I have resisted writing on this topic for sometime now, but I can no longer bite my tongue (or keyboard). Several months ago, Governor Blagojevich suspended a controversial law called HB4050. House Bill 4050 was implemented late last year and was intended to help curb foreclosures. The law only applied to ten zip codes in Cook County; mostly located on the southwest side of town which is why it probably never really got substantial mainstream press coverage and many Chicagoans don’t really know about it.
HB4050 called for mandatory credit counseling of borrowers who had 650 FICO scores or less when buying or refinancing a home in the selected zip codes. The counseling cost a whopping $300. In addition, the law authorized the state to create a predatory lending database of the borrowers personal information along with details of the transaction in order to track any commonalities of bad loans in the future. The state outlined a bunch of procedures that lenders and title companies had to follow to comply with the law from database submission to the title companies proving that everything was compliant. If the steps were not followed, lenders could not foreclose on the property in the event of a default. My buddy Dan Green over at The Mortgage Reports ran an excellent series of post on HB4050, so check it out if you want more details on the laws incarnation.
On the surface, HB4050 sounded like a good thing. However, like many government initiatives HB4050 wound up being a colossal fustercluck for a number of reasons. First the law was discriminatory. Second, it violated several laws of 10th grade economics. Third, it was just a pain in the ass. In summary, the law wound up hurting the people it was intended to help by raising the cost of obtaining a mortgage and reducing the lending options available to borrowers. The end result was that a large number of lenders curtailed lending in the targeted zip codes and basically killed the housing market in the affected areas. Under mounting pressure from the constituency in those areas, the Governor suspended the law after it was clear it wasn’t working.
Well, after the overwhelming success of the first go around, the Governor has decided to give HB4050 another shot. My guess is all the negative press about sub-prime mortgages over the past few weeks gave him excuse to try it one more time. Instead this time it applies to ALL of Cook County. Better yet, it also applies to ALL home buyers, regardless of credit scores or income. This time borrowers are required to go to credit counseling if any of the following is true:
- First time home buyer
- Adjustable rate mortgage (ARM) less than five years
- Interest-only loan
- Negative amortization (Pay option arm)
- Stated Income (Income not verified by lender)
- Second lien that allows 80/20 financing
- Total costs exceed 5% of the loan amount
While I don’t have any hard data, an edumakated guess would tell me that this law is going to apply to the vast majority of mortgages in Cook County. So instead of screwing up the largest investment of most people’s lives in just a few areas, we are gonna screw it up for everyone!
So who specifically is going to be affected by this law? Looking at some of my recent clients, the following people would all have to go to mandatory credit counseling according to the Governor:
Client A is a graduate of the University of Chicago MBA program, arguably the best finance school in the country. Currently works at a private equity firm buying and selling companies for a living. Oh yeah, he makes close to $250,000 per year. Of course, since he is a first time home buyer, the Governor thinks he is too stupid to understand mortgages.
Client B was a refinance of a multi-million dollar property on the Gold Coast. The borrower has been self-employed for nearly 20 years. He also sits on the Board of Directors of a Fortune 500 company and spent 15 years on Wall Street. We used a stated income product to lessen the paperwork. Since we didn’t verify his income, the Governor thinks he is too stupid to understand mortgages. He also wants to make sure my client understands the dangers of the interest-only option on the loan.
Yes, I will feel like a complete ass telling similar clients they need mandatory credit counseling if this law ever sees the light of day again.
If you believe the Governor is insane for continuing to try to ram this poorly thought out law down our throats, please email him and let him know that you don’t appreciate him calling you stupid. You can also call him at (217)782-0244 or (312)814-2121 to voice your displeasure.
Even though there was plenty of opposition to the law the first time around, it passed because the people primarily affected were minorities in the forgotten southwest side of town. We were lucky that the law imploded on itself due to its sheer stupidity, but this time it affects ALL of us regardless of income. It is important that we rally to let our voices be heard.
We don’t get the government we elect, we get the government we deserve.