Industry Watches QM Closely
Mortgage originators are casting a wary eye toward what is happening in terms of regulation as they await the definition of a “qualified mortgage” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
At the same time, as attendees at the Northeast Conference of Mortgage Brokers in Atlantic City, N.J., learned, the Consumer Financial Protection Bureau has been out and about, not only with its auditors, but its attorneys as well.
The legal professionals are only supposed be accompanying examiners so that they can get a handle on the mortgage business.
The industry has obviously cast a wary eye on that as well.
Origination News managing editor Brad Finkelstein met with representatives of the state mortgage banker and mortgage broker groups in New Jersey.
In the following portion of the conversation, the discussion suddenly shifted from how to get new, younger people into the mortgage business to what the situation is and could be when it comes to reestablishment of the non-conforming market.
Finkelstein spoke with John Amrhein, the past president of the Mortgage Bankers Association; Joseph Heisler Jr., president of the New Jersey Association of Mortgage Brokers; and E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey/New Jersey Association of Mortgage Brokers and counsel to their Pennsylvania counterparts.
Also participating in another portion of the discussion was Paul Logan, president of the Pennsylvania Association of Mortgage Brokers, who commented on the departure of big depositories from the wholesale market and the influx of smaller mortgage bankers that have moved in as the larger players have moved out.
The New Jersey Association of Mortgage Brokers and the Pennsylvania Association of Mortgage Brokers co-sponsored the Northeast Conference of Mortgage Brokers along with the Maryland Association of Mortgage Brokers.
During the show, Levy announced the creation of a regional trade group through a merger of Pennsylvania Association of Mortgage Brokers, the New Jersey Association of Mortgage Brokers and the Mortgage Bankers Association of New Jersey, to be called the Mid-Atlantic Association of Mortgage Bankers and Professionals.)
FINKELSTEIN: You speak about your long-term experience in your markets and that brings up another point. This industry has gotten older. The fallout from the boom into bust has resulted in a lot of those who came into the industry in the early 2000s no longer in it. Plus the reputation problem has made it harder to recruit younger people right now. Are you seeing that in your trade groups? And some companies are trying recruiting recent college graduates. Can that work?
LOGAN: I will try to address that a little differently than how you approached it. The large megabanks who were wholesalers have abandoned the market. They had their business reasons to do so. However, there are more and more small mortgage bankers who are wholesalers entering the market today than ever before. So they would not come into the market if they felt the market wasn’t growing. And the market is growing and they are filling the void of the megabanks who have left the wholesale channel. In that sense there is growth there. I think brokers are looking for alternatives to fit their needs. The next wave might be if we can come up with a way to come back to the people who were severely damaged in the recession with their credit and get them back into the market to buy homes. That part is blue sky, but I will tell you without hesitation with every month that goes by, two more wholesalers that come into the market.
AMRHEIN: From the standpoint of an individual loan officer situation, we do it more difficult to get loan officers out of college and into the business. First of all, a college graduate is not equipped to be a loan officer. It is a significant expense on behalf of companies to recruit and train individuals to be a loan officer. Even a newly licensed loan officer, just because they passed that test, they may not have every skill they need to transact business on a daily basis. There is a phase in time. There clearly is an age gap right now in the mortgage origination business.
HEISLER: And you will see that tomorrow at the general session when you look around the room. I know I’ve seen that the last several years—70% to 80% of the originators in New Jersey are no longer here. All of what this is doing, from I what I see after five years of listening to “the broker is dead,” everybody is going to come back to the same point we’ve known all of these years, that the most efficient delivery channel in the system is the mortgage broker. Banks are going to have problems recruiting on a retail basis and if they want mortgages, they are going end up going back to the most efficient delivery channel that exists, which is the mortgage broker. The mortgage brokers have the same challenge. It’s hard to bring younger people in the industry; it is the same whether you are a mortgage broker or a mortgage banker—good quality people who believe that there is a future in this industry.
LEVY: We don’t know at this point what the qualified mortgage definition is going to look like. It could be very restrictive. If the Consumer Financial Protection Bureau comes out and creates a conservative definition, those are the only loans that are going to be made. I came back from a regulatory compliance conference recently and we had somebody there from the CFPB talking about fair lending. The question was asked would their be any problem if I just decided I was only going to make QM loans is this a fair lending violation? The answer was, she didn’t know. And this is after all of the time they spent working on QM. This is a very logical question and they don’t know the answer.
