October 13, 2009

The Seven Samurai Deadly Sins New Mortgage Laws

Governor Schwarzenegger has approved seven new mortgage related laws. As a plugged-in reader summarizes:

The gist: Negative-amortization loans are banned...residential loan originators must now be licensed...it is now a felony to commit fraud on a mortgage loan application...appraisal management firms must register with the State.

Keep in mind that claiming a condo as "primary residence" in order to secure a better mortgage rate but then actually renting it out as an investment property constitutes fraud.

Schwarzenegger signs seven mortgage laws [LA Times]

First Published: October 13, 2009 9:00 AM

Comments from "Plugged In" Readers

why is it superior from a loan issuer's standpoint for a condo or property to be used as a primary residence instead of a rental? it seems that if was buying it to rent out, it will provide an income stream which would assure that i could pay the mortgage. what are the downsides?

Posted by: condoshopper at October 13, 2009 9:06 AM

I think one issue is that people will bend over backwards to protect their home, but folks are less likely to eat beans and rice to pay for something that is just an investment. So investment properties can be riskier.

Posted by: Jane at October 13, 2009 9:15 AM

It's about time loan originators were licensed.

M.R.

Posted by: Mystery Realtor at October 13, 2009 9:24 AM

The new fraud statute broadly applies to would-be borrowers, but the effect should be more sweeping on realtors. It is now a crime, punishable by imprisonment, to make any "misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process"

But the new statute also makes it a specific crime, punishable by imprisonment, to "deliberately use or facilitate" any such misstatement, misrepresentation, or omission. So advising clients to use the many little "tricks" to get approved for a loan, such as taking a gift from parents for the down payment and declining to disclose the fact that it was a gift and not savings, is now a pretty serious crime.

Posted by: Trip at October 13, 2009 9:24 AM

@condoshopper: I believe that statistically, in cases where people have multiple mortgages they will default on their primary residence last, since they don't want to loose the home in which they live.

While there is certainly much to be said for having controls in place for making sure people don't commit fraud with mortgage loans, I think having seven new laws to have to consider when handling transactions is mostly going to benefit the lawyers!

Posted by: Nick at October 13, 2009 9:25 AM

why is it superior from a loan issuer's standpoint for a condo or property to be used as a primary residence instead of a rental?

It doesn't matter if loan originators think one or the other is superior, if you are lying on your loan application in order to get a lower interest rate rather than paying the rate appropriate for investment property, as the editor says, that constitutes fraud.

Other socketsite posters can comment knowledgeably on whether or not a loan for an investment property can be sold to the government-sponsored enterprises; if they can't, then that would be a difference from the loan originator's standpoint and itself worth charging the would-be landlord a higher rate on the mortgage.

Posted by: Brahma (incensed renter) at October 13, 2009 9:29 AM

Not mentioned above but reported in sfgate.com, mortgage brokers now have a fiduciary duty to their borrower clients. Depending on how fiduciary duty is defined in this context, this could be a big change.

Posted by: Rubicon at October 13, 2009 9:37 AM

Two thirds of all SF realtors would be in jail had these 'common sense' rules be in place - and been enforced - in the period between 2004 and 2007 with.

Posted by: anon at October 13, 2009 9:50 AM

thanks for the explanations! it was something i'd been curious about for a while even though i'm not shopping for a loan at this time. going to sit out this market for a while and hopefully the loan industry will be more customer friendly by the time i'm back in.

Posted by: condoshopper at October 13, 2009 9:51 AM

Any misrepresentation on a loan application would have to be knowing and material at the time it was made. So if you got a mortgage for a condo with the representation that it was going to be your home and a year or two later your life circumstances changed and you decided to move out and rent the condo, there is no way you could be successfully prosectuted for fraud.

Of course, if you rented the condo out from day one, that would be a different story.

Posted by: bgelldawg at October 13, 2009 10:07 AM

So if you got a mortgage for a condo with the representation that it was going to be your home and a year or two later your life circumstances changed and you decided to move out and rent the condo, there is no way you could be successfully prosectuted for fraud.

