detroit Appraiser will look at a high end Burb-Exburb home and come in lower than it truly is, start deal all over, or find a new buyer. You also have to price your house to a real Appraisal ( So go get your home Appraised before you sell $350 to $400 out of your pocket so your selling it close to what it is truly worth ) because if you get a bid above the Bank's Appraisal they may or may not grant a mortgage even if the buyer shows up with the difference. Don't ask me how I know all this.
Should I talk about my conversation with an Uber Financial Adviser last night and it sparked my new pet theory that Net Neutrality is really based on the fact that FINRA can't keep up with new ways money can pay for goods and services and investments and they are far behind the curve and can't control it?
Good points.
Another detrimental hit for appraisal services in my area is that appraisers are no longer local. The banks send in appraisers from 100 miles away, which drive up their expenses, and who know little to nothing of local market conditions and laws/regulations.
The two charlatans Dodd and Frank are thankfully gone, but we have to deal with their disastrous legacy.
Why does the author assume the consequences were unintended? Concentration of power in the hands of a few companies makes it easier for the government to control them . . . I mean, be their partners.
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