Oh, No! Disclosure is Going to Mess Up Housing Sales!

Starting Saturday, the real-estate industry will be subject to new disclosure rules, courtesy of the Dodd-Frank law and the Consumer Financial Protection Bureau. Lenders will be required to make transparent and complete disclosure of the terms of mortgages — including all costs and fees.

This information was sorely lacking during the boom in the 2000s. Residential real estate peaked in the U.S. in 2006, and the housing bust that followed exposed the worst practices of the era. Common-sense disclosure could have curbed many of the more egregious and preventable abuses.

The new regs (details at theCFPB) also require a three-day grace period between the disclosure and the actual mortgage signing. In the past, closings were characterized by a flurry of signatures and initials — and it’s safe to say that most home buyers had no idea what they are signing, even after the cursory explanatory from their real estate attorney.

The rules were finalized two years ago and were initially scheduled to take effect in August. In response to industry concerns that the change could cause confusion in the height of the summer selling season, the agency postponed implementation until Oct. 3.

We should remember why these rules became necessary: During the housing boom, mortgage underwriting became a mass-produced, nondisclosed, poorly originated free-for-all. Unqualified buyers purchased mortgages that, in many cases, they did not know they could not afford. Many people believed they had inexpensive fixed-rate mortgages only to be surprised when these reset two years later.

Stories of abuse were rampant.

Stories of abuse were rampant. Mortgage brokers often filled out applications on behalf of home buyers, writing what they knew the underwriters wanted to see. Employees of JPMorgan Chase figured out how to work around “Zippy,” the bank’s own automated mortgage processing system. An internal document (circulated without official approval) titled “Zippy Cheats & Tricks” showed how to get questionable loans approved.

There were many other instances of poor judgment, unnecessary risk taking and bad behavior in the mortgage and financial industry. The net result was more than 8 million foreclosures, the collapse of the financial system and the worst banking crisis since the Great Depression.

It was an unholy mess, and as a few of us were warning in advance, it ended badly.

(I look forward to e-mails repeating the thoroughly debunked claims that Fannie Mae and Freddie Mac were to blame for the mortgagecrisis, so I can a) block your e-mail address; b) use them as an example of what happens when ideology compromises analysis.)

Nonetheless, the mortgage and real estate industries are up in arms about the new rules. They have made the questionable claim that it is costing billions of dollars to prepare, even though they knew the changes were coming five years ago.  And of course, they are predicting Armageddon, warning in a Wall Street Journal article that “the rest of the year could be marked by delayed closings, frustrated borrowers and confused real-estate professionals as they adjust to the new rules.”

I went through the process just a year ago, and I can attest to the fact that the old system was an utter mess. After handing out mortgages to anyone who could fog a mirror, the pendulum has now swung too far in the opposite direction. The mortgage originators themselves have changed the required documentation from borrowers, which already is gumming up and slowing down the process. Blaming two disclosure documents and a three-day waiting period is simply foolish.

This isn’t the first silliness from the industry. The National Association of Realtors made some laughable assertions during and after the mortgage crisis (see this, this, this, this, this, this, this, this, this, this, and this). But the Mortgage Bankers Association had been usually fairly sober about things, so I was surprised by the hair-on-fire comments from David Stevens, the MBA’s chief executive. He told the Wall Street Journal that “lenders have spent billions of dollars in technology-system changes and training” — a number that appears to be a gross exaggeration. Stevens added:

It is without question the single largest implementation challenge that the broad industry has faced since Dodd-Frank. It’s massive. It involves every real-estate agent, settlement-service provider, every consumer, mortgage originator, everyone.

Filling out two documents instead of four and transparently disclosing the full costs of a mortgage doesn’t sound like an insurmountable problem to me. Quicken Loans CEO Bill Emerson claimed he had “350 employees working for 17 months to change over to the new federally mandated processes and forms.” Let’s take him at his word: a year and half of people who likely make about $50,000 annually. Assuming they worked on that project exclusively for 17 months, Quicken, then the third-largest underwriter of mortgages, spent less than $25 million on this project. I suspect it was some fraction of that number. I doubt the industry-wide cost was one-tenth of the billions being claimed.

