Frank-Dodd Act will cost borrowers more money

Banks feeling squeezed by rising regulatory costs are trying to pass along the pain to big corporate borrowers.
In the past several weeks, lenders such as J.P. Morgan Chase & Co. and Bank of America Corp. have begun including in loan documents language that will help banks shift to their large borrowers additional costs triggered by the Dodd-Frank financial-overhaul law.
The changes, disclosed in securities filings by companies from insurer American International Group Inc. to refinery and convenience-store owner Western Refining Inc., reflect guidelines by a trade group of banks and loan investors called the Loan Syndications and Trading Association that might be finalized by February but already are appearing in deal documents.
Under the guidelines, likely to be followed by most banks making corporate loans, lenders can require borrowers to take a financial hit for costs resulting from the Dodd-Frank law "regardless of the date" when the cost-triggering change occurs. The clause doesn't specify whether the new costs would be passed along as a fee or added interest costs, but it says borrowers would pay the lender "such additional amount" to "compensate" that institution.
Previously, lenders generally included the "increased-cost" clause only for situations in which laws or rules changed after a loan agreement was signed. While common, such clauses rarely have been invoked.
Now, though, "banks are very concerned and want the broadest possible protections" in loan documents, said Sarah Ward, co-head of the banking group at law firm Skadden, Arps, Slate, Meagher & Flom LLP. Lenders are jittery about how the financial-overhaul law will be implemented as rules are written and the challenge of "working through the implications of these regulatory changes given the size and diversity of their loan portfolios," Ms. Ward said.
Some borrowers have resisted the new language. Endo Pharmaceutical Holdings Inc., of Chadds Ford, Pa., negotiated a clause that said its lenders, led by J.P. Morgan, are entitled to increased loan fees only if the rules are implemented after the late 2010 credit agreement, according to a person familiar with the deal.
Large and small companies are vulnerable to the language change, though some observers said it is most likely to show up in situations in which a big bank arranges a loan for a company that wasn't lucrative even before the law passed.
Still, banks that press borrowers too hard could lose them to rival financial institutions or to the bond market, which already is benefiting from the reluctance of many banks to make loans. One reason why banks traditionally have been reluctant to pass along regulatory fees to corporate borrowers is that many credit agreements allow borrowers to switch to another lender if the provision is used.
Companies that recently issued high-yield bonds to repay bank debt include Virgin Media Inc., HCA Holdings Inc., and Georgia-Pacific LLC, analysts at Goldman Sachs Group Inc. wrote in a recent report. Virgin Media has cut its bank debt to 55% of the company's total debt from about 80% four years ago.
As of November, corporate borrowing costs were up about two percentage points compared with their average from 1997 to 2007, according to analysts at Goldman.
In addition to higher potential costs for companies, the toughened loan-document provisions could slow the rebound in lending to businesses that has begun at many U.S. banks, especially those that have emerged from the financial crisis with plenty of capital and profits.
"Lenders are going to want to pass those costs through, and since entire classes of lenders are going to be impacted" by the new rules, it's more likely that some will try to use the provisions to cover their rising costs, said Elliot Ganz, general counsel at the Loan Syndications and Trading Association.
While the Dodd-Frank law, passed in July 2010, doesn't target corporate loans directly, costs of such borrowing could increase as a result of a provision requiring packagers of corporate-loan products to retain the risk of what they are selling to other investors, Mr. Ganz said. International capital rules being implemented in the U.S. by the Federal Reserve and other regulators also likely will lead to higher costs.
Some corporate borrowers haven't balked at the new language. In a recent bridge-loan commitment to help fund an acquisition, real-estate investment trust HCP Inc. agreed to the provision with a group of banks, including Citigroup Inc. and UBS AG, because the Long Beach, Calif., company didn't intend to use the loan commitment and because the rest of the increased-cost language was kept the same as a past credit agreement, a person involved with the deal said.


Source: Aaron Lucchetti, Wall Street Journal

2010 - The year of change in the mortgage industry.

"What doesn't kill you will only make you stronger". That sums up 2010, as it relates to the mortgage industry.

Regulatory changes have:

severely affected the appaisers livelihood. Those who chosen to stay in the industry, have taken a 25% pay cut thanks to appraisal management companies. I am all on board with appraisal assignments being selected at random, but you have to feel badly for anyone who takes that kind of pay cut.

taken a one page good faith estimate that was easily understood and turned it into a 3 page GFE that is so confusing it takes another form to explain to the customer how much money they will need to close and how much the monthly payment will be.

Truth-in-lending reform act: requires lenders to re-disclose after any change a customer makes on their loan that affects the APR by more than .125% and requires them to wait 3 business days before they can close. How does this affect you? Suppose you decide you need to raise your loan amount, and you do not discover the need until the day before you are scheduled to close. Guess what? It probably means you will need to re-schedule your closing because the change will likely change your APR, requiring a 3 business day delay. Can't come in to sign the new TIL and need it mailed to you? Sorry, 6 business day delay.

I know the intent "to protect consumers" is there, but mortgage lenders are not the bad guys the regulators make us out to be. After all, we are not the ones who created the mortgage products that caused the mortgage meltdown, nor did we rate the securities, or sell them on Wall Street.

