As U.S. financial organizations plot their course for 2009, many are waiting to see how the federal government will handle the current financial crisis under a new Presidential administration. And while there are plenty of unknowns, early leaks from the White House suggest that the Obama administration will not be taking a hands-off approach to managing the economy (an issue we'll analyze in an upcoming HW special report).
It's also clear that regulatory reform will likely sit front and center next year for mortgage market participants, as it has for most of the back half of this year.
This past week alone has seen the U.S. Dept. of Housing and Urban Development revise the Real Estate Settlement and Procedures Act, implementing changes to borrower disclosures via the Good Faith Estimate provided by lenders to borrower ahead of their obtaining a mortgage. Those changes go into effect in 2010, but other changes sit front-and-center as well, including a proposed sea-change to the appraisal process scheduled to go into effect early next year, as well as the elimination of seller-funded down payment assistance programs.
And, of course, that's just for starters. At least one industry expert, however, suggests that over-regulating mortgages could end up having some serious long-term consequences for both industry participants and borrowers.
“Everyone’s instinct when something goes wrong in the financial services industry is to come up with a new regulation,” said Edward Kramer, executive vice president for regulatory programs at Wolters Kluwer Financial Services. “But oftentimes, it really is a matter of fixing what you already have.”
He also sees an industry that will shrink back to where it was years ago, not only in terms of volume, but also in terms of underwriting criteria. "Loans were being made to people that didn’t necessarily have the credit," he said, "and they certainly, in many instances, didn’t have the capacity to repay."
Of course, regulators and industry participants now understand that. But the odd irony to the current situation facing the mortgage industry is that for all of the tough talk coming from Capitol Hill around regulation, most appear to be looking the other way when it comes to ensuring that the same sort of mistakes aren't being made within mortgages insured by the Federal Housing Administration.
BusinessWeek's cover story this week, for example, focuses on how FHA lending has become a wolf in sheep's clothing, the new subprime.
"[T]here's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments," authors Chad Terhune and Robert Berner write. "Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it."
Which means that while regulators and lawmakers clamp down on a market that largely no longer exists (private-party lending), they could completely miss an opportunity to use regulatory authority to prevent the same disaster from taking place in their own backyard.
But federal regulation is really only part of the picture here, with states and even cities enacting myriad new statutes and passing new procedures seemingly daily that affect the mortgage banking machine. The most common involve predatory and fair lending, and also include foreclosure notice periods and other programs designed to make it more difficult for a servicer to foreclose on a borrower's home.
“I don’t think we’ll see a lot of new regulations right away at the federal level, but I do think we will continue to see substantial change at the state level, given the recent subprime issues,” said Amy Downey, senior compliance consultant at Wolters Kluwer Financial Services. “State banking regulators haven’t traditionally waited for the federal banking regulators to take the initiative in protecting their citizens.”
And we're seeing plenty of proof of that already. California governor Arnold Schwarzenegger announced Nov. 6 that he will look to implement a 90-day moratorium on foreclosures, the latest move by state and local legislators to slow the number of foreclosures. But the California governor is far from alone -- state officials have been moving across the nation to address a growing number of troubled borrowers and the lending practices that put them into harm's way. See earlier coverage.Write to Paul Jackson at firstname.lastname@example.org.