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Future of the Mortgage Industry to be Decided in Tidal Wave of Regulations (in Next 6 Months)
David H. Stevens, President and
CEO of the Mortgage Bankers Association (MBA), told member of the Exchequer Club on Wednesday
that in the 12 months since he
last addressed them there had been some progress in clearing the uncertainty of
a year earlier and an improving housing market. The first of the rules mandated
under Dodd Frank have come out of the Consumer Financial Protection Bureau
(CFPB) and the housing market appears to be in a broad recovery. The new regulations, he said, will help shape
the lending environment in which MBA member must operate and homeowners must
alone will not solve the remaining ills of the housing and mortgage
markets. The rules must be done right, in a coordinated fashion mindful
of downstream impacts, if we are to accelerate the housing recovery.
The Ability to
Pay/Qualified Mortgage (QM) rule released by CFPB last week will by itself significantly
change the landscape of homeownership. With it the Bureau accomplished its goal of
eliminating risky loan products and features and, Stevens said, "is to be
commended on the deliberative, inclusive, transparent process they undertook in
creating this rule."
Because 90 percent of
mortgages are currently going through GSE and FHA underwriting the new rule is
unlikely to have much impact on tightening credit, however Stevens said it is
not going to do much to loosen it either.
The rule gets it right
not only because it eliminates those risky projects that got borrowers into
trouble but also because it includes a clearly defined safe harbor that "will
give lenders the confidence and certainty to lend right to the edges of the
intended QM credit box." By allowing for
43 percent DTI, with some exceptions for government purchase or guarantees, it creates
a broad credit box that should serve a large number of qualified borrowers
seeking conforming loans.
But Stevens said there is
still much more to be done. MBA members
have been flooding the office with questions and concerns about the rule and so
far the association has identified three major items that need a closer look.
The three percent point
and fee limit is overly inclusive because it includes affiliated fees and
compensation for loan officers.
The 43 percent DTI limit
on jumbo loans will make those loans more expensive in high cost areas. Other
attempts to apply an ability to repay standard have completely exempted large
balance loans which are necessarily made to higher income households and an
exemption based on loan size might make sense.
The three percent point
and fee cap, and the 150 basis point over APOR calculation for the safe harbor,
could limit access or increase the cost of lower balance loans.
Stevens said that the
rules issued last week are just the beginning of what he has long warned would
be a regulatory tidal wave. By January
21st seven new rules will have been released this year with many
more due by mid-year. Still to come are Basel
III, Risk Retention/Qualified Residential Mortgage (QRM), and RESPA TILA, on
top of the major Servicing Standards and Loan Officer
Compensation/Qualification Standards scheduled to be released this week.
In addition he said
there are huge economic challenges such as the debate over the debt ceiling,
the U.S. budget, and international economies as well as additional monetary
policies like QE3, Operation Twist, and other Federal Reserve activity. And
how does all of this impact the average American who doesn't understand the
detailed intricacies of the regulations and monetary policy? "They are left wondering, will I be able to
purchase a home or should I rent?"
Because MBA members will
finance all housing, owner occupied or rental and for purchase and rental we
have more than anyone, he said, a balanced perspective. We know that
changes had to be made and additional regulations were necessary, but in this
environment, we can go one of two ways.
The rules can be done
right with a coordinated, balanced approach that doesn't further tighten credit
and ensures a balanced housing policy where qualified borrowers not regulators
and policymakers make the ultimate decision on whether to rent or own. A balanced housing policy will drive broader
If the rules are done
wrong, if they make lending too restrictive, credit will become even tighter
than it is today and minorities and the middle class will feel the greatest
impact. Further tightening credit also entrenches a large FHA/government
role, rather than reinvigorating private capital back into the marketplace.
Consumers are the ones
who will get cut out of such a market, Stevens said. He quoted Federal Reserve Chairman Ben
Bernanke's statement that "The pendulum has swung too far the other way...overly
tight lending standards may now be preventing creditworthy borrowers from
"'One of the greatest
risks we face is lenders leaving the credit markets. The impact of over
regulating, uncontrolled litigation, and policy and repurchase confusion will
not only affect lenders, but consumers. I've been saying for two years
now that the victims of this current tight-credit environment will be first
time buyers and lower to middle-income families. The wealthy will always
Stevens said this
discussion is not theoretical, it is already happening in the United Kingdom. For example banks are exiting the lending
business due to risks created by the regulatory environment. A recent
article from The Guardian states, 'Labour
and Conservative policymakers have identified housing as a key battleground at
the next election, fighting to win the support of Generation Rent - young
people who are struggling to get on the housing ladder and may never afford a
home of their own'."
Stevens said this
underscores the need for a balanced housing policy in the United States. 'We
cannot have a system that over-corrects and prevents qualified borrowers from
obtaining a home. We must have a
coordinated housing policy strategy; a strategy with clear, distinct goals;
clear, distinct rules; and clear forethought to the downstream effects of
overlapping policies. The housing market needs it. The economy needs it.
And consumers deserve it.
This is why MBA has
called on the White House to create the role of housing policy coordinator - a
traffic cop for all new rules. This office
would have a clear and absolute mandate to identify and evaluate downstream
effects and unintended consequences of all changes to government housing
policy. It would give everyone greater
confidence in the real estate finance market and help set housing on a
sustainable recovery path.
We cannot talk about a
coordinated policy effort without including the GSEs, Stevens said. We
all need, respect and support the critical role the GSEs have played - and
continue to play. The fact is, they are financing 70 percent of the
single-family housing market and have a significant impact on our
economy. They are in conservatorship and thus are, for all intents and
purposes, part of the government.
And government regulators
are obligated to be transparent. Announcing
regulations for public comment and stakeholder input has been critical to
making new rules and policies work so MBA has also called for an open and
transparent process for the GSEs when, as a significant part of the broader housing
and economic ecosystems, they wish to make major policy or business
changes. The good news Stevens said, is that FHFA, Fannie Mae and Freddie
Mac have all shown willingness to discuss working toward transparency and better
coordination going forward.
Stevens told the
audience they are all stakeholders and there is a need for stakeholders to be
willing to cross customary lines in the sand to create better policy.
This means creating non-traditional alliances for the greater good, for the
good of borrowers. "If we're not careful, we will tip the balance and
block the gates to homeownership for qualified families."
Over the next six
months, much of the future of the real estate finance industry will be decided,
Stevens said. The Dodd-Frank rules are
now truly upon us and they will dramatically transform the industry-make no
mistake about it. More importantly they will determine what kind of
housing market we leave for future generations.
"Will it be the same
dream machine - so uniquely American - that's elevated so many out of poverty?
"Will it be a housing
market that offers a ladder-up for a new middle class?
Or, will it shut the
door on all but the most comfortable and secure?
"Will it be a housing
Or will it be a
take-no-chances market - where only the fortunate need apply?
"I deeply believe in the
housing market - and I know you do too. I believe the home mortgage is a
doorway to opportunity - when used responsibly."
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