Will the New Mortgage Rule Force Your Favorite Local Lender Out of Business?

bank closedIt’s a shame. Another nice local community credit union is being forced out of the mortgage business. Linda Sweet, president and CEO of Big Valley Credit Union in Sacramento announced the sad news:

“The burden of trying to comply with the (new) regulation is just overwhelmingly costly for a small financial institution,” she said.*

Her credit union is not the only one who is being strangled to death by the new laws. Last Friday, the government agency set up by the White House — ironically called the Consumer Financial Protection Bureau — enacted yet another new rule that favors the Big Banks and forces more little guys out of the mortgage business. These are the small, local, squeaky-clean lenders that are honest, efficient, competitively priced, and help keep their communities employed.

Look at Michigan Mutual, a company that employes 300 citizens. They, too, are feeling the squeeze. “There are going to be loans that we did in 2013 that we are not going to be able to do in 2014,” said chief executive Mark Walker. “We’re going to be very conservative just to make sure that we’re in compliance and don’t get into trouble.”

I’ll explain what he’s talking about.

Under the brand new “qualified mortgage” standards, approval guidelines will be more strict. The debt-to-income ratio is being lowered, which will negatively impact the following types of borrowers:

— Self-employed people.
— People who rely on tips for income.
— People with income from Internet sales, such as eBay and Etsy.
— People who do side jobs, such as child care, fixing cars, and yard work.
— People who do home party type of sales.
— and others who have income outside the W-2 box.

So forget what you’ve read about underwriting guidelines becoming more reasonable. They’re actually going in the other direction now. The new rules have got lenders scared that their loans won’t be accepted by Fannie Mae and Freddie Mac, even if the borrowers have excellent credit and a history of paying what they owe.

The new standards — not set by people who are experienced in mortgage lending, but by the CFPB committee — make it more difficult for lenders to sell loans to investors such as Fannie Mae and Freddie Mac. The wealthy Big Banks, such as Wells Fargo and Bank of America, can afford to keep a portion of their loans for 30 years on their own books without selling them in order to free up money to make more loans. In fact, those two banks have already said they plan to continue to issue loans outside of the new CFPB standards and keep them in-house. But the little guys cannot afford to do that. Therefore, making loans has just become riskier for them. So risky, that some are quitting mortgage loans altogether and others are significantly cutting down on the loans they will do.

Why is the government agency favoring the Big Banks over small lenders who, by the way, have a cleaner history of mortgage lending with fewer foreclosures?

Peter Carroll, CFPB’s assistant direction for mortgage markets had this to say about the new “qualified mortgage” rule: “I think we got the rule right.”

Really? That’s what you think, Mr. Carroll? Perhaps you should talk with Linda Sweet and Mark Walker and then think again.

* Big Valley Federal Credit Union of Sacramento, CA, is not closing for all business. President Linda Sweet said they will mostly stop making mortgage loans in 2014.

Source for quotes: REALTOR Magazine

One response

  1. Seems like the laws are moving in the wrong direction, favoring the big banks, which require government help if they begin to falter (“too big to fail”).

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