The Mortgage Bankers Association (MBA) provided its annual assessment of The State of the Mortgage Industry in a press conference Wednesday afternoon. Michael Young, MBA Chairman said that the states that have been hardest hit by the housing crisis are and will continue to deal with the aftermath but there are signs that in much of the nation 2012 will bring a recovering market.
One bright spot, Young said, is that the turmoil in the single family market has actually helped the multi-family sector; the rental market has tightened and more lenders have moved into the sector, especially life insurance companies. In the residential market, he said, the one topic that is discussed everywhere is the lack of financing and what can be done about it.
David H. Stevens, MBA President and CEO said that lack of financing can be traced to a single factor, market uncertainty. Part of it is uncertainty about international markets and how they might ultimately impact the domestic situation but there is also a tremendous amount of uncertainty about regulation. Dodd-Frank, he said, has 300 regulations that have yet to be fully promulgated and the new Consumer Financial Protection Bureau (CFPB) and other regulators all have or are considering regulations about how loans can be provided and serviced. There is uncertainty surrounding repurchases as well and while MBA believes lenders should be held accountable for their mistakes, they should not be held accountable for the loans performance if it failed solely due to changing economic circumstances. For that reason MBA supports a time limit on the repurchase obligation.
Addressing three areas in particular, he said, would decrease a lot of the insecurity. New regulations regarding Qualified Mortgages (QM) and Qualified Residential Mortgages (QRM) are eminent and QM will in effect, define what loans get made. Mortgages which do not meet QM as laid out by CRPB will simply not get made because lenders will feel there is too much liability involved. MBA supports certain parts of the QM such as the requirement for full documentation but other parts such as the point and fee cap lack flexibility and will disproportionately affect the pricing of small loans.
Most of all, he said, the proposed regulations are too general. There needs to be specificity in the underwriting standards such as in the definition of what constitutions "ability to repay." Without a bright line in the regulations that enable a safe harbor for lenders, he said, any lending is going to be restricted on the margins and any loans that fall into the gap between QM and QRM will see significant price adjustments to reflect the liability.
While MBA also supports risk retention and much of the intent of the QRM such as eliminating no-docs and interest only and other exotic loans, regulators are going beyond the intent of Congress by adding debt to income and loan-to-value ratios. The requirement for a 20 percent down payment will create a dual class system under QRM, with lower income borrowers, unable to amass the down payment; forced into FHA loans while there will be a private market for upper income borrowers. Stevens said MBA will be "very aggressive" in making sure these changes to QRM are pulled back.
Another area of uncertainty is the 50-state settlement with servicers. Borrowers don't care about their servicers until they get into trouble with their mortgages but then the multiple state and federal laws that govern servicing cause stress for the borrowers and for servicers and investors as well. The settlement may provide a framework for national standards which would remove some of the uncertainty in this area. In the same vein, Stevens said that President Obama's new fraud task force must be careful to avoid redundancy with other investigations and carefully measure how it impacts borrowers or it could create trepidation among lenders and further reluctance to lend.
The present structure of the mortgage market with 90 percent of lending having some government involvement through the GSEs or FHA is simply unsustainable, Stevens said. The private sector must be brought back into the market and the major players in the industry are close to agreement on what the future of the secondary market should look like. This is very close to a model proposed by MBA some years ago which would have the following characteristics:
- Transactions would be funded with private capital from a broad range of sources.
- The federal government should have a role in promoting stability and liquidity in the core mortgage market. This role should be in the form of an explicit credit guarantee on a class of mortgage-backed securities and the guarantee would be paid for by risk-based fees.
- Taxpayers and the system itself should be protected through limits on the mortgage products covered, the types of activities undertaken, strong risk-based capital requirement, and actuarially fair payments into a federal insurance fund.
In answer to a reporter's question about the chances of President Obama's streamlined refinancing program being approved, Stevens said it would be an uphill climb. FHA is legislatively limited to loans with a maximum LTV of 97.5 percent so to go as high as 140 percent which Steven's said he expected the legislation to attempt will require full approval of Congress.
Jay Brinkmann, Senior Vice President and Chief Economists said he expects jobs to be created at about a 150,000 per month pace in 2012 but this will be uneven by location and dependent on an individual's education. The length of unemployment hit a record high in November and persons with a high school education or less are remaining unemployed longer than those with a college degree.
According to Brinkmann, mortgage originations will drop from $1.26 trillion in 2011 to $992 billion in 2012 with most of the loss coming in refinancing. The purchase market will be largely unchanged or will rise slightly. This does not, however, reflect any changes that might be made in the HARP program or any unforeseen outside events.
