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.

As we approach the second anniversary of the onset of the COVID19 pandemic, mortgage loan servicers report that approximately one million homeowners are in active forbearance plans, according to MBA’s latest Forbearance and Call Volume survey. This is down from a peak of 4.3 million homeowners in June of 2020. Over the same period, MBA’s National Delinquency Survey shows a decline in mortgage delinquencies (which includes loans in forbearance) from a high of 8.22% in the second quarter of 2020 to 4.88% in the third quarter of 2021.

I share these numbers to demonstrate that the tremendous work that independent mortgage companies, banks, and credit unions have done to help borrowers stay in their homes despite the severe disruption in employment and income should not be overlooked. A reason for the success thus far has been the lessons we all learned from the last financial crisis, not the least of which is the importance of clear, honest communications between borrower and servicer.

While forbearance has always been a part of a servicer’s toolkit to help borrowers facing short-term hardships, it has never been tried on such a scale, and for such a duration, as mandated by Congress, HUD/FHA, and Fannie Mae and Freddie Mac in response to the pandemic. As with so much of the economic response to the national emergency, we are in uncharted territory. 

The burden has fallen upon the servicers to implement those massive mandates, often under tight timelines and with unclear or conflicting guidance from the owners, investors, or insurers of the mortgage. At the same time, servicers themselves were dealing with the impact of the pandemic on their own offices and workforces – stay-at-home orders, quarantines, and the shift to remote work environments.

In addition to handling millions of loans in forbearance (and tens of millions of borrower contacts each month, as demonstrated by MBA’s data on borrower inquires received by servicing call centers), servicers were transitioning their workforce to work from home. And while the pandemic has created chaotic responses in our daily economic lives – think airline delays, bare shelves in markets, etc. – mortgage servicers have responded heroically to the challenge.

While call volumes and borrower contacts have continued to surge, the servicing industry has not experienced a commensurate increase in the number of complaints per quarter, based on the Consumer Financial Protection Bureau’s (CFPB) complaint database. In fact, complaint volume today is near its lowest level since the Bureau began reporting the data in 2012.

While the CFPB’s complaint data is not a direct proxy for servicer performance (the complaints are not verified and many represent questions or misunderstandings that are easily answered and resolved), they can serve as a directional indicator. 

As I noted at the top, there remain approximately one million American homeowners in forbearance. This is not an insignificant number and one on which the industry remains intensely focused, given that many of these forbearance plans are scheduled to expire in the months ahead. Bringing these borrowers’ forbearance plans to a successful conclusion, and preventing avoidable foreclosures, will require trust and painstaking work between servicers and borrowers. Often those most at risk are the most vulnerable in our society: low to moderate-income homeowners and those in minority communities.

Policymakers have gone to great lengths to provide servicers and borrowers the tools they need to bring about a successful resolution in the vast majority of cases. I hope that policymakers will continue to allow servicers to do what they do best – help their customers. This means acknowledging the good work that servicers are doing and encouraging borrowers to work with their servicers, rather than fomenting fears of a return to the Great Financial Crisis. Both market and regulatory frameworks have changed dramatically since then, and borrowers should have confidence that their servicers’ interests and capabilities are aligned with the goal of successfully moving the customer out of forbearance into a home retention option that allows them to remain in their home for the long-term.

Should the Community Reinvestment Act (CRA) apply to Independent Mortgage Banks (IMBs)?

Federal and state policymakers are asking this very question. A new policy brief from the Mortgage Bankers Association provides a clear answer: No. The evidence shows that such a move is a solution in search of a problem.

Banks obtain deposit insurance from the Federal Deposit Insurance Corporation (FDIC), giving consumers in local communities the confidence to put their money in the banks. The CRA was enacted in 1977 to encourage banks that benefit from FDIC insurance (and other federal programs) to help meet the credit needs of the communities in which they do business, including low and moderate-income (LMI) neighborhoods.

IMBs, however, do not take local deposits. The concept of “reinvestment” of deposits, therefore, makes no sense in the context of IMBs. Instead, IMBs utilize other capital streams to make their services widely available within the communities they serve – importing funds from national and global capital markets to lend in these communities. They do not obtain deposit insurance or other benefits that federal- or state-chartered banks enjoy. The CRA is designed to cover a different business model and is therefore a poor fit for IMBs.

Moreover, IMBs already invest heavily in the communities that the CRA seeks to help. The Urban Institute has found that IMBs are the primary originators within the federal programs designed to reach low-and moderate-income communities.  