You have to sign something that says you will live in the house for 12 months, and will ask the lender for permission if you want to rent it out before that.

Posted by: J at October 13, 2009 10:17 AM

Horse: Long Gone.

Barn Door: Now Firmly Closed.

Hope the legislature doesn't break their arms patting themselves on the back. How long has everyone known this was a problem?

This is a great example of how government facilitates this type of fraud because their campaign contributors are all making money from the status quo and so no one wants tor rock the boat until everyone has safely jumped ship. It took them a year AFTER the meltdown to pass these laws?

It's only because the originators and appraisers are already scrutinizing more closely (making fraud nearly impossible to profit from) or this would never have passed even now.

Posted by: tipster at October 13, 2009 10:19 AM

"misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process"

Realtors weren't, and aren't a party to the mortgage lending process. They're not allowed.

Two thirds of all SF realtors would be in jail had these 'common sense' rules be in place - and been enforced - in the period between 2004 and 2007 with.

Typical no name no account nonsense. Fake statistic -> Fake quote-> Fake time period -> Unknown atttribution --> All around worthless summation.

Posted by: anonn at October 13, 2009 10:21 AM

I'm with tipster.

Posted by: EH at October 13, 2009 10:32 AM

anonn, you need to read the language of the statute. It does not matter if the realtor is a party to the lending process. Criminal liability can attach to anyone, such as a broker, who "facilitates" a misrepresentation or omission, such as in the example Trip used above. Realtors do this kind of thing all the time in advising their clients how to work the mortgage process. They continue to do so at their peril.

Posted by: anon at October 13, 2009 10:44 AM

Robust markets are always worthwhile. These rules did not prevent this bubble, but they will likely be useful the next time around. With bubbles there is always a next time even after a decade or more of recovery. Rules can always be turned back or thrown out, but it took a very long time to remove all of the safeguards put in place after the Great Depression. With some effort we might be able to keep the market functional for another fifty years or more before corruption again grows beyond all reasonable bounds.

As for the government facilitating fraud. That may be true, but it isn't necessarily relevant. It is also true that with improved disclosure through XBRL and such it may not be possible to hide this kind of extensive fraud for this long the next time there is a big bubble.

Posted by: Mole Man at October 13, 2009 10:59 AM

The example Trip gave above would not be in the realm of the realtor, but rather the mortgage broker. Advising about "tricks"? I don't think Trip has been through the process in a long while, and it seems as if you haven't either. Realtors are, and were, expressly forbidden from engaging in that sort of activity. I don't want to get into a fake legal debate with a bunch of realtor haters today. But I doubt "facilitate" encompasses whatever a third party (mortgage broker) suggests. That's whether the third party was recommended by a realtor, as sometimes occurs, or not, as buyers often have their own mortgage brokers. This is all aimed squarely at mortgage brokers. The idea that it will more adversely effect realtors is not valid.

Posted by: anonn at October 13, 2009 11:10 AM

It wasn't a year after the meltdown - it's been two and a half years since it started (it really got going in March / April of 2007).

Legislating at the speed of ... something slower than light?

Posted by: Brian at October 13, 2009 11:27 AM

This is a great example of how government facilitates this type of fraud because their campaign contributors are all making money from the status quo and so no one wants tor rock the boat until everyone has safely jumped ship.

And a little fact checking says... Bingo!

In all, Ameriquest donated at least $591,000 to Perata or committees closely associated with him from 2001 until late 2006, when the company went out of business because of its history of giving out lots of bad loans and preying on low-income borrowers who couldn't afford to pay them back.

Posted by: EBGuy at October 13, 2009 11:37 AM

AB 1160, by Assemblyman Paul Fong (D-Cupertino), requires that mortgage loan documents be written in the same language the verbal negotiations were conducted in.

Um, no. How about your buying a house in America, learn to read English.

Posted by: nottimhawko at October 13, 2009 11:43 AM

Awesome, so if I speak in pig latin at the closing, do they have to retype my documents?

