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 navigate. 

Increased certainty 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 economic growth.

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 buying homes."

"'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 get loans." 

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 opportunity society?

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."