The lack of affordable housing is a big issue this election year. A week before accepting the Democratic presidential nomination, Vice President Kamala Harris unveiled a multi-billion-dollar plan to build 3 million new homes, provide $25,000 in downpayment assistance for first-time homebuyers, and make housing more plentiful and affordable.

While program specifics are light at this stage of the game, there will be ample time to dissect and debate these and other ideas. We also know that ambitious federal housing initiatives often bump up against a web of state and local regulations and restrictions related to housing – not to mention market forces. Even if it is possible to work around these realities, it will not happen overnight.

Mortgage servicers have a vital function in the mortgage market and the wider economy. Helping homeowners in financial distress avoid foreclosure and stay in their homes is among their most important roles. Since the financial crisis, mortgage servicers have demonstrated their commitment to assisting distressed borrowers by diligently implementing new loss mitigation guidance issued by various investors. Recently, investors have issued several new loss mitigation programs to address challenges presented by today’s higher interest rates. For this reason, MBA urges greater collaboration and cooperation among the federal housing agencies when developing and implementing these extensive new policies.

The calendar has turned to 2024, which means one of my favorite events of the year, MBA’s annual Independent Mortgage Bankers Conference, is right around the corner in New Orleans. 

IMBs are the backbone of America’s mortgage market, providing homeownership opportunities for millions of aspiring homeowners, including minority households, Veterans, and those with low and moderate incomes.

That is why I was troubled by a recent Bloomberg article that uses a handful of outlier anecdotes about higher risk borrowers – whose loans naturally incur higher costs – to “illustrate” what are actually modest cost differences found in a regression analysis.  

Mortgage interest rates are higher than they have been in 20 years. The supply of affordable housing for purchase or rent is inadequate. These factors are making it harder to address racial disparities in homeownership and wealth. Given the inextricable link between mortgage lending, the American Dream, and the overall health of the economy, banking regulators should be doing whatever they can to support real estate markets and the broader economy. Unfortunately, the opposite is happening.

In July, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) unveiled a proposal to increase capital requirements for banks with $100 billion or more in assets by about 15 to 20 percent. The rules had been in the works as a fine-tuning of current capital standards, but the size of the proposed capital increase appears to have been an overreaction to the high-profile bank failures earlier this year. In short, the proposed rule is the wrong medicine for the wrong patient at the wrong time.

This spring, the Financial Stability Oversight Council (FSOC) issued a proposal that would remove procedural requirements and allow it to fast-track the designation of non-bank financial companies as systemically important financial institutions (“SIFI”) subject to enhanced supervision by the Federal Reserve. FSOC’s plans are unnecessary and, should regulators use their authority to designate independent mortgage bank servicers as SIFIs, would negatively affect the mortgage market and consumers.

In the 15 years since the financial crisis, banks’ share of mortgage origination and servicing volume has steadily declined. This is largely due to mounting bank capital and liquidity requirements and, in particular, the punitive risk-based capital treatment of mortgage servicing assets. Non-bank servicers have filled this void, substantially increasing their share of the servicing market. As this share has grown, so has attention from FSOC members.

However, FSOC – or at least some members of FSOC – seems to be on a quest to impose a solution where no problem exists. Among the Mortgage Bankers Association’s 2,200 member companies are hundreds of non-bank mortgage servicers and sub-servicers that engage in a core banking activity that is widely understood, easily transferrable, and decentralized. Today, no individual company comprises more than a small fraction – less than 7% – of the market for servicing outstanding single family mortgage debt. The concern that one of these companies could pose a systemic risk to the entire U.S. financial system is unfounded.

Millions of our fellow Americans are struggling to afford a decent and safe roof over their heads. Governments at all levels, working with the private sector, have many tools for adding to housing stock and making rental housing more affordable, but rent control is not part of the solution. In fact, it will make the affordable housing crisis worse.

As with most attempts to dictate market dynamics with government-controlled pricing, rent control leads to distortions and unintended consequences. First, rent control discourages the construction of new units of affordable housing.

Developers and landlords are best able to provide decent and safe housing profitable when renters pay what the market will bear. When the chances to recoup costs and make a reasonable profit, fewer housing units will be built, and housing becomes scarcer and more expensive. It is simply a matter of the law of supply and demand.

In a glaring example in recent experience, building permits dropped by nearly 50% in one year after St. Paul, Minnesota adopted rent control.[i] Fewer construction permits today means fewer housing units tomorrow. In neighboring Minneapolis, where rent control is not used, multifamily residential permitting grew by 16 percent during the same period.

This is a difficult time for the housing industry, and those challenges extend to all corners—not only mortgage lenders but also the warehouse lenders, vendors, title companies, and real estate agents that support the housing and mortgage finance ecosystem. Over the past 24 months, there has been a sharp pivot from historically high origination volume – spurred by record-low interest rates – to a rapid slowdown in home sales and origination volume driven by higher interest rates and tight inventory. According to MBA’s data, total origination volume was cut in half from an all-time high in 2021 of $4.436 trillion to $2.245 trillion in 2022, and we expect the number to be even lower in 2023. For better or for worse, real estate finance remains a cyclical business. But it’s also a resilient business.

Over the last couple of years, we have seen some necessary “right-sizing” of the industry to reflect the dramatic shift in production volumes. Consolidation in the housing and mortgage industries is ongoing. Some 600,000 real estate agents have left the business. New mortgage insurance written (NIW) and title insurance revenues are down sharply. We have seen a number of lenders merge or exit the mortgage origination business, and we are now seeing some institutions exit the mortgage warehouse lending business.

On March 15th, the Federal Housing Finance Agency (FHFA) announced that it would postpone the implementation of loan level pricing adjustment (LLPA) fees that would be based on a borrowers’ debt-to-income (DTI) ratio in Fannie Mae and Freddie Mac’s (the GSEs) single-family pricing grids until deliveries on or after August 1, 2023. The delay creates an opening for FHFA to get the policy right. The DTI-based LLPA is unworkable and should be replaced.

FHFA says the changes to the upfront fees would make the GSEs more “safe and sound” and help them continue to fulfill their mission to advance equitable and sustainable access to homeownership. Just about everyone agrees that these are worthy goals, but instituting DTI-based LLPAs is an ill-advised means to achieve them. There is a reason the revised general Qualified Mortgage (QM) definition excludes the DTI ratio: Studies demonstrate that as a stand-alone measure, DTI is not a strong indicator of a borrower’s ability to repay.

To start, tying an LLPA to a DTI ratio would pose a multitude of operational issues, and compliance challenges, and also create a frustrating and confusing borrower experience.  In addition, a DTI-based LLPA will create costly post-origination quality control disputes between lenders and the GSEs.  A borrower’s income and expenses can change several times throughout the loan application and underwriting process. This is especially true in today’s labor market, which is shaped by the growth in self-employment, part-time employment, and “gig economy” employment. Expenses can also fluctuate significantly because some items are not in credit reports (e.g., child support or alimony) and others are estimated at application but change at closing (e.g., hazard insurance, HOA dues, property taxes). The resulting fluctuations in DTI could result in multiple changes to a borrower’s loan pricing in the period between application and closing.