Mortgage industry insider warns about a stifling regulatory cliff

Lending to homebuyers in the U.S. remains little above the depressed levels hit during the recession because banks are wary about lending amid a slew of regulations coming out next year and proliferation of enforcement actions by state and federal regulators, a top mortgage banking official told The Washington Times.

Five years of criticism of banks by politicians, the public, the media and regulators have left the industry averse to taking risks, said David H. Stevens, president of the Mortgage Bankers Association, noting that banks today are willing to make loans only to the wealthiest or most creditworthy borrowers unless the borrower has government backing.

“The pendulum may have swung too far. We’re at a point right now where banks are afraid to make a bad loan,” he said in an interview with editors and reporters at The Times.

That’s at least in part because mortgages are much riskier than they once were, with about 11.5 percent of U.S. mortgages in default or foreclosure compared with about 1 percent before the housing market collapse, according to the association.

‘Piling on’

Federal Reserve Chairman Ben S. Bernanke is concerned about the slowdown in lending and has sought to coax more credit out of banks by driving interest rates on mortgages to record lows, but many overzealous state and federal regulators seem oblivious to the harm they are doing to the market and the broader economy through an onslaught of regulations and enforcement actions against banks, Mr. Stevens said.

“Institutions that committed crimes need to be held accountable, but the concern is there’s a piling-on effect, with everyone getting their trophy lawsuit,” he said.

“The exuberance over enforcement in the lending arena has a tipping point. Banks don’t have to lend money, and if you talk to any bank [chief executive] today, the message to their mortgage subsidiaries is, ‘I don’t want to be in the headlines ever again. Don’t do any bad loan that could cause a regulatory impact or significant damage to my balance sheet.’ That’s what’s causing the tightness in credit.”

Banks are “restricting credit availability to all but the most qualified homebuyers” as they await clarification of pending mortgage rules and lawsuits, he said.

The shortage of credit is having a particularly harsh effect on low-income borrowers and first-time homebuyers, said Mr. Stevens, a former commissioner of the Federal Housing Administration. “The 1 percent are always going to get mortgages.”

New regulations

While loan prospects are poor for people with average credit ratings, Mr. Stevens said, they could deteriorate further next year when a wave of six major regulations is due to hit banks. They include international requirements that banks set aside more capital to cushion against losses on risky loans, and major new Fed standards for mortgages that qualify to be incorporated into securities and sold to investors.

“It can get worse,” starting with the “qualified mortgage rule” due to be published next month, he said. “Any loan that’s not a ‘qualified mortgage’ will have huge litigation risk associated with it,” and banks will charge much higher interest rates on those loans, he said.

Also, “if [regulators] don’t give a clear safe harbor to banks” that comply with the rule, “that’s going to constrain lending further,” he said. “It could be fairly significant.”

The international capital standards also are hitting banks in a way that could force many of them out of the mortgage business, he said, or drive up the rates that consumers have to pay by as much as 2.5 percentage points. A study by the conservative American Action Forum recently found that the combination of regulations hitting banks next year could cut lending by 20 percent.

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