Dodd Frank is here. I get bulletins from the Consumer Financial Protection Bureau at least three times a week touting who they and the Dept of Justice have filed cases. These cases have ranged from servicers to payday loan companies, to mortgage companies. The director, Richard Corday, appear to be very ambitious and want to make his presence known. I believe he would like nothing better than to get an unscrupulous real estate investor under his belt. Below was his address to a field office in Phoenix. Make note he is addressing legal aid and housing counselors. The point being that the system has its "feelers" out for infractions in the Dodd Frank bill. If you are going to use seller financing as an exit strategy, I strongly suggest you dot your "Is" and cross your "ts". Do not get caught in the avalanche. Below are Director Cordray's remarks.



Prepared Remarks of Richard Cordray Director of the Consumer Financial Protection Bureau
Phoenix Field Hearing
Phoenix, Arizona January 10, 2014

Housing counselors, legal aid attorneys, Attorney General Tom Horne, and Superintendent Kingry - let me extend a warm thank you for joining us today.

When people are making decisions about buying a home, they deserve the best possible guidance.  Housing counselors and legal aid lawyers provide that sort of impartial advice, and you also offer much-needed help with rental and credit issues.  But you also have been invaluable advisors to many homeowners in trouble.  In fact, you are, to my mind, the unsung heroes of the foreclosure crisis, which would have done much greater damage to American consumers and American communities if not for your persistent service to those in need.  We all know that particular work is not finished.  You still stand in the breach to support millions of homeowners who are struggling with their mortgages and may be in imminent danger of losing their homes.  All of us at the Consumer Financial Protection Bureau salute you for this important work that you do every day.

Today, I am happy to say, is a big win for you and your clients across the country.  It is the day that our new mortgage rules go into effect and become the law of the land.

As we look back over the years before the financial crisis, we can recognize what Frank Lloyd Wright once said:  "There is nothing more uncommon than common sense."  That quotation epitomizes the heady years preceding the financial crisis of 2008.  Reason and sound judgment were absent when many banks and other mortgage businesses lent to consumers without even considering whether they could pay back the money.  The supposedly rational market had become wildly irrational.

Then, as you witnessed first-hand, it all blew up.  The collapse of the housing market destroyed jobs in every economic sector and wiped out big chunks of people's hard-earned assets in every community across the country.

Out of this mess came demands for financial reform and, among other things, the creation of the new Consumer Bureau.  Consumers want - and need - someone with the authority to stand on their side and provide reasonable safeguards against bad mortgage deals that ruin their credit, cost them their homes, and saddle them with problems that follow them throughout their lives.

While many areas of the country are now recovering and the economy is growing again, we must not forget those who are still struggling - your clients that you see every day.  We decided to come to Phoenix to kick off these new mortgage rules because this community knows all too well the heartaches of troubled homeownership.  One in five Arizona homeowners with a mortgage still owes more than their home is worth.  Across the country, that number is roughly one in ten.  As housing counselors, you know this means more than just having a hard time paying the bills; it also means stunted lives where people cannot move or sell their homes.  Others may be embarked on a great struggle just to keep from losing their homes because they cannot keep up with their mortgage payments.  Throughout the United States, two million households still remain at high risk of foreclosure.

These troubles did not come out of nowhere; these people were victims of a broken system, with deeply tragic consequences.  And today, we are doing something about it by taking a "back to basics" approach to mortgage lending practices.  No debt traps.  No surprises.  No runarounds.  These are bedrock concepts backed by our new common-sense rules, which take effect today.

The first back-to-basics approach addressed by our new mortgage rules is no debt traps.

For most people, their mortgage is the largest financial obligation of their lifetimes.  But it can be difficult to figure out how much house - and how much mortgage - is the right amount.  It is easy to get confused by the intricacies of taxes, escrows, interest rates, private mortgage insurance, changing monthly payments, and various fees.  So most people rely on the professionals to tell them how it all works.  And they assume that the lender will not lend them money unless the lender is confident they will be able to repay the loan.  They believe this all means they are positioned to make a responsible decision they can live with for decades, not be lured into something that will bring them financial ruin.

In the lead-up to the crisis, though, some mortgage businesses stopped their inquiries well short of the kind of due diligence needed to lend money responsibly.  Some joined their customers to engage in wishful thinking.  Some tricked people into believing they could afford loans they could not.  Some actually falsified the numbers to make them look like they would work.  Certainly some consumers should have known better and made very bad choices.  But too many others did not even recognize the risks they had taken on until it was too late.