Posted by: Brian at October 13, 2009 11:46 AM

Realtors weren't, and aren't a party to the mortgage lending process. They're not allowed.

from http://www.dre.ca.gov/faq_mlb.html:

California does not issue a "mortgage broker" license. A majority of those engaged in mortgage loan brokering do so with a real estate broker license. To the surprise of some, the license that allows the listing and sale of real property (the traditional activities associated with a real estate broker license) is the same license that allows the solicitation of borrowers or lenders, the negotiation of loans secured by real property and the collection of payments on notes secured by real property. For further details concerning the definition of licensed activity, review Business and Professions Code Sections 10130 and 10131.

How about your buying a house in America, learn to read English.

Speaking as a onetime immigrant (to Japan) Immigrants don't matter, as long as their children are streamlined into American culture (such as it is).

Posted by: Troy at October 13, 2009 12:24 PM

There are licenses and there are licenses, Troy. What happens in practice is not what Trip indicated. R.E. brokerages forbid it. Lenders forbid it.

Posted by: anonn at October 13, 2009 12:40 PM

...and now the law forbids it

Posted by: location at October 13, 2009 12:59 PM

Nobody said otherwise. Nor did such a thing happen to any of the commenters in the first place, I'll guess.

Posted by: anonn at October 13, 2009 1:06 PM

You may not like Assemblyman Paul Fong's bill now, but when prices really start to freefall, you'll really like it when the Hong Kong and PRC investors stream in to buy up all of the excess property and they can close their deals quickly because the mortgage loan documents are in their native language.

Deals they'll only feel comfortable doing if they know they aren't getting rooked by fly-by-night San Francisco mortgage brokers.

of course, I'm not a homeowner now, but hopefully by that point I will be and then it'll be in my best interest for the giant outside pool of money to flow this way and support residential home prices, pay property taxes, etc.

Posted by: Brahma (incensed renter) at October 13, 2009 1:09 PM

and when the documents are in a foreign language, when there is litigation do we have to bring in that country's judges and attorneys to interpret the wording too?

Posted by: condoshopper at October 13, 2009 1:29 PM

The new "language same as in verbal negotiations" law is asinine. I understand that some shysters pitched non-English speakers on a fairly tale deal that was far different from that represented in the English-language contracts. But just go after the crooks. No lender is going to vary from the English documents that have been vetted to death by an army of lawyers and conform with the requirements of the secondary markets. So this means that all "verbal negotiations" must be done in English. It will be that much harder for non-English speakers to participate in the process at all.

Posted by: Trip at October 13, 2009 1:47 PM

Posted by: SocketSite at October 13, 2009 2:29 PM

Two thirds of all SF realtors would be in jail had these 'common sense' rules be in place - and been enforced - in the period between 2004 and 2007

Between the periods you mention, if these laws were in place, it seems to me fewer people would have gotten mortgages partially because mortgage brokers wouldn't have been playing nearly as fast and loose. And there would have been fewer people slinging funky mortgages and selling overpriced real estate which required them.

The ability to finance real estate would have been, in aggregate, lower, and therefore the prices of real estate in San Francisco wouldn't have increased as quickly. The lower rate of increase would have in turn swept up fewer people in what became a speculative bubble in S.F. real estate ("buy now or be priced out of the market forever!", as real estate agents were so fond of saying), and the bubble wouldn't have expanded quite as fast as it in fact did.

So there would probably have been fewer real estate agents and mortgage brokers out there trying to get a piece of action; fewer out there dancing while the music was playing and hoping that they'd have a chair when the music stopped, which means there wouldn't have been all that competition to beat out the next broker in terms of sales production and deal closing and hence pressure to bend or break the law in order to stop a deal from going out the door to a competitor.

When you're on the left side of the inflection point, one or two reasonably visible prosecutions would gone a long way, and the snowball effect would have been stopped short.

Posted by: Brahma (incensed renter) at October 13, 2009 4:21 PM

and when the documents are in a foreign language, when there is litigation do we have to bring in that country's judges and attorneys to interpret the wording too?

Yes. Because language = country. When the docs are in Spanish, we'll bring attorneys in from Spain. When their in English, then I guess we'll have to get attorneys from England.

Posted by: joh at October 13, 2009 10:47 PM

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