Future of the Mortgage Industry to be Decided in Tidal Wave of Regulations (in Next 6 Months)

David H. Stevens, President andrnCEO of the Mortgage Bankers Association (MBA), told member of the Exchequer Club on Wednesdayrnthat  in the 12 months since hernlast addressed them there had been some progress in clearing the uncertainty ofrna year earlier and an improving housing market. The first of the rules mandatedrnunder Dodd Frank have come out of the Consumer Financial Protection Bureaurn(CFPB) and the housing market appears to be in a broad recovery.  The new regulations, he said, will help shapernthe lending environment in which MBA member must operate and homeowners mustrnnavigate.  </p

Increased certaintyrnalone will not solve the remaining ills of the housing and mortgagernmarkets.  The rules must be done right, in a coordinated fashion mindfulrnof downstream impacts, if we are to accelerate the housing recovery.</p

The Ability tornPay/Qualified Mortgage (QM) rule released by CFPB last week will by itself significantlyrnchange the landscape of homeownership.  With it the Bureau accomplished its goal ofrneliminating risky loan products and features and, Stevens said, “is to berncommended on the deliberative, inclusive, transparent process they undertook inrncreating this rule.”</p

Because 90 percent ofrnmortgages are currently going through GSE and FHA underwriting the new rule isrnunlikely to have much impact on tightening credit, however Stevens said it isrnnot going to do much to loosen it either.</p

The rule gets it rightrnnot only because it eliminates those risky projects that got borrowers intorntrouble but also because it includes a clearly defined safe harbor that “willrngive lenders the confidence and certainty to lend right to the edges of thernintended QM credit box.”  By allowing forrn43 percent DTI, with some exceptions for government purchase or guarantees, it createsrna broad credit box that should serve a large number of qualified borrowersrnseeking conforming loans.</p

But Stevens said there isrnstill much more to be done.  MBA membersrnhave been flooding the office with questions and concerns about the rule and sornfar the association has identified three major items that need a closer look.  </p<ul class="unIndentedList"<liThe three percent pointrnand fee limit is overly inclusive because it includes affiliated fees andrncompensation for loan officers. </li<liThe 43 percent DTI limitrnon jumbo loans will make those loans more expensive in high cost areas. Otherrnattempts to apply an ability to repay standard have completely exempted largernbalance loans which are necessarily made to higher income households and anrnexemption based on loan size might make sense. </li<liThe three percent pointrnand fee cap, and the 150 basis point over APOR calculation for the safe harbor,rncould limit access or increase the cost of lower balance loans. </li</ul

Stevens said that thernrules issued last week are just the beginning of what he has long warned wouldrnbe a regulatory tidal wave.  By Januaryrn21^st seven new rules will have been released this year with manyrnmore due by mid-year.  Still to come are BaselrnIII, Risk Retention/Qualified Residential Mortgage (QRM), and RESPA TILA, onrntop of the major Servicing Standards and Loan OfficerrnCompensation/Qualification Standards scheduled to be released this week.</p

In addition he saidrnthere are huge economic challenges such as the debate over the debt ceiling,rnthe U.S. budget, and international economies as well as additional monetaryrnpolicies like QE3, Operation Twist, and other Federal Reserve activity. Andrnhow does all of this impact the average American who doesn’t understand therndetailed intricacies of the regulations and monetary policy?  “They are left wondering, will I be able tornpurchase a home or should I rent?”</p

Because MBA members willrnfinance all housing, owner occupied or rental and for purchase and rental wernhave more than anyone, he said, a balanced perspective. We know thatrnchanges had to be made and additional regulations were necessary, but in thisrnenvironment, we can go one of two ways.</p

The rules can be donernright with a coordinated, balanced approach that doesn’t further tighten creditrnand ensures a balanced housing policy where qualified borrowers not regulatorsrnand policymakers make the ultimate decision on whether to rent or own.  A balanced housing policy will drive broaderrneconomic growth.</p

