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.
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.
As readers of this blog likely know, MBA has been laser-focused on issues of housing affordability for years. This attention has only grown more urgent in the face of rapidly rising interest rates, inflation at 40-year highs, and home-price growth continuing to outpace wage growth. These concerns are particularly important to low- to moderate-income borrowers, who predominantly are served by FHA-insured loans. To help make FHA loans more affordable, MBA continues to support a reduction in the FHA Mortgage Insurance Premium (MIP) set by HUD.
The MIP is the fee paid by borrowers for the insurance to protect FHA should a borrower default on a loan. The MIP contains two components – a 1.75 percent upfront charge paid at closing (and usually financed in the loan amount) and, for most borrowers, a 0.85 percent annual charge that is collected as part of the monthly payment for the life of the loan. This pricing structure has been unchanged since 2015.
Despite the challenges associated with the COVID-19 pandemic, the past few years have seen FHA develop a much larger financial “cushion” in its insurance fund. This robust improvement is due to a strong housing market, careful underwriting by lenders, decisive actions by government and industry actors to help borrowers remain in their homes, and prudent risk management by HUD leadership across political parties and administrations. Last November, in response to FHA’s latest annual report to Congress on the health of its insurance fund, I remarked that, “With the combined Fund capital ratio now at 8.03 percent, it is appropriate for HUD to expeditiously examine reductions in FHA mortgage insurance premiums, which have been at their current levels for nearly seven years.”
At that time, I noted that with several hundred thousand FHA borrowers still in forbearance, it was prudent for HUD to carefully monitor and assess how successfully those borrowers were exiting forbearance. That data is now in.
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.
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.
To The Point 