You were on the front lines.  We are all now familiar with "low doc" and exotic mortgages.  We know people took out loans they could not afford, or could only keep up with for the first year or two.  We know people signed onto complicated terms with no real comprehension of how the transaction worked.  We know loan originators got kickbacks for putting families in higher-cost loans than they actually qualified for.

Our new mortgage rules will not allow such practices.  Our Loan Originator Compensation rule restricts certain practices that created financial incentives for pushing people into loans with higher interest rates than they actually qualified for based on their creditworthiness.  And under our Ability-to-Repay rule (also known as the Qualified Mortgage or QM rule), lenders must now make a reasonable, good-faith determination that the consumer can actually afford the mortgage before they make the loan.  Now, obviously, mortgage lenders do not have a crystal ball:  they cannot predict if someone will lose a job or have an unexpected financial emergency.  But they must look at a consumer's income or assets, and at their debt, and must weigh them against the monthly payments over the long term - not just a teaser rate period.  Lenders then can offer any kind of mortgage they reasonably believe the borrower can afford to pay back.  This is, in fact, the very foundation of responsible lending - lending money based on a reasonable determination that you will get paid back.

Our second back-to-basics approach affects the mortgage servicing market, which performed so poorly in recent years.  As housing counselors, you know how important mortgage servicers are to homeowners.  They bear responsibility for managing the loans.  They collect and apply payments to loans.  They can work out modifications to the terms of a loan.  And they handle the difficult foreclosure process.  Because of all the things servicers do and the immense size of the $10 trillion mortgage market, their effects on borrowers and communities can be profound.

New rules are all the more necessary because of the basic structure of mortgage servicing.  For the consumer, this relationship often is not a matter of voluntary choice.  After a borrower chooses a lender and takes on a mortgage, the responsibility for managing that loan can be transferred to another servicer without any say-so from the borrower.  So if consumers are dissatisfied with their servicer, they have no opportunity to protect themselves by switching over to another provider.

The fundamental disconnect between servicers and consumers was starkly revealed during the financial crisis.  When the tsunami of delinquencies hit, you saw how problems worsened exponentially for homeowners.  Servicers were unprepared to work with borrowers who needed help to deal with their individual problems.  People did not get the support they needed, such as timely and accurate information about their options for saving their homes.  Servicers failed to answer phone calls, routinely lost paperwork, and mishandled accounts.  Consumers missed out on much-needed help due to the indifference or incompetence of their mortgage servicers.

Communication and coordination were so poor that many consumers thought they were on their way to a solution, only to find their homes being foreclosed upon.  Sometimes people arrived home to find they had been unexpectedly locked out.  Sometimes people found themselves stuck in a nightmare of lost paperwork even as the clock ticked on toward foreclosure. I am sure many in this room have had clients who dealt with similar nightmares.

To fix this broken system, the central principles of our mortgage servicing rules are no surprises and no runarounds.  Simply put, consumers should not be hit with surprises by those responsible for collecting their payments.  If a consumer takes out a mortgage to buy a home, our rules require servicers to keep the homebuyer informed about their loan and to investigate and fix errors.  Consumers must be able to see how payments are credited.  They cannot be caught off-guard when interest rates adjust.  And they cannot be surprised by "forced-placed insurance," which often can be more expensive than the insurance borrowers buy on their own.  Our rules force servicers to be more transparent in this process, including advance notice and pricing information before charging consumers.

Our new rules will help borrowers know where they stand.  Consumers will not have to guess how much money they owe or when they owe it, because servicers now must send monthly statements showing how they credited the monthly payment.  The statement puts all the important information in one place, showing the interest rate, loan balance, escrow account balance, and where the payments are going.  And consumers will get ample notice when interest rates adjust.  This is valuable, practical information to guide people's choices and actions - exactly what they need.  And these requirements apply to all servicers other than the smaller ones such as community banks and credit unions, which typically avoided problems by continuing to work closely with their customers throughout the financial crisis.

To clean up the servicing market, we also are taking square aim at practices that have constantly given consumers the runaround.  Our rules require mortgage servicers to treat consumers fairly - when things are going well and also when people get into trouble.  It is time to put the "service" back into mortgage servicing.  So starting today, our new rules require some very basic things.  For example, if you report errors on your bill or account, the servicer must investigate and fix any mistakes.

For consumers in trouble, getting the runaround is not just frustrating, but it can be disastrous.  They need good information and actual help.  Our rules require mortgage servicers to let consumers know about available options to save a home or to work out a problem in making payments.

Once borrowers become delinquent, servicers must give them instructions on how to obtain more information and begin a process that is intended to determine whether their homes can be saved.  Servicers have to provide regular and dependable assistance when consumers call for help.  No more endless phone trees or dealing with people who lack access to the relevant information.