According to MBA’s analysis of federal Home Mortgage Disclosure Act (HMDA) data, within the Federal Housing Administration, which predominantly serves minority and first-time homebuyers, IMBs account for 85 percent of loans. They also account for 74 percent of Department of Veterans Affairs loans and 69 percent of Rural Housing Service loans. All told, IMBs originate 62 percent of purchase mortgage loans for low- and moderate-income borrowers. They issue an even higher percentage of loans for minority borrowers – 67 percent. Homebuyers who rely on IMBs have loans that are, on average, 11 percent smaller than those who use banks covered by the CRA.

Applying the CRA to IMBs could undermine the purpose of the law itself. Independent mortgage banks already are subject to a robust and successful regulatory system. The Consumer Financial Protection Bureau (CFPB), state regulators, and Fannie Mae and Freddie Mac (the GSEs) apply high standards to IMBs with respect to capital and liquidity, consumer protection, fair lending, and other requirements. Expanding the CRA would expose them to significant new regulatory burdens, adding costs and complexities that would make their current operations more difficult to continue while providing no apparent benefit given their strong lending records.

While the CRA serves an important policy objective, it is inappropriate to apply it to these institutions. Federal and state policymakers should keep this fact in mind and remember that IMBs already are a key mortgage provider in low-and moderate-income communities. 

For more on the important role IMBs play in the housing market, visit www.mba.org/imb.

Why do this? More importantly, why do this now?

As I write this blog entry, I cannot make a single argument in support of the GSEs’ decision to impose a 50 basis point price increase on all refinances, effective Sept. 1.
Why, in the middle of a global pandemic, when millions of Americans are struggling, would FHFA and the GSEs make such a callous decision?

Since FHFA cravenly declined to issue any statement and instead directed the agencies to issue releases after business hours in mid-August during a Congressional recess, we are left to guess at FHFA’s motives.

Regardless, this fee will have adverse market effects on refinance loans purchased by the GSEs. This deeply misguided policy also undermines both Federal Reserve policy to keep rates low and FHFA’s recently announced directives to support homeowners.

How does a $1,400 tack-on fee in the middle of an unprecedented economic crisis support the American borrower? It will cost lenders hundreds of millions of dollars – the bulk of enormous, locked pipelines cannot be closed and delivered in 17 days – and it will cost American consumers billions in the midst of a pandemic, when the administration claims to be working to get relief and stimulus to the struggling economy.

You might be asking how we arrived at this number. Tacking on a half-point to an average GSE loan of $280,000 is $1,400.

What we all ought to be asking is where the money this fee will generate goes. The GSEs cited “market and economic uncertainty resulting in higher risk and costs” as a justification for this new policy. While the first quarter of 2020 was difficult, and allowances for loan loss reduced net income for Fannie and Freddie, both GSEs have enjoyed robust profitability in the second quarter, combining for $4.3 billion in net income. So, it’s hard to see how this is anything other than a cash grab.

FHFA is also withdrawing (after August 31st) a policy that allows the GSEs to purchase loans when borrowers experience COVID-19-related financial hardships shortly after closing and go into forbearance before the loan is delivered to the GSEs. The current policy has provided stability to the market and ensured that lenders could comply with the spirit of the CARES Act by providing forbearance to borrowers before their loans are delivered to Fannie Mae or Freddie Mac.

Legislation reflecting this intent has recently been introduced in both chambers of Congress, and we believe the GSEs should continue purchasing these loans for as long as lenders are mandated to offer forbearance to borrowers. They are rewarded handsomely for the perceived additional risk, with 7-point pricing add-ons (or 5 points for first time homebuyers).

We have issued a blunt statement and an MAA Call to Action, demanding that FHFA withdraw this directive immediately. This is America, and we will use whatever resources we can to make our voices heard. We are calling on senators, representatives, trade associations, consumer groups, and policymakers to join us in ending this wholly unwarranted action.

Last week, the Federal Housing Finance Agency (FHFA) re-proposed a rule that would establish a new capital framework for Fannie Mae and Freddie Mac (the GSEs), designed to ensure their safety and soundness. Once the proposal is published in the Federal Register, which is expected in the next few weeks, stakeholders will have 60 days to offer comments to FHFA.

MBA and its members have already begun reviewing the proposed rule (all 424 pages!), and we will submit comments – just as we did on the original 2018 version of the framework. Establishing new capital standards, and then ensuring that the GSEs meet them, is widely considered a critical step on the path toward stabilizing the GSEs for the long term and ending their conservatorships.

