With official Washington bogged down in politics, the outgoing chairman of the Mortgage Bankers Association holds out little hope that the all-important high-end loan limits will be extended beyond Sept. 30 and he is concerned that, with a fragile economy, lowering limits may not be the best move.
Michael Berman, whose run as the leader of the lending community concludes at the Mortgage Bankers Association's annual convention, also doesn't think lawmakers will get around to deciding the future of the secondary market until after the 2012 presidential elections.
But he believes progress has been made on government-sponsored enterprise reform and acknowledged it has complexities and implications that make taking the time to get it right crucial. He said the MBA has had many meetings on the issue.
In general, Berman believes a lot of the forces reshaping the industry will need time to play out due to their enormity, and their cumulative result is likely to have significance for the industry unparalleled by any other development in the past several years.
Berman, who is president and chief executive officer at the Boston-based CW Capital, a national lender to the multifamily and commercial real estate industry, touched on these and other subjects recently in a wide-ranging interview with National Mortgage News.
These included the definition for the qualified residential mortgage, which he said is coming into focus.
The stakes are extremely high when it comes to the QRM, something he thinks regulators will move forward on in upcoming months.
He believes regulators, while challenged to find a consensus on the key issue, will not want to wait a year to act on it.
Here are some excerpts of Berman “exit” interview, which has become a tradition among MBA officers and run in this publication for many years. In the passages that follow, he elaborates on the aforementioned industry issues and shares insights on how he sees them taking shape as well as the inner-workings of the association:
NMN: It seems to me and probably a lot of mortgage bankers out there in the hinterland that not much was achieved in official Washington this year, at least as far as the housing business is concerned. What are your thoughts on that?
BERMAN: There's certainly been a lot of noise, and some motion. For better or worse, Washington, for the last three years, has become the financial capital of the United States, if not the world, and there was no shortage of activity this year, although a lot of it was not finalized.
There were numerous hearings and bills proposed on the future of government-sponsored enterprises. Nothing has passed, but certainly a lot of noise, a lot of motion, a lot of ideas and proposals are being tossed around.
The Dodd-Frank legislative agenda with 100 new regulations affecting our industry have started to come down the pike. The concept of qualified residential mortgage and qualified mortgage is another area where proposals came out, and there's been a lot of dialogue.
Lawsuits have been filed, the big servicing lawsuits, the recent Federal Housing Finance Agency litigation on behalf of Fannie Mae and Freddie Mac against the banks. The whole thing with the Consumer Financial Protection Bureau that's been going on concerning whether we'll get a director, who that director might be and the politics of that and what its role is going to be and whether there might be some new governance put into place.
So let me put it differently: There's been a huge agenda of items of significance to the industry that have been raised in Washington. Most of the pieces have not been put into final form, but the challenges to the industry in the last year and the proposals that have been put out will probably have a more dramatic effect on the industry than anytime in maybe a decade. No, not a decade; maybe the last century. We have proposals out that would totally dismantle the GSEs with no replacement on any government role whatsoever. That's a real game-changer for the industry.
NMN: Let's talk about the future or lack thereof of Fannie Mae and Freddie Mac. That issue has been on the table for three years since they were taken into conservatorship in September 2008. Are we getting any closer to a final decision on what's going to happen with the secondary market?
BERMAN: If I can answer a question with a question, closer than what? I would suggest we're closer today than we were a year ago, and we're certainly closer that we were three years ago. Are we near the finish line? My best guess is there won't be actual legislation until after the 2012 presidential election.
But having said that, the fact that there have been numerous Congressional hearings shows that lawmakers are working hard to get their arms around what actually caused the downfall of Fannie and Freddie. We've done a lot of work on that.
Sen. Richard Shelby, D-Ala., has suggested that the Senate Banking Committee should continue doing work on that because it's better to get the solution right than it is to do it fast, and we've made some good progress there. At the same time, a number of proposals have been articulated, the first of which was the MBA's in 2009. Ours was the very first concrete proposal about how the secondary market should be reformed and what the government's role should be. And over the course of the last two years, any number of proposals have come out, a number of very thoughtful ones, including the Obama administration's white paper that came out in February with three what I call “generic” options.
Also, a number of bills have started to surface recently, particularly in the House.