If the rules are donernwrong, if they make lending too restrictive, credit will become even tighterrnthan it is today and minorities and the middle class will feel the greatestrnimpact.  Further tightening credit also entrenches a large FHA/governmentrnrole, rather than reinvigorating private capital back into the marketplace.</p

Consumers are the onesrnwho will get cut out of such a market, Stevens said.  He quoted Federal Reserve Chairman BenrnBernanke’s statement that “The pendulum has swung too far the other way…overlyrntight lending standards may now be preventing creditworthy borrowers fromrnbuying homes.”</p

“‘One of the greatestrnrisks we face is lenders leaving the credit markets.  The impact of overrnregulating, uncontrolled litigation, and policy and repurchase confusion willrnnot only affect lenders, but consumers.  I’ve been saying for two yearsrnnow that the victims of this current tight-credit environment will be firstrntime buyers and lower to middle-income families.  The wealthy will alwaysrnget loans.” </p

Stevens said thisrndiscussion is not theoretical, it is already happening in the United Kingdom.  For example banks are exiting the lendingrnbusiness due to risks created by the regulatory environment.  A recentrnarticle from The Guardian states, ‘Labourrnand Conservative policymakers have identified housing as a key battleground atrnthe next election, fighting to win the support of Generation Rent – youngrnpeople who are struggling to get on the housing ladder and may never afford arnhome of their own’.”</p

Stevens said thisrnunderscores the need for a balanced housing policy in the United States.  ‘Werncannot have a system that over-corrects and prevents qualified borrowers fromrnobtaining a home.  We must have arncoordinated housing policy strategy; a strategy with clear, distinct goals;rnclear, distinct rules; and clear forethought to the downstream effects ofrnoverlapping policies. The housing market needs it.  The economy needs it.rnAnd consumers deserve it.</p

This is why MBA hasrncalled on the White House to create the role of housing policy coordinator – arntraffic cop for all new rules.  This officernwould have a clear and absolute mandate to identify and evaluate downstreamrneffects and unintended consequences of all changes to government housingrnpolicy.  It would give everyone greaterrnconfidence in the real estate finance market and help set housing on arnsustainable recovery path.</p

We cannot talk about arncoordinated policy effort without including the GSEs, Stevens said.  Wernall need, respect and support the critical role the GSEs have played – andrncontinue to play.   The fact is, they are financing 70 percent of thernsingle-family housing market and have a significant impact on ourrneconomy.  They are in conservatorship and thus are, for all intents andrnpurposes, part of the government.   </p

And government regulatorsrnare obligated to be transparent.  Announcingrnregulations for public comment and stakeholder input has been critical tornmaking new rules and policies work so MBA has also called for an open andrntransparent process for the GSEs when, as a significant part of the broader housingrnand economic ecosystems, they wish to make major policy or businessrnchanges.  The good news Stevens said, is that FHFA, Fannie Mae and FreddiernMac have all shown willingness to discuss working toward transparency and betterrncoordination going forward. </p

Stevens told thernaudience they are all stakeholders and there is a need for stakeholders to bernwilling to cross customary lines in the sand to create better policy. rnThis means creating non-traditional alliances for the greater good, for therngood of borrowers. “If we’re not careful, we will tip the balance andrnblock the gates to homeownership for qualified families.”</p

Over the next sixrnmonths, much of the future of the real estate finance industry will be decided,rnStevens said.  The Dodd-Frank rules arernnow truly upon us and they will dramatically transform the industry-make nornmistake about it.  More importantly they will determine what kind ofrnhousing market we leave for future generations. </p

“Will it be the samerndream machine – so uniquely American – that’s elevated so many out of poverty?</p

“Will it be a housingrnmarket that offers a ladder-up for a new middle class?</p

Or, will it shut therndoor on all but the most comfortable and secure?</p

“Will it be a housingrnopportunity society?</p

Or will it be arntake-no-chances market – where only the fortunate need apply?</p

“I deeply believe in thernhousing market – and I know you do too. I believe the home mortgage is arndoorway to opportunity – when used responsibly.”

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