There will be a market for loans that do not meet the qualified mortgage rule, but the size and shape of that market remains unknown.
Some participants in our roundtable discussion at the Mortgage Bankers Association convention see an opportunity to be successful in rules that fail to meet the standards laid out in the qualified mortgage rule.
Others are worried about ďgot youĒ enforcement of the qualified mortgage rules by the Consumer Financial Protection Bureau and that is what is affecting the development of non-QM business.
At one point the discussion about operating in the new regulatory environment centered around the word ďfear.Ē
Lenders have to quantify what the risks are when they make a loan, says Daniel Jacobs, a former retail branch executive.
The inability for the market right to determine what those risks are is what is causing that fear.
That is because with the new regulation there is no track record of enforcement and the industry doesnít know ďif 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 driverís license?Ē Jacobs says.
It might take a couple of years before mortgage lenders see CFPB having set enough enforcement examples before the industry can quantify the risk and decide how to operate going forward.
The participants in this part of the discussion are Cecil Bowman, senior vice president of National Credit Reporting Systems; Amy Brandt, chief operating officer of Prospect Mortgage; Bill Cary, executive vice president of Lender Processing Services; Mark Fogarty, editorial director of Origination News; Phil Huff, chief executive officer of Platinum Data Solutions; and Jacobs, who is president of Pro Mortgage Branching Solutions.
HUFF: Thereís going to be a whole market of people that will do non-QM mortgages. Thereís going to be a whole group of companies that pop up and do that and I think youíre going to see a whole new awakening. We donít even know whatís going to happen to the FHFA and with the GSEs and how thatís all going to shake out yet, but I think as the QM takes effect and you start seeing other investors, other people providing capital into the markets, that youíre going to see a whole new division of lender thatís going to help drive what happens, not only on the implementation side, but on the secondary side too. So I think itís more than just CFPB. I mean thereís a lot still has to happen. We canít even get Mel Watt approved, so how do we know whatís going to happen with the FHFA level or with the GSEs yet? And then that will change everything. So I think weíre years away from any clarity, to be honest with you. I really do.
BRANDT: Thatís the unquantifiability of the risk is based on the uncertainties of the outcomes. And itís not clear yet how non-QM loans that do proceed to litigation, how that litigation will go, what will the litigation costs be, what will the penalties be? And in the case of the CFPB, itís not clear. The way that they make administrative law through enforcement actions is not that proactive for us to understand where theyíre going to go, what we need to do to be compliant. Itís almost youíre going to get in trouble and thatís how you find out that it was the wrong thing to do. So you can act with good intentions and you can try to convey those good intentions to the CFPB, it may be insufficient and itís hard to know. At least if the rules are pretty clear and published and understood, we can play by them and itís a game of execution.
HUFF: Itís going to be precedent based.
BOWMAN: Because until everything is adopted and then you do the adapting, and then youíll see the fallout. And then youíll understand what to do going forward.
BRANDT: Nobody wants to be the fallout.
BOWMAN: No, but someone will.
BRANDT: Or at least I donít.
BOWMAN: But someone is alwaysÖ
HUFF: The sacrificial lamb.
BOWMAN: Thereís going to be one.
FOGARTY: Anybody got an idea to solve the Fannie/Freddie crisis at this table?
HUFF: I think itís years away. I think weíre a long time away for it to be clear in that realm. Thereís a lot of not only political motivation, but also financial motivations. Iím now hearing talk going the other way, about being averse to breaking up Freddie and Fannie.
FOGARTY: Theyíre making lots of money.
HUFF: Everybody wanted them gone when they were losing billions, but now after making billions, theyíre not so bad after all.
CARY: Yeah, different story now. Weíre an industry thatís slow to move, (Congress doesnít) really have clarity yet on what weíre going to do with Fannie and Freddie and once they get clarity, itís going to take years to execute. So I think the conforming market for the foreseeable future seems reasonably clear and we have a long-term plan and then you hear a lot of money thatís sitting on the sidelines waiting for that to happen. I think that starts to drive some of the rest of the markets. So I think getting a plan for Fannie and Freddie is very important to start looking at private capital getting back to the marketplace.
JACOBS: I donít think thereís a whole lot of fear that theyíre going away anytime soon, based on the number of companies that Iíve heard have recently applied or received their Fannie and Freddie approvals. Nobody seems to think that itís a waste of time to start doing business with them now. ?