Although 2010 was a good year for lenders, due to extremely low rates, there were many challenges as far as new regulation, compliance and underwriting guidelines.
On the regulatory front, lenders dealt with the Home Valuation Code of Conduct (HVCC), the Mortgage Disclosure Improvement Act (MDIA), Higher Priced Mortgage Loans under Regulation Z (HPML), the Safe Act, and the sweeping changes to RESPA.
2011 will be much more of the same – new regulation is being piled on lenders, little of which benefits the homebuyers and, in many cases, has the unintended consequences of the total opposite result.
Regulation in 2011
Loan Officer Compensation
Since the new Federal Reserve rule says that loan originators must be paid the same amount for all types of loans, lenders will no longer be able to pay loan officers less for product types with lower margins. Lenders will be faced with the decision to discontinue offering some products. There are many more complex faucets to the rule, and some tough compensation guidelines for mortgage broker companies, which are considered “loan originators” under the rule.
Regulation Z – Truth-in-Lending
January 30 brought the implementation of a new Truth-in-Lending statement which no longer discloses a payment stream, but instead discloses the maximum payment in the first five years.
The Federal Reserve’s proposed rule for Regulation Z changes would require inclusion of all closing costs in the APR calculation, rather than just finance charge, but would require a second calculation of APR for purposes of determining if the loan is a higher priced mortgage loan, which would require additional underwriting criteria if the loan falls in the HPML category.
The proposed rule would also add another three days to the lending process by giving the borrower the right to request a refund of their application fee for three days after signing the initial truth-in-lending disclosure. This timeline would be in addition to timelines required as a result of the previous MDIA rule.
Home Mortgage Disclosure Act (HMDA)
Characteristics of all individual loan applications, which are reported to regulators on a yearly basis, would expand to disclose much more information.
Fair Credit Reporting Act
As of January 1, 2011, borrowers must now receive a credit score disclosure that informs them of their score – what it means, how it is used, ranges of scores, factors that affect the scores, how they rank among other consumers, the right to dispute, and that the score can affect the cost of credit.
Dodd-Frank Financial Reform
Dodd-Frank will bring 500 new laws, approximately 115 of which will affect mortgage lending! There will be tens of thousands of pages of rules. Dodd-Frank will impose huge regulatory burdens on small and regional financial institutions.
Formation of the Consumer Financial Protection Bureau
This far reaching independent bureau within the Federal Reserve will be responsible for Fair Lending enforcement, rule making for all consumer related regulation (except auto and retail), supervision over depositories with more than 10 billion in assets, examinations of smaller depositories, and enforcement authority over non-banks that provide mortgage-related services
Lenders are already facing tighter underwriting requirements from the agencies due to high unemployment, falling home prices, record foreclosures, record bankruptcies, and shadow inventory.
Those standards include:
• higher credit scores
• tougher appraisal requirements
• increased documentation
• increased waiting periods to finance after short-sales, bankruptcies and foreclosures
Interest rates are no longer a matter of supply and demand. Rates will be forced upward due to:
• the increased cost of regulation and compliance
• agency repurchases being forced back on lenders
• government borrowing to finance the federal debt
• lack of investors in mortgage revenue bonds
• new increases in agency pricing add-ons
Trying times for lenders
Mortgage Brokers will be faced with the challenges of lenders that are exiting the wholesale market, thus limiting their choices of where to place loans. Many wholesale lenders will be capping compensation to brokers due to recent compensation regulation. Since brokers will only be able to earn compensation from either the lender or the borrower, but not both, borrowers will be limited in their choices of rate offerings.
Mortgage bankers will be faced with the cost of regulation and compliance. An escalating number of loan repurchases from secondary market investors and the GSEs will create financial burdens.
FHA’s new net worth requirements, which quadrupled in 2011 and go much higher in May of 2013, will cause many smaller operations to give up their direct endorsement authority and be forced to broker to larger lenders.
Depository institutions will also be faced with the cost of regulation and compliance. Many depositories, especially small banks, will be challenged with the decision of whether or not to exit the mortgage lending arena because they don’t have the expertise that will be required to implement and monitor all of the new regulation. Loan repurchases will continue to be an issue for depositories.
With problems come opportunities
At 66.5 percent, the homeownership rate in December 2010 reached its lowest level since the end of 1998. The rate among white households is 74.2 percent, black households 44.7 percent, Hispanic households 46.8 percent. The low homeownership rate among blacks and Hispanics provides many opportunities to promote homeownership within these communities.
HUD expects its foreclosure inventory to increase by 50 percent in 2011. Shadow inventory is estimated at 2-4 million units. Housing inventory is expected to remain elevated for some time to come. This means great price opportunities for home buyers.
Congress has extended the deductibility of mortgage insurance through 2011. This includes the mortgage insurance premium on conventional, FHA, VA and USDA loans. Homebuyers that wait until after 2011 will lose the opportunity to take advantage of this deduction.
The good news is that mortgage interest, real estate taxes and mortgage insurance are still deductible. Rates are still low, there’s lots of inventory, and prices are affordable.
That old saying, “Now is the time to buy” holds true – now more than ever!
Marianne Collins is a 34 year veteran of the mortgage lending industry and Senior Vice President of Residential Mortgage Lending for Insight Bank. She is past president of both the Columbus and Ohio Mortgage Bankers associations and served two years on the Fannie Mae National Advisory Council. Marianne is deeply involved in legislative and regulatory issues concerning real estate finance.
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