So we're moving closer. But it's such a complicated issue and the stakes are so high, particularly with the GSEs' market share being at these extraordinary levels, that it is critically important that we not only get the end-game correct about what the government's role be and what we should do with Fannie and Freddie, but also any transition about how we get to that end game.
There has been progress. I, for one, would suggest that, as Sen. Shelby said, it's better to do it right than do it fast. That's been reflected in the pace of what's happening. People might have hoped that the Obama administration would have actually come forward with a single proposal or begin a dialog in that regard. But again, it feels like that now that we're into the election season, we may need to wait until post-election of 2012 to get that kind of dialogue going and to have a comprehensive kind of solution.
NMN: Aren't we always in election season now? Doesn't it seem like somebody's running all the time for something? Doesn't it just tend to slow the process down?
BERMAN: I often think about that in terms of the civics lessons we all learned back in grade school. Clearly the politics in Washington has intensified over the last number of years so that it might suggest that everybody's always running for office. But it does feel like that with the presidential election coming up, and with a third of the Senate and the entire House in 2012 up for grabs, it's a big moment politically. And so much seems to be focused on control of the White House that it feels very different from normal, if normal is the right term, in terms of the political stakes right now.
NMN: Let's talk about QM and QRM for a minute. Are those decisions coming into focus at all?
BERMAN: The short answer is yes. As you well know, we've got six regulatory bodies that need to agree on the QRM regulatory framework. The first proposal that came out was very controversial and the MBA took a strong leadership position in helping to get a coalition of not just MBA members and industry-related groups but also consumer and civil rights groups to call for further thought. There were well over 100 comments submitted, and we were successful in getting the comment period extended so that we would have more time to react.
We're now in that quiet period where the regulatory entities are trying to digest what they heard during the comment period. That's not easy. You're talking about six different agencies, Treasury, FDIC, Federal Reserve, Federal Housing Finance Agency, HUD and the Federal Trade Commission. I would suggest that it's a very tall order to get those six bodies to agree on almost anything, making this a particularly challenging task.
So no, I have not heard of any specific time line as to when that group of regulators will in fact come out with a new proposal or respond to the comments they received. But I think something will surface over the next number of months. We're not going to wait a year, because they want to push forward. After all, they do have some legislative pressure that's coming from Dodd-Frank, which requires the regulatory framework to be finalized in 270 days.
Clearly, that isn't happening. But again, it's better they get it right than they get it quickly done. But it's coming. And we're in the dialogue about what the risk retention is going to mean and what the implications are going to mean for rates for consumers and availability of credit for consumers.
Some of the issues of that came out in the first proposal, a 20% downpayment, back-end debt-to-income ratios of 28% and 36%, and a requirement that there be a two-year clean record to void any kind of credit issue would make it such that the box for a qualified residential mortgage would be so narrow that a huge percentage of homebuyers would not qualify, particularly first-time homebuyers and minority homebuyers.
It would have a devastating impact on many groups in terms of being able to obtain the least expensive credit available in the market. So the stakes are very, very high. We need to get this one right. It's all going to make a difference in what credit is available and what price to those segments of the population.
NMN: Some people are saying that it's also critically important that we keep the Fannie-Freddie-FHA loan limits where they are right now, and that deadline is rapidly approaching. We're talking just days before the limits go back down significantly in high-cost markets, from $729,750 to $625,000 or less. What do you think is going to happen there?
BERMAN: Our position clearly is that now is not the right time to lower the loan limits, given how fragile the market. We think it would be well advised for the loan limits to be extended, and there have been bills put on the table in that respect. But we're in the stretch run, and while we continue to advocate for an extension, it is unlikely given this late date that they will be extended.
NMN: You mentioned the FHFA's suit against 17 of the country's largest securitizers for losses on some $200 billion in loans it says contained materially false statements concerning credit quality. Did that come out of left field?
BERMAN: It was certainly not something that I was aware of. There may have been others who were, and I understand that the timing of it may have been pushed in part by the statue of limitations. But it was certainly something that we found distressing in the dynamic that it's creating.
NMN: What impact is the suit going to have, at least until it's settled?
BERMAN: First, there's obvious legal risk. Without getting into the merits of the suit, the concept that the banks may need to set aside capital with respect to the legal exposure is worrisome. By definition, if there's capital being set aside to cover legal risk, it's capital that's not available for lending.
