SAFE Act Made Brokers Safe

Fred Arnold and Kay Cleland say there has been a dearth of private money response to the unmet needs of self-employed and other borrowers. Photo: David Braun.

The NAMB National Conference in Las Vegas occurred at what might be termed a point in time when the industry was on hold due to some pending Washington developments, but felt somewhat secure due to its licensed status. It took place after the presidential elections but before the Consumer Financial Protection Bureau issued its definition of the qualified mortgage.
A sign of the mortgage originator’s possible concern regarding the future of the business might have been one of the drivers of the 1,500 registrations the show received. But another driver is likely the seeming rebound of the mortgage broker production channel. With rates remaining at record lows, people are optimistic about the future of the industry.
And many would take advantage of the opportunity to hear from speakers like Greg Frost, Rick Sharga, Spencer Rascoff, Ed Pinto and Ted Tozer. The market is shifting back towards a purchase one and these speakers among others helped attendees prepare for that occurring in 2013.
Origination News managing editor Brad Finkelstein met with the members of the NAMB board and in this portion of the interview discussed how mortgage brokers were able to gain an advantage from certain regulations as well as whether they felt private money will come back to the lending industry.
Participants in this segment include NAMB vice president John Councilman, secretary Kay Cleland, treasurer Fred Arnold, immediate past president Jim Pair and government affairs chairman John Hudson.

FINKELSTEIN: The SAFE Act actually seems to have worked in creating a differentiation between bank and nonbank originators. Is there a way to further differentiate the industry from those who work for banks?

HUDSON: I think so. In 2008 when the SAFE Act was proposed, NAMB jumped all over it in great support. Part of it was it separated us as mortgage professionals, mortgage originators, from those who are not required to be licensed and tested. I tell all of our members today to be advertising the fact they are a licensed mortgage professional. So not all regulation or legislation is bad. In hindsight, there have been regulations and legislation that has come out, like the SAFE Act, that has helped the industry become a little more professional, if you will. The fear is that there is not enough participation from others in the industry to help educate the regulators and the legislators as to what the real impact (some of the latest proposed rules) on their business and on the industry, and ultimately the consumer, because that is who we are all out there to protect and serve.

COUNCILMAN: On the SAFE Act, I was heavily involved in that and what I saw originally coming out would have been a nightmare. We’re very fortunate (former Rep.) Barney Frank’s office was willing to listen and because they listened, we came out with a law that is very good. It has a few things that I would have probably not put in there. But in general that act has been good because people listened. If the current group running things in D.C., especially on the regulatory side, will listen closely and pay attention, we will actually come out with a better industry than what we had before. But they have the potential of not listening and damaging the industry and damaging consumers more than industry, actually.

FINKELSTEIN: With Barney Frank now retired and Elizabeth Warren now in the Senate, do you see any shift in Congress?

COUNCILMAN: I was watching Warren long before she was on the national scene, I watched her on PBS quite often, years before anybody ever heard of Elizabeth Warren. I believe she has a good heart, I believe she wants to what is right, she has a heart for consumers. That’s really a great thing. But she has to also listen, and if she will listen I think that between us and her and other people that think similarly, we will have a great new set of regulations that will really work. If she simply views us as a problem, all mortgage originators—bank originators and brokers and others—if she views everybody as the enemy, that is going to be a serious problem. It will damage this country and harm consumers. It will take away a lot of choices from consumers and it will also cause consumers to pay more for financial services. So the ball is in her court, more or less. If she can work with us, which we believe that she can, we can come out of this a lot better.

HUDSON: We can all agree there were bad players in the industry. Fortunately, due to good legislation like the SAFE Act, a lot of those players are gone. If there are any other people that are wrong people that are wrong players then they absolutely need to be tossed out and put away. They ruin our name as mortgage professionals. We look forward to working with members (of Congress) from both sides of the aisle and we do a very good job of that today. A lot of it boils down to simply educating people on what it is exactly mortgage professionals do today.

FINKELSTEIN: Rick Sharga of Carrington Mortgage during his presentation said he believes private money is ready to come back into the market. Historically one of the advantages of using a broker had been being able to find the private money sources to do those difficult loans. Do you see private money coming back into the market anytime soon?

HUDSON: I don’t see private-label money coming back into the mortgage market any time soon. And the big reason for that is we’re still rolling out Dodd-Frank, we’re still implementing a lot of rules and requirements from Dodd-Frank. The qualified mortgage is still going to have an implementation time before it truly takes effect and right now (editor’s note: this took place before CFPB issued the QM rule) the penalties for not originating a qualified mortgage, the risks far outweigh the possible rewards. So you couple that with the fact that mortgage rates are still extremely low and the Federal Reserve Board is still buying mortgage-backed securities to help keep those rates extremely low, private money is not going to get the return that they would need in order to take the risk of the possibility of underwriting a nonqualified mortgage.

COUNCILMAN: We used to manage the largest private investment pool in the state of Maryland. There are two kinds of private money, the kind that John is talking about, which is money that is coming other than from the government. That is to compete with the government you might say and I can tell you you’re not going to compete with the government. As long as the government is willing to shell out money at below-market interest rates, there is not going to be private money coming back into the industry. The other side of private money is loans that do not necessarily fit the secondary market. That doesn’t mean they are hard money, although hard money is definitely as of Jan. 1 totally out of the residential market no matter what. But even what we called middle ground, like alt-A, it’s not going to be back as long as the regulations are structured in the way that they are. The Truth-in-Lending Act and many of the other changes that we had would prohibit anybody from being in the private market even if they wanted to be only a percent above for a person who had a property wouldn’t fit Fannie Mae or FHA (guidelines). It is just not coming back unless there is a major change in the industry.

PAIR: The ability to repay is the catch.

CLELAND: There is definitely a need for that private money.

PAIR: There definitely is.

CLELAND: We have self-employed borrowers that can’t loans, there are acres of borrowers that can’t get loans. We’ve got a lot of people that can’t get loans and there is nowhere for them to go.

ARNOLD: Those that traditionally filled that space over the years, some banks and some insurers and credit unions, they got burned pretty heavily in 2007, 2008 and 2009. They have a tremendous reluctance to go back into that space. In some states there are six or seven tests for high-cost loans, so not only do you have to meet that, you’ve got the CFPB that’s going to be asking questions and you have (these institutions) own boards of directors saying, “Boy we got burned for billions of dollars here. Are you sure we want to go back into this market and compete with the federal government?” So private money, which is more of the portfolio money, we won’t see coming back. And the shame of that is it served a great place in the 2000s. When yields go up, we might see some more players, but until the government stops buying MBS and keeping rates artificially low, we’re going to see a very muted response of people coming into private money.

COUNCILMAN: I believe if hadn’t gone the route that we did—which is governmentize everything—and simply let the market resolve the issue, we would have recovered by now.