The government’s oldest housing program has a new twist: Borrowers now can add the cost of replacing worn-out appliances, leaky windows or squeaky floors to their mortgages without a lot of fuss or muss, at least financially.

Under a sleeker, quicker version of the Federal Housing Administration’s 203(k) renovation-loan program, buyers of otherwise solid houses can roll the cost of these and other repairs into a government-insured mortgage, eliminating the need for a more expensive second mortgage or of digging deeper into pocketbooks.

While the loan program is designed primarily to move fixer-uppers into the hands of new and credit-worthy owners, it also can be used to refinance an existing loan to pay for fixing up a place, as long as the borrower does not extract any equity from the property.

Last week, rates ended higher than where they began.  The negative movement in rates began Monday due primarily to the continuing movement of foreign investment money out of the U.S. towards higher returns in Europe.  This trend coupled with the possibility of higher inflationary pressures doesn’t look good for rates in the short term. 

As we explained last week, the trend towards moving investment money out of the U.S. for the possibility of higher rates in Europe continued last week.  The most telling sign of this trend was last week’s Treasury auction. Typically, foreign investor’s appetite for our bonds usually consumes about 50% or more during a typical Treasury auction.  At last week’s auction however only a mere 5.5% was bought by foreign investors.  If this trend continues, it means big trouble for rates. 

As if the lack of foreign investment wasn’t trouble enough for rates, on Friday hidden in the Jobs Report, Hourly Earnings rose by 5 cents in February.  Although a nickel might not seem significant, it actually is quite significant.  This average nickel raise might just be enough to fuel the classic “wage-price spiral.”

Of course the wage -price spiral is inflationary by nature and is caused when employers are forced to raise prices due to increasing salaries, which in turn causes workers to demand higher salaries to afford the goods and services they use to be able to afford.  The spiral if left unchecked, is highly inflationary.

This week’s economic calendar is loaded with inflationary indicators, the most notable being the Consumer Price Index (CPI) and the Retail Sales report.  If any of this week’s indicators hint at inflation it is highly likely that rates will continue their upward movement this week.

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Prepared Remarks of Mr. Neill Fendly, Certified Mortgage Consultant President/CEO  Mortgage Defense, Inc.  