It's part of what I'd call sort of a “piling on” effect. When you add that on to the other attacks on the banks and the industry with puts-backs, the whole servicing settlement issue and so on, the question is, will it make the banks a little bit more reluctant to be lending in this kind of an atmosphere? It's not just the fact that they need to reserve more capital but it also could affect their strategy and their ability to move forward and provide the liquidity we so sorely need.
So I'm of the mind that this is looking back and finger pointing. Obviously, it's the FHFA's responsibility to recoup loses on behalf of taxpayers. But this is a very complicated set of issues. Fannie and Freddie are very sophisticated buyers of paper and I can't comment on the merits of the litigation per se. But the dynamic that it creates can only be one that would be chilling to the cause of trying to provide more liquidity.
NMN: How often have you come to Washington this year?
BERMAN: I can tell you that I've achieved chairman status on the US Airways shuttle from Boston. I haven't added it up, but I bet I've been in Washington almost every other week. I bet I've been there 20-plus times.
But it hasn't always been to go to the Hill. We certainly have had many, many meetings with respect to the future of the GSEs with secretary Shaun Donovan and his team at HUD, with the folks at Treasury when Michael Barr was there, with advisors at the White House, and with many members on the Hill.
On the GSE issue alone, I bet I was in Washington eight or nine times. And that doesn't count meetings on FHA issues, both single-family and multifamily. We actually have a quarterly meeting with Secretary Donovan and the National Association of Home Builders and National Multi-Housing Council. The pressure on both sectors has been such that FHA has really had to step up, so we had a number of meetings with FHA and HUD over the course of the year. So coming to Washington has become an important part of my calendar.
I do hope to continue on. I've been asked by (incoming chair) Mike Young and (new MBA president) Dave Stevens to continue on in a leadership role. I've been chairman of the Council on Ensuring Mortgage Liquidity, which is our position on the future of Fannie and Freddie and the secondary market, for the last three years. So although my time in Washington will be a little bit less, I think in the coming year there will continue to be a lot dialog on the future of the GSEs and the secondary market. And in 2013, there's a high likelihood we'll get some action.
NMN: So they're not going to just let you ride off into the sunset?
BERMAN: I feel a responsibility to help continue with some of the efforts I have been involved with. One of the important themes of my chairmanship has been calling out to our members to step up and get involved and step forward and make their voices heard on the Hill. I eat my own cooking, if you will. Even as I step down as chairman, I fully intend to continue to step forward as a citizen of our industry and continue to try to make a positive difference. I do intend to stay engaged. I will be happy to turn over the reins to Mike Young. But I've been trying to mobilize the industry, and that starts with looking in the mirror.
NMN: Things have moved glacially on the Hill, but around the MBA, they've moved very quickly. In the last year, you've sold your controversial office building, moved on to another address and had another turnover at the top with John Courson leaving and Dave Stevens coming on. How are things on the home front?
BERMAN: I would suggest that if there's one single most important thing that's been accomplished in the last year, it would be what I would call beginning a new virtuous cycle. By that I mean, when we brought in Dave Steven to take the reigns as president and CEO of the MBA, I believe that was a major statement that it was time for a new beginning.
I am a huge fan of John Courson. He was a tireless worker on behalf of the industry and made a huge contribution. But having said that, I believe it was the right time and Dave Stevens was the right guy. It was just lucky for us that he had decided to leave the administration but wanted to continue on in Washington and try to make a difference on behalf of our industry and on behalf of the country. It's really a huge move forward for us.
I can tell you that on the [qualified residential mortgage] issue alone, Dave's ability to mobilize the coalition across not only our industry trade groups but also the consumer advocacy groups and the civil rights groups is a unique skill.
NMN: Given all the issues that mortgage bankers are grappling with these days, is there anything out there lingering on the horizon that has not come to light yet that folks need to be aware of?
BERMAN: When we hear about issues, we try to get the word out. There's so much on our plates right now. One of my mentors always said to me, you always have to expect the unexpected and then be ready to deal with it in an intelligent fashion. So yeah, there's probably something out there, but anything that we know about we're engaged in and speaking to our members about.
Could something come out of left field with the whole debt ceiling and budget debate? What's going to happen with the mortgage interest deduction? Washington is a pretty unbelievable place these days. The only thing I can be certain of is that something unexpected is going to happen.
