Impact of financial reform on mortgages

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Last summer, I wrote a column about the potentially devastating impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (also referred to as the financial industry reform act) on community banks. This act is the most comprehensive overhaul of the financial services industry since the Great Depression.

It has now been a year since the passage of Dodd-Frank, and the unpleasant surprises just keep on coming. The latest will have a negative impact on homebuyers seeking mortgages, according to Steve Beecham, the president of Home Town Mortgage in downtown Alpharetta.

“It will result in less flexibility and higher mortgage prices for many homebuyers,” says Beecham.

Here’s why: Starting on April 1, loan originators and mortgage brokers can no longer receive compensation incentives based on mortgage pricing; or in other words, based on the APR or loan origination fees. Instead, compensation must be based either on a fixed percentage of the loan amount or a flat dollar amount per loan.

“This provision stems from the sub-prime mortgage collapse and the fact that many mortgage brokers made higher commissions based on higher loan pricing,” says Beecham. For example, if a homebuyer paid a higher-than-market rate or higher closing costs on a mortgage, the broker could receive additional compensation based on this higher amount.

Sounds reasonable enough. But as Beecham explains, this takes away the flexibility that owners of mortgage firms (like Home Town Mortgage) have to adjust the compensation they pay to their brokers based on the size of the loan. And this limits the types of mortgages brokers can offer customers, as well as how much they can charge.

“I’ve had to set my loan pricing within the range of the majority of home loans, which is $150,000-$400,000,” says Beecham. “If a customer wants a mortgage smaller than this, my price may be too high, and if he wants one bigger than this, it may be too low for my broker to spend time on.”

The bottom line: Many mortgage brokers will be less inclined to work on smaller mortgages, because they won’t be able to charge enough, and larger mortgages will be more expensive for homebuyers. “It will be harder for mortgage brokerage firms like mine to take care of our customers,” notes Beecham.

Add in the fact that as many as three out of every four mortgage brokers in Georgia has gone out of business since the financial crisis began, on top of all the bank failures in Georgia, and the mortgage options for homebuyers will diminish while the costs go up.

“In just a few short years, the mortgage industry has gone from one that was extremely competitive and able to do business based on supply and demand to one that is heavily regulated by the government,” says Beecham. “Unfortunately, the result will be higher prices and less choice for homebuyers.”

Brian Patton, CCIM, is a commercial real estate broker, author and instructor. He can be reached at 770-634-4848 or via his website at www.CommercialPropertyGuy.com.