As this article is written Congress is currently debating the merits of wholesale changes to the mortgage market. These changes include requiring additional licensing for mortgage brokers, requiring additional consumer disclosure, and providing much needed assistance for current borrowers being foreclosed upon. These sweeping changes sound like the calvary has finally arrived, but Congress is no knight in shining armor. The potential changes currently being proposed by Congress could have significant negative fallout.
The idea that all mortgage professionals should be licensed is probably one of the best ideas being bantered around Congress currently. This provides two important checks that the industry currently lacks. First, it provides a base standard for people representing themselves as financial experts in mortgages. Currently, anyone can call themselves a mortgage broker and sell mortgages. Unfortunately any consumer who relies on the “expert” advice of a mortgage broker may actually be talking to a salesman that knows little more than they do.
Second, it provides an avenue of accountability. Licensing sets up standards which can be enforced. Similar to the SEC and securities brokers, ensuring a level of expertise must be demonstrated and maintained provides consumers with better service. Consumers should be aware, however, that this will come at a price. If the industry evolves into a more professional and more regulated entity, consumer will have to pay more to cover the additional cost of the new regulations. This may be the only change that would merit the additional cost.
Additional Consumer Disclosure
If done properly this could have a positive effect on the mortgage industry. Creating documents that can be easily understood would ensure that consumers knew exactly what they were getting into. Oddly enough, if consumers read the current documents thoroughly they would know exactly what they were getting. Unfortunately, loan documents run in the hundreds of pages and take hours to read. Additionally, with the amount of legalese in mortgage contracts today, the borrower would need a college degree in economics or finance to be able to understand the finer points of resets and LIBOR.
Again, this change will be paid for by the consumer. Unfortunately this change is least likely to help them. Regardless of what the documents say, consumers look to mortgage brokers for assurance that they are getting the right product. Many subprime consumers understood the product they were getting; however, they were assured by their mortgage “expert’ that they were doing the right thing. Until Congress changes that dynamic, the mortgage industry will not change.