Maybe a federal government shutdown now and then would be a good idea — certainly for the current crop of financial regulatory officials. Twice in the past six months they have taken congressional mandates that significantly affect real estate transactions and home mortgages, and mangled them badly.
Cases in point: The long-awaited appraisal reform regulations that took effect April 1, and the "qualified residential mortgage" (QRM) proposals that were called for in last year’s Dodd-Frank financial legislation. In both instances, regulators took straightforward statutory language and arrived at rules that vastly altered clear congressional intent.
Personally, I think they are the most egregious examples of regulatory perversion — even nullification — that I have seen in 30-plus years of observing and writing about Congress and housing.
Take the appraisal reforms. The Dodd-Frank law said explicitly that lenders must compensate appraisers at rates that are "customary and reasonable" for their geographic markets. But what exactly is customary and reasonable? Congress wrote just two sentences of instructions to the Federal Reserve Board, which was assigned the task of writing the implementing regulations.
For guidance on what is fair in each geographic area, lenders and others could look to "objective third-party information, such as government agency fee schedules, academic studies and independent private sector surveys. Fee studies shall exclude assignments by known appraisal management companies."
Sound pretty clear? Not to the Federal Reserve, which has its own axe to grind when it comes to big banks. (Full disclosure here: I served a three-year term on the Fed’s Consumer Advisory Council, and saw the Fed’s institutional biases up close and personal.)
When the Fed produced its rules implementing the Dodd-Frank language, an entirely new concept emerged on "customary and reasonable" appraisal fees. The Fed created a "safe harbor" — a loophole — for lenders and others to arrive at their own definitions of fair fees by incorporating recent amounts paid by appraisal management companies.
Anybody who’s been active in real estate in recent years knows that, spurred along by the infamous Home Valuation Code of Conduct (HVCC) promulgated by Fannie Mae, and Freddie Mac under pressure from New York attorney general (now governor) Andrew M. Cuomo, appraisal management companies now dominate the home-valuation business.
Some management firms, such as LandSafe Inc. (Bank of America) and RELS (Wells Fargo) are wholly owned subsidiaries of major banks. Others are independents, working primarily with mid-sized lenders.
Though they perform valuable services for lenders — essentially outsourcing the appraisal function — virtually all appraisal management companies pay appraisers much lower fees than appraisers would normally receive if hired directly by a bank or mortgage company.
We’re talking about $200 to $250 for assignments that would normally earn an appraiser $450 or more. The discounted fees aren’t typically passed on to consumers by lenders — consumers still get charged full prices on their HUD-1 settlement sheets.
Using the Fed’s inventive but legally questionable loophole, major appraisal management firms have announced new "customary and reasonable" fee schedules since April 1. Are they fairer than they were before? To the contrary, say critics.
Pat Turner, an appraiser in the Richamond, Va., area, says some of them are worse than they were under the HVCC. One national appraiser management company, he says, cut its standard fees by as much as $90, citing the Fed’s post-April 1 carve-out. One firm offered local appraisers a paltry $134 as their rock-bottom minimum for a full Fannie Mae-Freddie Mac valuation.
"This is outrageous," Turner said in an interveiw. "This is not what Dodd-Frank intended, and the appraisers who’ll work for these fees are the least experienced people in the business." So look for less competent, less accurate appraisals if this Fed rule is not revised.
Now to QRM, the "qualified residential mortgage" proposal. Last year’s Dodd-Frank legislation assigned the task of coming up with a nationally recognized "safe" mortgage standard to six federal financial regulatory agencies, including the U.S. Housing and Urban Development Department, the Federal Housing Finance Agency, the Federal Reserve, Federal Deposit Insurance Corp. and the Comptroller of the Currency.
The congressional intent, according to sponsors of the QRM amendment, was to devise a standard that would incorporate the key features statistically associated with on-time payments of home loans. The law suggested such features as:
- Full documentation of borrower income and assets.
- Rigorous underwriting standards to ensure the borrower has the capacity to repay the debt.
- Avoidance of loan structures that increase the probability of default, such as balloon payments and negative amortization.
- Mortgage insurance and other credit enhancements.
Loans that could not meet the QRM standard would be deemed nonqualifying, and originators and securitization sponsors would be required to set aside their own capital — 5 percent of the loan amounts or pool balances — to help cover potential losses.
It was understood that loans in the non-qualifying category would likely carry higher rates than QRM-qualified loans. Industry estimates put the differential — the extra charge to borrowers — at somewhere between 75 and 300 basis points (0.75 percent to 3 percent.)
The congressional sponsors of the QRM segment of the bill — Sens. Johnny Isakson, R-Ga.; Kay Hagan, D-N.C.; and Mary Landrieu, D-La. — say their intent was never to set the bar so high that only a small fraction of borrowers could qualify.
They expressly excluded down payments as a factor in the QRM. In fact, in a letter to regulators prior to the release of the QRM proposal, the three senators said "we intentionally omitted" consideration of a minimum down payment in the formulation of what should constitute a "safe," qualifying mortgage.
"The QRM framework set forth in the statute," they wrote, "specifically contemplated the inclusion of low-down-payment loans, provided they have mortgage insurance or other forms of credit enhancement."
So what did the regulators, led by FDIC Chairman Sheila Bair, come up with? A highly restrictive QRM with a mandatory 20 percent down payment for home purchases, 30 percent minimum equity for refinancings, and mandatory debt-to-income ceilings of 28 percent (housing expenses) and 36 percent (total household monthly debt load).
The implicit message from the regulators seems to be: Forget about first-time buyers or send them all to the Federal Housing Administration, which is exempt from QRM. Forget about moderate-income minorities stuck in rentals who’d like to be able to buy a place at a reasonable interest rate.
And, oh yeah, forget about "congressional intent." We know more about mortgages than the politicians who write the laws. We write the rules …
Fortunately, the QRM is still a proposal open for public comment through June 10. You can bet there’ll be a lot of it.