Chairman Akin, Ranking Member Udall, I am Neill Fendly, Government Affairs Committee Chair and Past President of the National Association of Mortgage Brokers (NAMB). I appreciate the opportunity to discuss issues of vital importance to the small business community and specifically, mortgage brokers.  NAMB is the nation’s largest organization exclusively representing the interests of the mortgage brokerage industry and has more than 24,000 members and 48 state affiliates nationwide.  NAMB provides education, certification, industry representation, and publications for the mortgage broker industry. NAMB members subscribe to a strict code of ethics and a set of best business practices that promote integrity, confidentiality, and above all, the highest levels of professional service to the consumer.    Today, mortgage brokers originate more than two out of three of all residential mortgages. There are many reasons for this large market share.  Mortgage brokers are typically small businesses who operate in the communities in which they live, often in areas where traditional mortgage lenders may not have branch offices.  Many mortgage broker firms consist of one office and five employees, including the owner. Mortgage brokers provide lenders a nationwide product distribution channel that is much less expensive than traditional lender branch operations.   I.            NAMB Applauds the Department of Labor Regulations   NAMB commends the U.S. Department of Labor (DOL) for updating and clarifying its regulations regarding overtime pay for American workers.  The new regulations go a long way toward recognizing the vast changes that have occurred in the American economy over the years.  For the mortgage industry, they help clarify the status of loan officers and make the rules regarding overtime pay more consistent with actual industry practice. The new regulations update the Fair Labor Standards Act (FLSA), one of America’s first employment laws.  The FLSA established minimum wage, overtime pay, record-keeping and other employment requirements affecting full- and part-time workers, but hadn’t been updated in 50 years.  The new regulations specify a number of white-collar jobs that will be exempt from overtime pay eligibility. Significant changes have been made throughout the final rule to address concerns raised by both labor unions and employers alike.  NAMB is pleased that the DOL responded to the comments relating to clarifying the overtime exemption rules,  particularly with reference to employees in the financial services industry.  A loan officer for a mortgage broker must make certain judgments when assisting consumers in financing the most important purchase of their lives.  Mortgage loan officer positions requires a high degree of skill and judgment, the old regulations did not take these facts into account. The mortgage industry has long held that loan officers are exempt from the government’s overtime pay requirements.  According to the DOL, the final rule was designed to be consistent with existing law.  It includes a new section that specifically addresses the distinction between exempt and nonexempt financial services employees based on the primary duty they perform. The rule includes several broad exemptions from overtime pay for various kinds of employees, including one for qualifying “administrative” staff. In the financial services industries, employees will be included in the administrative exemption if their duties include:  “collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products.”  These duties are highly analogous to other financially services occupations such as stockbrokers that have always been exempt under the 541 Rules.  The new rules ensure that similarly situated occupations are treated the same – a fairness objective that should be a part of any administrative rulemaking. Most mortgage loan officers conduct such work and should therefore be classified under the administrative exemption from overtime pay. The rule cautions that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”  The mortgage industry understands that this language was intended to ensure that “boiler room” employees with little skill or knowledge and who offer no meaningful advice to consumers should not be exempt administrative employees.  This is a far cry from the advice provided by mortgage brokers today.  As discussed below in some detail, mortgage brokers consult with and advise consumers on every aspect of what is often the largest purchase the consumer will make.  For this reason, even though their position normally involves sales of mortgage products, under the rule they should be considered to be exempt administrative employees.  Although the final rule does not include specific language regarding loan officers, we believe the department’s decision to frame the rule in the context of existing case law is positive for the industry and a significant benefit to small business mortgage brokers with little or no access to expensive labor attorneys.     II.        THE MORTGAGE BROKER PROVIDES A VITAL AND SOPHISTICATED SERVICE TO HOMEOWNERS AND HOMEBUYERS   A.            Changes in the home mortgage industry The proposed regulations recognize that business practices and employment relationships today are vastly different from those that existed at the time the original Section 541 regulations were implemented.  The mortgage brokerage industry is a good example of a business model that simply did not exist at the time the current wage and hour regulations were written.  At that time, consumers obtained their home mortgages directly from banks (and, later, savings and loan associations).  In general, banks and savings and loan associations did almost no marketing of mortgage products; rather, they depended on consumers to contact them when they were in the market for a new home.  While consumers occasionally refinanced their existing mortgages, the practice was nowhere near as prevalent as it is today.  Moreover, typically each bank or savings and loan association offered only a handful of mortgage loan products, so the consumer had few options to consider.  The consumer filled out the loan application and the bank lending committee either approved the loan or not.  Either way, the transaction was relatively simple. The typical loan officer from fifty years, when these rules were last comprehensively revised, ago would not even recognize the loan products or procedures that dominate the market today.  In just the past fifteen years, there has been a rapid, radical evolution of the home mortgage market in many different respects, including the following: (1)               The home mortgage market has become extremely competitive.  In addition to banks and savings and loan associations, a new group of mortgage companies offer mortgage loan products.  An entire new industry, mortgage brokers, has evolved to serve as the intermediaries between the lenders (banks, savings and loan associations and mortgage companies) and the consumers.  Because all of these entities compete with one another for home mortgage business, marketing and outreach has become an important function in any mortgage-related business; (2)               The number and complexity of mortgage loan products has expanded dramatically.  Now a consumer must choose from an array of loan types, including fixed and variable rate loans, FHA and other government backed loans, debt consolidation loans, interest only loans, and a host of others.  Loan officers must have an intimate knowledge of these products and be prepared to explain advantages and disadvantages of each; (3)               The advent of risk-based pricing and development of the subprime mortgage market has added a vast array of new products and underwriting considerations that must be evaluated by loan officers.  In the past, access to credit was limited to those with the best credit histories.  With the development of the subprime market, each consumer must be evaluated by a loan officer to determine where they fit in the vastly expanded credit spectrum. As a consequence of these changes and others,[1] the role of the loan officer today (whether at a bank, savings and loan association, mortgage company or mortgage broker) is radically different from the role of the loan officer even twenty years ago.  Typically, loan officers today utilize skill and judgment to gain an understanding of the needs and financial status of the consumer as no two consumers are alike.  They then review the loan products available to aid the consumer in choosing loan programs, features, and terms for the consumers unique desires and financial situation.  While at all times loan officers work for their employers and not as agents of the consumer (except where required by state law), nevertheless, they must assist the consumers in understanding the complexities of the loan programs and assessing how particular products fit with their needs and abilities.  This work requires a high degree of skill and knowledge of both the various loan products and the consumers.  

B.        The role of the mortgage broker While mortgage broker firms vary greatly in size, typically they are small, independent businesses, employing five people including the owner. Mortgage brokers often work with low- to moderate-income consumers and consumers with less-than-perfect credit to help them realize the dream of homeownership.  They take the time necessary to help less sophisticated consumers cope with the various of home mortgage products. Many mortgage brokers work with their clients to understand and correct any credit deficiencies. Some consumers have unique credit situations, such as seasonal income or a bankruptcy in their credit history. Without the assistance of mortgage brokers, many of these consumers would find it impossible to find loans and work their way through the application process. Mortgage brokers have relationships with numerous lenders.  Mortgage brokers must understand the subtle differences between the products offered by the different lenders with whom they deal.  A mortgage broker may have literally hundreds of different loan products available, each of which has unique properties.  The mortgage broker acts as an intermediary between the lenders and the consumers.  As each consumer is different, a loan officer of a mortgage broker must make certain judgments, analyzing information unique to each consumer and placing them in the product they choose. Thus, there is no standard template mortgage that applies to all consumers. This role requires a high degree of skill and judgment, bringing together the needs of the consumer with the products offered by the lenders.  As such, mortgage brokers provide consumers the most efficient and cost-effective method of obtaining a mortgage that fits the consumer’s financial goals and circumstances as well as provide savings to wholesale lenders.   III.             Conclusion As discussed above, NAMB applauds the substantial effort of the DOL in overhauling these regulations.  The final regulations go a long way toward recognizing the vast changes that have occurred in the American economy since the Section 541 regulations were originally written.  The final changes will help to clarify the FLSA and to make it more workable in the modern economy.   Wage and hour litigation has become the leading source of costly employment litigation for small business.  We believe the DOL revisions will change this trend for small business owners.   Thank you again for providing the opportunity to testify on the DOL’s final overtime rule.  I would be happy to answer any questions the committee may have.