Tight might be the most overused word in today’s mortgage business. Originators, already facing restrictive underwriting criteria, are reportedly facing even more restrictive guidelines in anticipation of new regulatory definitions.
But our panel of experts at the recent Northeast Conference of Mortgage Brokers in Atlantic City, N.J., attributed the further tightening more to what is happening with the secondary market purchasers, as they have been requesting loan buybacks from their seller/servicers in unprecedented numbers.
National Mortgage News associate editor Brad Finkelstein moderated the discussion, whose participants in this segment included Joseph Heisler, president of the New Jersey Association of Mortgage Brokers; Paul Logan, president of the Pennsylvania Association of Mortgage Brokers (the two groups co-sponsored the event along with the Maryland Association of Mortgage Brokers); John J. Amrhein, past-president of the Mortgage Bankers Association of Pennsylvania; and E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey and NJAMB.
During the show, Levy announced the creation of a regional trade group through a merger of PAMB, NJAMB and MBA-NJ, to be called the Mid-Atlantic Association of Mortgage Bankers and Professionals.
FINKELSTEIN: This is still one of the most interesting times in the history of the mortgage industry, especially with all of the unknowns facing it. One of the biggest is the qualified mortgage definition and on the NationalMortgageNews.com website there was a report that lenders are starting to tighten their underwriting guidelines in anticipation of what the Consumer Financial Protection Bureau will come out with. What would that mean from both the standpoint of third-party originators and for consumers?
HEISLER: I’ve certainly recently seen underwriting guidelines tightening, but I don’t know if it has anything to do with what coming down the road with QM or if it’s simply the direct effect of the push-back that the aggregators are getting from Fannie and Freddie for loans (in regard to repurchases). We are getting more and more onerous criteria for underwriting some of which makes no sense whatsoever and has nothing to do with the loan itself. What it does to the consumers, all it does is drive costs up for all of us. The more time we have to spend, the more energy and effort we have to put, and bodies we have to put, at problems, ultimately the costs go up and the costs always go back to the consumer.
AMRHEIN: I would agree with that. I think clearly we have to be reactionary to what the secondary market is dictating. I don’t know that what we’re looking at is a direct response to QM. We originate loans in Pennsylvania; Pennsylvania for a number of years has had the ability to repay analysis. Are we moving away from a risk standpoint with automated underwriting, back to the rules-based system where we have specific front-end and back-end ratios that we have to follow—I think there is a migration to that. But there’s a migration to that concept in direct response to the actions of Fannie and Freddie with respect to repurchase risk.
FINKELSTEIN: Do you think Fannie and Freddie have become a little too heavy handed with their repurchase request demands?
AMRHEIN: When you get the first notice, some of their conclusions might not be accurate. And when afforded the opportunity to provide your thoughts and rational (when the loan was sold to the agency), a substantial number of the actual repurchase requests get rescinded. The issue we see on repurchases that we have the most difficulty with is when they attempt to use the retro appraisal. We have to deal with a retro appraisal looking at a property five or six years ago. I think that is very subjective and creates substantial concern for the industry.
HEISLER: One of the things I am seeing with documentation is that a lot of the things we are being asked to do have absolutely no bearing on the loan or the performance of the loan itself, or the ability to repay of the consumer. They’re horrible conditions. They have nothing to do with debt-to-income ratios; they have nothing to do with credit quality. It’s simply paperwork, and dotting i’s and crossing t’s.
LOGAN: Also, we’re going to see more of this from the appraisal side, is that the appraisal management companies are increasing their fees for reviewing appraisals. Because the appraiser has to go out two or three times to answer these questions over and over. And back to Joe’s point, these are being passed on to the consumer. They’re not helping the consumer. Although the intent may be to have good loans—of course, that is important—but you can go to an extreme where you can’t move. There is not breathing room.
LEVY: Part of the problem is this overall risk-adverse attitude which permeates the whole marketplace really. I’ve seen it with the Federal Housing Finance Agency and the (government-sponsored) agencies and the efforts made to both decrease risk and increase profits because of the huge impact on the taxpayer. Today the loan quality is apparently very, very good because the underwriting is so stringent. But you have this risk aversion. To get approved by Ginnie Mae now, from what I understand is if you don’t have a compare ratio of less than 120%, you’re just not going to get approved. There is no flexibility there. This all has to do with risk aversion and trying to limit the risk down to a point where you almost have none and that’s a big problem. When you combine that with appraisals that are very, very conservative—I guess that is a kind way to put it—you have a marketplace that is very tough in terms of achieving anything in the housing market.
FINKELSTEIN: But lately there seems to be some movement in the housing market. Admittedly the bulk of foreclosures/potential foreclosures have yet to be put up for sale, but there are those in the Realtor community complaining of a shortage of inventory. Are we seeing a return towards more normal levels of home purchase activity?
HEISLER: It is difficult to say when you don’t know what the inventory of foreclosures really is. I think part of the reason that you are hearing Realtors say that they don’t have enough inventory is because probably 50% of the clients I sit down with who are getting preapproved to buy a home will not look at a short sale. A large percentage—I don’t know what that percentage is—of the market that is being offered for sale is short sales. And the consumers who are out there looking for houses, at least 50% from my experience won’t look at short sales, because they have an unknown time frame and they hear the horror stories of what it takes to go through the process and the paperwork that is required.
FINKELSTEIN: So consumers would rather spend more money on a property than take the likely discount they would receive when buying a short sale property?
HEISLER: In some cases it is simply a matter of what their obligations are. If they have a lease that has an end period, or they are trying to sell a home and there is a closing date, then those people can’t work with (the unknown) situation. So what you’re seeing is, and I’ve seen more of this in the past three months than I have in the last five years, is that you are seeing multiple offers on homes. The homes that are priced well and show well are getting multiple offers and there is a lot inventory sitting by the side that no one will even look at.
LEVY: Joe, is there a lot of fall out on short sales?
HEISLER: Not as much now as there used to be, but yes.
LEVY: So one of the issues with a short sale is “Am I really going to get this property?”
HEISLER: It really is “Am I going to get this property, and, as importantly, am I going to get it in three months, or in six months, or in nine months? When do I give my landlord notice?”
FINKELSTEIN: You speak about your long-term experience in your markets and that brings up another point. This industry has gotten older. The fallout from the boom into bust has resulted in a lot of those who came into the industry in the early 2000s no longer in it. Plus the reputation problem has made it harder to recruit younger people right now. Are you seeing that in your trade groups? And some companies are trying recruiting recent college graduates. Can that work?
LOGAN: I will try to address that a little differently than how you approached it. The large megabanks who were wholesalers have abandoned the market. They had their business reasons to do so. However, there are more and more small mortgage bankers who are wholesalers entering the market today than ever before. So they would not come into the market if they felt the market wasn’t growing. And the market is growing and they are filling the void of the megabanks who have left the wholesale channel. In that sense there is growth there. I think brokers are looking for alternatives.
