John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Video: Brian Chappelle addresses risk retention, rates
Brian Chappelle addresses about 200 people at Universal Land's annual meeting on Tuesday, March 9, at the Cable Center.
It was not your typical annual meeting.
Before the lights came on in the auditorium of the Cable Center on the University of Denver campus, voices rang out to tune of the Black Eyed Peas hit “I Gotta Feelin,” but with sly references to the mortgage industry and nods to host Universal Lending, which is celebrating its 29th year in business, and held its annual meeting on Tuesday. (Universal Lending also is a sponsor of InsideRealEstateNews.com.)
Lotta Change
The lone woman singer of the trio, performed with the stage name “Lotta Change;” Brian Chappelle, the keynote speaker, noted several times that “lotta change” nails exactly what is happening in the mortgage and real estate industries.
“Washington thinks the mortgage system is broken,” Chappelle, a partner of Potomac Partners in Washington, D.C., told about 200 people in the audience at one point. And Congress, he said, “Wants its pound of flesh,” from the industry.
Draconian measures unlikely
Yet, overall, Chappelle said that he is much more optimistic about new regulations and changes that Congress is likely going to enact. For the most part, he does not feel Congress is going to implement “Draconian” measures feared by many industry observers.
For example, he does not think that Congress will pass new “risk-retention” legislation, which would require lenders to put aside 5 percent to 10 percent of the amount of loans sold into secondary markets. (For an earlier blog on this subject, please visit this link.)
“This is probably the most critical issue facing the mortgage industry,” Chappelle told InsideRealEstateNews, before he gave his keynote speech. “It sounds good. Have lenders have some “skin-in-the-game” so they won’t give the consumers the horrible products that started the housing collapse.”
Risk Retention
While risk retention might be a good idea for the so-called toxic loans of a few years ago – option ARMs, stated-income loans, the piggyback 80-20 loans that combined first and second mortgages – those products are not offered anymore, he said. Indeed, a national report released last week, showed that consumers were almost three times likely to face default if they have risky loans than if they have safer, more traditional loans. (For more on that report, please visit this link.) Chappelle later told the audience that the greatest percentage increase in loan defaults is occurring in the “prime” loans, which are supposed to have been offered to the best clients.
Six months ago, Chappelle said, he thought there was a strong likelihood that Congress would adopt the new rule, but he said now they increasingly realize that no company, big or small, has the ability to put aside tens of millions – or even hundreds of millions or even billions – in dollars. But he said the political winds seem to have shifted, as legislators have been schooled on the unintended consequences of the rule, which opponents believe could pose a threat to the entire industry.
Mortgage rates to remain low
On another important topic, he said he does not see mortgage rates spiraling out-of-control, as some observers had worried as little as a month ago. There was a feeling earlier this year that Uncle Sam would stop buying securitized mortgages by April 1, which could have caused mortgage rates to rise by 150 basis points or more almost immediately.
“I’m not an economist, but when I listen to people like Treasury Secretary (Timothy) Geithner and Fed Chairman Ben Bernanke, for the foreseeable future they plan to keep their foot on the accelerator to help drive the economy,” Chappelle said. “What that means is that they have to keep interest rates low. They know that the overall economy will not recover, unless the housing market recovers. And the housing market won’t recover unless interest rates remain low.”
He said one economist he has been following since he was with the Mortgage Bankers Association in the 1990s, is Laurence Meyer, a former Federal Reserve Governor and the head of Macroeconomic Advisers in St. Louis. “Laurence says, “Wait until you see the Fed changes its forecast,” before rates start to rise. But Chappelle said with inflation remaining tame, there is no indication that the Fed will be under any pressure to raise rates anytime soon. Also, he said there appears to be little chance that Congress will extend the federal tax credits for qualified first-time home buyers and some existing homeowners. In order to keep the housing market rolling, one of the few tools in its kit will be to keep interest rates at low levels, he said.
Simplicity goal
One thing is certain, is that there will continue to be more disclosures, transparency and responsibility expected from lenders in the future, Chappelle said. The idea will be to simplify all of the charges and expenses to consumers, he said. On one hand, the government wants more disclosure, but on the other hand, there is a feeling by the government that getting a loan is so complicated, that disclosures don’t really work, he said. Ultimately, he said, the government would like all of the information boiled down to one rate, so consumers could more easily compare competing offers from different companies.
And without a doubt, this will mean more forms to fill out, under the guise of simplification, he said. The good news, is that the added complexity will benefit companies, such as Universal Lending and others, he said, that “know how to follow rules.” Some companies, for example, will not want to make FHA-insured loans, which could account for 50 percent of the loans made this year nationwide, because they don’t want to or find it to difficult to follow the maze of rules that exist and will emerge. Companies that can explain what is going on to consumers and Realtors, he said, will prosper.
The government also would eventually like to have mortgage brokers paid the same for any loan, no matter what the size. For example, they might get paid $1,500 for a $100,000 loan and $1,500 for a $400,000 loan. The idea is that there would be no financial incentive for a broker to convince someone to take out a mortgage that they can’t afford. Mortgage companies would still set the amount paid to brokers and it could be adjusted. But Chappelle said there is no chance of that happening this year. And even if it does happen in the next few years, he said that there will be no cap put on what brokers can make, “so you will still be able to make a good living as a mortgage broker.”
And more regulations and proposals are surely going to be floated, discussed and dissected by the industry and Congress.
“There’s going to be a lotta changes, but change makes for opportunities,” Chappelle said.
Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.