We are also restricting "dual tracking" by barring servicers from starting foreclosure proceedings until the borrower has been delinquent for at least 120 days.  If the borrower submits a completed application for loss mitigation, no foreclosure sale can occur until all other available options have been considered.  These options can range from deferring payments to modifying loans or even a short sale, among other things.  And servicers cannot foreclose on a property once a loss mitigation agreement has been reached, unless the borrower fails to perform under that agreement.  We expect these simple protections to help prevent needless foreclosures, which is best for borrowers, lenders, and our entire economy.

These measures can often determine whether people save or lose their homes.  That is not just an economic matter.  For many, their home is the only safe place in their lives, the fundamental constant in their family relationships, and a key symbol of their progress in climbing the ladder to success in life.  Those deep emotional attachments show just how much is at stake here.

I would like to take a moment to correct an erroneous myth that these new measures will bog people down in red tape.  On the contrary, these measures are not new at all.  They are exactly what good community banks and credit unions have been doing for many, many years.  They amount to little more than taking the time to work directly with customers to address their personal circumstances.  In short, our rules mean simply that mortgage servicers must now do their jobs.

It may seem silly that we need rules to tell servicers to answer the phone; not to lose people's paperwork; to tell borrowers how much they owe.  It might also seem silly that we need a rule telling lenders they must pay attention to whether borrowers will be able to repay the money that is lent to them.  But we have lived through the financial crisis.  We have seen with our own eyes the grave dysfunctions in the mortgage market.  There was an embarrassingly long list of things that should have happened but never seemed to happen.  Our new rules are aimed at setting things right again.

We mean to end a failed process in which too many struggling homeowners have been kept in the dark about where they stand.  Too many Americans have been forced to roll this rock up the hill only to see it roll down again, repeatedly.  People deserve better; they are entitled to be treated with respect, dignity, and fairness.  Our new servicing rules will help ensure that happens.

Importantly, these new mortgage rules are now subject to federal supervision and enforcement across the entire marketplace.  It does not matter whether a loan is made by a bank or by some other kind of financial firm.  It no longer matters whether a bank or some other kind of financial firm is servicing mortgages for the mortgage owner:  the same basic rules and oversight apply.  In particular, our mortgage rules are backed by the full supervisory and enforcement authority that Congress has vested in the Consumer Bureau.  We will be vigilant about overseeing and enforcing these rules.

As we all saw in the lead-up to the financial crisis, common sense turned out to be not so common.  By bringing back the basic building blocks embodied in these rules, we will improve conditions for all Americans seeking to enter the housing market, as well as for those who are working to pay down their existing loans or struggling to stay in their homes.

Today, we are very glad to take the time to walk you through the specifics of these rules.  We urge you to help us spread the word about their benefits to your clients as well.  Work with us to help educate the public about the specific ways they can look forward to a new and better marketplace.  And if they experience problems with servicers that are not following these new rules, please let them know that anyone is welcome to file a consumer complaint - on mortgage issues or on many other consumer financial issues - at our website, consumerfinance.gov.  For those of you here today, if you have any further questions about the issues we will be covering, please go to consumerfinance.gov/mortgage to find out more.

It is a great partnership for our new agency to be working with housing counselors and legal aid attorneys across the country.  You have made, and continue to make, a crucial difference in many people's lives.  When I served in state office in Ohio, we were hit by the first waves of the foreclosure crisis.  We struggled to understand the issues, and we worked and worked to help people save their homes.  Again and again, we found that nobody did that as well as HUD-approved housing counselors. 

Today is an important day because the Consumer Financial Protection Bureau is providing you with the kind of support you needed and deserved all along.  Together, we can find renewed hope in what lies ahead.  Our mutual goal is sustainable homeownership based on responsible lending and excellent customer service.  Common sense, after all, serves the common good. Thank you.

If you have questions or comments, please CONTACT ME. Remember, I pay for referrals if you know of someone who has a note to sell.

Copyright © H&P Capital Investments LLC
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Tom Henderson
a.k.a. THE NOTE PROFESSOR

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Several of you have asked me to comment on the national debt and debt ceiling. However, before we can discuss the national debt, we must first understand the true nature of debt, as well as dispel misconceptions of loans and debt. The major misconception that must be dismissed is we tend to think of loans and debt in terms of currency or money, rather than production. I can think of no better example of discussing loans and debt and dispelling this misconception than seller financing.

Remember that currency, which in this article I will equate with money, represents production. Money is merely a medium of exchange; it is not production. With this in mind, let's take selling a house as great example of debt, and then apply these concepts to government debt.

