If credit standards are being loosened, they are being done out of fear of losing revenue, says Daniel Jacobs of Pro Mortgage Banking Solutions during a panel discussion hosted by National Mortgage News at the Mortgage Bankers Association’s annual convention in Washington.
Lenders have to quantify what the risks are when they make a loan, Jacobs says. With the new regulation there is no track record of enforcement and the industry doesn’t know “if there will be police on the side of the road to see if I am speeding and what will that ticket cost me. Will it cost me $100 or is it going to cost me my driver’s license?” Jacobs says.
It might take a couple of years before the industry sees CFPB having set enough enforcement examples before the industry can quantify the risk and decide how to operate going forward, he says.
But even that loosening of standards is being done cautiously as the industry seems to have learned the lessons from the crisis.
If the “irrational restriction of credit” in today’s market continues, the effect on the economy could be greater than the losses seen during the crisis, Lewis Ranieri, chairman of Ranieri Partners, said earlier at the convention.
Fear is why a larger percentage of people than necessary will be excluded from purchasing a home.
Not everybody is qualified to purchase a home but to deny people credit by using arbitrary means such as the overreliance on credit scores is not rational, he stated.
Uncertainty about Consumer Financial Protection Bureau enforcement of the QM rule is what is holding lenders back from widening credit availability. Certain protected classes of borrowers such as minorities and low-income consumers will find it more difficult to get a loan.
That is an unintended consequence of CFPB’s actions, says Jonathan Corr, president of Ellie Mae.
It is a “noble goal” to protect the consumer, to make sure the past is not repeated. But it is the people on the margins of the lending spectrum who will suffer the most.
There are unquantifiable costs of compliance such as fines or other regulatory and legal actions if a loan doesn’t meet the QM test, says Amy Brandt, chief operating officer of Prospect Mortgage.
As a result, lenders will be very cautious with the type of business that they will do in the first half of the year, waiting to see what types of enforcement actions will come down, adds Phil Huff, chief executive officer of Platinum Data Solutions.
Ellie Mae interacts with CFPB several times a week as it is getting its technology platform ready for the Jan. 10, 2014 start date for QM.
CFPB has been indicating that if lenders are trying to do the right thing but somehow have gotten outside the lines, the agency is not likely to be heavy-handed, Corr says. But if a lender is completely negligent, that is when the regulator will unleash its power.
So far, CFPB has done what it said it will do, and it will be a surprise if it will do anything different than what it conveys, Corr says.
It can take years before there is any clarity in the market, Huff says. But as the rule takes effect, there will be those that will see an opportunity in doing non-QM loans.
What might hold people back is the uncertainty over the legal and regulatory risks for doing them, Brandt says.
Companies will get in trouble and it is only then they find out it was the wrong thing to do, she continues.
Several lenders spoken with during the conference say they will take a wait-and-see attitude about doing non-QM loans, if they are considering doing them at all.
Then there is United Wholesale Mortgage. The company is planning to come out with a non-QM product for mortgage brokers to originate and it is looking to roll it out before Jan. 10, says company president Mat Ishbia.
There is a lot of opportunity for those who want to do this product, but only if it is done right, he says during an interview conducted separately from the roundtable. Anyone doing these loans needs to protect their business as well as the consumer.
Don’t expect UWM to be pushing the boundaries with the non-QM offering. It is “a conservative company by nature” and the product will on the low end of the risk scale, Ishbia says.
Right now, a borrower with a 670 credit score, with a 45% debt-to-income ratio and no reserves seeking a 95% loan-to-value ratio mortgage with the downpayment coming as a gift from his parents is able to get a conforming loan or a Federal Housing Administration insured loan.
But no lender is willing to originate a mortgage to a borrower with a 780 credit score, five years of reserves and a 65% LTV with a 51% DTI and additionally is self-employed.
“There are borrowers who deserve mortgages and that is where I think the non-QM stuff will be,” Ishbia says.