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My comments are submitted as mortgage broker in Minnesota with

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					From:       "Dan Stephens" <danestephens@earthlink.net> on 01/19/2008 05:10:04 PM

Subject:    Regulation Z

My comments are submitted as a mortgage broker in Minnesota with four
years of experience, a consumer of prime ARMs for seventeen years for
both my primary residence and my one investment property, an economist
with a B.S. in Economics from the University of Minnesota, and as a citizen
deeply concerned about the worsening mortgage and real estate markets ,
and even more worried about the possibility that the knee-jerk responses of
regulators and lawmakers is going to significantly worsen the trend,
especially in the short run.

1. General Comments:

1.1. Good Rules, Bad Rules, and What About the Laws?: There are some
good proposed rules, however, there are also some dangerous ones, and I
fear that numerous actions regarding mortgage regulation by regulators
and lawmakers, are going to turn the current or prospective crisis into a
guaranteed catastrophe. The actions include not only some of the
proposed amendments to Reg Z as discussed in detail below, but also the
already-issued Guidance of the Interagency Group, some of the legislation
in consideration in Congress (HR 3915 and S1299), some legislation
considered in state legislatures, and some just enacted (Minnesota Senate
File809, House File 1009, now in MN Statutes Section 58). If any action is
taken, it must be correct, and some very wrong proposed actions must be
avoided, or, in some cases, reversed, if the nation is to avoid an economic
catastrophe. The proposed rules fail to contain the most needed
reforms, and contain certain provisions that will guarantee that the
default trend will be much worse than it otherwise would be the case.
The subprime default trend is like a first domino to fall in a potentially
cascading general debt crisis. If the trend is not stopped, but especially if it
is worsened by regulators and legislators, the A credit ARM mortgage
market will be next, and then residential real estate values will really topple,
because ARMs are over 50% of all mortgages according to Fannie Mae.
That would lead to a very general crisis in consumer debt, consumer
spending and an economic depression. Surely the Fed realizes that bank
equity is gravely exposed to fatal risk in this drama. Any rules that
reduce the availability of mortgage credit should be avoided at this
time. Unfortunately, the knee jerk reaction of regulators and legislators
has been to first unfairly put the blame squarely on mortgage brokers
instead of lenders and Wall Street investment bankers who designed the
dangerous products that are now blowing up. It does not help now for
regulators or lawmakers to move in to usurp the free market process with
government fiats to make mortgage credit more difficult to get, which will
only pour more fuel on the fire. I compare what is happening now with
regulation in home ownership with how the Fed responded to the stock
market crash of 1929 by radically tightening the required margin for stock
ownership (i.e. tightening credit) which naturally made the situation much
worse. With radically tightened mortgage credit, there will be a reduced
risk of mortgage defaults in the future because a huge number of potential
borrowers will be denied in order to prevent defaults in the future by a small
minority. In the process millions of homeowners will be put out of their
homes by government dictate. Many comments in the proposal suggest
that the Fed is well aware that such dangers exist, but not all of the
proposed rules seem are consistent with that awareness.

1.2. Uniform Rules for Interstate Commerce:

If the proposed rules will override the many existing or considered varying
state laws, it would be a huge improvement in the entire industry. Lenders
are besieged by differing laws in every state regarding mortgage terms and
prepayment penalties. I contend that most of the state laws are basically
unconstitutional since only Congress has the power to regulate interstate
commerce, and the mortgage market is entirely interstate in nature with
regard to any securitized products and even largely interstate in the case of
portfolio loans originated by wholesale lenders from outside of a state . As
recited in the proposed rules you have the authority to set national rules via
Congressional authorization. It would be very helpful to clarify whether the
rules would preempt state laws that are more restrictive with regard to the
allowed terms of subprime loans, the allowed prepayment penalties, and
the allowed methods of processing loans. For example, would you disallow
the recent Minnesota statute applicable to all loans, including prime loans,
prohibiting all option ARMs and prohibiting underwriting any loans with
stated income, no ratio and no doc processes, and requiring all ARMs to be
underwritten using the fully indexed rate at the fully amortizing payment ,
since those prohibitions are far more restrictive than proposed rules under
Reg Z? The Minnesota statute was no doubt motivated by the Interagency
Guidance on Non Traditional Mortgages, but erroneously goes way beyond
the intent of the Guidance to the point of radically restricting mortgage
credit, including a huge portion of A-credit loans, in the state and putting
many brokers out of business.

1.3. Proposed Rules Fail to Regulate the Basic Problems with
"Higher-Priced Mortgage Loans":

You nicely summarize the recent rising trend of defaults of higher-priced
(subprime) loans. Such a trend has always accompanied a downswing of
the real estate markets. What's different about this cycle is the special
probable cause for an unusually severe trend, and somewhat unique to this
cycle, an unusually large number of holders of subprime two and three
year ARMs ("2/28's" and "3/27's") who cannot either pay the much higher
adjusted payments when the loans go into their reset period, or refinance.
It is apparent that the main problem is that the terms of the traditional
subprime ARMs as they have been traditionally constituted have proven
themselves very dangerous due to several factors:

     (a) the shortness of the fixed rate period doesn't give the property
owner a good enough chance to achieve improvements needed to be able
to
          refinance out of the loan into a much better one before payment
shock occurs (i.e. some needed combination of improve credit score and
history,
          or significant appreciation in the property, or an increase in income,
or a decrease in debt);
     (b) the terms of the loan guarantee a rapid and unbearably large
increases in the interest rate and minimum payments as soon as the fixed
rate period
         ends (a high limit for the first adjustment, usually 3% to 6%),
frequent adjustments (almost always every six months), very high margins
(typically 4%
         to 7%), and the high lifetime adjustment cap (usually 6%);
     (c) the existence of prepayment penalties that make it difficult to
refinance or very expensive to do so during the penalty period ;
     (e) the fact that prepayment penalties expire either coincident with the
first reset or even later.

A great deal of regulatory and legislative consideration is being given to
trying to limit access to the loans via more strict underwriting or creating
incentives and disincentives for originators to use other less dangerous
loans whenever possible, and to help consumers avoid them by making
them more aware of the potential dangers. However, very little
discussion or attention seems to be given to the most obvious and
pressing need which is to out rightly prohibit or restrict the most
dangerous features of the loans. The dangerous features of the loans
will continue to exist to damage borrowers, lenders, investors and the
economy no matter what means is used to restrict their use, and no matter
how informed a borrower might be about their terrible new loan, and no
matter how costly or cheap the closing costs might be, and no matter how
the originator behaved during the lending process. It's mind boggling that
investors designed the subprime ARMs in such ways that they are almost
guaranteed to blow up if the loan cannot be refinanced before the fixed rate
period expires.

