How Legislation Recast the Mortgage Industry
Continued from Page 19
Recent legislation is affecting — and will continue to affect —
the mortgage industry in many ways. When the dust settles,
the mortgage business likely will look a lot like it did before
2003, except for having to deal with new legislation and large
government entities.
But that’s not necessarily a bad business to be in. For 2009,
analysts estimate a total origination volume of $1.5 trillion to
$1.6 trillion for purchases and refinances combined. With fewer
players in the market, it’s likely that supply and demand will
return to a pre-boom level of equilibrium.
The question is, will current legislative initiatives speed
up or slow down equilibrium? Let’s look at it from supply
(i.e., banks, brokers and lenders) and demand (i.e., borrowers)
perspectives.
BORROWER DEMAND
If enacted as per original plans, the $700 billion government
bailout passed this past October likely will speed current legislative initiatives, which will further drive supply and demand.
There will continue to be demand for mortgages. From 2003
to ’06, home values appreciated at a higher rate than the equity
taken out of most homes. Unless home prices continue to drop
at current rates for the next 24 months in most markets, however, this equity will continue to be there.
Further, the U.S. Department of Housing and Urban Development (HUD), through its American Dream Downpayment
Initiative, allows state and local governments to use home funds
to provide downpayment and closing-cost assistance for low-and moderate-income families. As many of these homeowners
are refinanced into FHA loans, the FHA Modernization Act,
which was part of the larger housing bill, will provide many new
protection measures.
For example, homeowners will be required to have more
insurance on their property’s appraised value. Another example is repealing the insurance termination date, thus enabling
HUD to insure loans for the rehabilitation of one- to four-family
structures. Single-unit-condominium owners will now have a
blanket mortgage insured by HUD, even in certain multifamily projects.
This act also affects reverse-mortgage holders. It requires
counseling from independent third parties with no financial
interest in the mortgage transaction.
There are a number of additional measures under the Foreclosure Prevention Act of 2008, also part of the housing bill.
One of the most pervasive will be the level of counseling services to buyers, owners and armed-services personnel. The
HUD secretary will administer these services.
THE EFFECT ON SUPPLY
Perhaps the most-important legislative initiatives to level the
number of players with demand for mortgages are at the state
and federal levels — and are focused on mortgage brokers.
“When the dust settles, the mortgage business likely will look a lot like it did before
2003, except for having to deal with new legislation and large government entities.”
Many refinance borrowers who took out equity in that period likely will look to refinance again in 2009. Legislation,
along with the government’s bailout, also may help stabilize
home prices.
One change that legislation likely will have on demand is
the widening of today’s constrained approval criteria. Today,
underwriting criteria typically exclude about 20 percent to 40
percent of homeowner demand. Many potential homebuyers
simply can’t qualify. And depending on where they are in the
country, it’s not so much because of equity as it is because of
credit quality.
Another change will be in stabilizing approval criteria. Even
if lenders and brokers can approve their clients, they often cannot get them funded 20 or 40 days later because of the volatility
of conforming-loan underwriting guidelines.
We also likely are entering a period in which there will be
a considerable amount of real estate owned properties (REOs)
sold and loan-workouts completed, with a likely spike before
year-end. Few loan-portfolio executives will want to carry
these properties and loans into 2009. Therefore, there could be
tens of thousands of new loans available from these REOs to
homebuyers.
OTHER LEGISLATIVE FACTORS
The Housing and Economic Recovery Act of 2008 is authorized
to insure nearly $4 billion in new mortgages. Along with increased Federal Housing Administration (FHA) loan limits, this
likely will have some observable impact in stemming foreclosure
rates and could add to supply.
As an example of the application of the nearly $4 billion
in federal neighborhood-stabilization funding under the housing bill, Florida will benefit from nearly $300 million in direct
funds, with an additional $625 million in grants to create new
jobs. This is expected to return about 8,700 of the 135,832 properties that were in foreclosure at the beginning of this year.
At the other end of the spectrum, Connecticut, with nearly
10,000 foreclosures at the start of 2008, stands to benefit from
$67 million in direct funds, restoring nearly 1,280 properties
to productive use.
First-time homebuyers also will see a direct effect from the
bill. It makes available a refundable tax credit through which
first-time buyers will receive as much as $7,500 for home purchases through this coming July.
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There have been measures — including the Mortgage Reform and Anti-Predatory Lending Act of 2007 — to prohibit
the yield-spread premiums typically paid to brokers, eliminate
qualification benefits for adjustable-rate and interest-only mortgages, and essentially make no-doc and low-doc loans illegal.
Additionally, the Housing and Economic Recovery Act created a mandatory, nationwide process to license and track mortgage brokers. The licensing requirements and fees, minimum
net worth, and surety-bond requirements have caused or will
cause many brokers to exit the industry. And a number of those
who do stay in the industry simply will be unable to originate
mortgages at the profit levels they enjoyed years earlier.
The result: The supply of brokers and lenders likely will be
further aligned with the demand for their services.
WHAT THE FUTURE HOLDS
Some time in the next four to six quarters — or perhaps sooner —
the mortgage industry could be back at supply-and-demand
equilibrium in terms of the number of players and the demand
for their services. The most significant variable is the time it
will take to reach this equilibrium. Timing may largely be in the
hands of our legislators — which places the mortgage industry
in a precarious position.
We can expect, however, that there will be far fewer players
on the supply side, which likely will comprise mostly seasoned
lenders who moved from executive positions to originating
loans. Banks will likely focus on cross-selling and retention,
with a few becoming large originators. And brokers must face
new legislation that affects how they do business.
The true effect of the legislation remains to be seen. From
what we can tell, however, the mortgage industry moving into
next year will look more like the industry of the pre-boom period than that of recent years.
PETER HARVEY, Intellidyn Corp.’s founder
and CEO, spent 20 years in direct-to-con-sumer marketing for several large banks and
lenders. Reach him at pharvey@intellidyn.
com or (631) 390-0435, ext. 100.
