The Loan Mod Industry is Dead?

As the as the financial train wreck from the housing crash keeps rumbling down the track across California, state lawmakers sent several bills that crack down on mortgage fraud to Gov. Arnold
Schwarzenegger's desk which effectively kill the loan modification industry.

Recently California legislature jointly passed bills to ban loan modification companies from asking for upfront fees and make mortgage brokers put their customers' financial needs ahead of their own
commissions. The Bills also propose to limit the size of pre-payment penalties and would add California to the list of states that allow prosecutors to file specific felony charges for those accused of mortgage fraud.

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One of the Bills most sweeping mortgage reform bills this year, Assembly Bill 260, bans so-called subprime "negative amortization" loans where the principal balance grows even as the borrower makes payments. It also prevents mortgage brokers from collecting upfront fees prior to funding a loan for originating subprime loans and those with pre-payment penalties. The bill also limits the size of pre-payment penalties for
borrowers who pay off their loans early.

Lastly, it requires that mortgage brokers have a higher degree of duty to borrowers - that is, they must place the "economic interest of the borrower ahead of the broker's own economic interest" when making loans. Skilled Brokers already do this, of course. And that provision is especially opposed by the California
Association of Mortgage Brokers. Fred Arnold, a Santa Clarita-area broker and the group's past president, said the bill's definition of fiduciary duty is vague and an invitation to "frivolous lawsuits."

These bills were signed into law as California continues to ponder what to do in the wake of more than 410,000 foreclosures since the start of 2007, the aftermath of predatory lending practices and greedy brokers. It's also a time of high unemployment in the state and a devastated real estate and lending economy.

During the housing boom, mortgage brokers could earn fees of $20,000 or more for making risky subprime adjustable-rate loans, often to unsuspecting A contrary view would be the borrowers knew what they were
doing and decided to roll the dice in a surging market. many unqualified buyers got into homes they knew they could not afford but decided to engage in speculation in hopes that the anticipated record appreciation
in value would continue.

Among groups backing changes in mortgage practices is the California District Attorneys Association, which is pushing for new felony penalties for mortgage fraud. A bill now before the governor, Senate Bill 239, would create a specific category of felony mortgage fraud, which the DA's group hails as chief causes
California real estate market and the related crises in the financial sectors." Sacramento is ranked seventh among U.S. metropolitan areas in reporting mortgage fraud complaints to the FBI.

These bills were signed into law on October 30, 2009. While there is an interest in curbing abusive lending practices, there does not appear to be any discussion of the borrowers responsibility to become educated and knowledgeable about their own finances. There was also no discussion of effects of Governmental pressure to promote those programs, such as the Community Reinvestment Act. In fact, anyone who has read Thomas Sowell's book "The Housing Boom and Bust" can understand how government deregulation of the banks and over-regulating requiring funds to make "affordable housing" available, actually created the bust. Further, there should be some discussion of the effect of banning up front fees which will tend to chill assistance to borrowers trying to run the gauntlet of lenders ad hoc loan mod programs. Instead of banning upfront fees, the DRE might consider expanding those programs to put out of work real estate professionals back to work and providing a positive stimulus to the economy. Not many load mod people are going to be able, or willing to work to help borrowers unless they can charge something up front. Anyone dealing in the load mod arena has found that the process can be extremely tedious and can last from 3 to 6 months or more for approval. Any loan mod processor would be hard pressed to fund those efforts for that length of time.

While much of the commentary seems to focus on finding fault with the lending industry, it leads one to believe that all borrowers in trouble were just unwitting victims. This simply is not the case. There were two parties to the transaction, a willing buyer and a willing lender. It's time that people woke up and realized that it worked on both sides of the deal. Personal gain and profit were the motivators for both parties, not in long term thinking about cost or value.

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