Mortgage Industry Rules and Regs Being Rewritten. Who Will Survive?
I remember clearly, 40 years ago, sitting in the auditorium on the University of North Carolina Law School, listening to the dean tell all the eager young “lawyers to be” to look to either side and remember the face because by year end there was a good chance that person would no longer be enrolled in school. Sure enough over one third of our first year class dropped out or was academically unqualified to return. Today I feel like I am reliving that event.
In just three short weeks mortgage bankers from across the nation will gather in Atlanta for a convention, the 97th. How many will be returning for the 100th convention in 2013? Look around remember the faces you see in Atlanta, most likely over one third will not be there and very possibly as many as half!
Why? Well the rules are changing and the question is how many traditional mortgage bankers will be able to survive to compete under the new rules?
First, the most difficult hurdle: Retain 5% of each loan closed (6% for Ginnie Mae). To do so for a depository institution is not nearly as difficult as it is for the independently owned mortgage banker. The independent mortgage banker will be required to raise capital to support their portfolio or take on the new role of a mortgage broker. Not only will the once highly leveraged Mortgage Banking industry be required to have “skin in the game” they will have to have substantial capital positions just to play in the game! Once the most highly leveraged business model in the financial services industry Mortgage Bankers will be required to have unimpaired capital in proportion to their book of business. The “Bank” part of Mortgage Banker is going to be by far the focus of the future.
The loan level retention of 5% or 6% is not the only hurdle for increased capital required to be a mortgage banker. There are increased minimum net worth requirements to maintain Ginnie Mae issuer qualification; $2.5 million dollars with $500,000 minimum of liquidity available for a buyback request. Wait don’t stop there you also have to have 1% additional net worth for the MBS securities closed above $5 million to $20 million and then 20 basis point for everything over $20 million. The new standards will be a phased in requirement over the next three years.
It was just two years ago (August of 2008) when the minimum net worth was raised from $250,000 to $1,000,000. Then to insure the capital adequacy of Ginnie Mae, issuers must pass a capital adequacy test similar to the FDIC requirements for a depository institution. The field of participants who participate in the mortgage capital supply chain as non-depository mortgage bankers will shrink!
Was it wise to allow a company to act as a major distributor of credit without adequate capital to take responsibility for their improper actions, inadequate underwriting, and their poor asset management? No of course not and now we are paying the consequences of the lax attention paid to a major sector of our financial system.
Is this new regulatory structure, which will result in a reduction in the number of mortgage bankers, harmful to the credit supply chain? Yes in the short term but the capital strength of the lenders who are able to adapt to the new rules will provide our economy with a far more stable group of lenders who are significantly more cautious in their granting of credit, reacting to the red flags of credit, maintain a constant vigilance over their origination process and loans serviced, and employ the necessary tools to effectively manage risk.
As we all prepare to make our way to Atlanta to celebrate the 97th anniversary of the Mortgage Bankers let’s focus on how we can take our industry to the next level. Every single Mortgage Banker needs to assess their ability to raise capital;carefully employ tools to hone their skills on prediction of risk in their portfolios at the point of origination as well as post-closing, and build an infrastructure capable of dealing with significant government oversight. Proper preparation will position the survivors for successful entry to the new century of Mortgage Banking.
Then in three years we can look around the convention and know our industry has reached the century mark with renewed strength and credibility led by professionals who understand credit risk while they place their financial stake in the ground of accountability.