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Archive for the ‘HB4050’ Category

wolf-in-sheeps-clothing.jpgWith very little fanfare the Supreme Court ruled in favor of Wachovia Bank in the Watters vs. Wachovia case last week. The case was about whether a subsidiary mortgage company of Wachovia Bank should be governed by state laws or federal law. Most of the big mega banks we are all familiar with (WAMU, BofA, Wells Fargo, Citibank, etc) are regulated by federal laws under the National Banking Act and enforced by the Office of Comptroller of the Currency (OCC) which means they are generally exempt from state banking laws. The case in question was about whether a subsidiary of these companies should be regulated at the state level or federal level. Basically the Court ‘s ruling said that any subsidiary of federally regulated banks are exempt from state laws.

What does this have to with mortgages? A lot. With all the hype about predatory lending and recent state legislation, one key fact that has been consistently left out of the mainstream media and conveniently forgotten by supporting politicians is that these laws DO NOT APPLY to federally regulated banks. In other words, the only businesses that are impacted by anti-predatory lending laws at the state level are mortgage brokers and in some cases, smaller state chartered banks. The big mega banks can keep on screwing over consumers till the cows come home regardless of what kind of laws are passed at the state level. The Supreme Courts ruling further validates this.

The impact of this ruling is that it continues to tilt the playing field in favor of large banks over smaller mortgage brokers who would have to comply with many of the onerous state laws that are being debated in state legislatures across the country. In other words, they are anti-small business laws.

Mortgage brokers and large mortgage banks often times have a strained relationship. Mortgage banks need mortgage brokers to sell their loans to on a wholesale basis, but at the same time mortgage brokers have consistently taken market share from banks because brokers tend to the cheaper. The retail mortgage divisions of banks have been unable to compete on price so many feel they have been using legislative tactics to tie the hands of brokers.

Now let’s bring this issue closer to home and examine yet one more reason why House Bill 4050 is one of the dumbest pieces of legislation ever conceived by the People’s Republic of Illinois. If you recall, HB4050 is the attempt by Governor Blagojevich and Speaker of the House Mike Madigan to force mandatory credit counseling on home owners in Cook County. However, the law only applies if you obtain your home loan through a mortgage broker. So if you decide to get the same loan through one of the mega banks, you aren’t subject to the mandatory credit counseling or your personal information being submitted to the State database. Makes a whole lot of sense doesn’t it? The law is like saying if you buy a gun from a small gun dealer, you will need a background check. However, if you go to Wal-Mart to buy a gun, no background check is needed. Of course, this is completely ignoring the fact that a gun is a gun regardless of where it is obtained. The same applies to mortgages. The negative amortization option ARM from Washington Mutual is just as toxic to average consumers if you get from WAMU directly or if the mortgage broker gets it for you wholesale.

Unfortunately, mortgage brokers are a small rag tag bunch and don’t really have the political power of the mega banks and we have taken an ass whupping in the media as expected. The big banks get to sit back and relax as if they are innocent wolves in sheep’s clothing. What will happen is that the big banks are going to set up more mortgage subsidiaries who can operate outside of the scope of state lending laws. Of course, it will be a lot easier to be predatory when no one is looking over your shoulder.

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get-a-brain.jpgFolks, the clock is ticking as there are only 45 days for the public to comment on House Bill 4050. Comments must be submitted before May 21st. If you don’t think the State of Illinois should be forcing mandatory counseling on borrowers in Cook County, you need to take five minutes and let them know that you are not in support of this bill. The new rules to the law are in the public comments phase and your voice needs to be heard. To summarize, the law will require that you attend mandatory counseling if one of the following is true about your loan:

  • First time home buyer
  • Lender does not verify your income (stated income)
  • Adjustable rate mortgage with less than a five year fixed period
  • Interest-only loansĀ 
  • Negative amortization loans
  • Pre-payment penalties
  • Utilization of a second mortgage to get 100% financing (80/20)

Send your comments to the Joint Committee for Administrative Rules to voice your displeasure at jcar@ilga.gov

Remember, don’t be outraged when the bill is implemented and you didn’t take time to comment on this horrendous law.

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crazyman-01.jpg“The definition of insanity is continuing to do the same thing over and over again expecting different results.” – Rita Mae Brown (Or Einstein depending on the source).

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.

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