Risky Business

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Feature Securitization and the CFPB What started as a commonsense approach to righting the industry has left some wondering if the adverse repercussions will be too much to bear. By Mark Lieberman I n response to the Great Recession, which some experts say was at least partially caused by too many people obtaining mortgages they could not afford, the Consumer Financial Protection Bureau (CFPB) in January published its long-anticipated final "ability to repay" mortgage rule. While it will not take effect until January 2014, the mandate is already beginning to pique the mortgage business with the potential for turning lending activities upside down. "The Bureau's decisions, which, to be fair, have been forced upon it by the DoddFrank Act, will have a major impact on lending trends," forecast Dave Felt of Arnall Golden Gregory LLP, an Atlantabased law firm. "They will lead to a greater commoditization of mortgage lending, because it is far easier to regulate a homogenous product than a wide variety of mortgage types and rate structures." Under the new rule, lenders will be required to verify a potential borrower's ability to repay a mortgage, checking eight specific factors: income or assets, employment, credit history, monthly mortgage payment, other monthly payments associated with the property, other monthly obligations associated with the mortgage, other debt, and debt-to-income ratio. By requiring lenders to establish at least these criteria, the rule prevents them from offering no-doc or low-doc loans, which were common prior to the credit crisis as they were bundled and, in effect, hidden in mortgagebacked securities, creating the equivalent of mortgage meatloaf. Coupled with new limitations on mortgage securitization, the CFPB rules appear to get to the root of the credit contraction, which followed the bursting of the housing bubble. Or do they? Balking at the Board I ndeed market participants are not universal fans of what the Bureau has done. "As of now, the CFPB has had a negative effect on the [mortgage] market because key players have stayed on the sidelines due to the uncertainty surrounding current and proposed lending rules," said Jerry Frost, president of Midwest Mortgage Capital. "The Bureau's decisions have the potential to have a huge impact on the future makeup of securitizations and the housing market in general. The decisions the CFPB makes and how they are implemented will define the number of players that choose to enter the market and to what degree they elect to get involved. "But the jury is still out, according to Sanjeev Dahiwadkar, founder and CEO of IndiSoft, a financial services software development company. "The CFPB's short-term impact might be a slight slowdown in the volume of originations," Dahiwadkar said. "In the long term, the CFPB is working to bring much-needed transparency and accountability to the origination process." Those efforts could change the primary and secondary lending markets—with a broader impact on housing—by reducing the pool of available borrowers. The new rule requires mortgage lenders to determine that a potential borrower can repay the loan. Further, it creates a new category of mortgages—dubbed "qualified mortgages"—which are presumed to meet the abilityto-repay criteria. Most of the mortgages made going forward are expected to be qualified mortgages. "Lenders already tend to avoid making loans that are not on simple terms to highly qualified borrowers, because there is currently very little interest in buying private MBS in the secondary market unless it is comprised of very high-quality loans with risks that can be modeled and understood," Felt said. "By adding the additional risk that lower-end or non-standard loans may violate the The M Report | 31

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