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Mortgage industry insider warns about a stifling regulatory cliff

- The Washington Times - Thursday, December 20, 2012

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.

Major banks and lenders are exiting the mortgage business because of the high losses from defaults on loans made during the housing bubble and risks of further losses through regulation and litigation, Mr. Stevens said.

He pointed to Metropolitan Life's recent decision to drop its mortgage-lending division and Wells Fargo's decision to shut down its wholesale lending channel.

"People are running from the credit markets. It's actually the greatest risk that we face," he said.

Given the public furor against banks, mortgage lenders are resigned to more regulation, Mr. Stevens said, but would like the rules written with greater attention to the market's needs and more coordination among the half-dozen federal agencies writing the rules as well as dozens of states that are taking action against banks.

"There's a multitude of cases going on," he said. "Consumers and lenders need to have clear rules of the road."

Where lawsuits overlap, he said, the U.S. Department of Justice should coordinate and try to get a "common, mass settlement" so that banks no longer face an endless risk of litigation.

Political absence

Despite the massive housing market collapse that sent the broader economy into a deep recession in 2008, Mr. Stevens said, political leaders seem to be reluctant to discuss or address the many remaining problems, including the continuing credit shortage and the need to revive the defunct private market for mortgage financing.

Since the crisis, more than 9 in 10 mortgages have been provided through federal guarantee programs sponsored by Fannie Mae, Freddie Mac and the Federal Housing Administration.

"There's been really very little attention paid to the housing market" in the past couple of years, he said, despite its importance to the overall economy. "Chairman Bernanke is the only one focusing on it."

The association estimates that housing drives about one-fifth of U.S. economic output, when taking into account not only homebuilding and sales, but also sales of furniture, utilities and many other businesses connected indirectly to housing.

Despite the Fed's concern, the central bank could contribute to the mortgage market's woes in the next year or two when it starts to sell off the trillions of dollars of mortgage bonds and Treasury securities it has accumulated since 2008 as it sought to drive interest rates lower through unconventional bond-purchase programs, he said.

The Mortgage Bankers Association expects the Fed's exit from the market eventually to drive up mortgage interest rates by about one-half percentage point from today's historic lows of less than 4 percent.

Although that doesn't sound like much, Mr. Stevens said, it's enough to snuff out the mortgage-refinancing boom and could stifle the tentative growth in mortgages for home purchases that has emerged.

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