Unfortunately, the fallout of this is a higher charge to the consumer, the same consumer our government is trying to protect.

Let's hope 2011 brings a little more common sense as it relates to regulatory issues.

Mortgage Helpful Hints

Helpful Hints

MORTGAGE MISTAKES AND SOLUTIONS

You can borrow too much or prepare too little. You can misjudge terms or overestimate your credit. With so much at stake, it's no wonder so much can go wrong.

Applying for a mortgage can be a daunting experience. It's not enough that you're agreeing to take on the biggest debt of your life, one that represents two to three times your annual income. You're also confronted with piles of paperwork, flurries of fees and a tidal wave of terms, from amortization to title insurance, whose meaning is fuzzy at best.

Most people don't understand the loan process. In this confusing and pressure-filled atmosphere, it's easy to make some mistakes. Here are some common ones that lenders and mortgage brokers see, and what you can do to prevent them.

Not fixing your credit

Mortgage brokers say they're confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.

Before you even think about applying for a mortgage, obtain copies of your credit report and your credit score. Your credit score is the three-digit number that's used in 75% of mortgage-lending decisions. You can order your credit score from your local mortgage provider or directly from Trans Union www.transunion.com, Equifax www.equifax.com, or Experian www.experian.com.

Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they're removed by the time you're ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.

Not getting pre-approved for a loan

Many first-time borrowers confuse being "pre-qualified" with being "pre-approved." Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment.

Getting pre-approval, by contrast, is a much more rigorous process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan.In a hot or even warm real estate market, the house hunter who is only pre-qualified is not as appealing as one who is pre-approved. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.

Borrowing too much money

Many people take out the biggest loan they possibly can, figuring that their incomes will eventually increase enough to make the payments comfortable. But few first-time buyers have any clear idea of how expensive homeownership can be. Not only will you shell out more for mortgage payments than you probably did for rent, but you'll also need to cover property taxes and homeowners insurance, as well as higher bills for utilities, maintenance and repairs than you faced as a renter.

Lenders are perfectly willing to let you overextend, knowing that you'll probably forgo vacations, retirement savings and new clothes for the kids rather than default on your mortgage.

People tend to overbuy and that can really stress family life. It's also a formula for foreclosure.Instead of going to the edge of affordability, consider limiting your housing costs -- mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That's a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.

Not shopping around for rates and terms

If the borrower doesn't know what the prevailing interest rates are for someone with their credit standing they can easily pay thousands of dollars more than they need to. You can see a listing of loan rates by credit score at www.myfico.com.

Even people with a few dings on their credit can often qualify for better loans than they're typically offered. Most of the people being shunted into government loan programs, such as Federal Housing Administration (FHA) loans, would pay less if they used mortgages now being offered by private-sector lenders.

Customers

"It is well worth remembering that the customer is the most important factor in any business. If you don't think so, try to get along without him for a while". Napoleon Hill

I know my posts have been few and far between lately, but this is a quote that spurred me to share it.

Fortunately, I have been too busy to take time to write any articles. I realize that meeting my customer's needs is the most important aspect in my business. While I love to educate on the numerous changes in our industry, I can not lose site of the most important person in my job ... the Customer.

Augusta, The Stable Real Estate Market

In a recent report in Business Week, Augusta, GA is ranked as the 21st best markets in the United States, in regards to the stability of the real estate market.

"Augusta is a hub for military, manufacturing, and medicine. It is also home to the Masters Golf Tournament held in April. The city's educational institutions include Augusta State University, Augusta Technical College, Georgia Military College-Augusta, and the Medical College of Georgia".

Despite all the gloom and doom we read about in the national news, Augusta is a great place to own a home.

My closing will take how long?

Interesting article about the lenght of time it is taking to process and close mortgage loans.

While it's true we are required to do more behind the scene processing, we are a local community bank with local processing, local underwriting, and local closing.

What that means to you: Faster closings.

$8,000 Tax Credit

A lot of questions have arisen about HUD's approval of the $8,000 tax credit being approved for use PRIOR to closing; i.e., as a source of down payment. Here's an article from http://www.fhaloanpros.com/


FHA Deals With No Money Down To Be Rare
Posted: 15 Jun 2009 12:27 AM PDT

A lot has been made of the $8,000 tax credit and how it can be combined with FHA financing to buy a home with nothing down.

If you would dearly like such an arrangement to be widely available, that just isn’t the case today and won’t be the case tomorrow.

To understand why, you have to look at several realities.

First, the FHA is insistent that homebuyers purchase with 3.5 percent down, money which must come from either their own pocket or in the form of a gift.

Second, you can only use the tax credit for a downpayment when the money is advanced to you by a state housing agency or an approved nonprofit. Otherwise the tax credit will go into your bank account sometime after your purchase.So to buy with FHA financing and no money down several things have to happen. You have to be able to get a “bridge” loan from an approved third-party — that state housing agency or approved nonprofit — AND you can’t borrow more than $228,571.42.

Call me for ideas on how to make this work for you.