According to the Consumer Financial Protection Bureau (CFPB), the new lending rules that went into effect on January 10 are meant to take a back-to-basics approach to mortgage lending and lower the risk of default and foreclosure among borrowers. However, many industry veterans feel that the rules may hurt those they are designed to protect, primarily low income borrowers.
On January 14, Congress’ House Financial Services Committee held a conference to discuss how homeowners may be harmed by the new CFPB rulings. Speakers said low-to-moderate income borrowers stand to lose the most if lenders cannot write loans outside of the Qualified Mortgage (QM) guidelines.
“In rural areas, it is crucial to tailor mortgages to fit borrowers’ needs and risk profiles,” one lawmaker noted. Another lawmaker who represents a state where 50 percent of the homes consist of manufactured housing said most of the housing loans in his state will not meet QM standards.
Speaking on “Mortgage Markets Today,” Chris Whalen, EVP and managing director for Carrington Holding Company, discussed the pitfalls in the new regulations with Louis Amaya, host of the Five Star Internet radio show and CEO of iServe Companies.
“I think these concerns are well founded,” Whalen said. “Under the new CFPB rules, about half the prospective homeowners in this country can’t get a mortgage from a bank because the new laws have greatly restricted credit access.”
Whalen warns this indicates the mortgage industry will be tightening. “We’re basically replaying what happened in the late 1920s and 1930s in terms of stifling credit creation,” he said.
Under the new QM rules, a borrower must have a FICO score of 740 or higher. In addition, debt-to-income ratio can be no higher than 43 percent. Whalen explained that although these rules disqualify a lot of borrowers, they give the lender assurances about possible lawsuits.
“If you write a Qualified Mortgage following these rules, then you have what is essentially a safe harbor against many types of litigation,” Whalen explained. “However, it’s still possible for a borrower to sue. There is arguably more litigation risk for lenders today than there has been in the past.”
Whalen says there is still a demand for non-QM loans—financing for borrowers with FICO scores down into the mid-600s but who can also pay 20 to 25 percent down. However, the problem is that most investors will not buy these loans.
“You can’t sell them to the government, which is 95 percent of the market today,” Whalen said. “It’s relatively easy to find investors for jumbos and high-quality borrowers, but for loans made to lower quality borrowers, there is no obvious investor. That’s why it’s not working so far. There is some demand, but it’s relatively small.”
Lending in this category may increase in a couple of years when lenders and servicers can see to what degree there is successful litigation concerning non-QM loans. This will give them a better idea of what the risk profile is.
“In a transaction with a less affluent borrower, lenders are going to be much more reluctant to exceed those CFPB rules for the simple fact that they may be working for a $2,000 profit on a loan over its lifetime,” Whalen said. “If they are sued in a jurisdiction like California, they could end up with a settlement that is much higher. How many times is someone going to take that risk?”
According to Whalen, it’s going to be a few years into the future before non-QM loans are an investor preference. “They’re going to wait until they can better understand the risk in purchasing non-QM loans,” he said.
Nevertheless, Whalen says there are a lot of interesting dynamics in this market. “We are going to probably see a very strong market for non-conforming loans this year because there is still more than $200 billion in loans that have not been resolved sitting on the books of the banks.”
Whalen’s predictions for the mortgage market in 2014: “I think loan volume numbers will continue to slump through this year, and we will probably see home prices start to weaken as well.
“In addition, I think we’re going to see a lot of pressure on politicians and regulators to take another look at these rules because I think we have gone too far. These new rules are limiting credit availability at a time when we want to make credit grow in this economy so that we can generate jobs. Unfortunately, the current regulatory regime is going to stifle credit creation, and it’s going to greatly limit access to mortgage credit for American consumers.”
Whalen closed his predictions with “It’s going to be a challenge going forward for some organizations to stay in this market, be compliant, and as a result, be able to do business and do so profitably.”
The Five Star Institute and iServe Companies have partnered to create “Mortgage Markets Today,” an in-depth, formal talk radio resource featuring expert guests, quality subject matter, and timely insights. The show delves into a vast array of topics ranging from the secondary market and federal compliance standards to real estate and mortgage lending.
Investors, lenders, service providers, and all those interested in and affected by the mortgage and housing markets can tune in on the Web at Radio.TheFiveStar.com or download audio podcasts of program broadcasts from iTunes.