Unfortunately your proposed rules do almost nothing to limit the toxic
terms of the higher priced loans, including the shortness of the fixed
rate periods, or adjustment periods, or margins, or initial and life
adjustment caps. The proposed rule changes are mainly intended to limit
access to the dangerous loans by tightening underwriting guidelines (and
they will do that to an excessive degree), or by making it more likely the
borrower understands what a terrible loan they're getting, or by making it
more difficult for a borrower to get such a loan as a result of some type of
consumer abuse, or by reducing the chance that the loan will be worse
than it might otherwise be in absence of adverse actions by the originator .
All these complex rule changes diligently work at the fringes of the problem
without actually attacking the fundamental problem, the terms of the loans.
Rather than focusing on limiting access to a dangerous product, or
the conditions under which they are advertised and originated, you
should instead be concentrating on limiting the terms of such loans
to make them less dangerous. If the products weren't so dangerous in
the first place, the consequences of any other possible problems relating to
the origination process wouldn't be so damaging.

Following are my suggestions to restrict the most dangerous terms of
subprime ARMs, and prevent similar dangers or possible problems with
other types of prime and alt-A loans, including :

(a) Definition and trigger: A higher-priced ARM is any ARM that has a
margin greater than 3% over an index, or a start rate greater than the fully
indexed rate, or a life maximum rate adjustment of more than 6%. Such
definition perfectly identifies all subprime ARMs and excludes virtually all
prime and alt-A ARMs, with the possible exception of some option ARMs
that can be dealt with using an exception clause, say a 4% margin rule.
For this definition to function to its intended effect in practice, item (g)
below is likely necessary;
(b) No higher-priced ARM loan should have a fixed rate period less than
three years, if it adjusts at intervals less than one year;
(c) No higher-priced ARM loan should adjust more frequently than once
every six months;
(d) If a higher-priced ARM loan adjusts at intervals of less than one year,
the initial and periodic adjustments should be limited to 1%;
(e) No ARM loan should have an initial rate adjustment of more than 2%;
(f) No ARM loan should have a margin greater than 5%;
(g) No ARM index should have a maturity of more than one year;
(h) No ARM should should have a prepayment penalty period that expires
less than 120 days before the first rate adjustment in order to ensure that a
     borrower has time to get competitive quotes and to take advantage of
possible beneficial changes in rates (60 days is inadequate);
(i) No higher-priced ARM loan having a term of less than five years shall
allow payment of interest only for any period.

It is extremely important to realize that the foregoing recommended
regulations would help the current problem somewhat even if your
proposed rule regarding qualifying ARMs with the fully amortizing
payment at the fully indexed rate is promulgated (which I strongly
oppose), since the current fully indexed rate would be only 7.8% on ARMs
using the 6-month LIBOR index currently at 3.8%, a significant
improvement over the current typical fully indexed rates of 9% or higher.
Most subprime ARMs use the 6-month LIBOR index which historically has
been over 5%, as was the case for most of the past two years, and most
subprime ARMs have margins of 6% or higher (margin equals start rate or
start rate minus 1% quite frequently), and that would put the typical current
maximum fully indexed rate at 11% or higher, in which case very few
subprime borrowers would qualify to refinance or purchase. Even with
index rates currently down to 3.8%, if the fully indexed rate is required for
qualification, the effect will be that many fewer borrowers would qualify,
even if margins are regulated to 4% maximum. Without the above
recommendations limiting margins, subprime ARMs using the 6-month
LIBOR index will continue to have margins of 5% or higher, often 7% or
higher, and fully indexed rates of at least 9% even with the index as low as
3%. In that case, if the proposed rule requiring qualification at the fully
indexed rate is implemented, very few existing subprime ARM borrowers
will be able to refinance, so the current default trend will be even worse
than it would otherwise be without the . Also, in that case very few
subprime borrowers will ever qualify for an ARM with the fully amortizing
payment at the fully indexed rates that have historically prevailed , typically
over 10% for subprime. Even prime borrowers would have problems
financing with a prime ARM given the fully indexed rates that have
historically prevailed, 7.25% to 7.75% assuming the typical prime margins
of 2.25% to 2.75%. You might as well just outlaw ARMs entirely! In
absence of very low interest rates, the provision to qualify at the fully
indexed rate will cause a make it more difficult for current subprime
borrowers to hold on to their homes, severely reduce the pool of qualified
buyers, and thereby devalue subprime mortgage securities even more,
probably lead to a second phase of problems with prime ARM refinances,
and possibly cause a major collapse of real estate values leading to an
economic depression.

However, if the terms of ARMs are properly limited as suggested, it will not
be necessary to restrict access by rule in the proposed manner , or by
statute as has been done in Minnesota and is proposed in Congress . If the
terms of ARMs are limited as suggested above, the consequences of future
interest rate shocks is limited, and stretched out over a longer time span
instead of being concentrated into a couple of years. If ARMs are
regulated as suggested, and access is not restricted at the present
time, that might actually revive the availability of subprime capital and
revive the values of existing mortgage securities, which is what the
market desperately needs right now. In addition, by using uniform
national limits on the terms of non-prime ARMs it is much more likely that
such loans will become more standardized and acquire a more transparent
competitive character as prime loans have done, which is one of your
implied objectives. To achieve full beneficial effect, it would be necessary
also to eliminate the underwriting restriction on ARMs from the June, 2007
Guidance, and convince Congress and states to abandon similar
provisions in existing and pending law (HR3915; S1299; Minnesota House
File 1009 and Senate File 809 already passed to amend statutes Section
58). Finally, if additionally there was some way to constitutionally,
retroactively impose on existing subprime ARMs the rules suggested
above, the total effect would offer the greatest chance to halt the trend in
defaults and stabilize the real estate markets.
1.4. Rules Preferable to Statutes: I have been highly alarmed by pending
legislation in Congress (HR 3915 and S1299) to directly dictate
underwriting guidelines for higher-priced loans, and to impose severe
underwriting restrictions on ARMs. I believe the use of statutes to
dictate mortgage underwriting guidelines is unprecedented, and is
certainly not desirable. Although I strongly oppose any attempt to
impose underwriting rules under Reg Z, any statutes that attempt to directly
limit underwriting procedures or address other aspects of the lending
process will be even less discriminating and less flexible in the future than
the use of regulatory rules. Statutes lack flexibility, and are far more
difficult and time consuming to alter in response to changing economic or
real estate market conditions. I hope that your proposal to alter Regulation
Z has been pressed upon Congressional leaders as a preferable
alternative to statutory changes, if it is deemed unavoidable to impose the
underwriting restrictions, which will most certainly damage many
homeowners and the economy if imposed by any means. Ultimately free
market solutions to underwriting guidelines are far preferable to
regulatory or statutory approaches, and the free market has already
responded forcefully to recent trends, perhaps too forcefully, to reduce
risks. But any free market solutions would benefit greatly, if developed
in the context of the above suggested new uniform national
limitations on the design of ARMs to eliminate their most dangerous
features.