AMRHEIN: That’s a real problem because once this definition on QM comes out, there is going to be virtually no one who is going to want to make a loan that doesn’t meet the QM requirements.
LEVY: You’re going to want to make one real badly if you are going to wind up with a fair lending violation. It’s a dilemma.
FINKELSTEIN: There seems to be talk of a subprime market redeveloping. But [the Qualified Mortgage definition] could put the kibosh on that happening. Do you think we will see any kind of subprime business coming back soon?
AMRHEIN: Not the subprime market as it once was. It is very difficult to make a loan to an individual with a credit score under 640. The subprime market as we knew it before made loans with credit scores below 580. I don’t think we’re going to see that type of a subprime market come back. So what the definition of subprime will ultimate come to be in this next generation will be substantially different than what we knew it to be in the past. So I don’t think we will get to that market again. But clearly there is a segment of the population with credit scores below 640 that can’t purchase a home and that is an issue. Companies that originate loans through state housing finance agencies, which do not have credit score limitations, there is a lot of emphasis to originate those loans. When you originate those loans and they go delinquent, then you are penalized by the Department of Housing and Urban Development for a high compare ratio. It’s a very difficult juggling act right now. So many aggregators look at that compare ratio as a measure of the quality of your business and as a criterion to be approved to do business with them.
HEISLER: I agree with John as far as defining subprime. You call it subprime; it doesn’t mean it is horrible, it just means it isn’t AAA. There used to programs where we could verify income through deposits and bank statements. There were underwriters who would actually look at circumstance. In a year or two, hopefully everything’s back to normal (in the U.S. economy). What do you with that large group of people who lost their jobs or had health issues and had valid reasons (for missing payments) and now are back on their feet? When we do everything through Fannie and Freddie, it goes through their underwriting engines, when you hit a debt-to-income ratio and it stops you. If you are at 44.99% DTI you get approved; if you are at a 45.001% you don’t. There is nothing in there that says, “This guy’s got $800,000 in the bank, or he’s been on his job for 27 years, or he’s never made a late payment on anything in his life.” This magic that computer decided—it is like Oz behind the curtain.
AMRHEIN: And the agencies will tell you their automated underwriting engines don’t make decision on loans. However, no underwriter, for risk of repurchase, is going to make that decision and that’s that reality.
HEISLER: I have had companies that I broker loans to tell me their underwriters are afraid to approve loans. We’ve basically flipped. Part of the problem was, where this started was if you had a certain credit score you didn’t need to verify your income, you didn’t need to verify your assets, you didn’t need to verify your job. If you had this credit score, you paid the loan back. Now we’ve gone the other way. And the penalties for (poor) credit scores and (high) loan-to-value ratios from Fannie and Freddie are egregious for what people are paying for having an average credit score.
LEVY: You had an MBS market out there that doesn’t exist anymore.
HEISLER: It is for jumbos. There is a private market but it is very, very limited and it is very, very high quality loans.
LEVY: You were using criteria that were meant for wealthy folks. Stated income loans were fine for multimillionaires.
HEISLER: They can also be fine for small business owners who are not multimillionaires, if they have the credit score and the downpayment.
FINKELSTEIN: The problem was, is that they were being used for busboys, waiters and the like.
LEVY: You do have ability to repay in Dodd-Frank also. Right in the Dodd-Frank Act there is a listing of criteria for ability to repay. In Pennsylvania, we’ve had one for years, but you didn’t have the CFPB. So now, you have this agency whose function is to protect the consumer, and we all agree the consumer should be protected, no question about it. I’m not even getting into QM yet, but you’ve got this ability to repay requirement, you also requirements like unfair, deceptive and abusive acts and practices—abusive was not in the law under Federal Trade Commission. You have these criteria in the hands of the CFPB, who comes marching in to a mortgage company’s offices with fair lending experts and enforcement attorneys. You have all of this coming at you, and think about as a company, with that out there are you really going to start doing some tougher subprime loans? There is a lot out there that needs clarification.
HEISLER: But the subprime market will come back. One of the things you keep hearing in the news and on Wall Street is that there is no return on investment anywhere.