January 2016 - Out of the Woods

TheMReport — News and strategies for the evolving mortgage marketplace.

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TH E M R EP O RT | 17 COVER STORY produced mixed results, suggests Meg Burns, managing director with policy and advisory firm The Collingwood Group. "To me, the housing market has not evolved in the tradi - tional sense of the term, which suggests persistent, continual transformation; rather, as a result of the crisis, the market has been shocked and jolted by a series of significant changes," Burns said. "While government interven - tion and oversight have triggered much of this change, and many in Washington would character- ize the more assertive role of government as a positive influence on the market, there are many indications that the legislative and regulatory mandates imposed over the course of the crisis have been disruptive, costly, and frankly, have constrained the pace of the overall economic recovery." Ray Barbone, EVP of mort- gage services with BankUnited, describes a shift from a market that "was more about driving revenue," to one that currently has an "extreme focus on compliance and consumer protection." Like Burns, Barbone sees the shifting regulatory structure as the driver behind all of the recent developments since the crisis. "These changes were initially brought on by regulatory scrutiny and ultimately by the introduction of new regulations," Barbone said. "The level of scrutiny on lenders, and more particularly servicers, during the crisis and continuing today is unprecedented and ulti - mately resulted in Dodd-Frank, the CFPB, and the plethora of regulations and enforcement ac- tions we have witnessed the past several years." The drive toward compliance does have an upside though; and it's one that Bailey of PennyMac, is not shy about pointing out. "I think the entire space was in need of increased quality regula - tion," Bailey said in regards to the industry's state in 2008. "Over time, the industry will benefit from improved regulation. At this time, I cannot say the regulatory environment is at a mature state. Some of the changes are great, and some the industry is still working through." As for the downside of the industry's newfound focus on compliance? "Some of it is very burdensome to people in the process," Bailey said, "but like all things, it is evolving, so it's not at its final resting place." The Future of GSE Reform T hough there have certainly been regulatory shifts in the mortgage market since pre-crisis times, there's one area of the industry that has remained largely the same: GSEs. The industry may have come a long way, but GSE reform hasn't, and the debate still wages on regarding what role Fannie Mae and Freddie Mac should play in the future. "If you listen to the political rhetoric of 2007 and 2008, the surprise would be that Fannie Mae and Freddie Mac even exist today," said Clayton's Tennyson, who remembers a time when policy makers wanted to decon - struct the two housing agencies after the financial crisis. "Not only are they existing, but they repre- sent 70 percent of the mortgage origination market," he added. Tennyson is not the only one to comment on what little progress has been made in reforming the GSEs. Yet, one thing that has been reconfirmed by most parties in the mortgage finance sector: The im- plicit admission by many that the GSEs play a valued role in hous- ing, despite continuous rhetoric to get rid of Fannie and Freddie. In 2011, the Treasury pro- posed three plans to reform the enterprises to ensure more entry of private capital into the housing finance system. Now, five years later, a sense of complacency— mixed with anxiety over the enterprises' future—remains, and little has been done to enact any of the 2011 reform plans or other solutions. Bailey of PennyMac, summed up some of the uncertainty still plagu - ing these two GSEs. "They are coping with their cur- rent place in the marketplace. They are trying to imagine how their fu- ture is going to evolve," Bailey said. Yet, he notes, "There is controversy and different plans for what their future is going to look like." Tom Jeter, CFO and treasurer with mortgage insurer Arch MI, said that prior to the crisis, Fannie, Freddie, and the FHA were the standard provider for borrowers, but there were numerous other mortgage options still available. Fast-forward to today and Jeter said, "Those entities now complete- ly dominate the landscape. Any non-GSE or non-FHA lending has fallen by the wayside and is not a significant portion of the origina- tion system today. Further, there are numerous qualified borrowers in the market that are not able to refinance or get a first-time mort- gage. For example, conventional jumbo and specifically high LTV jumbo loans are significantly under- served in the marketplace, which is why we launched Arch Mortgage Guaranty to offer credit enhance- ment to those lenders wanting to portfolio or securitize loans that won't be sold to the GSEs." Housing policy analysts, who see the GSEs as more influential than ever, mirror this statement in their market analyses. "I think the major difference is that we have entrenched govern- ment involvement in the mortgage market," Pinto said, when asked about how the housing finance system has changed over the course of the last eight years. "The home purchase market is guaranteed by federal agencies. While people say that is unsus- tainable, it has been going on for quite a while and there is nothing in the offering that seems to change that," he noted. Calabria also describes the eight-year rebuilding cycle as one that essentially evolved into a government-dominated market. When asked how the system has developed since 2008, Calabria said: "Perhaps, the biggest change has been the almost complete take-over by Washington. The taxpayer bears most of the risk now, via the GSEs and the Federal Housing Administration, while regulators' changes have almost made mortgages another form of unsecured lending." Meeting Tomorrow's Challenges T hough it may be too soon to call the market in complete recovery, one thing is clear— today's housing and mortgage pro- fessionals will continue to build on the solid foundation that the housing crisis response has laid. "Every cloud has a silver lining," Cato's Calabria said. "So it was with the crisis … there's been a healthy reminder as to risk. The potential for a downturn in the housing market is taken more seriously than it was a decade ago. That said, most of the de - velopments have been negative. Greater role of Washington in the mortgage market has been for the worst. There is more political risk than ever. One of few bright spots is the shift back to more portfolio lending, which I viewed as better managed and inherently more stable and responsible." Clayton's Tennyson agrees. "I would say we are close to being fully recovered," he said. "And I think today, we have a very healthy mortgage industry. We put some solid regulatory ac - tivities in place for mortgage origi- nations," he noted. By doing so, these regulations created a level playing field for large banks and independent, smaller institutions. Not to mention the fact that, "the borrower is being fully disclosed in a much more transparent pro - cess," Tennyson said. RACHEL WILLIAMS is a Texas-based writer and editor with extensive experience in news reporting, feature writing, and marketing. Her areas of focus include mortgage, default servicing, REO, real estate, and home design and remodeling. She currently serves as editor of the MReport and is past Executive Editor of DS News.

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