1.5. Two Distinct Problems with Distinct Solutions:

The causes of subprime loan defaults in general can usefully be
segmented into two layers. One is defaults due to the inability to make
payments at the original note rate. This layer more or less correlates with
the underlying fluctuating default rate for subprime loans at any point in
history, which varies with economic and real estate conditions, and has
underlying causes including the ever-present risks of changes in borrowers'
abilities to make payments, or from overly lax underwriting in a certain
proportion of loans, or by outright dishonor by some borrowers. The other
layer of cause is the inability to make the adjusted payments, which we
may presume is always a factor when interest rates increase markedly over
a two year or longer time span, and probably explains an unusually high
proportion of the more recent rising defaults, or at least the layer that is
most feared to rise during the next year or two. This layer is the one that is
somewhat unique and most likely more pronounced in this particular
economic cycle due to the unusually large number of subprime loans that
were qualified when rates were unusually low for so long, and the
subsequent rapid increase. Reinforcing the difficulties of borrowers to
make payments at adjusted rates, were the accompanying trends of rapidly
rising inflation, especially health insurance costs, energy costs, and
property taxes, and stagnant nominal wages. Many borrowers were
expecting, or at least hoping, to be able to refinance their dangerous two or
three year ARMs before the rates adjusted, but have been caught unable
to do so due either to higher interest rates, lower home equity, inadequate
assets to pay closing costs, much tighter lending guidelines, or some
combination of those factors. Meanwhile the shrunken pool of qualified
borrowers leaves the market values sinking.

The problem of borrowers not being able to continue to make the
initial payments on new ARMs loans made in the future always can be
reduced somewhat by new more restrictive underwriting lending guidelines .
However, regardless of what form that approach takes, that will inevitably
worsen the present problem during the next few years by preventing
needed refinances and by reducing the pool of prospective qualified buyers
to support the housing market. Many lenders in the private market have
already instituted that solution in many ways with much tighter lending
guidelines without regulatory intervention in order to protect lenders and
investors' future interests. However certain of your proposed rules seek to
institutionalize even more restrictive lending guidelines than what many
lenders and investors have imposed, which will even further exacerbate the
problem by both ensuring that all lenders must abandon relaxed guidelines,
and impose even more restrictive guidelines, and prevent the market from
responding with less restrictive guidelines at such time that housing trends
should reverse, in absence of new rule amendments.

The problem of borrowers not being able to make payments under
adjusted rates has two possible solutions: either underwrite at adjusted
rates higher than the note rate, which will maximally restrict available
credit, or simply limit the allowable rate adjustments for all loans by
restricting their terms in a manner as suggested above, which would have
the most beneficial effect on the current market, especially if more
restrictive underwriting guidelines are not mandated by rule or law at the
same time. Limiting the allowable rate adjustments for all loans doesn't
help the current rate of foreclosures due to the first layer of causes , but is a
distinct solution for the second layer of causes to help reduce the rate of
defaults of future loans. Tightening guidelines not only reduces future
defaults of a reduced number of future loans due to either layer of
causes, but also worsens the current problem over the near term by
disallowing refinances and reducing the pool of qualified borrowers.
It is extremely disconcerting that on one hand there are efforts by
regulators and lawmakers to reduce the severity of the current problem by
enhancing the FHA program (FHASecure program last August), stopping
foreclosures, and modifying existing loans, while at the same time there are
various regulatory and lawmaking bodies going exactly the opposite way
(perhaps inadvertently or unknowingly) by creating rules and statutes which
will have the effect of preventing refinances of the vast majority of existing
ARMs. If there is any way to slow or halt the default trend, consistent
approaches are paramount.

2. Regarding Rules Coverage:

In general any new rules implemented at this time should be limited to
those most likely to slow or reverse the trend in defaults. Those that
restrict credit should be deferred for a latter date after the storm has
passed, if not abandoned altogether. Any rules restricting credit at this
time, or complicating the lending process, or making it more expensive for
refinances, ideally would be deferred, or at least should be established with
impact as limited as possible at first until the outcomes can be gauged .
The possible adverse consequences to the real estate markets and the
economy from any new rules need to be carefully considered. As
Chairman Bernanke himself stated in a Congressional hearing in late 2007,
any changes in mortgage regulations must be approached very cautiously
at this delicate point in history. (1) The rules should not apply to
investment loans since that would likely further hamper an already
contracted real estate market, and Reg Z has no statutory authority
regarding investment properties. (2) The rules should apply equally to first
time homebuyers, purchasers and refinancers. (3) The rules should not
apply to HELOC's, reverse mortgages, construction loans, or bridge loans.
(4) Similar rules should apply to second lien loans, assuming new limits on
the terms of higher priced loans as proposed above are employed. (5)
Whatever rules are used to define "higher-priced loans," they definitely
should not encompass the prime market, and they should avoid
encompassing the alt-A market as much as possible, otherwise any
adverse consequences will be much broader. (6) The rules should
apply equally to federally and state chartered bank lending in regard to any
requirement for escrows, which we strongly oppose for many reasons
stated below; what's good for the goose is good for the gander.

