Balloon Loans Could Be Trial Balloon

WE’RE HEARING it could be a case of one government agency not knowing what the other is doing. (How many times has that happened?)

Or it could be a case of the Consumer Financial Protection Bureau taking a shine to balloon-payment loans which could make the banking regulators think twice before jacking up the capital requirements on this niche mortgage product.

Either way, there is going to have to be an accommodation.

Last summer, the Federal Reserve Board and the other banking regulators released their Basel III capital proposal that would penalize community banks for originating and holding balloon or interest-only mortgages in portfolio.

Under the proposal, the risk weightings for such nontraditional mortgages would range from 100% and 200%—double what they are today.

If adopted, these capital requirements would force most community banks to stop making those loans.

Meanwhile, the Dodd-Frank Act generally prohibits lenders from making balloon mortgages along with other toxic mortgages.

But there is an exception for small creditors in rural and underserved areas. 

Researchers at CFPB realized how important those mortgages are in rural areas. And CFPB officials decided to keep this form of “relationship-based” lending alive.

So the consumer bureau carved out a special exemption in the final qualified mortgage rule so community banks and credit unions can continue to make balloon-payment loans in rural and underserved areas.

Eligible institutions must have less than $2 billion in assets, make less than 500 first mortgages per year and hold the balloon loans in portfolio.

These community lenders have “strong incentives to pay close attention to the borrower’s ability to repay,” said CFPB director Richard Cordray.

The CFPB also is seeking public comment on a proposal that would create a new category of qualified mortgages (without balloon-payment features) that are originated and held on the books of small depositories.

The Federal Reserve Board and the Office of the Comptroller of the Currency have been pretty quiet about the Basel III proposal for some time.

Speaking at the California Bankers Association, Comptroller Thomas Curry admitted that there are elements in the Basel proposal that are “not appropriate for smaller banks and thrifts.” He did not mention anything specific to mortgages.

“I can assure you that we are giving very close attention to all of the issues that have been raised in the comment process, and we doing our best to craft rules that will maintain strong capital without unduly increasing burden,” the comptroller said.

Maybe balloon loans will get a little respect over at OCC now that the consumer bureau has blessed them.

WHAT’S NEXT: With the issuance of QM behind us, the mortgage industry is waiting for the next shoe to drop—the qualified residential mortgage rule. A group of six regulators has been working on the QRM, which will determine risk retention requirements for non-QM loans for over a year. “We really are nearing the finish line on Volcker and risk retention,” Curry said Jan. 11.

SERVICING RULES: We are also hearing that the CFPB is ready to issue its mortgage servicing regulation. Could be released next week?

NO FIBS, PLEASE: Our 2013 mortgage originator survey is out now so please take part in it if you have originated mortgages in 2012. Now, we’re on the honor system here, so please keep it transparent for us. Inflation is low in the general economy and should be in what you report to us as your origination volume! We will calculate the results and report back to you on it online and in an upcoming issue of Origination News. The survey can be found here.

MOST READ: This week’s most read and most emailed content on our website is Brian’s report on, what else, the qualified mortgage. How many points can you charge? What DTI ratio applies? And what does this all mean for the future of the mortgage industry. Let us break it all down for you here.

WELCOME, WELCOME: First-time blogger Garth Graham of Stratmor debuted in our daily “What We’re Hearing” blog this week with a splash. Garth, who at one of our SourceMedia Mortgage Group meetings once compared RESPA to a horse’s ass (and the horse definitely came out ahead there), wrote a column about a new industry acronym that could be translated as “Oh, Puke.” That endeavor got Garth, a former senior vice president of ABN Amro and Citi Mortgage, a very nice 1,200 readers in one day. Next up, his blogs on mortgage sweat and phlegm!

OH THOSE WACKY GRAPEVINERS: Our community of posters at www.mortgagegrapevine.com obviously aren’t fans of the cable show “Curb Your Enthusiasm.” They write enthusiastically about anything under the sun, inside and outside the mortgage industry. Here’s a thread reacting to the disclosure of some of Angelo Mozilo’s Countrywide emails. Viners may not always be right, but they are never in doubt. Warning, there are a few F-bombs in this thread that we want to warn you about though as First Amendment fans we would never censor. Read the thread at your own risk!

SHOUT OUT! We feel that individual company hiring is the way out of this tepid recovery we find ourselves in. (And thanks to alert reader Kerri Milam for pointing out that last week’s reference to a “turgid” recovery probably inflated the case a bit.) So we will give a shout out to firms that are doing multiple net new hires. California-based Carrington Mortgage said it is opening a new loan underwriting center in Connecticut and has started a new lending operations center in Indiana as part of its growth forecast for 2013. And Urban Lending Solutions, based in Pittsburgh, said it will hire 100 new employees in Broomfield and Littleton, Colo., by the end of this month.

FINAL THOUGHT: Readers of a certain age will associate the acronym QM not with mortgage regs but Quinn Martin Productions, which produced lots of television shows back in the day including “The FBI.” That dull-as-dishwater show gave the agency a bad rep for decades until “The X-Files” restored the FBI’s hipness factor!

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.