Vail Daily column: If you were king for a day …
August 17, 2013
Imagine if you were appointed to head a government agency and, with little oversight from any branch of government, could write the rules for your particular industry. And let's just say that your particular background is in banking and finance. And let's also assume that you see the government post as a temporary job at best — you want the big time.
So what would you do to further your future prospects? How about writing one of the most restrictive set of rules ever conceived to virtually eliminate any significant competition to your future plans as a businessman?
A guy named Raj Date just did this. He was put in place to write the rules at the Consumer Finance Protection Bureau, or as it is becoming known in some circles, the Raj Date Good Life Protection Bureau.
In particular, Date spearheaded the effort to re-write how consumers qualify for mortgages, with what is called the Qualified Residential Mortgage rules, or QRM. If lenders loan within the QRM guidelines, then they can sell their loans to Fannie Mae and Freddie Mac and be exempt from quite a bit of future liability if the borrower defaults.
QRM rules impose strict requirements in terms of credit scores, loan to value and ability to repay. And as with any strict guidelines, there will be many unintended consequences.
For example, let's assume that you have a million dollar home and only owe $100,000 on it. But your small business has a lot of write-offs, and your income fluctuates, and last year it was a little slow. But you have great credit and a million dollars in liquid assets and no other significant debt. While common sense would say that no one is ever going to take a bath on making you a $100,000 loan on a million dollar home, you will most likely not be able to get a loan under the QRM rules.
The CFPB theory is that there might be an evil banker out there who thinks foreclosing on your home in Vail and making a bundle would be just what the bottom line of his bank needs, and they might lend you the money hoping you can't make the payments on the $100,000 and the lender would have the opportunity to profit handsomely from your downfall. This is what could be called predatory lending and that is prohibited under the QRM rules.
While prohibiting predatory lending may be a noble idea when protecting lower income citizens from the likes of Tony Soprano, it makes no sense in reality for the above scenario, yet in the eyes of the CFPB, having Fannie Mae lend you $100,000 on your million dollar home is just as predatory as the local loan shark lending someone who makes minimum wage money they are unlikely to be able to pay back.
In fact, several studies have predicted that the QRM rules will exclude as much as 40 percent of potential and current homeowners from obtaining traditional financing. This includes a lot of retirees and small business owners. So what is to become of these tens of millions of otherwise well qualified borrowers?
Apparently our fearless Public Servant at the CFPB, Date, had a plan when he was writing those rules! He saw the problem and came up with a solution!
Date has left the CFPB and started his own firm called Fenway Summers which plan to do nothing else but provide mortgage capital to the 40 percent of people who are excluded because they won't qualify under the QRM rules that he wrote while in office, under the guise of saving the people from the evils of companies that wanted to lend them money that, in extreme theory, they would not be able to repay.
I think we can safely assume that Fenway Summers sees its potential clientele as people who have loads of equity and cash on hand but might fall outside the prescribed debt-to-income ratios because of the restrictive rules Date put in place for the rest of the mortgage industry. It's unlikely they are going to help lower-income folks who pay their mortgage by having a roommate or two (and they won't qualify either under the new rules).
This is one of the most appalling cases of self dealing that has come out of Washington in awhile, and that is saying something. It's a bit like if Jamie Dimon was allowed to re-write the rules on banking and banned all banks but Chase.
It's enough to make you root for the Republicans some days, except that it's quite likely most of the investors in Fenway Summers probably are Republicans, and no doubt many of their clients will be typical Republicans as well. Of course Fenway Summers will command a premium interest rate on their money because borrowers with money, credit and equity will have been turned down by conventional lenders who have to abide by rules put in place by the head of Fenway Summers in his previous career with the CFPB.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.