The Washington Post published an interesting article by Barry Ritholtz in the Business Section Sunday, November 20. (The article is reproduced and additional data added in his blog for November 20. Click to view article.) He analyzed economic data about our economic crisis and observed that the “vast majority of subprime mortgages – the loans at the heart of the global crisis – were underwritten by unregulated private firms.” He reported that the data also shows that the bulk of these mortgages were sold to Wall Street, not Fannie or Freddie. Finally, he stated that Fannie and Freddie began purchasing subprime loans on the secondary market only because they were losing market share to the unregulated private lenders. On this point he elaborated, in response to a question on his blog, that “in late 2005, having lost so much marketshare to private lenders, Fannie & Freddie petitioned their regulator, OFHEO, to jump into the subprime mortgage market. That was granted, and they ramped up purchases into the peak of the housing boom.”

The take away from this data is that it was not until Fannie and Freddie strayed from their original business model that they became a problem. It seems to me that, until that point in time, they provided the linchpin in the mortgage market, insuring stability and inexpensive mortgages, and enabling millions and millions of people to own homes. That was, and continues to be, a good thing.

The obvious solution is to fix what is broken. It seems clear that the simple “fix” is to return Fannie and Freddie to their original business model. That has already been accomplished.

So, why eliminate them? “Political correctness” tells us that “private” is always better than “public.” Please correct me if I am wrong, but wasn’t it the private market that created the mess that destroyed our economy?

Forget “political correctness.” The biggest problem with governmental regulation is overreaction. In order to fix one problem, five more are created. Smart regulation limits itself to fixing the problem. Smarter regulation fixes the problem and creates a basis for economic progress.

Smart regulation has already happened; Fannie and Freddie have been forcibly returned to their original roles.  Smart regulation stops here.

Smarter regulation is regulation that not only allows, but encourages, the blossoming of a secondary mortgage market while preventing the kinds of abuses which damage the economy and bankrupt individuals. Smarter regulation is really hard, but if we jettison our penchant for distorting facts to fit into our political philosophies, we can do it.

If and when a private secondary mortgage market evolves that is better, Fannie’s and Freddie’s market share will decline. At that time, we should learn from past mistakes and allow it to happen. If and when the private secondary market establishes itself as secure and reliable with a competent consumer protection component (in stark contrast to the recent past) Fannie and Freddie can be allowed to fade away, with minimal disruption to the economy. And if a satisfactory secondary market never does evolve, Fannie and Freddie can continue to serve the functions they capably served prior to losing their direction.

The Obama administration is revamping a program that’s designed to let more homeowners refinance their mortgages even if they don’t have any equity. This isn’t a new program, but instead attempts to turbo-charge an existing federal initiative called the Home Affordable Refinance Program.

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Regulations now administered by CFPB include those governing Loan Officer salaries and commissions, Mortgage Originator registration; Truth in Lending (Regulation Z), and RESPA. The Agency’s jurisdiction includes enforcement of the regulations in addition to the power to draft new, and modify existing, regulations.

In the short term, the transition to the new agency should be seamless. The CFPB has indicated that all existing regulations, as well as interpretations and written guidance issued by the former agencies, will be honored.

Over the long term, I am optimistic that the impact of the CFPB will be positive, although its success is by no means assured.

In my view competent regulation gives clear guidance to regulated industries, levels the playing field so no players have an unfair advantage, minimizes the costs of compliance, encourages (or at least doesn’t inhibit) innovation, and provides a rational structure for industry to operate. It includes adequate, but not oppressive, enforcement. It accomplishes all of this while protecting consumers, which is the prime objective of the CFPB. Indeed, if by protecting consumers the CFPB eliminates the unscrupulous players, it is a benefit to the industry as well as consumers. Effective enforcement is one aspect of leveling the field so that the rest of us can compete on price and service, and it eliminates the disadvantage we have competing against those who ignore the rules.

The early indications are that the CFPB has the right idea – that they “get it.” For example, on the CFPB Blog two staff members wrote: “Our examination process [i.e., enforcement] will strive for transparency, efficiency, and fairness. It will not be about ‘gotcha.’ ” (A Consumer- Centered Supervision Program, by Peggy Twohig and Steve Antonakes, CFPB blog, July 22). Also, in its initial major rule-writing task of combining the Truth-in-Lending and Good Faith Estimate forms into one form, the CFPB is actively seeking consumer and industry input in ways that are nothing short of revolutionary for a Federal Agency. The CFPB is meeting with experts, interviewing consumers, lenders, and brokers in six cities across the country, posting successive iterations of the proposed form on its web site and inviting comment, and seeking input in other ways. The Agency is doing all of this before issuing a proposed regulation, receiving comments, and adopting the new form as part of a final operative regulation.