Rebuilding an appropriate level of capital, however, is just one of the mileposts FHFA and the GSEs must reach before policymakers can end the conservatorships. MBA has long been a thought leader on the future of the GSEs and the housing finance system, and our 2017 paper remains one of the most comprehensive documents on the topic. While a lot has changed in the last three years, our views on the core elements of housing finance reform remain the same.

First among those is that there must be structural reforms before the GSEs are released from conservatorship. Said differently, a strong capital framework is necessary, but not sufficient. During the decade-plus that the GSEs have been in conservatorship, their regulator has made several positive changes that have served the market and consumers well. It remains our belief that those changes and others need to be locked in before the GSEs are fully returned to the private sector.

Chief among the reforms we continue to advocate for (there is much more in our 2017 paper linked above) are:

• A level playing field for lenders of all sizes and business models to ensure equal access to the secondary mortgage market;
• An explicit federal government guarantee or backstop on the mortgage-backed securities issued by the GSEs;
• A utility-style regulatory framework overseeing GSE operations;
• Clear and transparent standards for new GSE activities and pilot programs; and
• A strong commitment to affordable housing.

There are a number of ways these reforms can be made permanent, whether as part of legislative reform, through administrative actions, or both. These approaches include official rulemakings, amendments to the Preferred Stock Purchase Agreements (PSPAs) under which the GSEs are currently operating, or other regulatory measures – the more durable, the better. But it must happen before the conservatorships are ended.

From the beginning, FHFA Director Mark Calabria has talked about a milestone-based approach to reform rather than a calendar-driven process. This is even more important in light of current conditions in our economy and financial markets. MBA speaks with the FHFA leadership about this constantly, and Director Calabria and his team understand our position. With the capital rule now out for comment, it’s time for FHFA to make these vitally important administrative reforms permanent.

The entire mortgage industry is focused on making sure that we assist borrowers during this challenging time. I am very proud of the work we as an industry are doing and recognize that it is vital to the ability of Americans to stay safe and sheltered while maintaining some stability during this pandemic and its associated uncertainty and fear.

Mortgage servicers are on the front line, dealing with the millions of borrowers impacted by COVID-19 and implementing the forbearances granted by Congress through the CARES Act. It is a fluid situation, compounded by the challenges that mortgage servicers — like all businesses — face in the current environment where employees must work from home. The demands are severe, and servicers are rising to the challenge.

It is perhaps inevitable that in such a rapidly unfolding situation, some confusion and mixed messaging will occur. MBA has worked with regulators and others to address issues as they arise and get consensus interpretations of newly implemented programs like the forbearances required under the CARES Act.

One issue that arises persistently is the misperception that a borrower must repay the deferred payments in a lump sum at the end of the forbearance period. We are seeing it frequently in news stories, and we are hearing about it from policymakers who are receiving unnerving reports from their constituents. The narrative threatens to overshadow the work that servicers have done to successfully place more than three million consumers on forbearance plans in just a few short weeks.

Fannie Mae and Freddie Mac have given clear guidance that immediate repayment of arrears is not a required solution for CARES Act forbearances. The GSEs released forbearance scripts — located here and here — to assist servicers as they guide homeowners who have experienced a hardship as a result of the COVID-19 pandemic through their options. I encourage servicers to use them. If the scripts are unclear or do not raise issues you are confronting, please let us know.

Finally, I know that while the CARES Act covers a significant majority of the market, it is not the standard for the entire industry. Investors or owners of loans that are not federally backed should ensure that their borrowers also have exit options from forbearance that help borrowers repay their obligations while availing themselves of forbearance if needed.

Helping distressed borrowers is what servicers do. We must do everything we can to get borrowers into forbearance if they need it, with as little uncertainty and pain as possible. That means making them aware of all the repayment options that could be available to them when their forbearance ends.

In passing the CARES Act, Congress took the unprecedented step of mandating forbearance for homeowners and renters who have suffered a loss or reduction in income as a result of the pandemic.

Congress codified forbearance actions closely aligned with those announced by the FHFA and taken by Fannie Mae and Freddie Mac in March to ensure that both homeowners and renters can maintain a roof over their heads during the crisis. This is in addition to providing support for unemployed workers and small businesses.

