The legislative and regulatory reactions to the “subprime mortgage crisis” on both a state and federal level, while laudable in their attempt to help consumers in distress, have the potential of seriously altering the manner in which mortgage financing is provided to consumers. This could result in many deserving citizens being deprived of the opportunity to purchase homes.
In addition, the political opportunities available when taking a strong stand on these economic issues have led some to suggest radical action. Unfortunately, the impact of these actions on the industry and consumers in need of financing are poorly understood. This has taken place notwithstanding that the market has already reacted and imposed more conservative underwriting requirements and the elimination of certain product types.
The danger of irreparably harming the free market competition that is at the heart of our mortgage delivery system in this country has become apparent to those who understand mortgage finance. It is, therefore, critical for industry representatives to be aware of the legislative and regulatory proposals that have the potential to be passed or promulgated and respond with clear and concise explanations of how they would impact the marketplace.
The current regulatory atmosphere resulted, in part, from the development and use of a plethora of mortgage products with adjustable features and deferred principal or interest payments combined with the application of more liberal mortgage underwriting standards. This left some consumers with loans that were not affordable from the outset or were to become unaffordable when interest rates reset. Refinancing, which was used to avoid the higher reset interest rates, was lost as an option when housing prices fell and substantially reduced or eliminated the consumers equity in the mortgaged property.
Delinquencies rose substantially as did foreclosures and Congress as well as state regulators and legislators began to look for short and long term solutions. In order to deal with the immediate problem, regulators have been attempting to counsel and aid those who are delinquent or soon will be as well as those in foreclosure. For example, Community Forums held around the state such as those we have participated in with the New Jersey Department of Banking have been productive, as has the counseling available through various nonprofit organizations. The industry has responded with modifications of loan terms, forbearance and by counseling those who are in a position to avoid foreclosure.
In an effort to avoid similar problems in the future, statutory and regulatory proposals abound. Unfortunately, subjective and problematic criteria such as ensuring a “net tangible benefit” to consumers on certain mortgage loans tend to shut down the market. On a federal level, Rep. Barney Frank’s Bill (H.R. 3915) and Senator Christopher Dodd’s Bill (S. 2452) may be well intended, but they do not reflect any concern for retaining the free competitive market that enables our industry to function and continues to provide a plethora of mortgage products at reasonable prices.
Instead, they constitute an overreaction to the mortgage crises and reflect a sense that neither state nor federal regulators have done enough in past years and now Congress must act decisively! Yes, their actions are decisive but can be extremely harmful, not helpful, to consumers and the housing markets.
The Federal Reserve Board’s proposal (Proposed Rules to modify Regulation Z under the Home Ownership and Equity Protection Act) comes from a different and far more knowledgeable perspective. It is immediately evident from a reading of the document that the Board was making a conscious effort to avoid undermining the competitive market. The Board, therefore, restricted its approach so that it would only impact the existing mortgage delivery system by regulating in those areas where the system is imperfect or not functioning as it should. And in those areas where regulations are proposed, the Board did not simply adopt absolute prohibitions but, rather, made carefully crafted proposals which are minimally restrictive. These proposed regulations and the comments provided with them reflect the Federal Reserve’s comprehensive knowledge of the marketplace and mortgage finance.
It is important to note that the Board also asked for comments to be submitted to it on a variety of topics. In many cases, the Board wants input as to whether the proposed regulations would go too far or not far enough. They will read the comments carefully, as they usually do, and report them in their final proposal explaining why they agreed or disagreed with each submission. This gives our industry a great opportunity to use its expertise in sending in comments and responding to the Board’s questions. Industry input is critical as the Federal Reserve’s proposal will certainly be under attack (Both Sen. Dodd and Rep. Frank have attacked the proposal already) and needs industry support.
One of the greatest concerns about the current regulatory atmosphere is the recent trend toward regulators prescribing standards and criteria for the underwriting of mortgage loans.
This raises, among other things, the philosophical question of the extent to which government ought to determine who should or should not qualify for a loan, rather than leaving the marketplace and consumer to make that decision.
With specific reference to the “ability to repay” issue, for example, the Federal Reserve’s Proposal would prohibit a “pattern or practice” of lending without regard to a borrower’s ability to repay considering the consumers’ current and expected income and other factors in the case of “higher priced loans” (APR on purchase, refinance and home equity loans exceeds interest rate on Treasury with comparable maturity by 3 percent on first lien loan) but provides a safe harbor where a creditor has a reasonable basis to believe that a consumer can make the loan payments for at least seven years. Investment loans, vacation homes, HELOC’s, reverse mortgages, bridge or construction-only loans are excluded.
This type of provision reveals the effort made by the Federal Reserve to impose standards without destroying the discretion needed for lenders to provide mortgage loans to those who may show an ability to repay even when traditional means of verifying income are not sufficient. It clearly supports the concept that government should not impose itself to the point where the standards for underwriting are fixed and absolute and all but predetermine that certain consumers will not be eligible for mortgage financing. In sum, the proposal is an effort to have responsible government oversee the mortgage market that should be tweaked, perhaps, but generally supported by industry and consumers alike