The end of the refinancing boom is likely to prompt to a wave of consolidation among mortgage lenders because there is simply not enough purchase business to go around.
That's the assessment of Rick Aneshansel, a longtime U.S. Bancorp executive and incoming president of the company's home-lending unit.
Interest rates have jumped in the past month, causing refinance volume to drop to 68% of the mortgage market, down from 82% in January, according to the Mortgage Bankers Association. Aneshansel doubts that home purchase volume will make up for the drop in refinancing activity —job growth is still too anemic—and the upshot, he argues, is that some lenders will have little choice but to exit the mortgage business or pair up with a competitor.
"If industry volumes are down, the industry has to resize itself," Aneshansel says. "When we go through those cycles we see consolidation. I think it's going to be a period that has some challenges and there will be winners and losers."
Aneshansel will take over as president of U.S. Bank Home Mortgage at the end of June, replacing Dan Arrigoni, a 42-year mortgage industry veteran who is retiring.
He is taking the helm at a time of profound change for the mortgage industry. Not only are refinancings expected to slow dramatically in coming months, banks are still trying to digest new mortgage rules from the Consumer Financial Protection Bureau that require proof of a borrower's ability to repay a loan. The question is whether the changes will reduce the eligible pool of borrowers—a major concern given that mortgage income has driven bank profits over the last two years.
In an interview last week, Aneshansel and Arrigoni said that while the industry is in a state of flux, there are some bright spots. With home prices stabilizing and even rising in many markets, home equity lending is poised to take off, they said.
They also veered away from the industry's usual talking points on the Consumer Financial Protection Bureau and heaped praise on the agency that bankers love to hate. The perception among bankers is CFPB wields too much power, but Arrigoni says that the agency has shown that it is willing to listen to banks' concerns.
"We have been able to talk with the CFPB and explain what the pluses and negatives could be and they've been very open—and that has been wonderful," says Arrigoni.
It may take some time for lenders to be comfortable with the CFPB's rules. Aneshansel says bankers are still digesting nearly 3,500 pages covering seven new regulations in the first quarter alone that have to be implemented by January 2014.
The CFPB's revised final ability-to-repay rule, released last month, went a long way toward easing concerns that it would not completely restrict access to credit while also creating an ultra-safe class of “qualified mortgages” that shields lenders from being sued by borrowers.
"There is a slight tightening of credit associated with QM," Anshensal says. "As far as lending outside the QM box, that's still to be determined yet. I think lenders are fairly leery of the consequences of a robust non-QM market and here, we're still discussing it."
During the debate on QM, mortgage lenders had asked repeatedly for "a bright line," that would distinguish ultra-safe loans, and they got it with the specific cut-off of a 43% debt-to-income ratio. But that bright line may have little meaning given that lenders have seven years to make exceptions on loans insured by Fannie Mae and Freddie Mac while they are still under conservatorship.
Adhering to so many regulations is perhaps the biggest concern for mortgage lenders. A common refrain is that one regulator agency is not talking to the other.
"We're always going to have to make sure that we're not playing with fire in trying to adhere to one regulation but ignoring another one," Arrigoni says. "One of the things we constantly say when we come into Washington, is we hope you guys are all talking to one another. I've been in meetings where HUD is saying one thing, the CFPB is saying another and the Fed is saying another."
Still, given the massive breakdown of underwriting standards that led to the financial crisis, U.S. Bank executives are generally pleased with the outcome of most of the regulations.
"More than a year ago there wasn't even a glimmer of hope where the industry wanted a safe harbor," says Aneshansel. "We're quite happy that in many cases they've moved in a direction that is best for both the consumer and the industry."
Mortgage lenders are still grappling with the hangover of foreclosures, short sales and loan modifications. As lenders try to find credit-worthy borrowers, they are struggling with what to do with those underwater homeowners who walked away because they owed more on their mortgage than their home was worth.
Typically these borrowers would be shut out of the market for two to seven years, but Arrigoni suggests that some might be worth taking a chance on.
"There are people that have done short sales or have walked away from being underwater and they want to come back in and buy homes again," Arrigoni says. "Our industry is going to have to address that and if there are circumstances that would allow a lender to look at each individual borrower."
A bigger opportunity is in home equity lending, they say.
"We see continuing [home price] appreciation and as people get right-side up there's an opportunity to grow home equity lending in a responsible way," Aneshansel says. "We believe that will be a growth product in the next few years."