3. Definition of Higher-Priced Mortgage Loan:

The definition of a higher-priced fixed rate loan is probably most
easily and efficiently expressed in the start rate, not the APR. The
start rate can easily be compared to the yields on treasury securities at any
point in the lending process, but APR can vary depending on how closing
costs are handled. In any case, fixed rate subprime loans are not widely
used by borrowers, and present no special problem in the general
mortgage market. ARMs have been and will continue to be the main
problem. However, the use of either start rate or APR as a criterion to
identify subprime ARMs is neither the simplest nor the most efficient ,
since they have little or no direct correlation with the most distinguishing
feature and problem of subprime ARMs which is the potential for a rapidly
and dramatically escalating payment after two or three years, and that
correlates most directly with the fully indexed rate, which in turn is directly
embodied by the margin. The primary problem with all of the subprime
loans is the shock of rapidly rising payments during adjustment periods , not
the APR, which relates mainly to the starting rate and closing costs. Based
on your other proposal to underwrite ARMs at the fully indexed rate, it is
quite apparent that the adjusted rate is a major concern. Therefore, the
definition of a higher-priced ARM should correlate most closely with
the adjusted payments, not the APR. Consistent with that you should
use fully indexed rate (or equivalently the margin) to define a higher-priced
ARM. As an alternative definition you could include a criterion for the
maximum adjusted rate, but that wouldn't be an alternative to using the
margin as the primary criterion. You could additionally include a criterion
for initial adjustment, as that is a primary issue with any ARM. The typical
initial adjustment limit of 3% or higher is a major problem regardless of the
margin. We suggest that if the above recommended limits on ARMs are
not implemented, then a higher priced ARM should be any ARM with an
initial adjustment of more than 1.5%, which we note would,
however,included virtually every ARM now in existence. If you want to
efficiently capture only the problem ARMs, presumably the existing and
future subprime ARMs, and not the Alt-A or prime ARMs, the best choice
to define a higher-priced ARM clearly is either the fully indexed rate
(or identically, the margin), or the maximum contract rate, not the
initial note rate or the APR. APR for an ARM has no correlation with the
problematic possible future payments that really set subprime loans apart
from other classes of loans. Using either the fully indexed rate, the
margin or the maximum rate would also have the advantage of
pressuring lenders to reduce their margins on ARMs so as to avoid
the status of being a higher priced loan, and that would clearly benefit
any individual consumer who must hold the loan a significant time after the
first reset, as well as reduce systemic risks to the economy in the case of a
large rapid run up in short term interest rates.

Further, as you discuss at length in your proposal, a good working
definition of APR is difficult to achieve, and whatever definition is
used, APR cannot be known until a loan is actually closed, whereas
the note rate, and the fully indexed rate, the margin and the maximum rate
are all easily defined and known at any point in the lending process . Also,
as you point out, using APR opens the possibility of the lender
manipulating rates versus closing costs solely to avoid being a higher
priced loan. You might be encouraging lenders to use higher closing costs
to keep the APR down, and that will hurt consumers the most in the short
run when refinances are needed in a context of shrunken equity. Using the
note rate for fixed rate loans, and for ARMs the margin, the initial
adjustment and the maximum rate, leaves the consumer more free to
accept different rates to adjust closing costs, without a loan becoming a
higher-priced loan. APR is controlled by competitive pressures to hold
down origination costs if consumers bother to shop at all, and it is
reasonable to expect that they have an obligation to do that. The liability .

The use of APR as a trigger is a much more logical and meaningful
approach in the case of fixed rate loans, and may be the only feasible
definition.

4. Simple, Meaningful, Well-defined, Easily-Understood Trigger
Mechanisms:

It's virtually impossible to usefully define triggers in the same way for ARMs
as for fixed rate loans since the main danger with an ARM is the potentially
high adjusted rate not the start rate, whereas the potential problem and
distinguishing characteristic of subprime fixed rate loans is the high start
rate. A fee trigger should not be used, since that just further complicates a
lending market already overwhelmed with rules and laws. Fees are a
significant issue to every consumer, and are often a limiting factor in being
able to originate a loan at all. They can be controlled with separate rules
perhaps, but they have little to do with the main problem of trying to reduce
defaults on subprime mortgages through regulatory changes.

4.1. Triggers for ARMs: In the case of an ARM the trigger should be either
any fully indexed rate higher than three percent over the index , which is
identical to any ARM loan with a margin more than 3%. You should also
include the criterion of a start rate higher than the fully indexed rate , in
order to prevent circumvention of the margin criterion by using a lo w
margin and a ridiculously high start rate. Further, you might include a
criterion for an initial adjustment of more than 2%, to prevent circumvention
by using a low margin, a high start rate and a large initial adjustment.
Finally, you also might want to add an alternate definition of any ARM with
a maximum adjusted rate of more than 6% over the start rate, in order to
prevent circumvention with a combination of a high start rate, a short fixed
rate period, frequent adjustments and very high maximum adjustment.
Virtually all common hybrid prime ARMs and alt-A arms have margins of
not more than 3%, most commonly 2.25% or 2.75%, and virtually all use
either the 6-month LIBOR rate or the 1-year LIBOR rate as an index (option
ARMs are a special case, and usually use different indices and often have
margins of 3% or more, but they are considered higher credit loans, so they
might need an alternate definition of a margin of more than, say, 3.5%).
Using the definition of a margin higher than 3% quite simply and
definitely captures all subprime ARMs as they are now constituted,
but virtually no prime or alt-A ARMs, and definitely captures all ARMs
that may be the most dangerous to the borrower or to the economy.
To prevent lender shenanigans such as using an index with a normally high
rate, such as 30-year T-bond yield, or a corporate bond yield index, it
would be ideal if the rules also require that all ARMs have indices
using maturities of one year or less.

You should not try to regulate alt-A ARMs. In practice it's almost
impossible to capture alt-A ARMS without also inadvertently including
prime ARMs, since the products and rates are almost
indistinguishable. What distinguishes alt-A products from prime products
is their slightly higher start rates and their less restrictive underwriting
processes, not the margins. As far as danger to the economy from alt-A
ARMs, the start rates pose little added danger, and the adjusted rates are
little different than prime ARMs. Granted, there's was more danger in the
past due to the less restrictive underwriting, but with the dramatically
tightened private underwriting guidelines, the danger is no longer much
different from prime ARMs. Therefore, on balance, at this time you
should not try to capture either alt-A or prime ARMs under the rules
because there's no documented proof than any obvious unusual
default problems exist among those loans, at least not yet. Any
attempt to restrict access to alt-A ARMs or prime ARMs, including the
restrictions already in place in the June 2007 Guidance, will simply
exacerbate and prolong the current downturn in real estate. The free
market has already dramatically restricted guidelines for alt-A ARMs, much
to the further detriment of the market. There is no problem with alt-A
products per se, so any change would involve underwriting restrictions,
which might limit hypothetical future problems by limiting availability of
credit, but would only make matters worse in the short run. Using the
margin as the trigger mechanism perfectly matches the definition with the
problem to be solved (adjusted rates) and with this approach there's no
need to define how to match securities to start rates. ARM second liens
other than HELOCs do exist, so you could use the same definitions and
triggers for those as for first lien ARMs.

4.2. Triggers for Fixed Rate Loans: Fixed rate loans should be defined as
higher-priced loans if the note rate is higher by 3% over the yield on the
Treasury security related to the amortizing term of the loan in the case of
first liens, and more than 5% for fixed rate or balloon equity liens. The
Treasury securities you name in the proposal look good. I would also
recommend that second liens having balloons less than 15 years be
prohibited.