I am hopeful that these good intentions will result in good regulation. We shall see. As a new agency the CFPB must prove itself to consumers, the real estate-related industries, and Congress. More importantly, even if it starts out strong, will it revert over time into the old dysfunctional model? Only time will tell.

One obstacle is political. Some Republicans in Congress are doing their best to hamstring the Agency before it even gets started. They are advertising that they will filibuster the nomination of any Director unless Congress is given increased oversight over the Agency. Lacking a Director, the CFPB will be unable to operate effectively. I am not sure they aren’t “shooting themselves in the foot” (unless their aim is to undermine CFPB and insure its failure). More political control usually results in politicized regulation which is the last thing anyone needs.

If the CFPB is able to overcome the obstacles and evolve into an effective regulatory agency consumers, real estate related industries, and everyone else are winners. If successful, the CFPB could be a model for other Federal agencies. If not, we really need to come up with something else, as the structure the CFPB replaced wasn’t working.

The Montgomery County Department of Finance has issued a notice that tax bills are not expected to be issued until as late as July 15 because the County is waiting for billing data from the State Department of Assessments and Taxation. As the bills are delayed, the County is waiving the requirement that the tax be paid, but only until 2 business days after the tax bills are posted on the Department of Finance Web Site.

We have also been informed that Prince George’s continues to require payment of Property Tax when a deed is recorded, notwithstanding the absence of a current tax bill. Prince George’s is calculating the tax to be paid by using the tax from the 2010-2011 bill and eliminating any homestead credit (because a purchaser is not entitled to the homestead credit). After the tax bills are issued, Prince George’s will presumably issue an adjusted bill with a credit for the payment made at the time a deed is recorded.

Both Montgomery and Prince George’s Counties are attributing the cause of delay to the State. Thus, we suspect, but have not confirmed, that tax bills for property in other Maryland counties will be similarly delayed.

In addition, please remember that the recording fee has been increased by $20 for all documents dated on or after July 1, 2011. Most deeds now cost $60. Deeds of Trust for owner occupied residential property cost $60, and Deeds of Trust over 9 pages for investment or commercial property cost $115.

To recap, over the summer the CFPB is seeking input on a proposed combination disclosure form which will replace the federal Truth in Lending Act mortgage disclosure (TIL) and the Good Faith Estimate (GFE) forms. In May the CFPB requested comments on two alternate drafts of the form. After reviewing the comments, the CFPB posted a set of revised draft forms and is requesting comments on the 2nd page differences. (http://www.consumerfinance.gov/).

After settling on a final format the CFPB will publish in the Federal Register, possibly as early as this fall, proposed regulations adopting the form.

• CFPB Redbud Form

• CFPB Dogwood Form

A diverse coalition of 44 consumer organizations, civil rights groups, lenders, real estate professionals and insurers joined with Members of Congress today urging regulators to make important changes to proposed mortgage lending regulations.  The Coalition for Sensible Housing Policy released a joint white paper detailing how the proposed risk retention regulation, and the failure to properly define exemptions for Qualified Residential Mortgages (QRM), would significantly harm creditworthy borrowers while frustrating the nation’s fragile housing recovery.

To read more, click here.

The regulations were proposed on April 8, and finalized to be effective May 25, 2011. I understand that the City has hired and trained a cadre of Mediators and is now prepared to administer the process. I also understand that only a couple foreclosures have been started so far, and none has progressed very far into the process.

As I’ll summarize below, the 44-page single-spaced regulations are extremely detailed and complex. Notwithstanding the detail, there are many ambiguities and unanswered questions. The requirements placed upon lenders are burdensome. It remains to be seen what effect they will have on the volume of foreclosures in DC.

The procedures will allow lenders on residential properties to begin foreclosing when loans are in default. Lenders will be required to “dot ALL of the ‘i’s’ and cross ALL of the ‘t’s’” and thereby provide a level of protection for consumers. If there is sloppy documentation on loans that have been combined into pools and sold on Wall Street, lenders may be unable to ever foreclose. I would be surprised if someone doesn’t challenge the law and/or regulations in court. I would also expect that the increased cost to lenders will somehow raise the cost of borrowing in the District of Columbia and/or tighten underwriting standards for DC loans, thereby making it more difficult for the rest of us to obtain financing.

