Digging out from the 2008 housing crisis has not been easy. Americans were harmed by predatory mortgage lending practices, a collapse in home prices and a steep drop in the national homeownership rate. Since then, the U.S. housing market has experienced a slow but steady recovery.
Census data shows the national homeownership rate was 65.9% as of second-quarter 2023, up a full 3 percentage points since 2016. But challenges remain. The National Association of Realtors found that the gap in the homeownership rate between Blacks and whites is the biggest in a decade.
“When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers.”
And a report this past June from the National Association of Homebuilders showed that while wage gains boosted affordability at the start of this year, the trade group’s first-quarter 2023 affordability index was still significantly lower than one year earlier.
When 30-year mortgage rates were in the 3% range, it was easier to overlook mortgage practices that harmed consumers. But now that interest rates have skyrocketed, protecting people from glitches in consumer protections should be more of a priority than ever.
This past summer, the Community Home Lenders of America released its Consumer Mortgage Bill of Rights. This document identifies specific areas where consumer protections need to be strengthened. Mortgage professionals should advocate for these positions to ensure a fair and thriving mortgage market.
One consumer right should be robust competition in the mortgage services market. For instance, the opposition of the Federal Trade Commission (FTC) to the Intercontinental Exchange (ICE) purchase of Black Knight was a meaningful step. One company with quasi-monopoly power over mortgage origination software services should not increase its market share.
The divestitures of Black Knight’s Empower and Optimal Blue platforms were designed to win FTC approval and helped to ease the deal’s many problems. The merger approval facilitates vertical integration of mortgage origination and servicing tasks.
There are ways that a company like ICE with such a large market share can impose anti- competitive measures on the mortgage industry. For instance, it charges so-called “user seat” fees based on the number of loan originators who use its software. By increasing these fees as originator numbers go up but not reducing them as numbers go down artificially inflates the costs of the mortgage process.
“Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices.”
Pressuring lenders into buying discretionary services (what’s known as tying and bundling) just to continue using the basic mortgage origination software service also increases costs. The same goes for charging junk fees — so-called “click fees” — to electronically access various vendor information such as the appraisal, credit report, title insurance and flood certification.
Inflated fees caused by these practices will inevitably be passed along to consumers. These practices should be scrutinized as a merged ICE-Black Knight entity grows. For example, the Consumer Financial Protection Bureau (CFPB) should monitor and address consumer mistreatment.
A different area that includes not only a dominant market power, but an actual monopoly, is credit scores. In November 2022, FICO raised its fees for credit scores by 400% — with the exception of an arbitrary and select group of about 50 mortgage lenders. The lenders pay these fees directly, but they’re ultimately passed along to borrowers, since a credit score is a required element of a mortgage. Underserved borrowers are hurt the most. This creates a disincentive for mortgage originators to work with and improve the scores of underserved borrowers with credit blemishes, since the 400% price hike will be compounded over multiple credit pulls.
The long-term solution is to create competition. Sandra Thompson, director of the Federal Housing Finance Agency, is trying to do this by initiating a process for conforming lenders to use VantageScore. Until there is real competition, however, FICO should rescind its 400% price hike and scale it back to something that resembles its true inflationary costs.
Consumer protection is not just about pricing policies but also about safeguarding borrowers from abusive practices. So, another right should be the option for consumers to say no to trigger lead solicitations. Too often, when a loan originator pulls a credit report on a mortgage application, the borrower is immediately inundated with an avalanche of intrusive texts, emails and phone calls.
There are powerful financial forces that will fight any effort to end or limit trigger lead solicitations. A simple solution would be to create a credit-reporting portal so that consumers can be given the power at the time of the loan application to decide whether or not they want to receive trigger lead solicitations.
Another non-price-based consumer protection deals with so-called “dual compensation,” in which an individual acts as both the agent on the purchase or sale of a home and as the loan originator on the purchase mortgage for that home. Reasonable people disagree on whether this is a good or bad idea, but no one should disagree on basic protections for consumers.
Consumers should have three basic protections in regard to this practice. First, an individual representing the property seller should not simultaneously serve as the loan originator for the buyer. Second, there should be uniform nationwide disclosures. Third, a loan originator who also makes money from the real estate transaction should be licensed.
In fact, this licensing requirement should be universal for all registered mortgage originators. The CFPB should use its authority under the Dodd-Frank Act requirement that all loan originators must be “qualified.” This would close the loophole under which bank-based originators do not have to pass the Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act test, pass an independent background check or complete eight hours of continuing education each year.
Uniformity of rules should also apply to the loan originator compensation requirements under the Truth in Lending Act. This rule prohibits originator compensation to vary from borrower to borrower, but independent brokers can evade it by using different channels to charge different fees to similar borrowers who utilize the same type of loan. This loophole should be closed or enforced as appropriate.
Finally — and yes, this may not technically be a consumer protection — but borrowers should have the right to have their mortgage insurance premiums canceled when their loan-to-value ratio reaches 78%.
This right actually exists in the 1998 Homeowner Protection Act statute, but not for loans through the Federal Housing Administration (FHA). The agency used to adhere to this, but in 2013 it changed the policy and the FHA now charges premiums for the life of the loan (unless the borrower made a downpayment of at least 10%).
Ten years ago, this might have made sense as a temporary step to help the FHA build up capital after the 2008 housing crisis. But the FHA is now flush with capital, and with today’s skyrocketing mortgage rates, the exit option to refinance with Fannie Mae or Freddie Mac has closed for many homeowners. ●