Monday, February 3, 2014

Over Regulation Pains

The CFBP- the new regulatory agency for mortgage lenders and brokers -has started a study into the compliance costs associated with mortgage lending. The problem stems from multiple regulations being implemented from various agencies- coupled with an atmosphere of government led nanny state for mortgage lending. So the question is- Who gets hurt the most by government over-regulation?

The consumer takes the biggest hit, and often are not even aware of the costs associated with these regulations. Those who push for government regulations often fail to see the full consequence of the actions put in place. This is often referred to as unintended consequences. Whenever the costs increase for the banks and lending institutions they are forced to pass on those costs to consumers via higher interest rates and/or fees. As a result the consumer essentially pays for the regulation- which often does not help that consumer at all.

To illustrate the problem let’s take a look at the rules regarding appraisal practices. The problem stemmed from concerns of appraisers over-estimating the value of homes- resulting in lenders lending too much and consumers paying too much for new home purchases. The Feds solution to the problem was to implement a policy requiring appraisal management companies to be established as a buffer between loan officers and appraisers- an attempt to alleviate appraisers from the pressure that could potentially be applied from a loan officer or lender to improve the value of the home, usually in order to make the loan work.

Fast forward a year and consumers are paying about $100.00 more for their appraisers than before, and are no longer able to use an appraisal completed for one lender with a second lender. Lets say Joe applies for a mortgage loan and has an appraisal completed. The loan is submitted but the lender turns the loan down. Another lender is willing to take the loan- and in the past would use the same appraisal Joe already had paid for provided the appraiser was on their approved list of appraisers. Under the new regulation lenders were required to randomly assign appraisals via management companies and the new lenders legal team explains that accepting the appraisal completed for the other company will violate the new appraisal regulations. The borrower is left with a choice to pay for a second appraisal or not get the loan. The new appraisal has no value to Joe and does not benefit the new lender. All it achieves is satisfying the mortgage regulators.

Since then attempts have been made to resolve the illustrated problem, and some progress has been made- however very few professionals in the industry feel that this regulation improved mortgage lending in general. Sure- some benefits were achieved, but at a tremendous cost passed on to the consumer and a great burden placed on the mortgage lending community.

So my take on all of this? I am glad the CFBP is finally studying the cost of its regulations- but its far later than it needed to be- and a true free market system would have fixed the appraisal problem years ago with far fewer consequences to the consumer and at tremendous financial savings. Some regulation is always required to ensure that neither consumer nor lenders are defrauded- and the all parties are treated fairly. Right now however we live in a time where regulations rule the day- and we all pay for whether we know it or not.

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