Why Qualified Mortgages Could Clobber Housing
Consumer protections embedded in an impending “qualified mortgage” definition, paired with lenders’ tight focus on making low-risk loans, pose a threat to a fragile housing recovery.
Neither the Consumer Financial Protection Bureau nor the large lenders are likely to admit publicly that fewer borrowers will, and probably fewer people should qualify for mortgage loans, says Rick Sharga, executive vice president, Auction.com, Irvine, Calif.
“It's very likely that the major depository banks are going to focus most of their lending on QM loans when the new CFPB rules take effect in January,” says Sharga. “The CFPB already estimates that 90% of today's loans fall within the QM rules, so we're probably already beginning to see that trend happening.”
He expects banks will continue to look for loans with the lowest risk, including regulatory risk, litigation risk and headline risk. “And QM loans fit that description.”
One thing that might indicate a shift in a lender’s focus would be a dramatic change in the balance sheet. And Bank of America is one of the banks hurrying to clean up high-risk, delinquent loan operations.
Its executives, though, deny the megabank is dramatically reducing the number of delinquent loans in its mortgage servicing portfolio because it is shifting strategy to focus on low-risk, so-called vanilla loans.
“Generally, Bank of America does not discuss specifics of MSR sales and transfers, so we will not be providing a full accounting or details of all transactions we have completed or plan to complete,” explained Rick Simon, a spokesperson for Bank of America Home Loans & Servicing, in an email. B of A has been actively reducing its mortgage servicing portfolio for a couple of years, he wrote.
“B of A’s strategy is the path chosen by several other banks” currently involved in strategic MSR sales for various reasons, while nonbank servicers continue to build scale, he said.
“Many of the loan types” included in these sales or transfers represent products B of A has discontinued or, in many cases never offered, Simon noted. “This activity ties directly to our ongoing focus on simplifying the company [and] reducing exposure to acquired portfolio risk.”
Bank of America decided to sell or subservice 6.5 million of the 13 million mortgage loans in its servicing portfolio that were identified as high risk at the end of 2010, according to Moody’s Investors Service. The ratings agency recently reported that by September 2013 the bank had reduced its loan servicing portfolio by almost half compared to 2010.
“This strategy significantly changes Bank of America’s servicing operations. It involves cutting staff levels and closing or consolidating servicing sites,” says Gene Berman, Moody’s assistant vice president and author of the report. “Bank of America has executed on its strategy thus far, and if it continues its efforts, will no longer be a major servicer of delinquent loans.”
As of Aug. 31, the servicing portfolio totaled around 6.7 million loans with an unpaid principal balance of approximately $910 billion, down from 10.5 million loans with an UPB of $1.5 trillion as of Aug. 31, 2012. In addition B of A reduced its full-time staff to 42,000, down from its peak of 59,000 employees, cut down the number of servicing locations from 51 to 33, including eight vendor sites in 13 states, “and may eliminate other sites or transition them to origination platforms,” he said.
Moody’s also reported that B of A is outsourcing 25% of its primarily early-stage collections activity, down from a peak of 70% and the use of single point of contacts to coordinate loss mitigation activities from 9,000 in November 2012 to just under 2,000.
These changes could also indicate the bank is getting ready to operate in a QM-dominated marketplace.
The mortgage industry, and regulators, overcorrected after the housing bubble burst, leading to a tight credit environment that slowed down the housing market recovery, Sharga says. “Tightening credit further—whether because of QM rules, or simply because of shifts to more risk-averse lending practices by major lenders—will certainly slow down buying even further among potential owner/occupants.”
Currently, U.S. housing price appreciation is the only good news homeowners have had in years, but it also is bad news for aspiring homeowners who cannot afford to buy.
Ron D'Vari, CEO and co-founder of NewOak, New York, said in a blog that the combination of higher rates and the rise in home prices to near pre-crisis levels in some parts of the country “has pushed the mortgage burden to over 33% of borrowers' monthly income.” As interest rates increase, even with a moderate rise in home prices in some of the major cities, “the mortgage expenses can exceed 45% of borrowers' monthly income.”
Sharga does not advocate returning “to the bad old days when virtually anyone could get a loan for virtually any amount on virtually any home,” just to a more reasonable lending environment where millions of potential homebuyers would qualify for a reasonably priced loan. If not, he adds, ultimately these borrowers will probably be served by nonbank lenders, who will offer non-QM loans at prices that have higher rates than conventional loan products.