TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/113472
Feature feature servicers," said Stuart Eisenberg, national director of the real estate practice for BDO, a global accounting and consulting firm. "It allows them to know what they need to do, as opposed to assuming that they know what to do." There is little doubt that mortgages meeting the QM standards will create a class of outstanding securities. But, Eisenberg says, what happens to the people who don't come neatly wrapped in the QM criteria? They comprise the majority of the borrowers currently seeking mortgages: people who their lost jobs during the recession, are self-employed, or don't meet the 43 percent debt-to-loan ratio. The fact is the new QM standards will make it harder for most people to qualify for a mortgage. So what will happen to those people? Well, for at least the next year or so, nothing. Lenders will most likely follow CFPB's QM and QRM standards to the letter. That will leave those folks still wandering in the mortgage wilderness. But sometime in the future, lenders will start carefully writing nonconforming loans. In fact, some lenders are already talking about it. "Really what we're talking about are loans that would go to credit-impaired borrowers who otherwise look like really high-quality customers," said Rick Sharga, EVP of Carrington Mortgage Services, a Californiabased residential mortgage company. "These are people who had something bad happen to their credit during the recession. They are people who can put down a significant down payment and have their documentation and work history all in order." He continued: "But the loans won't be resalable to Fannie Mae or Freddie Mac or other government agencies since they won't meet QM or QRM criteria. That necessitates the creation of an active secondary market. And that's what I think will take a little bit of time to redevelop . . . . When that happens I do believe you will find lenders ready to make some of those loans. I believe it will take the better part of a year for 32 | that to unfold. But it will come. These are borrowers who, if you know how to do underwriting, will perform very well." How Much Down? O f course, the best borrower can't perform at all if he or she doesn't have the upfront cash to put down on the bricks and mortar that make up their American dream. The idea behind having borrowers dish out a substantial down payment is across the board. Mandating a 20 percent down payment would be setting limits that cannot be met by everyone. "Not everyone has 20 percent down," he said. "Therefore you are forcing me to violate fair lending. How can you say it's an across-the-board policy that a lender must abide by when it is impossible to meet the standards that CFPB is setting?" Oleynick also thinks that a 20 percent down payment will force more borrowers to seek FHA loans. That will flood the system "It's the fly-by-night lenders who just want to make a buck and get out that risk retention should hit." —Robert Oleynick, Equity Loans pretty simple: The more money a borrower puts into a property, the less likely they will default. But with the exotic mortgage products that helped take down the market gone, loans are actually performing quite well. Still, if nothing else, the CFPB has managed to unite two traditional adversaries in a common cause. "Before the industry even had the chance to protest, consumer advocates came out and said, 'No, no, no. You can't do that. You'll wipe out a huge percentage of potential homebuyers, and you are going to disproportionately affect low- and middle-income homebuyers,'" Sharga said. The effect a 20 percent down payment would have on middleand lower-income buyers, says Equity Loans' Oleynick, may make it illegal. His argument is basically this: Fair lending practices require lenders to offer everyone the same products on a level playing field and overwhelm the resources the agency has in place. "It will drastically deplete the FHA's reserve accounts when loans start going bad because as the percentage of business increases, you increase the projected percentage of loans that will go into default," Oleynick said. "It might totally destroy the reserve accounts they have set up." Almost everyone believes that the CFPB's final down payment number will be somewhere around 10 percent. That said, everyone also readily admits that their number is shear spit-balling. "To go back to 20 percent is kind of draconian," said BDO's Eisenberg. "I think everyone thinks it is going to be less than 20 percent. But where it's going to fall is still up in the air. I think 10 percent is probably a good number if you underwrite things correctly. That's pretty much what I'm hearing. But I don't think anyone is comfortable that they know that." The Other Part of QRM W ith the spotlight on borrower down payments, less attention has been paid to the other rule expected to be part of QRM: lender risk retention. How much risk CFPB will require lenders to keep on their books is, once again, an unknown. Whatever the number, many in the mortgage industry oppose it because it will tie up capital. Others, like Sharga, understand the industry's position but still like the idea of lenders—like their borrowers—having some of their own skin in the game. "Our management here actually thinks that it's not such a bad idea because it does provide what we call an alignment of interests," he said. "You are going to be more careful about writing a loan if you know that you maintain part of the risk. Theoretically that should work out for everyone." Nor does Oleynick see the fuss over risk retention since most lenders already keep sizeable reserve accounts to cover loan losses. "It's the fly-by-night lenders who just want to make a buck and get out that risk retention should hit," he said. "I think that is one of the things that the CFPB is trying to do." Overall the CFPB generally receives decent marks not just for what it has done so far, but how it has done it. Sharga said that when CFPB was first created he was concerned that it might do its job so well that it would "protect people from ever being able to get a loan again." But now he's encouraged by the agency's "reasonableness." "The CFPB has more or less codified current underwriting standards," he said. "If it had tried to make things more stringent, it would have probably strangled what's left of credit availability. It was smart enough not to do that." The M Report M