Assume Sam and Sally Seller want to sell their home for $100,000. It is important to note here that Sam and Sally do not actually want to "sell" their home, but rather trade it for other goods and/or services they desire more than their home for whatever reason. You wish to own Sam and Sally's house. Since you do not have $100,000 for the purchase, you ask them to take back a note. In reality you are asking Sam and Sally to loan you their home in exchange for payments in money. Sam and Sally decline your offer because the goods and/or services they desire require more money than your monthly installments, or maybe they just do not trust you. In other words Sam and Sally refuse to lend you their house. Seller financing makes it very easy to see that you are borrowing the house from Sam and Sally.

Not to be denied, you go to your local bank and ask for a $100,000 loan to purchase Sam and Sally's house. The bank agrees. Sam and Sally get their $100,000 to purchase other goods and services and you get their house. Many believe you directly "purchased" the house. However, in effect you did not purchase the house. The bank purchased the house, and then lent it to you. In other words you did not borrow $100,000. You borrowed a house from the bank. You will pay back the bank in money, but remember money is only a medium of exchange. The money you use to pay the bank back was acquired in exchange for goods and/or services you produced.

It is worth mentioning the money the bank used to purchase the house is actually goods and services its depositors converted to dollars before placing the dollars in the bank. In other words the dollars the banks have in their vault represents the total goods and services that its depositors have converted to dollars. (Fractional reserve banking and the Federal Reserve play a large part in banking, but this will be a topic for another issue.)

Are you getting the picture that all transactions are the exchange of production, whether you are purchasing a house for cash or taking on debt.

The same holds true for all debt. Nobody borrows money for the sake of having money. When we borrow money, we are actually borrowing the goods and services money can buy, not the money itself. Money merely facilitates the exchange of goods and services. If you borrow $20,000 to purchase a car, you have in essence borrowed the car, not $20,000. Likewise, in reality, the bank did not lend you $20,000, but rather the bank lent you a car. Although you will pay the bank back in dollars, keep in mind you acquired those dollars because of your production of goods and services. The same holds true when you use your bank credit card to "purchase" a sweater. The bank lent you the sweater, which you will pay with your future production of goods and services. I want to emphasize again; all transactions are actually exchanges of goods and services; in other words an exchange of production. Money is merely the medium of exchange, no matter if you purchase the product or borrow money to purchase the product.

Let's apply this concept to government debt. Just as with an individual or business entity, when the government borrows, it is actually borrowing goods and services. The borrowed money will be converted to such things as salaries, subsidies, foreign aid, supplies, rent, and bridges to nowhere, etc. Since the government produces nothing, but only consumes, how does the government repay its debt? The short answer is taxation. (Government Borrowing is a form of taxation, it is just hidden) But remember, when we pay our taxes in dollars, these dollars represent our production of goods and services. A point to ponder is all government borrowing depletes resources that could have gone to productive use. More importantly, we must transfer more and more of the goods and services we produce to pay back the debt the politicians have accumulated. The pay back of government debt, as with any individual loan, is paid back by future production.

Now the double whammy. To hide the effects of government spending and wealth redistribution programs, instead of direct taxation to pay back government's debt, the politicians have figured out they can borrow more money and not directly tax its citizens. Now the spiral begins.

Remember, government debt is backed only by the ability to tax the future production of its citizens. The debt has reached a point where consumption of goods and services by government exceeds the ability of producers to produce. The printing of dollars to pay off debt is not the same as production, which is another avenue these politicians seem to favor. But in the end, it will be fruitless because consumption cannot exceed production.

Summary: When we borrow "money", we are actually borrowing a product, not pieces of paper. Just as seller financing demonstrates it is the house that is being borrowed, not money, the same holds true for government debt. The government borrows goods and services, not money. Just as the house payment must be repaid in the goods or services that are produced, the same holds true for government debt. Yet governments do not produce, it consumes. The "good faith and credit" of the United States is backed by the ability of its citizens to produce enough to make the government's debt payment. We have reached the point where the citizens cannot produce enough to pay back the debt. As a result, politicians will continue to raise the debt ceiling, the Federal Reserve will continue to print money in a vain attempt that some miracle will just erase the debt in the future. Politicians from both parties fail to recognize that consumption cannot exceed production. Our problem is not the debt per se, but the system that has allowed the debt to accumulate to this proportion. Acknowledging we do not have a free market system, and the system of wealth redistribution has failed MUST be the first step to solving the problem. No matter what action our politicians take for "smaller" government or pay our "fair" share, keeping the same system of economics will lead to undesired consequences of debt sprial. Why? Because CONSUMPTION CANNOT EXCEED PRODUCTION.



If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR .

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