Recently, I was able to attend the Mortgage Bankers Association Annual Convention and Expo in Las Vegas, and, what perfect timing, too, with so many changes happening in the industry. There were a couple major announcements that will shift the way we do business: a Dodd Frank rule on Qualified Mortgages (QMs) and Qualified Residential Mortgages (QRMs), as well as changes to the way GSEs will function and interact in the future.
While the conference was in session, a final rule regarding QRMs was agreed upon by 6 federal agencies. To start, the new rule provides a much-needed alignment to the definitions of QM and QRM. It also eliminates the down payment requirement that was previously in place for QRMs – making it substantially more advantageous to lenders. Finally, moving forward, any loan eligible to be purchased by GSEs will qualify as both QM and QRM – broadening the roles of Fannie and Freddie.
Simultaneously, the GSEs are loosening underwriting criteria and encouraging lenders to make more loans to deserving borrowers. Some changes we’ll see: minimum down payment requirements will drop from 5% to 3% for high-quality borrowers; lenders will enjoy a greater level of transparency when dealing with GSE reps and warrants; and the transition toward a Common GSE Security and a Common Securitization Platform (CSP) will continue – all leading to a renewed sense of competition between the GSEs.
But even ignoring these major changes, conversation didn’t lull. Take the looming concerns regarding the new Basel 3 capital requirements, for example, and add in the fact that a New York regulator accused Ocwen, the largest non-bank servicer, of backdating foreclosure notices, making it impossible for borrowers to comply with loan modification requirements.
Also fodder for discussion was the mandated change to mortgage loan application and closing disclosures called TILA/RESPA. This new CFPB regulation which goes into effect in August 2015, will require lenders to change many of their systems and processes and is giving the entire industry heartburn.
So what does this all mean for the industry? The new low down payment guidelines should encourage additional loan demand and will increase the market for mortgage insurance and spike average premiums. The changes should be a stimulus to the US housing market and especially attract millennials who are moving into prime family formation age. The overall credit risk pendulum is beginning to swing in the opposite direction toward easing. Ultimately, the residential mortgage market should begin to recover. Some forecasts are already beginning to reflect an improvement in 2015 and beyond, but as always, only time will tell …