The Dodd-Frank Reform Act is an enormous piece of business. It may require over 300 separate rules to be promulgated—and then lenders are going to have to comply with all of them!
At the recent Northeast Conference of Mortgage Brokers in Atlantic City, Joseph F. Heisler Jr., president of the New Jersey Association of Mortgage Brokers, Rose Stancato, immediate past president of the Pennsylvania Association of Mortgage Brokers, and E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, NJAMB and the Mortgage Bankers Association of Pennsylvania met with myself and associate editor Brad Finkelstein to talk about Dodd-Frank and other topics.
FOGARTY: There was a lot of talk about the Dodd-Frank Act and the CFPB at the conference. Nobody knows for sure what is going to happen, but what do you think the effects of this legislation will be?
LEVY: From my perspective, there are a number of impacts. One of them, in terms of the consumer, I think you are going to have a hard time seeing any other loan types other than the 30-year fixed—at least at the outset—because of the constraints of the ability to repay (clause) and the qualified mortgage definition. It will put most mortgage lenders in a position where they are not going to be comfortable going outside of the parameters of the qualified mortgage (safe harbor) for a period of time. A lot is going to depend on the kinds of regulations that come out and we don’t what they are going to be at this point. What we know about the folks that are most likely to head up the CFPB, there is definitely a consumer orientation, which is fine but our concern is that it is not overregulation and unnecessary regulation and unnecessary constraints. I think there was a good point made this morning on the 3% points and fees trigger, which takes you out of the qualified mortgage (safe harbor). When you think about it, it makes no sense. Because when you are calculating an ability to repay of a particular consumer, part of what you calculate is whether the consumer can pay the points necessary as well as the monthly payments and so on. If that is part of the calculation, why would you put a lid on it? In effect it acts as a cap because most players in the market aren’t going to want to go beyond it. I think there is a definite constraint on new mortgage products. The flexibility in the mortgage industry is slowly being taken away.
HEISLER: I think the flexibility is not only being taken away from the mortgage industry, it is being taken away from the consumer to a large extent, with the Fed rule saying that the consumer has to pay all of their fees either on the front or the back, rather than a combination. It takes the ability away from the consumer to choose possibly paying a point or some portion thereof to get a lower interest rate. The other thing with the originator compensation rule, is more than anything else, it is going to adversely affect underserved markets and smaller loan amounts. Because as a company, if I have to bring in a certain amount of revenue to stay in business, to pay my loan officer and pay my processor, if I am limited to a fixed dollar amount of income, then on smaller loan amounts, in New Jersey I would be over what are now the high-cost loan limitations. I would end charging the consumer more money for a smaller loan amount where I have the ability to put that into the rate now.
STANCATO: It is also very confusing for our lenders. It sounds like we are going to end up with two rates, a par rate and whatever our contract is for the back end rates. Does that change for each brokerage firm depending on their contract with the lender or is that something that the lender is going to have across the board for any brokerage firm?
FOGARTY: So do you think the net effect will be to decrease liquidity in the market?
HEISLER: I think it will decrease competition in the market.
LEVY: I think it will direct liquidity into certain channels more than decrease liquidity. But in effect, as you limit the types of loans that are available and with the ability to repay requirements, which are somewhat ambiguous and somewhat subjective and the fear of litigation, what you are doing is channeling loans to people you are totally comfortable with repayment ability, which lead you to higher FICO scores, higher downpayments and different debt-to-income and loan-to-value ratios. So you wind up with consumers who do not show as much in the way of the ability to repay as kind of being left out. Lenders can’t afford to take risks theses days.
STANCATO: I agree that it is detrimental to the underserved communities.
FOGARTY: So do you think this will further delay the return of the nonconforming market?
HEISLER: Everything is geared to the GSEs or government lending. We’ve seen over the past year or two lenders putting further restrictions on lending than what FHA or VA or the GSEs are requiring. We see them not accepting loans under certain credit scores or if they will accept, they are charging premiums in the name of overlays for higher risk. But they are adding layers of cost to the consumer that the secondary market doesn’t have in place.
FOGARTY: The market share of FHA loans has gone from 3% five years ago to 30% or higher today. What do you think a more normal level will be?
HEISLER: It is difficult to say where the number is going to end up...
STANCATO: ...because of the changes that are occurring.
HEISLER: One of the things that is changing, is that they changed the mortgage insurance premium and calculations. The good news is that the upfront premium is going to be reduced, but the monthly premium is going to be drastically increased, which is going to eliminate from being able to get an FHA loan because they’ll no longer qualify simply by virtue of the fact that the mortgage insurance premium is going to double.
FOGARTY: They were very clear this was done to protect the insurance fund and increase their fee revenue.
STANCATO: It does depend on what other changes are occurring with FHA. If they reduce the seller paid closing costs from 6% to 3% that is going to affect the market share because that is big push why someone would go with FHA financing. That and 3.5% down does serve the first-time homebuyer community who don’t have the money to pay the closing costs. So if we get rid of that and we bring it down to 3%, which is equivalent to what you can do on a conventional loan, that will probably reduce the market share of FHA. But you don’t know until the mortgagee letters come out and we figure out what is going on as far as the guidelines are concerned.
LEVY: And HUD is not pleased with the current market share. They would rather have a smaller share. Their concern is the reserve that they have, the fact that the reserve is below what is required and lower than what they would like. And the more activity they have, it gets to point where it is more than what they are comfortable with. They have been trying to accommodate the consumers. But I think if you see anything from FHA, it will be some methodology to try and reduce market share eventually.
STANCATO: One of the reasons that I have seen it increase in our shop is because I am getting people with 750-plus credit scores that are going FHA because they can put less than 5% down. And also because they can do a cash-out refinance to 85%. So because the guidelines are more flexible, you are seeing a better quality of person going into that product than you used to see.
