The mortgage industry has always endured wild swings in activity, but these past few years have been even more extreme. After near-death experiences in the spring of 2020 for many companies due to unprecedented margin calls and market illiquidity, 2020 and 2021 wound up being two of the highest volume and most profitable years ever for lenders. Now, lenders are facing very tough times as volumes and margins have dropped sharply.
Through these swings, it is important to recognize how well US mortgage markets have performed for borrowers, delivering record-low rates to millions of homeowners who refinanced, meeting mortgage demand in a booming housing market, and keeping millions of Americans in their homes during the pandemic through the wide-scale implementation of forbearance plans.
A debate broke out last week among industry commentators about the meaning and importance of mortgage lender margins during the COVID-19 pandemic. The conversation matters because it could impact the policies that govern the industry and affect people’s ability to obtain affordable mortgage loans and pursue the American Dream.
What is not up for debate is the difference mortgage lenders made over the past two years:
• Home Purchase Financing: Lenders enabled 9.8 million families to obtain the financing to move into their first home, a better home, or a home that fit their needs in a difficult time.
• Refinances: Lenders empowered 15.2 million families with existing loans to get better rates, saving significant sums of money for people to spend on other pressing needs.
• Record Forbearance: Lenders helped more than 7.2 million families struggling to make their mortgage payments on time. Not only did they give people time to get back on their feet, but lenders have now helped more than 6.5 million people get back on track with their payments.
Policymakers across the spectrum have praised lenders for these actions, which enabled an unprecedented number of people to make the most of low interest rates and come through the pandemic in a more secure financial position than they otherwise would have. At every stage, lenders sought to give borrowers the relief they needed while taking steps to maintain business stability.
Yet mortgage lenders could have served even more borrowers – and given them even more financial relief – with additional reforms. As policymakers consider lessons learned and prepare for future emergencies, their best bet is to remove the barriers that prevent lenders from rapidly scaling up to meet customer demand when rates fall sharply.
Four reforms deserve special attention.
First: FHFA and the GSEs should remove underwriting, appraisal, and other operational barriers for streamlined rate/term refis, including for borrowers in government-mandated forbearance. This policy would reduce processing bottlenecks and help lenders quickly process and fund refinancing transactions, on loans the GSEs already guarantee, that simply lower interest rates and monthly payments, with no additional risk to the GSEs.
Second: CFPB should facilitate streamlined rate reduction refis by providing an exemption from the Ability to Repay rule for loans that reduce interest rates and payments without exposing borrowers to greater default risk. As with the GSE streamlined option, lenders could bypass cumbersome and costly income and asset documentation and verifications and process these streamlined loans more quickly, while focusing their efforts on purchase transactions.
Third: State policymakers should facilitate more remote work options. This move would allow lenders to hire more people –without having to increase their physical footprint — and serve more borrowers when interest rates drop quickly.
Fourth: Policymakers and mortgage lenders should collaborate to enact more digital solutions, from e-notes and automated appraisals to remote online notarizations, digital signatures, and more. Many of the pandemic-related bottlenecks were a function of continued reliance on paper documents and physical presence — round table closings, in-person document recording, and in-home inspections. Broader adoption of digital solutions by all participants throughout the mortgage process – from application to closing to recording – will lower costs and speed the lending process.
These reforms will empower mortgage lenders to serve more families, in good times and bad. The result? Fewer bottlenecks, faster processing, lower costs, and enhanced ability for borrowers to take advantage of interest rate declines quickly and easily. There should be no debate about building on the record relief lenders provided borrowers during the pandemic.