5. Underwriting ARMs with Fully Indexed Rates: If ARMs have terms
limited as suggested above to protect against disastrously adjusted rates
there is little need to require underwriting at any rate other than the note
rate. Requiring underwriting all higher-priced ARMs with the fully
amortizing payment at the fully indexed rate will inevitably make the
credit contraction much worse. Fixed rate loans with their higher rates
are not a qualified alternative to most nonprime borrowers. Only about
10% of existing subprime loans are fixed rate. Undoubtedly, that's
because fixed rate subprime loans have rates much higher than ARMs,
and most borrowers don't qualify for the higher rate. It is suggested that
the underwriting requirement be applied only to higher-priced ARMs
with fixed rates lasting less than three years (note that I've suggested
above that any such higher-priced loans be banned). Also, ARMs having
fixed rates for five years or more and fixed rate loans having
provisions for payment of interest only for any period longer than five
years should allow underwriting with an interest only payment. Such
underwriting is allowed for prime ARMs and prime fixed rates, and even
some subprime agency loans (My Community), so such terms should be
allowed; let lenders and investors price and underwrite tem in a manner so
as to adequately cover their risks. Continuing to allow such underwriting,
at least for several more years will keep the credit spigots open during the
critical period when existing ARMs need to be refinanced.

Underwriting all subprime ARMs using only fully indexed rates with fully
amortizing payments, especially higher-priced loans defined by almost any
reasonable method, will most assuredly result in hardly any borrower
qualifying for one, at least as they are now constituted in the market, since
the fully indexed rates will always be higher than 9.5%, and most often
much higher. Frankly, that's the first large domino in a nightmare scenario
that investors in mortgage securities and bank stocks apparently have
been fearing. You would be confirming their worst fears, and the
worthlessness of a lot of securities, and encouraging a depression
scenario. Do your member banks want you to do this? It's financial
suicide! We're talking about 10% of existing mortgages that would
have a great deal of trouble getting refinanced. A huge number of
loans would go into adjustment in 2008 and 2009, and could not be
refinanced with any type of loan. A huge number of properties would
go on the market in the next two years, and the available qualified
buyers would be greatly contracted. That scenario would probably
guarantee that a major problem would even intensify in 2010 and
beyond when so many alt-A and prime ARMs go into resets.
According to a research report by Fannie Mae, over 50%, as as many
as 60% of all existing mortgages are ARMs. So,me might consider that
a dangerous situation for the economy, but the last thing you should do is
to make it harder for subprime borrowers to refinance out of those loans
when they go into adjustment. The proposed rule seems to almost
guarantee that the first domino will fall and can't get up again. I refer to the
scenario that's developing as the Japan scenario, where almost all banks
got upside down in regard to commercial real estate loans, the stock
market dropped 80% and short term interest rates went to 0%, and they
both pretty much have stayed there for 20 years. It's very possible that our
banks and homeowners will get upside down in residential properties, the
stock market will drop 80%, and interest rates will go to 0% and both stay
there for 20 years. Unfortunately, if the savings rate is 0%, as it has been
in the U.S. for several years, then investment is also 0% also by economic
definition. But 0% interest rates and demolished stock values won't do
much to encourage saving. At least with 0% interest rates the fully indexed
rates will be back down to some level where a few borrowers will qualify.
And what happens to bank capital? The behavior of the bank stock index
(symbol "BKX"), down almost 50% in a few months, seems to confirm that
the nightmare scenario is suddenly all too possible.

Using maximum adjusted ARM rates for underwriting, as suggested by
some consumer "advocate" groups, would be the ultimate in restricting
credit. Virtually no subprime borrower will qualify for an ARM with a rate of
14% or higher. Surely all interested parties must realize that defaults can
be certainly prevented by preventing any more loans, but that means
harming 90% or more of existing and prospective homeowners to avoid
possible harm to 10% of subprime borrowers and lenders. I don't think
that the proponents of radically restrictive underwriting rules understand
what the likely consequences will be of eliminating up to 10% of all existing
homeowners and prospective buyers...an avalanche of unsalable homes,
huge loss of equity for the remaining homeowners, and probably a
depression. There will always be defaults no matter how strict the
underwriting standards become. A zero tolerance policy will be an
economic disaster.

6. Debt to Income Ratios, Residual Income: The proposal to actually
dictate debt ratios is one more aspect of the unprecedented
ill-advised effort to have government dictate lending guidelines. This
is micromanagement at its very worst. It's shocking that this proposal
comes from an administration that purports to represent the political party
that favors minimum interference by government in the free market. There
should not be any government definition of allowable debt to income ratios .
The free market is the best solution to this issue. Similarly there should not
be any government regulation of loans based on residual income.
Investors and lenders are capable of establishing appropriate definitions of
income and debt, and appropriate debt ratios and residual incomes needed
to control risks for various lending scenarios. Appropriate debt ratios vary
according to a great variety of factors, and lenders have different
judgments of the risks, and they also have pricing premiums when higher
than normal ratios are allowed to compensate for higher risks. Indeed, if
government is going to dictate debt ratios, then government will need to
dictate definitions of income and debt for that purpose. Lender guidelines
all do that already. Some observers have proposed a regulatory or
statutory limit of 50%. Is there any evidence that shows how many defaults
might have been avoided with such a restriction? Why not 49% or 48%?
Even if there were accurate quantitative data to show the trade off between
certain changes in debt ratios versus default rates, how would you
determine the acceptable level of defaults? Government mandates for
debt ratios would be an unprecedented level of involvement in lending
guidelines and sets a very bad precedent. Do you intend to begin dictating
lending guidelines for all other types of consumer loans when they begin to
have higher levels of delinquencies? In practice a 50% limit per se would
have little effect at all in the marketplace, since most lending guidelines
don't allow more than that anyway. So what is the benefit? Meanwhile,
that rule would set a very bad precedent of direct government meddling in
lending guidelines.

7. Consumer Disclosures for ARM Loans: Of course there should be
comprehensive disclosures. Current practice and statute require Truth in
Lending Statements ("TILs") from the broker and lender. TILs go out with
applications, from lenders who get the applications, and TILs are explained
at all of the closings I've attended. The loan docs and the TIL shows the
initial fixed rate, the duration of the fixed rate, the current index value and
the margin, the initial and adjusted payments. Perhaps the fully-indexed
rate should be added to that. What more is needed? If disclosures at
three stages of the process aren't adequate, how can any additional
disclosures help? Many argue that borrowers don't read or understand the
disclosures or the terms of the loan. If that's the case, then more
disclosures won't help, and the only answer is to outlaw ARMs entirely.
There is a point at which some of the responsibility for reading the contract
and understanding the loan falls on the homeowner. Presumably a person
competent enough to purchase a home should be competent enough to
understand the financing disclosures.

