A mortgage industry wish list for 2024

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Mortgage lenders have much to be grateful for as 2023 ends. Sure, new loan origination volumes are at record lows and most lenders are losing money and laying off staff. But hope remains. An election is approaching next November and with it the possibility of badly needed change in the staffing of the executive branch.

"The scarcity of single-family homes available for sale and the affordability challenge for would-be buyers who find one means the purchase applications index is running about 38% below its trailing ten-year average," writes Christopher Maloney at BOK Financial. 

"Putting it all together explains why mortgage-sector employment has dropped 22% since mid-2021 and, judging by the collapse in refinancing especially, may continue to move lower," he writes. 

Even as the world of mortgage finance downsizes to fit current market volumes, predictions of doom and destruction for larger nonbank issuers from members of the Biden Administration and the media have turned out to be completely wrong. 

Remember two years back when a prominent financial writer predicted the imminent demise of PennyMac Financial? In fact, the lender/servicer had just completed a $750 million debt offering. The stock is one of the top performers in the mortgage group. The steady flow of PennyMac staffers seeking to sell shares will have a happy Christmas.

More recently, there were dire predictions expressed for Mr. Cooper, one of the largest servicers in the U.S. In fact the stock continues to lead the publicly traded independent mortgage banks such as Guild Holdings, United Wholesale Mortgage and Rocket Companies higher. Why? Because the mortgage servicing assets owned by these IMB's are providing an offset for low lending volumes.

One big wish of many mortgage bankers is that the Consumer Finance Protection Bureau will be defunded by the U.S. Supreme Court in 2024.  Most observers don't expect the Court to take such radical action in the litigation with the Community Financial Services Association of America, but there may be another problem facing the CFPB that has not yet received public attention.   

While the constitutionality of the CFPB's funding is almost assured to be upheld, notes a prominent D.C. lawyer, there is a statutory concern that few have focused on – namely the CFPB is generally funded from the Fed's "combined earnings."  Since the Fed has no "earnings" and is projected to lose more than $1 trillion over the next decade, how exactly does the central bank fund the CFPB's operations? Given that the central bank is insolvent, are the Fed's payments to the CFPB unlawful?

Section 1021 (12 USC 5497) states that "the Board of Governors shall transfer to the Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law." 

Since the Fed has exhausted its capital as set by Congress and is now spending hundreds of billions per year from its holdings of Treasury and agency mortgage securities, how does the Federal Reserve Board justify these payments? If they need more money than that, doesn't the Fed need to ask Congress? 

Wish: Maybe the Mortgage Bankers Association et al could or should sue the Fed for paying the CFPB's bills? Happy thought. 

It's fair to say that most people in the mortgage industry would wish for the CFPB to be magically transported to a different cosmic dimension and without a return ticket. Sadly, this is unlikely to happen, but many lenders are wishing for higher levels of activity in nontraditional products like non-QM loans and second lien mortgages.

Many IMBs would tell you that interest rates are too high, but that really depends upon your perspective.  Even with mortgage rates north of seven percent, home equity loans and other second lien products are barely moving the needle vs roughly the 8% annual portfolio runoff, according to the FDIC.

The unpaid principal balance of bank-owned HELOCs actually fell 0.5% in Q3 vs. Q2 2023, a reflection of the fact that this product still struggles in a market below double-digit interest rates. Please note that the amount of unused credit available to existing borrowers has been rising as the Fed has raised interest rates, hardly a bullish sign. 

Bank sales of HELOCs are barely measurable, again a function of the fact that bank HELOCs as an asset class continue to decline in unpaid principal balance. IMBs might wish for higher HELOC volumes, but this wish seems unlikely to be granted if the Fed is really done raising interest rates.

One big wish within the mortgage industry for 2024 is to partner with a fintech company as a source of new loan originations, particularly non-QM loans. In seeking such partnerships, however, IMBs should remember a couple of things. First, non-agency originations include full credit and counterparty risk to the bank or investor funding the loan. 

Second and more significant, fintech firms operating in the market for non-QM loans must be mindful of the increased scrutiny by the CFPB and federal bank regulators for fair lending violations by nonbanks that work in concert with depositories. Banks are generally the primary buyers of non-QM loans.

The most serious challenge to the cooperation between IMBs and banks came in April 2023, when the FDIC publicly released a Consent Order with Cross River Bank. The consent order with the FDIC was to resolve claims that the bank "engaged in the unsafe or unsound banking practices related to its compliance with applicable fair lending laws and regulations."

"What I find notable and new about these requirements is that they make explicit a bank's requirement to evaluate independently the fair lending compliance of third-party lending decisions - including supporting decision models - executed on the bank's behalf," notes Richard Pace in a lengthy article about the FDIC's Cross River Consent Order.

Pace notes that, under the FDIC order, a bank has responsibility for evaluating the effectiveness of the nonbank's fair lending compliance management system as part of the bank's internal controls.  Yet even if a bank deems the partner's fair lending compliance to be effective, it cannot wholly rely on the nonbank to manage its fair lending compliance responsibilities.

Unless good fortune smiles on the mortgage industry and the U.S. Supreme Court invalidates every CFPB decision since inception, look for the consumer agency we all love to hate to impose similar fair lending duties on non bank lenders in the New Year. This could impact high-flying fintechs including Affirm Holdings, Upstart Holdings and SoFi Technologies. 

IMBs should continue to wish for lower interest rates in 2024 or maybe even 2025. The good news is that in the event of a short-term rate cut by the Fed, funding costs for lenders will fall. But the New Year may also bring a normal yield curve, which could see longer-term yields for benchmark Treasury and mortgage bonds higher than yields are today.  Ponder that as you sip your eggnog.