Lending oversight overdue for reform

To give a $16 haircut in Maryland, one must take a year or more of classes and pass a rigorous test on the theory and practice of barbering. To originate a $500,000 mortgage, you take a class for a week or two.

Now that toxic mortgages have helped push nearly 16,000 Maryland homes into foreclosure proceedings over the past 12 months, the Maryland legislature has to know that things must radically change. Even mortgage lenders are embarrassed by what has happened and mortgage brokers - middlemen for third-party lenders - talk about reform.


But some are fighting proposed standards ensuring mortgage agents exhibit the highest level of care. Given the abuses of the past three years and the way housing finance has changed, let's make sure the General Assembly insists on the jumbo, non-adjustable, strictest mortgage reform plan.

"We need to have meaningful barriers to entry so that the public can be assured that when someone calls them to offer brokerage service they're actually qualified to do the work," says Thomas E. Perez, secretary of the Department of Labor, Licensing and Regulation.


Stockbrokers and insurance agents already go through scrubbing to assure competence and attention to the interests of the client. Similar standards, says Perez, "should apply for the people who are involved in the most important financial transaction that people will enter into in their lives" - a home loan.

Home mortgages have been around for a century. How did we get to the 2000s before realizing mortgage "originators" need to be watched carefully?

It has to do with the changing business. Your father or grandfather probably got mortgages from the local savings and loan, which kept the note and clipped the coupons. The institution policed itself because it wanted to get paid back.

These days mortgage originators usually immediately sell the loan, pocket a finder's profit and forget about it. If the homeowner can't handle the deal, it's not their problem. Even banks and thrifts resell loans, but at least they're covered by state and federal banking regulations that require a certain amount of care.

The cowboys were the mortgage brokers, who handle most Maryland home loans and who by definition have a fleeting relationship with the borrower.

Brokers had huge incentives to issue loans people couldn't afford, bury bombs in the fine print and pretty much set the housing-bubble dial on Bazooka Joe.

Of course, borrowers are much to blame, too. For every unsophisticated homebuyer who genuinely didn't understand his/her interest rate could hit 12 percent, many knew the risks but were blinded by the soaring entry arcade and Jacuzzi bathtub and figured (incorrectly) they could refinance when the loan reset.

But one role of government (sorry, libertarians!) is to protect consumers from their worst mistakes.


The main problem isn't that brokers understood their business too little. They understood it too well. They knew that the bigger the loan and the higher the rate, the more they could make on deals that paid up to 8 percent of principal and bonuses on rate spreads.

Suckers who bought loans knew there was some risk but incorrectly believed they could hedge against it.

That's why the most important part of mortgage reform is aligning the interests of mortgage originators with those of the customer and lender.

Companies know this. The Maryland Association of Mortgage Brokers pushed for minimal qualification standards (40 hours of classes, background check) that took effect in January.

The association supports recommendations made last week by a state task force, which Perez co-chaired, to require loans be suitable and produce "tangible net benefit" for borrowers.

"From Wall Street on down, everybody was a little aggressive," says association director Thomas Shaner. "Everybody was a little greedy. And now we're paying for it."


But the task force stopped short. Minnesota just imposed a fiduciary duty on mortgage brokers, a strict obligation of faith and loyalty requiring them to treat customers' interests as their own.

That should be Maryland's aspiration, despite brokers' opposition and the task force's lack of endorsement. (A fiduciary standard would make it too easy for customers to sue frivolously, say brokers.)

Brokers will be in the middle of the rescue package announced yesterday by President Bush, refinancing toxic loans and profiting from their own mess.

They've already given us enough bad haircuts. Let's make sure we can trust them as much as the guys with scissors and razors.