These are traumatic times for millions of American homeowners, many of whom are facing unexpected unemployment triggered by business closures and state-ordered shutdowns. Our industry has been called on to do our part to assure that homeowners and renters can stay in their homes during these extraordinary times, and we are up the challenge, even as we pivot our own workplaces to respond to the crisis.

While part of a necessary and prudent response to COVID-19, the need for widespread forbearance – without a source of liquidity to support it — threatens the stability of the housing finance market.

Why is this happening? Mortgage servicers must advance payments to investors even if a borrower goes into forbearance. In such a large-scale event as this, one which could never be foreseen or planned for by servicers or regulators alike, it is not unreasonable to expect policymakers to provide a source of funding to those mortgage servicers that may need additional capacity to support homeowners and renters impacted by COVID-19. Servicers want to help at-risk borrowers, but to do so, servicers need short-term financing to be able to provide this help.

That is why we are asking the Federal Reserve and Treasury to leverage a subset of the funding Treasury received from Congress in the CARES Act to provide a liquidity facility that single-family and multifamily servicers can borrow from to ensure that they can deliver much-needed economic relief to consumers through this unprecedented forbearance plan.

Key leaders in Congress have already sounded this position. Senator Mike Crapo (R-ID), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, urged the Treasury Department and the Federal Reserve to prioritize facilities that stabilize key markets, such as the mortgage servicing market. Representative Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, clarified that “Congress expects the Fed will act promptly to establish and implement this facility.”

The industry is prepared to supply relief, and the established forbearance framework is appropriate because it delivers help to the most people as quickly as possible. While some servicers will not need assistance, many will require temporary support to deliver forbearance at the scale and for the duration required.

As an industry, we’re committed to helping. Delaying these liquidity structures leads to the potential of greater uncertainty and volatility in the market. That would be a disservice to the millions of Americans we are all trying to help.

Important aspects of the 2020 housing outlook – in addition to demand, supply, and rates – are the various changes to the regulatory environment that will affect lenders and borrowers.

Improvements to FHA’s defect taxonomy – the method used to identify defects at the loan level and the remedies for such shortcomings – are one of the more positive developments, particularly for first-time homebuyers and low- and moderate-income borrowers.

These changes are part of a larger effort by HUD to revise the loan review process and simplify the certifications that lenders make in connection with the FHA program in order to reduce the risk of False Claims Act enforcement for immaterial loan origination errors.

MBA has championed reforming the taxonomy for some time. Our posture has been that FHA does not need new rules and regulations to govern our industry, but rather more clarity and transparency in the ones that are already on the books.

Since the crisis, the legal and reputational risks associated with originating FHA-insured loans have substantially increased through hyper-technical enforcement of FHA’s lending requirements, driving many lenders – particularly banks – away from offering FHA loans to their customers.

To address these concerns, the just-released final defect taxonomy includes specific remedies for various tiers of defect severity. This will allow lenders to understand in advance the remedies for different types of loan defects.

Not only did HUD work to make changes to the loan review process, but last October, HUD Secretary Ben Carson announced a joint memorandum of understanding (MOU) between HUD and the Department of Justice (DOJ). This MOU stated that DOJ would defer primarily to HUD’s administrative proceedings to evaluate and remediate loan origination errors, rather than pursuing the draconian damages allowed in the Civil War-era False Claims Act. It also provided for closer coordination between HUD and DOJ throughout the investigative process.

In addition, HUD revised the certifications that lenders provide annually and on each loan. The changes to the loan-level and annual certifications more closely link them to relevant regulations, as opposed to every requirement found in the FHA Handbook. They also stress that the underwriting process should allow for judgment and discretion on the part of underwriters. Lastly, the loan-level certification ties in to the defect taxonomy as the remedy for any defects, and thus limits the risk that errors will be adjudicated through the False Claims Act.

Taken together, these changes represent a significant effort by HUD to resolve longstanding concerns about exposure to False Claims Act penalties, and to bring lenders back to the program. HUD took steps to make these changes durable to provide lenders with some certainty that a future administration could not easily return to the indiscriminate use of the False Claims Act to pursue lenders for immaterial defects on FHA loans.  While individual lenders must consider when and how to return to FHA lending or increase their participation in the program, these reforms represent very positive progress in restoring clarity and certainty.

Housing market stability is strengthened when key programs like FHA are supported by a deep pool of participating lenders, depository institution and IMB alike. I commend HUD for these steps and encourage them to continue their efforts in other areas, particularly on FHA servicing reforms.