The "dazzling changes" in the mortgage market over the last decade were the topic of address last week by Richard Cordray to the National Association of Realtors (NAR). Cordray, Director of the Consumer Financial Protection Bureau, said the market has gone from an overheated, increasingly irresponsible one that "blew up the largest economy in the world, to retrenching dramatically into an overly tight and restrictive market where many good, creditworthy applicants could not qualify for reasonable loans."
The lack of effective regulation before the crash, he said, has now led to strong new regulations designed to protect and support both consumers and responsible businesses. The result is a mortgage market that is steadily recovering, with home values increasing in many areas and millions of homes emerging from their previous underwater status. He commended NAR and its members for "hanging tough" through all of the bewildering changes that have led to this new regime.
The Ability to Repay Rule, he said, requires lenders to make sure borrowers have the capacity to actually pay back their loan. Some, he said, called this rule, which is also known at the Qualified Mortgage or QM rule the "Quitting Mortgages" rule, predicting that it would cause mortgage prices to double while cutting the volume in half and would lead to the demise of banks and credit unions as mortgage originators.
Instead, with the rules now in place for almost two years, he said, recent data confirms the very opposite of the hyperbole and fears expressed in advance. In 2014, the first year of the new rules, mortgage originations for owner-occupied home purchases increased between 4 and 5 percent, an upward trend that appears to have accelerated in the first half of 2015. While there was minor consolidation in some parts of the mortgage market, there is no evidence of any mass exodus. In fact, after adjusting for merger activity, he said, the number of lenders that reported having originated mortgages showed an increase in 2014.
He called most of the new regulations "common sense" and said there had been special attention paid to community banks and small lenders which had the lowest default rates during the mortgage crisis. The number of these smaller lenders originating mortgages in 2014 was higher than in 2013 which he called great news. "It means more opportunity for more consumers, and a renewed pathway to the American dream in a mortgage market that has been strengthened by the changes we have made."
By taking on and rooting out unfair competition that gobbled up market share by driving down sound underwriting standards, the Consumer Bureau is supporting responsible lenders, Cordray said. The market leaders of today are those that have remained focused on providing sustainable homeownership rather than just making a quick buck, no matter how.
At the same time this sensible regulation that includes substantial consumer protections should foster greater trust among consumers. "If people believe they will be treated fairly rather than becoming victims of predatory lending, they can develop a renewed sense of consumer confidence. And in the past few years, as consumers have improved their own financial health and seen their home values stabilize in many parts of the country, those sentiments are gradually returning."
Cordray noted that the new Truth-In-Lending-RESPA Integrated Disclosure Rule (TRID) will go into effect on October 3, with its two associated disclosure forms replacing four older overlapping ones. The Loan Estimate and the Closing Disclosure show people what they are getting into in plain language in in an easy to understand format and with the information they most want - loan amount, monthly payments, taxes, insurance, other property costs, and the total cash required to close the loan - right up front. Not only will this make understanding the loan easier but will do the same for comparison shopping as the forms reduce the information gap between lenders, who understand mortgage pricing inside and out, and consumers, to whom the process can often feel like a mystery.
Cordray explained the timing under which homebuyers must obtain the forms from lenders but said there has been misinformation spread about what happens what loan changes will affect the Closing Disclosure. Should this form become inaccurate before the closing a new version must be given the borrower three days before closing, but there are only three very limited sets of changes that will trigger this; changing the loan product (for example fixed to adjustable rate), increasing the APR beyond certain limits, or adding a prepayment penalty. Last minute changes based on walk-through and other changes to seller credits and the like will never require a new Closing Disclosure that delays the closing date Cordray said.
He concluded by pointing to a recent pilot study CFPB did where borrowers went through a mortgage closing using an electronic platform. Those borrowers, he said, "Showed higher measures of understanding, efficiency, and feeling empowered than borrowers who used only paper forms." Based on those results, he said the Bureau is strongly encouraging further industry action and innovation around "e-closings.