8. Low Documentation Loans: I strongly agree with your proposal not to
restrict individual loans being underwritten without documentation of
income or assets. While it might seem useful to prohibit a pattern of an
originator making such loans when they aren't appropriate, it is apparent
that it is almost impossible for an originator to know whether they are
complying with this provision in absence of a coherent definition of such a
pattern. By low doc loans I mean loans underwritten with processes known
as "stated income," "no ratio," and "no doc." In the subprime arena there
really are very few loans offered with low doc processing other than stated
income processing whereby employment and any necessary assets are
verified but income is not documented. Such loans always have more
restrictive guidelines, requiring higher credit and lower loan to values than
loans done with full income processing. Guidelines for such loans have
tightened dramatically in the free market in just the past several months in
response to market conditions. It should also be noted that when
underwriting stated income loans lenders routinely consider the borrowers
type of employment and the likely income range for such verified
employment, so it isn't true at all that such loans can be originated easily
with a lie about income. Restricting or eliminating low doc loans by statute
or rule or otherwise seems like common sense to most folks, but doing so
would be a drastic shift from established practice, and will significantly
contract mortgage credit, having adverse consequences for real estate
values. In the past lenders have done a pretty good job of setting loan
guidelines and pricing loans for low doc loans, particularly A-credit loans.
They know when low loan to values and high credit scores make a loan
safe with little or no income documentation, and they know how to price the
loans based on the risks. There is scant hard data to show that loans
originated with these types of processing are a major problem due to the
processing type per se.

Some argue that the U.S. economy is in such dangerous uncharted waters
with regard to consumer debt that all low doc loans should be banned, but
doing so will significantly worsen the state of the residential real estate
market and contribute to even more dangerous economic conditions. If we
are in uncharted waters then caution must prevail, since the consequences
of changes would also be unpredictable. I would argue that the lenders
and investors whose investments are directly at risk are in the best position
to judge the performance of their funds, and that they should remain
entitled to set the guidelines. I would also argue that forcing major
changes in lending guidelines onto the system at this time may directly
further reduce the values of their investments and the future availability of
mortgage credit. While consumer advocate groups ironically favor policies
that will make credit much harder for consumers to get in the future, and
will in fact force many more current homeowners out of their homes, they
also almost totally ignore the effects such dramatic changes in mortgage
practices could have on the values of existing mortgage securities . I'm
against any restrictive changes to underwriting guidelines by government
regulations or statutes. Let the free market alter guidelines as conditions
change. We must avoid harming the overwhelming majority with rigid
guidelines in order to protect a small minority. For example, due to
such overreaching, as of August 1, 2007, it is now flatly illegal for a broker
or wholesale lender to give Bill Gates or Warren Buffet a stated income
loan to purchase a second home in Minnesota, even if there's a 99% down
payment. Such absurd, overly-broad legislation throws all borrowers and
all lending scenarios into the same dumpster. Even though the law doesn't
apply to federal or state chartered bank type institutions, since about 75%
of all mortgages in Minnesota have been traditionally originated by brokers ,
the elimination of all low doc loans originated just by brokers could result in
some alarming new data about what such drastic changes can do to the
mortgage and real estate markets. In Minnesota expect a big shift in the
share of all originations from brokers to banks, an acceleration in defaults
among all types of mortgages, especially subprime, a major crisis in sales
of residences for primary occupancy, and an up tick in purchases by
investors and, of course, a very noticeable decline in housing prices.

I also strongly disagree that provisions governing loan processing methods
should be established in any state or federal statutes, as has been done or
is now being considered; that unduly hampers the availability of credit, and
removes a great deal of flexibility for free market solutions.

9. Ability to Repay Time Horizon: As mentioned elsewhere, when ability to
repay is considered, it should only take into account the payment actually
required by the terms of the note during the fixed rate period, assuming
higher priced ARMs are restricted to having fixed rate periods not less than
three years. Under no circumstances should any regulation requiring
consideration of ability to repay out of income require consideration of the
possible payment applicable more than five years beyond the origination .

10. Property Taxes and Insurance: Of course ability to repay should take
into account property taxes and insurance as well as other debt obligations .
But the uniform mortgage application already clearly contains that
information and uses it to calculate housing debt ratios and total debt
ratios. All underwriting guidelines I've ever seen include provisions to
consider those items, except when legitimate no doc and no ratio type
mortgage processing is allowed for the loan scenario. No originator has
the ability to predict changes in future property tax obligations or insurance
costs, so only the current costs can be considered.

11. Escrows for Property Taxes and Insurance: I strongly oppose the
proposal to require escrows. In general the costs and disadvantages of
requiring escrows far outweighs the advantages. Mandating escrows is
unnecessary for the vast majority of borrowers and poses significant
disadvantages for the borrower and some for the lender. Nobody has
made a cogent case how this idea helps solve the current or future
mortgage crises.

Requiring escrows greatly increases settlement costs, and that will
definitely prevent some borrows from being able to refinance, since closing
funds must be taken out of equity and be rolled into the loan principal , if
they aren't available from liquid funds, and equities have shrunk too much
for many borrowers to be able to roll the costs into the loan principal . Even
if the needed equity is available, the added principal could pose problems
with regard to loan-to-value tiers, preventing a refinance or forcing the rate
higher. In addition, the full mortgage payment including escrows goes on a
borrowers credit report, which can affect underwriting of other
non-mortgage financing. This is another item that will significantly
exacerbate the current trend of rising defaults and distress sales .

According to some government sources, the number one subject of
consumer complaints related to mortgages is the mishandling of escrows .
And what happens in an environment like the present one when brokers
and lenders are going out of business in large numbers? Will borrowers
end up with escrows that are difficult to recover from defunct entities ?
Consumers should remain free to pay their own taxes and insurance. I
have a hard time perceiving any significant benefit to a consumer by
making escrow payments other than the minor advantage that some
borrowers like of not having to make separate payments for insurance and
taxes.

As far as the objection that lenders can advertise low payments without
including payments for taxes and insurance, it is simply the case that there
is no way for an advertising lender to have any information whatsoever
about a borrower's current or prospective payments for such items. I don't
think it's expecting too much for borrowers to be responsible to be aware or
discover their payment obligations for homeownership expenses other than
the mortgage. I find it very implausible that any significant proportion of
borrowers don't understand that taxes and insurance are part of the
monthly cost of housing, even first time homebuyers. For one thing it's just
common knowledge to the vast majority of borrowers. Also, those items
are quite prominently shown on the application and the good faith estimate .
There's no harm in requiring a statement in advertised payments that taxes
and insurance are not included, but I doubt there's much benefit either,
since the total payment is completely obvious when the borrower gets loan
application documents.

