Feeling the icy wind of stronger regulation on their necks and fearing the worst from agitated regulators bent on layering on even more protections for consumers, mortgage brokers are calling for what they hope will be pre-emptive action in the form of an independent government inquiry into the causal factors of the rising foreclosures taking place across the country.
“Before you rush to the judgment that brokers are placing consumers in bad loans and before we impose ‘suitability’ standards, we have to know the cause of problem,” insists longtime south Florida broker and outspoken industry defender Joseph Falk.
He suggests the results of a study proposed by the National Association of Mortgage Brokers would show that among other factors for the rise in foreclosures has been a raft of new and difficult-to-understand mortgage products coming from lenders — supported by the investor community — which have not been properly explained.
“The rapid rise of these products is a major part of the foreclosure story,” says Falk. “We know, for example, that disclosures at the time of application and funding for a pay-option ARM (adjustable-rate mortgage) are not sufficient.”
He blames “a flood of uneducated or new loan officers entering the market. The competency of the loan officer field is open to question,” he declares. In addition, there have been “some financial literacy concerns,” which are part of the problem, according to Falk.
“When you hear that foreclosures in Texas have reached record levels, higher than the ‘oil crash’ of the 1980s; when you see foreclosures rising 27 percent in Florida, year over year; and increasing in Massachusetts by 600 percent,” you know there’s a problem, says Falk. But what is it exactly?” he asks.
“Although the consumer advocates blame industry for inappropriate activity, it’s time to study and see (the real) causal factors.”
What suitability might look like
If suitability requirements are written into law, says widely quoted industry legal eye Donald Lampe, partner in the law firm of Womble Carlyle Sandridge & Rice PLLC, it would force lenders to ask more questions and make more disclosures, factoring in such eventualities as tax consequences, income forecasts, the borrower’s resale plans, and whether their debt loads are likely to increase.
Though estimates vary and actual numbers often lag well behind events, it is widely predicted that as many as 20 percent of all subprime loans funded over the past two years will wind up in foreclosure.
RealtyTrac, an online foreclosure marketplace based in Irvine, Calif., has reported that 318,355 properties nationwide entered some stage of foreclosure in the third quarter of last year, a 43 percent, year-over-year increase. The number represented a 17 percent increase from the level recorded in the second quarter.
But is suitability a real solution?
“It’s a very difficult concept,” argues Falk, “because it has not been defined.” Yet the broker advocate says he knows what it is. “It’s simple: The primary person responsible for making loan decision is consumer. The loan officer can not use a crystal ball or be liable for future facts and circumstances.”
Falk says the industry is under attack and “certain consumer advocacy groups” have made accusations. “But we don’t believe their conclusions are fair and accurate,” he says.
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