The Mortgage Bankers Association is having its 100th annual convention this week. The guest speaker list is headlined by George W. Bush, and includes an impressive set of politicians (senators, governors, etc), policy setters (top officials at CFPB, HUD, FHFA, Fannie Mae, Freddie Mac), and private sector representatives.
If these acronyms and names don’t mean much to you, don’t worry too much about it. The takeaway here is that for the MBA’s big anniversary, we have a “who’s who” list within the housing industry. And what does this gathering want to talk about? We have been following along on twitter (follow us!) and the word on the street is “regulation, regulation, regulation.” How much is necessary? Where should it be applied? And, will borrowers end up paying more?
The topic of regulation comes as a handful of new loan rules go into effect to begin 2014. These changes were designed to “protect” consumers from lender abuses and implement industry safeguards to avoid another crippling crash.
The two things you will hear most about are as follows:
1. Qualified Mortgage (QM) Rule
The qualified mortgage rule attempts to define “safe” lending standard. The general number to remember here is 43%, which is the minimum debt-to-income ratio to qualify for a loan.
As with anything in the mortgage industry, the small text is a bit more complicated.
“The 43% debt ratio is what everybody has latched onto,” said Central Coast Lending owner Daniel Podesto. “There is a big ‘or’ that goes into that statement as well.”
“The loan has to be ‘qualified’, or meet Fannie, Freddie, or FHA standards.”
As Podesto goes on to explain, Fannie and Freddie qualifying loans can go up to a 50% DTI (with approval), FHA will go up to 57%, and VA will go to 60%. HARP loans go even higher.
Lenders that fail to meet these threshold will be subject to a 5% stake in the loan before selling it on the secondary market, which gives them incentive to manage risk effectively.
The Effect:
Minimal. The lending industry had already tightened up after the crash and borrowing standards are much, much higher than before. In 2012, just 12.8 percent of mortgages wouldn’t have qualified, according to Core Logic.
“The only thing it might impact is jumbo loans, portfolio loans, or interest only-type products,” said Podesto, pointing out that over 90% of loans are already underwritten by FHA, Fannie, and Freddie.
We have also seen the question posed: will tighter standards hurt working class borrowers? Podesto sees the effect as minimal, pointing out that the industry has already tightened lending practices over the past five years and that new rules will do little to tighten conditions further.
In some ways, the rules clarification will benefit the industry, giving much-needed stability so that lenders can appropriately plan for the future instead of having unclear future regulation held over their heads.
2. Fees rule
This is a bit more on the “industry mumbo-jumbo” side of things. Lenders will have the fee that they are able to charge for a loan capped at 3% of the total loan amount.
The Effect
“I have run so many scenarios,” said Podesto. “And any way you put it, we are well under the 3% cap.”
“These rules don’t really have a big impact on us. We operate the right way, doing safe loans at a good price with proper underwriting. These rules don’t factor into my thought process for the most part.”
Podesto said that he expected that most lenders will easily come in below the 3% threshold.
When asked if he thought that the rules are a good thing for the industry, Podesto listed a few points.
1. Competition usually does a good job of regulation. “There are usually enough honest people out there that will charge a fair fee and not make dangerous loans. Consumers are usually pretty good about finding deals.”
2. Risk management. On the other hand, adding a bit of risk into the equation can help competitive markets make better long-term decisions. In the real estate bubble, lenders could make sub-prime loans and quickly sell them to the secondary market, making a quick profit with little risk.
Now, lenders that want to offer specialized products beyond the industry standard will need to absorb some of that risk (maintaining a stake in the loan), instead of passing it down the line.
“I do think there is a place in the market for riskier loans, but we have seen it can be dangerous if used too liberally,” said Podesto.
The regulations could have been much tighter. An earlier draft of the Consumer Finance Protection Bureau (CFPB) rules mulled requiring a 36% minimum DTI and a 20% down payment. The CFPB took input and relaxed the rule proposal so as not to tighten credit further.
