Mortgage Banking Industry Threatened

A portion of mortgage reform working its way through Congress that has received little publicity in the mainstream press, could have the unintended consequence of driving up the cost of 30-year mortgages, and driving out of business almost a third of the companies that make home loans.

Mortgage bankers and brokers in Colorado are among the most vocal opponents of the “risk-retention” requirement proposed in the Restoring American Financial Stability Act.

The idea is to require lenders to have some “skin in the game,” in an attempt to curtail lenders from making inappropriate, risky loans, a leading cause of the foreclosure crisis that swept the country starting in 2007.

Proposal goes too far

But the proposal goes too far by requiring lenders to retain up to 10 percent of the loan value for every mortgage they make that is sold into the secondary market, for as long as the loan in outstanding, according to a broad-range of critics. That would mean mortgage bankers and brokers – among other lenders – would need to have billions of dollars on hand, something they are not set up to do, opponents contend. (See chart below for an example of the impact to mortgage lenders.)

“To require a 5 percent or 10 percent risk retention, really penalizes  independent mortgage bankers,” said Mike Rosser, who started in the Denver mortgage business since 1965.

“Most of the FHA loans that are being done, and have been done, are by the independent mortgage bankers,” added Rosser, now principal of an Aurora-based consulting firm, the Mortgage Investment Co. Inc. “This will be very bad for homeowners who want to get an FHA loan because they will have far fewer choices of where to go.”

HUD already polices lenders

Rosser said many in Congress do not realize that the U.S. Department of Housing and Urban Development, which owns FHA, “already has a very strong auditing program, a mortgagee review board, they do quality audits all of the time, and have a certain amount of capital requirements to get into the FHA business. So this is really redundant.”

Some lenders point out that the so-called toxic-loans of the past – such as options ARMs and other subprime loans- no longer are being made, while the plain vanilla 30-year mortgages have been packaged and sold as securities for decades, without causing the problems of the discontinued loans that were made without strict underwriting guidelines.

Skin in the game

Peter Lansing, head of Universal Lending, one of the largest privately held mortgage banking companies in Denver (and a sponsor of InsideRealEstateNews), said that Congress “wants us to have some financial skin in the game,” which is why it is considering the risk retention requirements.

But despite the recent financial calamity involving so-called toxic loans, the lending industry has done very well when it properly underwrites conservative loans based on a borrower’s assets, appraisal, income, credit scores and work history, and debt to income ratios. In fact, a report completed this week, shows that borrowers of risky loans are more than three times likely to default than traditional loans.  (For a separate story on that report, please go to this link.)

Congress may be unaware of consequences

Lansing said he does not see this as a Democratic or Republican issues.

“I honestly think that Congress has not thought this through,” Lansing said. “What Congress is proposing is ‘over-medicating.’  Congress does need to guard against future abuses which happened in the past. I don’t want to carry this too far, but just like building codes are stricter in the U.S., so if we have an earthquake, it doesn’t have the same devastation as we have seen in some other countries, with less stringent building standards. But we don’t need is over-medication, which will actually be devastating to consumers and mortgage lenders.”

Public in the dark

Lansing said that while people in his industry are aware of it, he believes most of the public doesn’t have a clue it is being proposed or its impact.

“This would be very bad for the consumer,” Lansing said. “No mortgage lender has the type of capital needed to put in an escrow account or something like that. The only way to raise the money is to charge the consumer. On a $200,000 loan, if they only required another 5 percent, that would be an extra $10,000.  That’s obviously not going to work.”

Peter Mills, which last September helped found the Community Mortgage Banking Project, a Washington, D.C.-based coalition created to represent the interests of independent mortgage companies, agreed with Lansing.

“The problem is it does not distinguish between high-risk loans and well-underwritten loans,” Mills said. “It is a very blunt instrument, which would affect everyone across the board.”

Mills said the Senate version would require a 10 percent risk retention amount and the House version a 5 percent retention.  But he said even a 1 percent retention would be too much.  For a lender making about $1 billion a year in loans, in three years it would need to put aside more than $50 million in funds at even a 1% risk retention rate, by his group’s calculations.

Lenders protest proposal

The Community Mortgage Banking Project and the Community Mortgage Lenders of America, last November sent a letter signed by 87 mortgage lenders across the country to the Senate Banking Committee. Eight of them were from Colorado. Only Michigan had as many lenders sign the letter.

“We are very active on this issue in Colorado,” Lansing said. In addition to Universal Lending, the letter was signed by executives from America’s Mortgage in Wheat Ridge; Cherry Creek Mortgage in Greenwood Village;  Clarion Mortgage Capital in Greenwood Village; First National Bank Mortgage in Fort Collins; Ideal Homes Loan, Englewood; Pinnacle Mortgage Group, Lakewood; and Unifirst Mortgage, Grand Junction.

“Under the risk retention requirement in the draft bill, independent mortgage bankers- which accounted for almost one-third of all home mortgages in 2008 – would be forced out of business,” according to the letter to Christopher J. Dodd and Richard C. Shelby, the chairman and ranking member of the Senate Banking Committee, respectively.

Community banks, credit unions impacted

But it wouldn’t stop there.

Community banks and credit unions also would “face liquidity and balance sheet constraints that would limit their lending capabilities,” according to the letter.

The impact of a “poorly designed” risk retention requirement would consolidate the market into the hands of a few major lenders, according to the mortgage bankers.

“This is an ironic result in a bill that is trying to mitigate systemic risk and too-big-to-fail concerns,” the mortgage lenders contend.

Bank Monopolies Feared

Mortgage bankers are facing off on the issue with traditional banks, which have money on hand from short-term investments such as checking and saving accounts and CDs. In a statement, the American Bankers Association said that lenders with secured deposits already have enough capital on hand and should be excluded from the risk retention requirement, although it oppose some other parts of the proposed legislation.

“The big banks could certainly live with this,” said consultant Rosser.

But Lansing, of Universal Lending, isn’t so sure.

“Yes, large financial institutions could be better able to handle these requirements,” Lansing said. “But last year, something like $2.75 trillion in mortgage loans were made in the U.S. Is any bank in the country big enough to absorb those kind of costs and handle that kind of volume?”

Also, Lansing said that consumers would lose if only a few banks were making home loans.

“What Congress, unintentionally would be doing is creating a situation where maybe only three or four lenders in the country would make all of the home loans,” Lansing said. “What Congress would be doing is creating monopolies. I’m not against regulation. I think our industry needs, good, sound regulations that make sense. For example, I think some kind of risk retention probably is appropriate when making high-risk loans. But I am against monopolies.”

The Mortgage Bankers Association, which represents about 280,000 people nationwide, strongly opposes the measure, saying it would have “dire consequences” for mortgage markets.

The provision would “unnecessarily stem competition, reducing choices and increasing the costs of credit for consumers,” according to the group. “At the same time, smaller community banks and even larger depositories would be constrained from lending – and available funds for home financing would be reduced by countless billions of dollars – to meet reserve requirements,” according to the MBA.

Grassroots group shares concerns

And the American Homeowners Grassroots Alliance, which in the past has butted heads with lenders on many issues, worries that while the risk-retention requirement will require more more responsible lending, “it may also somewhat limit the availability of mortgage loans for qualified borrowers and thereby slow the housing market’s economic recovery.”

It urged the banking committee to avoid this unintended consequence.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865

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