I also don't perceive any significant advantage to a lender other than the
interest-free use of accumulated escrow funds, presumably invested in
safe short term securities. However, many subprime lenders don't even
have infrastructure to administer escrows. Requiring subprime lenders
who service portfolio loans to set up escrow infrastructure and bear
administrative costs will likely further discourage lenders from this already
shrinking segment of the market, thereby reducing competition and the
general availability of mortgage capital.

As far as helping protect against consumer defaults, it seems to me there's
no advantage and some disadvantage for a lender to collect escrows . A
consumer in financial difficulty is more likely to pay the mortgage as first
priority, and postpone separate payments of taxes or insurance for a while,
if necessary. If the borrower cannot pay the regular mortgage payment
including the escrow amounts, they are less likely to make any payment at
all. So requiring escrow payments can more quickly result in defaults with
credit damage to the consumer and the foreclosure process starting
sooner. At least if the client can manage tax and insurance payments
separately there is more latitude in managing cash flow to make mortgage
payments on time. Mortgage servicers already have the specific remedy of
forced insurance if the consumer fails to pay insurance premiums. In
addition state or local governments have strong remedies in the event
taxes are not paid, but these take a considerable length of time during
which the borrower might find a way out of difficulty.

The proposal to require escrows initially but allow opting out after 12
months seems to be the worst of all possible worlds. It captures the
biggest disadvantages regarding higher closing costs and higher
administrative costs without guaranteeing any purported benefits for more
than a short period.
12. Prepayment Penalties: In general prepayment penalties are one of the
most troublesome areas for consumers, lenders, brokers and loan officers,
and cry out for federal regulation. The terms of a penalty are rarely
prominently defined or understood by a consumer at any point in the
origination process. Often even a broker doesn't know the terms of such a
penalty just by looking at a rate sheet. Rarely does a borrower even know
the prepayment penalty terms of their existing loan, if they even know that
there is one. When a borrower inquires about a refinance a broker has
difficulty obtaining accurate information from the client regarding the terms
of any prepayment penalty that might apply and could affect the cost or
optimal timing to close a new loan. Then the borrower has trouble locating
the prepayment penalty rider in the loan documents. A mandated uniform
national disclosure form should be required as part of the origination
and closing process to fully inform all involved parties about the
terms of any prepayment penalty. A prepayment penalty rider to
mortgage documents often found only in the closing documents is not
sufficient. In addition to defining the prepayment penalty, a disclosure
required at the time of application should tell the borrower whether there is
a choice of having a prepayment penalty or not, and what the terms of the
loan would be in the event a prepayment penalty is not elected. Such
regulations and disclosures should apply to mortgages of every type ,
including prime, subprime, first liens, second liens, HELOCs, etc.

When a prepayment penalty exists, it is often such a major expense that a
borrower feels forced to wait to refinance until the penalty expires which is
most often coincident with the date of the first rate adjustment for an ARM,
but might even be a year or two later. When a penalty expires on the date
of the first adjustment, that means the optimal timing to close a new loan is
a window of only one month in order to avoid both the penalty and an
adjusted mortgage payment. Prepayment penalties that expire less
than 120 days before the first rate adjustment of an ARM should be
prohibited; 60 days is not enough. A borrower needs to be guaranteed
enough time to shop for a refinance before the rate adjusts, to have some
window of opportunity to take advantage of possible favorable interest rate
trends, and to accomplish the refinance without paying a prepayment
penalty. In addition penalty periods longer than 4.5 years should be
prohibited.

In addition federal regulations should mandate maximum prepayment
penalties of no more than 60 days interest. It's just outright consumer
abuse to penalize more than that. A penalty of 60 days interest is a
reasonable compensation to a lender, amounting to 8.3% of of the entire
amount of interest they might have earned if an ARM would have been
held to the end of a two year prepayment penalty period. It's a sufficient
penalty to discourage refinancing during the penalty period without a strong
motive. Any greater penalty prevents many consumers from refinancing at
a time when it would be to their advantage to do so if the penalty didn't
exist.

I do not believe that any of the foregoing recommended rules would
significantly affect the availability of subprime credit. It might tend to
increase a little the starting interest rates for subprime ARMs that have the
new regulated penalties as compared to the lender's previous penalties,
but that would be a very reasonable tradeoff for consumers and lenders
alike.

Uniform federal regulations of prepayment penalties should preempt
all state regulations. For some time the mortgage market has endured a
crazy quilt of state laws governing prepayment penalties, and those laws
often don't even apply equally to different types of lenders. Mortgage
lending is essentially a business of interstate commerce and such diverse
rules interfere with interstate commerce, and might be unconstitutional as
applied to loans originated interstate (I don't know whether that legal theory
has ever been tested in the courts). Uniform national rules would limit
the penalties in a reasonable manner, make the penalties much easier
for consumers and originators to know, and would offer major
consumer protections. Other than new rules governing the terms of
ARMs loans, nothing would bring more cheer to consumers and brokers
than new federal rules mandating uniform national fair prepayment
penalties and disclosures; lenders might like that approach also. If there
was a way that such rules could retroactively be applied constitutionally to
existing subprime ARMs it might also significantly prevent some
prospective defaults over the next two years.

13. HELOCs and "Evasion": It's not clear to me what HELOCs would be
evading. If a HELOCs is available as a more attractive first lien alternative
to whatever ARMs or fixed rate loans remain available under new rules,
then either the HELOCs rules are inadequate or the new rules are too
restrictive, or the HELOCs are truly more attractive to the ARMs and
subprime fixed rate loans that are still allowed, and so so be it. Then new
rules for HELOCs should be instituted, if needed to address consequential
new market problems. You need to engineer comprehensive rational
market solutions, and if that requires coordination between rules for
different types of loans, then that's what you should do. "Evasion" is a
relative term that judges motive, not substance. I don't think you can ever
prove that a consumer chose a HELOC over some other alternative as the
result of some objectionable motive to avoid another type of loan. I don't
think you can structure coherent or enforceable "anti-evasion" provisions
to try to prevent the greater use of HELOCs as an alternative. You should
instead focus on making subprime loans sufficiently non-toxic that they are
more attractive as first liens than allowed HELOCs. Since some state laws
are beginning to require that brokers act "in the best interests of the
borrower," one might reasonably presume that getting a HELOC for a client
who will not qualify for either any prime credit loan or any of the broker 's
available subprime loans under the new rules, is in the best interest of the
consumer, even though it might be construed as evading the new rules for
subprime loans. What is the broker to do in that case? And who is doing
the evading, the borrower or the broker? A broker can offer alternative
solutions, but the borrower has a responsibility to shop for alternatives and
is the one who ultimately chooses. If a broker offers a HELOC because
that's a workable option, and the borrower chooses it, is the broker
somehow liable for the choice? No broker can have ultimate knowledge of
all the alternatives available in the lending universe for a particular
borrower, and no power at all to compel the borrower's final choice. It is
absurd to conclude that either party evaded something because the
borrower chose something else!

