Time to Change the Menu for Mortgage Banking Industry

I’ve never personally eaten a frog, let alone tried to cook one. I’ve heard they taste like chicken, so maybe I’ll have to give it a try sometime. Even though I’ve never eaten one, I certainly have heard that there is one right way, and one wrong way to cook them.

If you put the frog in a pot of cold water, and slowly heat it up to a boil, the frog doesn’t notice, and soon enough the water is boiling and the frog is cooked. Alternatively, if you put the frog in a pot of water that is already boiling, the frog will jump out and you’ll go hungry. Either way it’s done, someone gets burned.

A few years ago, the mortgage industry was cruising along nicely; anyone could get a loan. I even briefly worked for a mortgage broker (do mortgage brokers even exist anymore?). There was a loan type for anyone: Stated income, no doc, negative amortization, zero credit score, no down-payment, HELOCs, all with ridiculously low interest rates. The Federal Reserve failed to use its regulatory authority over banks, mortgage underwriters and other lenders who abandoned loan standards (employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability). For years, banks were seizing the opportunity and raking in money making risky loans. Eventually, the bubble burst. The water temperature was rising very slowly over a long time. The frog didn’t notice what was happening until it was too late…bad news for the frog.

Now we’re in a completely different situation. In a knee-jerk reaction and with finger-pointing criticism and blame, the government has passed laws and instituted policies to throttle banks and lenders. Newly created agencies regulate the industry in an effort to protect the consumer. The intent is good, but the method is causing turmoil within the industry. Lender requirements are so demanding, confusing and backed by threats of huge penalties for non-compliance that many small banks may have to get out of the business of lending. Even large banks are raising credit requirementsand reducing or eliminating certain loan types because the penalties and risk is too great. These are the types of loans that are more favorable to lower-income families.Servicers have to create whole new departments and technology simply to deal with the ever-changing and complex government-mandated requirements. The CFPB has even created a consumer complaint website where borrowers can vent their frustrations; however there is no recourse for the lender/servicer to respond to these complaints. Studies indicate that 77% of these complaints could be closed with a simple clarification, without relief needed of any sort. Organizations comprised of mortgage banks and servicers have formed groups to lobby against what they deem as unfair practices by the government. Clearly the frog was thrown into a pot of boiling water…and that’s bad news for the consumer.

I don’t know what the answer is, but it seems like the government is still punishing banks for past deeds. Banks and servicers are businesses which employ many good people across America. Businesses are in business to make money. I think the two sides need to sit down face to face and hash out an equitable way forward. One which includes regulation and oversight, but not to the point where banks become technology and regulatory compliance companies that occasionally lend money to people.

Maybe it’s time to put something new on the menu. Hey. Here’s an idea: How about lobster…after all, they can’t jump.

Michael Meroney