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Regulations to Shape the Future of the Industry

Robert Ottone
May 28, 2014

With a wave of legislation unveiled in recent months, and with more on the horizon, it’s fascinating to speculate on the kind of year 2014 could be. Ken Harney, a nationally-syndicated financial columnist and Lawrence Yun, chief economist for the National Association of Realtors (NAR) are two leading experts in the field and were keen to discuss a speculative outlook while also looking back at the year 2013. Where do you see the residential mortgage marketplace heading in 2014? Ken Harney: The refi boom is clearly gone. I’ve seen estimates around 30 percent lower volume next year, but that means there will be greater concentration on the purchase market. The brokers I know seem very good about dealing with buyers, so, if they can get things straightened out with the government, it could be a great year for them because of their traditional focus on word of mouth, all those things I like … the attention to service, etc. Brokers seem to care. In the past, big banks never gave me that impression. I’d love to see a more mortgage broker style brought to the servicing end of business.” Lawrence Yun: In terms of unit sales, I believe we have hit a plateau. There won’t be any meaningful change in unit sales on existing homes, even though prices, I expect, will continue to increase in moderation, perhaps around six percent next year, overall. What are some of the things that have led to this plateau in the market? Yun: It’s not really a concern, honestly. The home sales market has been recovering nicely over the past two years. Many people would consider 2013 a success in terms of performance, so they’d potentially see a repeat of that. Now, the reason why there isn’t more growth on the horizon is because there are some negative factors that are beginning to impact the market, principally the affordability condition, which is coming down due to a combination of much higher home prices in relation to income growth. That disparity is a prime concern. We’re clearly in a rising interest rate environment. Rising rates will hold back the potential buyers.   “People aren’t defaulting in a rising home price environment. Underwriting is preventing further recovery and the potential for a faster, more robust recovery.”—Lawrence Yun, chief economist for the National Association of Realtors (NAR)     What impact will compliance issues have on the industry in 2014? Yun: The compliance issue is an uncertainty. Out of new Washington policies, including the QM [qualified mortgage] and QRM [qualified residential mortgage] issues, if there are further title regulations, naturally, that would impact the forecast, but I don’t predict any compliance changes. I think the final rulings would be very reasonable. The current condition involves tight underwriting and I don’t see any tighter underwriting. Have you found, based on personal experience, that the Big Four are looking for ways to disqualify? Harney: To some extent. The retail guys are looking to do business, but at a lower intensity and lower ambition level. You don’t get the same attention you get from a broker. They want you kept on the hook. They want you as their client, surely. I can’t say every broker is as good, but over time, in investment property purchases, I’ve been able to identify who the good ones are for me, so I stick with them. Is there any criteria you feel a mortgage broker should have that makes them stand out? Harney: Well, it’s hard to advertise words like ‘service,’ so, to tell you the truth, I’ve been connected by word of mouth. A real estate agent will suggest somebody and that person often proves to be the best. That broker is often consumer-focused. That’s the difference between retail guys and brokers. Brokers, in general, are smaller-business, but do a decent volume. They’re constantly in touch and working hard. I can’t say the same for retail guys. Consumers don’t know who the brokers are. Put aside Fed issues and CFPB issues and I think that’s the biggest challenge brokers face … making themselves identifiable to the consumer. Social media and the Internet is the cheapest and easiest way to get your name out there. Brokers need to make a more energetic effort in getting themselves out to clients. Do you foresee any shock to the economic system as we transition from Ben Bernanke to Janet Yellen as Fed Reserve chair considering how drastically different they are? Yun: No, I don’t think so. I think it’ll be relatively similar. Small, modest changes would be made. The tapering of quantitative easing [QE] could be achieved at a faster pace next year under Yellen. Do you feel that mortgage brokers are still the poster child of the crisis? Harney: The word I would use is “scapegoat,” but that’s a Biblical term. It has to do with transferring all the sins of the community onto one goat and send it into the wilderness. I do think that brokers were partially responsible for what happened, but you had to have underwriters as well. There’s plenty of blame to go around. You had unscrupulous brokers out there, sure. My sense is that those people who were doing that have been removed or have left the industry. The industry is much smaller now than it was at the height. What you have left are the ethical ones who have weathered the storm of Congress, and particularly, of this Administration.   “The brokers I know seem very good about dealing with buyers, so, if they can get things straightened out with the government, 2014 could be a great year for them because of their traditional focus on word of mouth …”—Ken Harney, nationally-syndicated financial columnist     Do you foresee any further refinement of existing CFPB rules over the next year? Harney: I have been under the impression since day one that the CFPB has tried to bend over backwards to be responsive to various industries. While those industries might not agree, I think those are the marching orders. The pattern is that they are very open, they welcome sitting down and talking and negotiating, and I think that’s the style they have established. Whether they succeed on QM or anything else, in some cases, they’re locked into Dodd-Frank and might not have the room to compromise. I wouldn’t be surprised if they didn’t decide to work more with the industry as a whole. Yun: I think the big-picture is that these banks have benefited from low interest rate policies. Cash reserves are strong. Underwriting standards are very tight, preventing renters from becoming homeowners. This prevents renters from partaking in homeownership, which means they aren’t part of the housing recovery. That’s the big picture. Many public statements from the Fed and the Administration point to underwriting being too restrictive. The CFPB might need to take that as a cue in how they engage in legislation. People aren’t defaulting in a rising home price environment. Underwriting is preventing further recovery and the potential for a faster, more robust recovery. Can you discuss the implications of any regulatory shifts on the consumer? Harney: I don’t think we know how this is all going to work out. I think we’re tumbling towards something that could be more jilting than many people think. If people are shunted into non-QM and being thrown out, especially if it’s combined with the possibility of sometime, after six months or more, lower conventional Fannie Mae or Freddie Mac limits will push people who normally could have gone through with Fannie and Freddie won’t be able to do that. They’ll be in the jumbo arena where they’ll have to pay more. The CFPB exception won’t benefit them. I think that the first six months of 2014 will be a bumpy time. The industry is gearing up to handle this, but as more people get thrown out under lower loan limits, there could be a burst of activity going to the FHA. Their premiums are harsh, so people won’t be able to afford FHA, either. Robert Ottone is senior editor of National Mortgage Professional Magazine. He may be reached by phone at (516) 409-5555, ext. 314 or e-mail
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