14. Yield Spread Premium: It would not harm the market in any way to
require that brokers and lenders obtain prior agreement with a borrower to
earn a maximum contractual yield spread premium ("YSP"). I doubt if it
would really change much about the market either. Lending is an
extremely competitive business and most borrowers shop at least
somewhat. Successful shoppers find the best combination of
rate/payment/closing costs to satisfy their preferences, and that doesn't
necessarily mean the lowest rate resulting in the lowest YSP to the lender,
in the frequent case where the borrower wants to minimize closing costs at
the closing table. If a client really wants the lowest rate or APR, the
borrower will almost certainly shop, and the prospect that the client will
shop limits both the origination fees and the YSP that any originator
attempts to earn for a loan. Also higher YSP's involve higher rates that
make it harder to qualify many borrowers, so it's a myth that the broker has
unlimited incentive to maximize the rate. If a borrower is vulnerable to
higher YSP due to lack of motivation to shop, then a prior agreement to a
maximum YSP is probably not sufficient to get the client to shop; even if
the client understands the role of YSP, they will have no basis to judge the
fairness of the proposed maximum YSP, if they don't shop, especially if the
terms of the loan as proposed appear to meet their needs or expectations .
The contractual YSP should be shown as a maximum percentage of
the loan and should not be set in stone as either a set dollar amount
or as a set percentage of the loan. It is already required that the YSP be
disclosed on the Good Faith Estimate along with all closing costs and
estimates of prepaid items. Typically YSP shown on a Good Faith
Estimate is expressed as a maximum amount as a percentage, or range of
percentages, of the loan principal. A broker of lender cannot know the
actual YSP until the rate is locked, and even then, the YSP changes if the
rate lock must be extended for any reason, or due to pricing changes
necessitated by details discovered during the lender's underwriting
process. So it seems reasonable to state the YSP as a maximum
percentage rather than as a definite percentage or dollar amount , and it's
hard to imagine how a contractual obligation for a definite amount would
work unless that was obtained at the time of registering a locked loan
rather than with an application.

There is certainly nothing wrong with improving disclosures of YSP
and how it works. However, if one asserts that borrowers fail to read or
understand disclosures of prepayment penalties or the terms of an ARM,
as so many claim, it's really hard to argue that borrowers would read or
understand much about the role of YSP in their loan. It is already required
that the YSP be disclosed on the Good Faith Estimate along with all closing
costs and estimates of prepaid items. It would be very practical and
feasible to add language to some standard RESPA docs to explain how
YSP works, explain the trade off between YSP and interest rate, and that
YSP varies daily or even within a day for a given interest rate, and that a
broker or retail lender may have an incentive to offer a higher rate to collect
a higher YSP, and that the broker does not act as a fiduciary or agent. But
the language should also clearly state that lower interest rates not
only involve lower YSP for the originator, but might also result in
higher origination fees to the borrower as a directly related
consequence. The language should clearly show that the YSP is paid by
the lender to the broker, since that is the case; language indicating that the
borrower is somehow paying it would be very misleading. The disclosures
should be required as part of RESPA docs for purchases and refinances.

On the theory that YSP works entirely against the consumer, some
consumer advocates have proposed that YSP be banned, as I believe a bill
now pending in the Senate does (S1299). That would be very damaging to
consumers, and would be horribly disruptive to the traditional lending
process and require complete retooling of the industry. Under such a
system all loans would either need to be done at par rates, or YSP for
higher rates would need to be paid directly to the consumer, so the nearly
universal lender rules against paying YSP to consumers would need to
change. In that case the borrower would decide the tradeoff between rate
and closing costs as they now do anyway, but the decision would be more
transparent, and there would never be any incentive for an originator to
steer a borrower to a higher rate. As the market now works, YSP is not
only an important source of income for an originator, it can also
defray other rate pricing and closing costs for the loan. In absence of
YSP originators would need to charge all the costs of doing business
directly to the consumer in closing costs. Under such a system the
originator would have much less incentive to shop wholesale lenders for
the best rates (i.e. best YSP for a rate). The originator income would be
limited to the origination and service fees, so the tendency would be to
offer a rate and closing costs on a take it or leave it basis. The borrower
would inherit the primary incentive to shop for the best rate/YSP
combination as originators do now, but the borrower is in a much less
capable position to do so since the borrower does not have access to
wholesale price sheets showing YSP's versus rates from a variety of
lenders and has much more limited time to shop different lenders.
Borrowers would practically need to become loan officers to learn to
access, read and understand price sheets, and to deal with the fact that
rates change daily of even within a day. I have a hard time envisioning
how that system would work. I can easily envision that borrowers would be
full of complaints that rates weren't locked at the desired YSP. Who would
be liable when pricing the YSP was mistaken because some factor failed to
be considered. As it now stands, the originator is at risk for correct pricing
and locking of YSP. Would the lender be at risk for any difference in final
YSP at closing and what the borrower thought they'd be getting? That
system would likely chase more brokers and lenders out of the market
thereby reducing competition. In addition, borrowers would likely not fare
much better in getting the optimal combination of best rate and closing
costs.

If YSP is banned entirely for both the originator and the borrower, it's hard
to imagine how the market would work at all. It would also be very
detrimental to consumers as YSP is a very important source of funds to
control origination fees, whether the loan is originated by a broker or a
direct lender. If a consumer didn't have access to YSP either, consumers
would need to pay full closing costs either out of pocket or as part of the
loan principal, when allowed. That would prevent many borrowers,
especially subprime ones, from being able to refinance at all, or at least
would put many prospective clients into higher loan-to-value tiers in order
to finance closing costs. Once again, consumer advocates who assume
they are advocating for the consumers by pushing this notion, are actually
working against the interests of most consumers and would contract overall
availability of credit or raise the costs of credit.

Whatever rules are adopted regarding YSP to brokers, the same rules
should apply to YSP or Service Release Premiums for direct lenders
and banks. What's good for the goose is good for the gander. If the
proposed rules are truly designed to protect consumers, and not to
disadvantage brokers and wholesale lenders versus bank-type lenders,
then all lenders must abide by similar rules. Since the Fed answers
primarily to the interests of the banking community, which plays by many
different sets of laws and regulations than brokers and wholesale lenders ,
one cannot help but wonder whether the introduction of proposals
regarding YSP's, that were not introduced in prior public hearings, and fail
to mention banks, are really intended to improve the competitive positions
of banks relative to brokers.

Respectfully Submitted,

Dan Stephens
Bloomington, MN 55437

				
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