Dodd Frank Keeps Generating Housing Market Uncertainty

The Dodd-Frank Act has single handedly kept mortgage lenders and servicers on their tiptoes in the past few years and is expected to do the same in 2013.

At yearend 2012 much talked about fiscal issues were only part of what mortgage industry insiders had to worry about. Other legislation, namely various expiring or nonexisting Dodd-Frank Act deadlines, along with confusing requirements, continue to keep up the suspense of an uncertain future.

The servicing industry is facing the most challenging regulatory environment ever that causes uncertainty and consumes unprecedented resources, says Leonard A. Bernstein, a partner at Reed Smith LLP of Philadelphia. “It is a good reason why people want to hold back, even exit the marketplace.”

The bottom line, he argues, is that whether there is any true regulatory compliance driven economic damage or not, the perception of uncertainty does not help improve the mortgage marketplace, quite the contrary.

In his view, one of the key challenges for mortgage servicers is the impending codification of the national mortgage settlement. The mortgage servicing rules proposed by the Consumer Financial Protection Bureau represent a major compliance burden that is not yet finalized into a law that applies to all servicers.

Also, the not-yet finalized proposal to integrate the Truth in Lending Act and the Real Estate Settlement Procedures Act disclosures will affect the loan origination side and by default servicers.

CFPB regulation issued in September contains major changes to mortgage servicing. One example is an effort to regulate loss mitigation procedures including loan modifications and HAMP. Since previously servicers were not required to do modifications the rule gets will specify how.

Dodd-Frank imposes no deadline for the adoption of the integration of TILA and RESPA disclosures.

The CFPB recently adopted a temporary exemption for several mortgage disclosure requirements added by the Dodd-Frank Act to allow the implementation of these disclosures alongside the integration of RESPA and TILA, which according to attorneys from Ballard Spahr, a specialized counseling firm based in Washington, was a positive move and for a number of reasons.

Without the temporary exemption, the disclosures would be required as of Jan. 21, 2013. Plus, when the CFPB issued a proposal to integrate the RESPA and TILA disclosures earlier this year it also proposed to temporarily exempt the mortgage industry from compliance with 12 new disclosures the Dodd-Frank Act added to the blended RESPA and TILA.

The goal, they wrote in a recent report, was to avoid the need to amend the existing RESPA and TILA documents just for the short term. Thus, the exemption helps save both time and money for the CFPB and the industry, avoids potential consumer confusion and unnecessary costs, and also “affords the CFPB the opportunity to assess the new disclosures in connection with consumer testing of the integrated disclosures.”

Meanwhile, the temporary exemption applies to RESPA’s appraisal management fee optional disclosure and at least eleven TILA disclosures including its negative amortization feature warning, the state anti-deficiency protection disclosure, the partial payment acceptance policy disclosure, the mandatory escrow account disclosure, or the settlement charges disclosure.

The report notes that all disclosure changes are reflected in the proposed loan estimate and/or closing disclosure, “the centerpiece of the integrated mortgage disclosure proposal.”

According to Ballard Spahr, based on consumer testing the CFPB is considering not adopting at least two of the listed disclosures and has requested comment on this consideration. And as the CFPB continues to assess the validity of these disclosures lenders-servicers affected by these requirements are in limbo waiting.

Meanwhile the regulatory landscape keeps changing.

The Mortgage Debt Relief Act of 2007 is originally set to expire on Dec. 31, 2012. As a rule the Internal Revenue Service considers cancelled debt as income, but a provision of the relief act has allowed borrowers to exclude from income “certain cancelled debt,” through a loan modification, after a foreclosure or a short sale on a principal residence.

As stated in an Internal Revenue Service excerpt, “Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”

“As signatories to the national mortgage settlement,” several state attorneys general wrote to Congress urging legislators to extend forgiven debt tax relief “so that distressed homeowners are not stuck with an unexpected tax bill or deterred from participating in” the national mortgage settlement or other mortgage debt relief programs that will provide them debt relief in 2013.

They note that according to the Congressional Budget Office, “failure to extend this tax exclusion will result in $1.3 billion in tax increases on the very families who can least afford it.”

By early December Section 112 of the Family and Business Tax Cut Certainty Act of 2012 (S. 3521) received bipartisan support from the Senate Finance Committee.

Similarly, the Mortgage Bankers Association also expressed concern in December warning that unless the act is extended, short sales could decline sharply.

Feedback from at least one real estate agent based in Orange County show there is a very small REO inventory and a shrinking short sale “active” inventory. If the relief act is removed from the equation, argued Paul Reid, a Redfin real estate agent, given the large number of pending short sales in many distressed areas the number of short sales may drop significantly, “but because of how slow the REO process is, you wouldn’t likely see a proportionate increase in the number of REO listings.”

Lost in the conversation about the potential combined effect of federal spending cuts and tax changes “is a discussion about how much damage any agreement may cause,” says Keith Gumbinger, vice president of HSH.com, a Riverdale, N.J.-based provider of mortgage loan data and analysis based on data from hundreds of direct lenders. 

“Add to that somewhat less encouraging economic news and mortgage rates have found some space to fall of late,” he added, “Fortunately, slower growth is good for mortgage rates, so favorable financing opportunities should persist.”

The question in everyone’s mind is: Will Dodd-Frank challenges persist or dissipate in 2013? Will it in the end offer more protection to borrowers and new opportunities for businesses?

New proposals and regulations will continue to regulate the industry more than it has ever been regulated before, says Bernstein, and almost all of these regulatory pressures emanate from Dodd-Frank whose ramifications will last for years simply because many of its rules have not been finalized. “Nobody can predict whether in 2013 Congress will amend it, or not.”

The amount of litigation has steadily increased over the years, he says, and “it promises to get worse as the regulatory compliance process becomes more and more complicated.”