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Friday, December 21, 2007

Illinois High Cost and My Favorite Reagan Quote

My business, mortgages, is frankly hard enough without government interference. Between a plethora of rules and regulations created by the banks themselves and irrational borrowers, sellers, realtors and attorneys, I sometimes wonder how loans get closed at all, EVER. That's why what happened to my protege and his dealings with the Illinois high cost law was simply beyond the pale.My protege is young mortgage broker, just out of college, that I have taken under my wing and trained. Over the last month and a half he has been carrying a very tough deal. It involves a marginal borrower trying to by a two unit property for investment purposes while that borrower puts down what the bank considers a minimal down payment. These factors together created a difficult loan and as a result it took my protege about a month and a half to complete it. He carried the loan all the way till its conclusion only to have a misquided Illinois law along with bank incompetence cut his legs out at its conclusion.

Illinois high cost, an Illinois law that arbitrariy sets a ceiling upon the annual percentage rate that any first mortgage can have at just under 11%. Some of you maybe reading this and immediately say that 11% is plenty and no loan should charge higher or the broker is simply being greedy. Those that are would actually be wrong. The rate someone is charged on their mortgage is much more determined by their credit profile than by the overwhelming greed or lack thereof of their broker.In other words, someone with excellent credit willing to put down 20% minimum on a home is going to have a much better rate than someone willing to put down nothing, with marginal credit on a four unit property. In fact, those factors are much more relevant than any greed or lack thereof on the part of their broker or banker.

I say this so that no one thinks that my protege got himself in trouble because they were looking to rip off their client. He wasn't. The rate from the beginning was near eleven percent. It never changed. The borrower knew it, understood it, and signed all of the necessary documents agreeing to it.

The term Clear to Close is an industry term indicating what all of you should infer. This is the last step before closing. This is the step that my protege got the loan to before Illinois High cost took over. The loan was sent to the closing department only to have the closing department determine at the end that the loan in its current form was ILLEGAL. In other words, the closing department determined that the loan exceeded Illinois high cost regulations. Yes, despite carrying it through the process, signing all the necessary documents, and most importantly having complete borrower approval, the rate on this loan was too high. Not too high for the borrower mind you, but rather for some bureaucrat in Springfield, Illinois.

The bank of course was not immune for criticism. The rate on this loan was the same at the end as it was in the beginning. Only an incompetent or cruel bank could possibly allow for such a determination to be made in the end rather than in the beginning. The situation is complicated by the fact that this loan is an adjustable rate mortgage meaning its rate was only fixed for the beginning of the process. As a result when the bank determines the APR, they ACTUALLY allow a software system to project future rates and let that play a determination in the APR.

To say that my protege was confused, frustrated, and angry would be an obvious understatement. Insult to injury was added when the bank finally figured out a way to do the loan. There was only one catch. The loan could only be done as long as my protege made absolutely nothing on it. As I was discussing further strategy, I couldn't resist throwing out partisan political rantings. I reminded my protege that such laws as Illinois High Cost, those that replace market principles with the musings of bureaucrats, are those normally associated with Democrats. He responded, "those damn Democrats". I don't think he really meant it, however he got a first hand lesson in what happens when big brother steps in and replaces the judgement of the market and profession itself with its own judgement.

I thought of this when I started again thinking of my favorite Ronald Reagan quote, "the nine most dangerous words in the English language are 'I'm from the government and I'm here to help'". This law was designed to protect the borrower from predatory lending, however this particular borrower didn't need protection. They knew their situation and they were willing to accept the loan they got because it was the only one they qualified for. While some bureaucrat may have thought that the rate on this loan was higher than acceptable, the borrower, the one this bureaucrat thought needed protection, was perfectly happy to take it. Someone who had real compasssion for the little guy or maybe just wanted us to think they did created this law. They created this law to protect the individual from unscrupulous brokers.

What they didn't understand, what they never understood, is that mortgages work on logic. Borrowers get the loan they deserve. This borrower got the loan he deserved, or he would have if the government hadn't stepped in to protect him from himself appararently. Those words continued to filter in my mind, "the nine most terrifying words in the English language are, 'I'm from the government and I'm here to help'".

I thought of this quote when I thought of universal health care. Some other similar politician once again has real compassion or would like us to think they do when they promise "free" health care for all. Just as they protected the borrower right out of a loan that they wanted and frankly needed so to will they deliver free health care for all. Does anyone really think that government can get health care right anymore then they got this Illinois High Cost law? Beware folks when the government steps in, and they substitute the judgement of the market or the industry with their own. One day you too will be on the other side of your own Illinois High Cost Law.

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