While it is very likely Obama violated constitutional law and surely decades long presidential and Justice Department precedent and rulings, that is a side show to the potentially severe damage he has just done to single family housing, and to the entire residential mortgage industry, from originators to servicers. There were a number of regulatory rules and implementations which the Dodd Frank law said could not be triggered until a director was confirmed. Ignore the fact that Cordray was not legally appointed and definitely not confirmed as specifically required by Dodd Frank, he is in place for now and has already triggered all of those pending rules and much worse.  Litigation to unseat him will take a very long time. His very first act was to post on the internet, that the public needs to start sending in complaints. As Ohio AG he used tort lawyers to go after banks, thereby saving funding for litigation and encouraging class actions. He intends to do the same now. Keep in mind he sets his own budget and he gets 10% of the budget of the Federal Reserve with Congress having no say at all. The bank regulators now have full authority, and are mandated, to go after non-bank financial companies.

The regulators manual now says, in so many words, go out and find “unfair and abusive practices”. In short, if you are an examiner it is your job to find something you determine is unfair. There is no working definition of unfair, so you can imagine a zealous examiner who has been instructed to go into the field and find things to pursue. That is what you are going to witness. In addition, there seems to be no clearly defined privilege for internal audit docs, internal manuals and risk procedures. Nor for your files. Cordray intends to share them with state AG’s who we know are really politicians trying to look like they are there protecting the poor, taken advantage of borrower. They will be shared with various tort lawyers. You can count on some big bank or servicer appearing in the NY Times or on CNN with confidential files showing up. Reputational risk just got ramped up way beyond what it already was.

There is now a rule that the lender must do everything it can to be certain the borrower can repay. Just checking a W-2 is apparently not sufficient anymore.   It would seem the onus is now on the lender to find out when he is being defrauded by the borrower, and if he is defrauded, it is potentially his fault for not knowing. There are a myriad of other rules coming that relate to servicing, risk management, internal audit procedures and the like. The problem is nobody knows what the rules are, or how they will be implemented, so even the best consultants and lawyers can only say –here is what is known, so do this, but they still do not know all that is coming the limits, if any of how they will be interpreted by a zealot as director who has his own political ambitions to be governor of Ohio and a president seeking reelection on a platform of, get the banks.  

Then we move on to the “qualified loan”. Meaning pristine credit, 20% down, and other very tight underwriting parameters. This type of loan relieves the lender of certain things, but how many mortgages will there be that fit this platinum criteria. Few.  And to get a loan to qualify you will have to have maybe three layers of review and internal sign off so there is no question, because you can be absolutely sure the examiners will be looking at these. It is very possible that securitization will then become only for “qualified loans”. With potentially very limited securitization there will be constrained liquidity to make more loans. Subprime securitization is likely dead for the foreseeable future.

There will be a large field force of, what has been described by very knowledgeable legal experts, as a group that are overzealous, and who believe the lenders are bad people taking unfair advantage of individual borrowers. Think hundreds of Elizabeth Warrens coming to your offices to do an examination. In case you did not know, if you are a borrower, the government knows better how to do your loan than you do- Obama and Pelosi have mandated that. With the agency encouraging borrowers to file complaints, and the tort lawyers standing by to launch class actions, and state AG’s being brought into these situations to dig deeper and find anything, and all levels of government needing revenue –spell that big fines on banks and servicers- think tobacco cases-lenders and servicers will be forced to spend inordinate amounts of money dealing with all these examiners from the feds and states. It will be even worse than it already is, extra levels of review on each loan, more than already is the case, more lawyers watching over everything, and PR people to deal with the inevitable reputation risk, which is the biggest concern.

The one area of possible relief and good news,  is if you simply modify existing defaulted loans, you are free from some of this burden, and that is where the opportunity to work mortgages exists. Just do not reissue a new mortgage to replace the old one. Once you originate, you are in the potential for real risk.

There is much more that you should discuss with your lawyers, and the NY and Washington lawyers and accountants who have been deeply into this whole subject and are the real experts. The result of the Cordray appointment and the populist campaign 2012 –get the lenders philosophy of Obama- is that it will be much harder now for anyone to get any mortgage. Why would you originate unless you have a massive department filled with lawyers, triple levels of underwriters and other people, and very expensive training and monitoring procedures. The cost burden will be excessive. In the end, homeowners will have an even harder time selling, qualified buyers will be stymied, homebuilders will find it harder to move product, and lenders will be saddled with unending audits, threats, lawsuits, fines and bad PR. Mortgages will be more expensive for borrowers than they should be. The economy will suffer, jobs will suffer, less people will be able to sell their homes to go find a new job in another area. The housing recovery will be delayed.

The Cordray appointment was legally disgraceful, but it is far worse for the industry and the economy.  The business media and the Republicans need to get on top of this quickly and loudly. This is a disaster for not just the industry, but also for the individual homeowner and borrower.