The new age in mortgage lending includes more regulations, a higher cost of doing business and an increase in the cost to originate loans.
What we have not embraced as an industry is the fact that to remain viable in this highly competitive, narrowing margin era, these costs will need to be passed on to consumers. The only way to prevent that cost from being overwhelming is to gain efficiencies through the use of technology and systems that are compliant with this new era.
It is not yet clear whether leaders at the federal level truly realize that the heightened scrutiny established to protect consumers against a few nefarious mortgage individuals and/or companies will result in driving up the cost of lending.
Mortgage companies that want to survive have little recourse other than to pass a portion of that cost on to consumers. This is the complete opposite result of the government entities’ goals of helping homeowners achieve affordable home ownership.
One of the new rules that will increase the cost of originations is the qualified mortgage. As we have heard, the QM was designed to prevent lenders from lending to borrowers with a debt-to-income ratio of more than 43%. The flip side of this is that non-QM loans, that undoubtedly will be a part of the future landscape, will be more expense for lenders to originate because they will need to cover their addition risk.
The increase could be in the interest rate or the fees for these loans, or both. Additionally, there are the new quality controls related to QMs that also will go into effect on Jan. 14, 2014 requiring lenders to further scrutinize and modify their internal efforts, which means additional cost.
According to Mortgage Bankers Association’s president and CEO David Stevens, 22% to 25% of jumbo loans have debt-to-income ratios above 43%, which excludes them from the QM rule. In addition, interest-only loans are prohibited under QM. This translates into buyers of higher-priced homes having higher lending costs or having to provide a much larger downpayment.
Another expense increase for lenders will come as a result of the CFPB requiring them to provide written estimates of loan terms and closing costs to customers.
While part of the reason for this is to allow consumers to shop around for service providers and even loans, many consumers have not taken advantage of this rule based on the uniform disclosures already required by the Truth in Lending Act or the Real Estate Settlement Procedures Act. Because the CFPB has a “zero tolerance” for providing lowball fee estimates from unaffiliated service providers, lenders have now increased fees to ensure that they are in compliance.
Also effective Jan. 14, servicers will be required to comply with “common-sense” rules that many industry professionals believe will increase the cost of servicing defaulted loans.
The industry is getting squeezed on both sides, and common sense begs the question of who is truly benefiting from these new rules. People who agree with the school of thought in retail, the more you pay, the better the quality, might see this as a win for consumers. They certainly will pay more and the quality certainly will be better.
Simply throwing more bodies at the effort to be compliant will not make it easier for companies. Every company that touches the mortgage industry can benefit from exploring systems that allow them to track internal processes while capturing data on those processes.
This will not only allow managers to determine if the company is compliant but also whether they need to make adjustments to improve efficiencies.
The good news is that in five years, the CFPB, in accordance with the Dodd-Frank Act, which created the bureau, will conduct a study to determine the effectiveness of its rules and identify whether the higher costs of originating loans will affect consumers.
While forecasting another five years before the rules are even in place is risky, we know that the new mortgage era will include a higher cost of doing business.
No one is able to definitively tell what the effect of all rules will be and how much loan origination and servicing costs will increase; however, as we have seen with loan origination and servicing systems, properly engaging technology has significantly reduced those costs for mortgage companies and ultimately the party the rules were meant to protect, consumers.
Using technology will help ease the industry and consumers into the new normal and help each party receive the benefits of this new age.
Sanjeev Dahiwadkar is CEO of IndiSoft.
