The mortgage industry is facing a period of extraordinary change in the wake of the subprime meltdown and subsequent recession. As mortgage lenders try to move on, they face mountains of new regulation and legislation, as well as a market that has changed dramatically. * Almost every business owner or decision-maker has things that keep him or her awake at night. Unfortunately, the past few years have given rise to an inordinate number of bogeymen and demons for mortgage lenders--some regulatory, some market-driven. * Perhaps the most frightening challenge we face today is the uncertainty. * We know there has been some improvement in the market, and we now know who will be enforcing the blast of regulation aimed our way. But we still don't know exactly how the recovery will proceed or exactly what we must do to stay perfectly compliant. * I've worked in this industry for more than 40 years. For much of that time, I've kept what I call a "worry list" for both myself and my clients. * I don't use the worry list to scare people, but instead as a planning tool. I believe strongly that with change comes opportunity. It is not always easy or pleasant, but it's there.
Right now, it seems quite a bit of change is coming our way. How we--individually and as an industry--choose to adapt to it will likely determine who survives and who doesn't.
It is now painfully clear we will not be given a clear road map to what the future holds. So let us instead examine some of the most insomnia-inducing possibilities and, more importantly, how we might react to them.
The direct impact of government-related action
This is the most obvious category of worry--and the most uncertain. We can react to proposed rules, bills or unusual enforcement actions. But we can rarely predict what might be coming next.
Faced with a new enforcement agency with unprecedented power and a very short track record--the Consumer Financial Protection Bureau (CFPB)--most mortgage lenders are straining to craft policies and processes that will ensure compliance. Unfortunately, they're being forced to do so with a crystal ball.
"The industry has a lot of worries right now," says mortgage banking and financial services attorney Brian Levy, of counsel with Katten & Temple LLP, Chicago.
"I'm seeing a high level of concern about the role of government in housing, and how things will shake out. Lenders are concerned with the general direction of government involvement, the new regulations and their enforcement, the fate of Freddie [Mac] and Fannie [Mac] and so forth," he says.
One thing of which we can be reasonably certain is that more intrusive regulation is coming to the mortgage industry. Stan Gordon, managing partner for Gordon & Associates, Costa Mesa, California, and long-time counsel for multiple mortgage lenders, refers to the impending regulations as "micromanagement rather than guidance."
Gordon says, "The marketplace will likely be impeded in its efforts to respond to the needs of qualified buyers. It's surprising to see how much detail the Dodd-Frank [Wal] Street Reform and Consumer Protection] Act requires of the CFPB in its forthcoming regulations. We're going to see our industry excessively constrained for an extended period of time."
Gordon credits the trade associations for fighting a worthy fight on behalf of the industry. Nonetheless, he says, there is simply too much requiring their engagement. "They're making some headway on the most excessive proposals of the CFPB, but there's simply too much to push back on. We face a long, uphill battle to reach equilibrium."
John E. Jacobs, shareholder with Maddin, Hauser, Wartell, Roth & Heller PC, Southfield, Michigan, agrees. "This is the most highly regulated industry in the United States," he says. "We are facing tremendous scrutiny right now, and these regulations are making it more and more difficult to originate loans."
WORRY No. 1: That FHA 'compare ratios' are further tightened
The Federal Housing Administration (FHA) loan remains a key product in the origination industry. It is also a critical conduit for otherwise worthy borrowers who might not have the highest of FICO[R] scores.
Of course, a compare ratio is a particular lender's rate of default in comparison to its local market. The FHA's tolerance for default has been shrinking in recent years, and it is not inconceivable that its tolerance will drop further. The more lenders that are unable to provide FHA loans, the fewer choices borrowers will have. The market will contract to those willing and able to settle for the "plain-vanilla" mortgage.
Untortunately, that is not what the FHA mortgage was intended to be. Rather, the FHA loan program was designed to put deserving homeowners who could not otherwise afford such credit into homes.
Jacobs points to the 5 percent risk-retention requirement under the Qualified Residential Mortgage (QRM) provision of the Dodd-Frank Act for lenders originating "non-qualified" loans as proof that the industry is being pushed in that direction. "This requirement eliminates a number of loans," he observes.
"Are we going to be allowed to provide financing for all qualified borrowers?," asks Andrew Peters, chief executive officer of First Guaranty Mortgage Corporation, McLean, Virginia.
Peters adds, "It's inevitable that rates will see an uptick. Refinancing will not always be robust. When we once again face a purchase market, will the rules and legislation put in place now make it so restrictive that it becomes difficult to place deserving consumers into new homes?"