MReport July 2020

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M R EP O RT | 31 EXPERT INSIGHTS We're seeing things like mini- mum credit scores on warehouse lines or lending guidelines of 680 and 700. Certainly, that leaves out a large portion of borrowers. We're seeing DTI and LTB caps. Even jumbo loans are seeing LTB caps of 80. By the way, this is something that's affecting not just low to moderate-income bor- rowers and things like Federal Housing Administration (FHA) lending, but it's going all the way up into the nonagency jumbo space as well. Non-QM is dead. It is just a completely frozen market. I have seen one program trying to get back out there, but we've seen a 680 FICO with respect to that non-QM program, a 680 FICO going to 65 LTV, and that certainly doesn't sound like expanded credit lending to me. We're seeing restrictions or suspensions of FHA lending and even on cash out refinance suspensions. I saw a recent study done or recent report put out by Urban Institute that looks at the restric- tions that are currently in place, put together a representative sample. They found that with respect to 2019 GSE lending or GSE volume, about two thirds of the loans made in 2019 would not qualify under these restric- tions. That's over 350 billion. All of that adds up to, and evidences a significant restriction of credit, and hopefully we can get through COVID-19 quickly because it only stands to get worse. On top of that, we must look to a future market and what the lending rules and underwriting guidelines allow for. There will be disloca- tions from COVID-19. Gaps in income, gaps in housing history, declines or reductions of income. Those are the kinds of factors that because of look backs in underwriting can have an impact, an adverse impact for several years to come. Hopefully, future lending rules and guidelines will be able to take these impacts as anomalies, especially with respect to those borrowers who have reestablished their ability to pay mortgage credit. M // What are some regulatory changes that could occur due to recent events? KAPLAN // We've spent a lot of time in the Milken Institute Center for Financial markets, of which my program, the Housing Finance Program is a part. My senior fellows, Mike Stegman and Ted Tozer, have joined me and we've done a lot of work with re- spect to policy recommendations. I'm thinking about this in the near term and longer term. Near term, we have been behind it and have recommended policies that include forbearance, foreclosure, and eviction restriction, particu- larly during a period of forbear- ance, because if you're forbearing on the requirement to pay on a mortgage loan, it doesn't make sense to then pursue foreclosure, so I think there has to be some alignment there. We're certainly in favor of a last resort servicing liquidity facility. I know that there are those, particular in govern- ment right now, who say that it's either not necessary or premature to do anything about it. Our concern is what happens if you reach a point where you do need that and you don't have the facility ready to go? It could lead to a market crash or a housing crash that puts 2008 to shame. We're hopeful that the govern- ment will at least see that and put a facility like that in place, or at least ready to go. That's the real concern, because we can't let the health crisis turn into a housing crisis. That will set back a lot of the government relief efforts, not just in housing, but across the board as well, because housing is such a significant part of the economy and of family life as well. Also, in that regard, we're looking to the future, a future state of what regulatory changes can come out of the COVID-19 crisis, at least with respect to housing. That's going to be a tough one. We'll have to do a real deep dive into what institu- tions were ready, which ones weren't. What authorities were in place, which authorities were not. What worked, what didn't. There should be some tweaks, if not new avenues to deal with situations of this nature, should they ever happen again, which we hope they won't, but we have to be prepared. And I think there'll be some good ideas that come out of that. Certainly, there's a ton of recommendations to deal with the current crisis in place. Those may not apply to a steady state housing finance system. But one of the most important regulations that really comes to light here is the CFPB's QM rule. I think as most people know in the space, the CFPB is in the middle of its rulemaking process for the quali- fied mortgage rule in connection with the expiration of the QM patch and also taking a look back since the inception of the QM rule to see what needs to be done to fix it to serve borrowing needs going forward. But I think the QM rule will need to be flexible, as I said earlier, to deal with the COVID-19 crisis as an anomaly, and certainly take it into account, but allow for the reestablishment of credit among borrowers, who right now, if you look at appendix Q , they would not qualify for mortgage credit as result of COVID-19's impact on their credit worthiness. So, I think we have to really pay attention to what the CFPB does there. Fortunately, I know they've been hard at work on that, and we still expect to see them go through with the rulemaking pro- cess over the course of the next month or two, so that will be an important one worth watching. "There are market factors at play that are operating to restrict access to credit." — Eric Kaplan

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