Another thought – the strict time limits will put pressure on all parties – including the DC government – to efficiently manage the process. Especially if the number of foreclosures is more than a trickle, I’d be amazed if there isn’t a multitude of problems. In a nutshell, when a lender of owner-occupied residential property desires to foreclose, it must send Notice of Default to all Borrowers. The Notice form and the attachments are specified in detail. One of the forms is a “Mediation Election” form and another is a “Loss Mitigation Application.” The Lender is required to send a copy of all forms and a $300 fee to the DC Department of Insurance, Securities, and Banking (“DISB”).

The upshot of the Notice is that the Borrower has 30 days to elect Mediation. The Borrower must return the completed forms to the Lender and to DISB (with a $50 fee) within 30 days in order to avoid immediate foreclosure.

Once validly elected, DISB will schedule Mediation. Prior to Mediation the Lender is required to provide detailed documentation of the loan and default, including an itemization of the amount to cure, complete payment history, copies of the Note, Deed of Trust, & every assignment, the name of the holder of the Note, documentation of the Lender’s right to foreclose, details of the Lender’s loss mitigation analysis, and copies of all pooling and servicing agreements. Mediation must begin within 45 days from the date the Notice of Default was mailed, and must be completed within 90 days from the same date. Only one 30 day extension is available. All parties are required to attend Mediation and have decision-making authority, or have access to someone with decision-making authority, on all loss mitigation programs, loan modification, and other available options.

All parties are required to mediate in good faith, as determined by DISB. The lender is required to enter into a loan modification agreement if the Borrower qualifies under any available program. If the Borrower doesn’t qualify, the Lender is required to provide written explanation for the rejection.

If a party fails to attend Mediation, or fails to mediate in good faith, that party loses the benefit of Mediation. If it is the Borrower, the Lender can proceed to foreclose. If it is the Lender, the Lender can be fined and/or lose its right to foreclose.

If the Borrower does not elect Mediation or the Mediation process does not result in the agreement of a foreclosure alternative, DISB will issue a “Mediation Certificate.” The Certificate is to be recorded in the land records and will permit the Lender to proceed with foreclosure. It constitutes conclusive proof of the Lender’s compliance with the law and can be relied upon by bona fide purchasers of the property after foreclosure. Without the Certificate, the Lender cannot foreclose.

The Directive provides that “[t]he relationship manager has primary responsibility for coordinating the servicer’s actions to resolve the borrower’s delinquency until all available home retention and non-foreclosure liquidation options have been exhausted and for communicating those actions to the borrower.”

The Relationship Manager will be responsible for managing all communications with the borrowers and their agents and communicating options and requirements to them; for collecting documentation and for keeping track of documents so information will only need to be submitted once; coordinating servicer & non-servicer staff throughout the whole process; making sure the borrowers are considered for all eligible programs & options; and staying on top of the borrowers’ situation.

We are optimistic that, once implemented, this requirement will eliminate many bottlenecks in the short sale approval process thereby speeding up resolution of many borrowers’ delinquency problems.

One of its initial rulemaking activities will be to combine  the federal Truth in Lending Act mortgage disclosure (TIL) and the Real Estate Settlement Procedures Act Good Faith Estimate (GFE) forms into one document.

Current federal law requires that mortgage loan applicants receive two documents – the TIL and the GFE – within three days of application. The current forms are two pages and three pages long, respectively. They have overlapping information and complicated terms that are confusing and difficult to understand.

The CFPB has created two alternate prototype forms to combine and replace the TIL and GFE forms.  The CFPB intends to conduct consumer testing of these two forms over the summer, and then to publish for comment, possibly as early as this fall, proposed regulations adopting a single replacement form.

CFPB Alternate Prototype Forms

• Consumer Financial Protection Bureau Disclosure Form Sample A
• Consumer Financial Protection Bureau Disclosure Form Sample B

• The forgivable loan applies to all residential transaction types including foreclosures, short-sales, new construction and traditional resales.
• Income Limitations do apply
• Max sales price $362,790
• In person first time home buyer counseling is required – 8 hours
• Home inspection required
• The home must pass a Housing Quality Standards (HQS) inspection. It is provided by the County at no cost to Buyer or Seller.
• An FHA 203K Streamline rehabilitation loan is allowed. However rehab costs must be $35,000 or below
• The Borrower’s minimum cash investment is the greater of 1.75% of the sales price or 50% of liquid assets over $3,000.
• Funds are available on a first come/first served basis as the program funds are limited.