I have been interested in real estate for as long as I can remember. My mother was a Realtor in the 1970s and 1980s, in the days of 14 percent mortgages. The excesses of that era were dinner table fodder in my home.

The mess in real estate was created by the industry itself. Its reactions and overreactions to reasonable disclosure measures are typical. No wonder so few people take it seriously when it keeps crying wolf. One day, when it really needs relief, no one will be listening.

 

Originally: Crocodile Tears From Mortgage Lenders

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What's been said:

Discussions found on the web:
  1. VennData commented on Sep 30

    West Coast states have pre-formed contracts. No need for lawyers. Way ahead of the morons beholden to the lawyers in other states. Ridiculous!

    States Rights!

  2. DeDude commented on Sep 30

    You mean actually informing the customer of what they are getting – and giving them time to read the 6 pages of fine print to figure out if they are indeed signing what they were told they are signing? What an outrage, certainly the end of American capitalism. How are the banksters supposed to rob you, if you are being told that you are being robbed?

  3. rd commented on Sep 30

    With mortgages sold off as soon as made these days, instead of held on the banks’ books like before, the primary objective in real estate now is simply selling. Keeping is a mere after thought as all of the parties in the sale (except for the homeowner) are long gone by the time the homeowner defaults on the loan.

  4. Lyle commented on Sep 30

    Since closing agents push you to sign without reading it makes sense for the 3 day delay for a chance to read the documents. The closing agents want minimum time to do the closing which means if you insist on reading everything you hold up their process. (Of course btw for home improvement loans there is already a 3 day change your mind delay)
    It appears to the home loan industry an uninformed customer is the best customer since they are more open to be shafted. (Of course if you look around the web a bit you can find copies of the Fannie/Freddie standard loan documents to read the boiler plate, all that is left is the fill in the blanks).
    During the boom it was reported that folks would ask for a fixed mortgage and get documents for a variable rate one, which was one of the worst deceptions around.

  5. KDawg commented on Sep 30

    When we signed our note and deed of trust we met with a notary public that worked with the escrow company. She was visibly annoyed that I was actually reading everything before signing. This was after the housing debacle! Were there really people not reading the stuff by this point? Oh yeah, sure, I trust you guys. Never mind all the other paperwork errors we already ran into and had to get corrected.

    This disclosure rule is a great change. I wish we had three days to read what we were signing.

    I don’t know what VennData is talking about regarding pre-formed contracts. We got buried in paperwork. The note and deed of trust were Fannie Mae/Freddie Mac Uniform Instruments and the purchase agreement was a bunch of California Association of Realtors forms. As far as I know, none of these specific contracts are required by law in California. They are just common.

    The down side in California for the homeowner is the deed of trust which allows nonjudicial foreclosure. Hell, even HOAs can use nonjudicial foreclosure which is really irksome considering how poorly most HOAs are run.

    • VennData commented on Sep 30

      In California you don’t need a lawyer.

      In Illinois you do. The closing process is much more expensive.

      Now you know what VennData is talking about

    • KDawg commented on Oct 1

      Not really, because I would need numbers to know the price difference and also what the difference in service is. Plus, you talked about pre-formed contracts. Don’t know what those are unless you are referring to Realtor forms which I would assume are available in some form in Illinois.

      You know, like this:

      http://www.tidyforms.com/download/illinois-residential-real-estate-contract.html

      Also, I’m betting that you don’t actually need a lawyer in Illinois, but that it is simply a good idea. You don’t need a real estate agent in California, but it is generally a good idea. You also don’t need an escrow company in California, but it is almost always a good idea.

    • Lyle commented on Sep 30

      The use of standard documents suggests that one could ask what they will be in advance, or even be included in the disclosures (seems like an obvious mod to the regulations). Then you can know where the blanks to be filled in are and have read the boilerplate as well. I do suspect that most mortgages/deeds of trust use the fannie/freddie instruments because they want to be able to sell them to fannie and freddie.

  6. VennData commented on Sep 30

    I find it hard to believe Rupert Murdoch is concocting a rant about regulation.

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