The U.S. mortgage market will linger in a Groundhog Day type of scenario unless the qualified-residential mortgage and qualified mortgage rules outlined in Dodd-Frank are tweaked and defined, David Stevens, president and CEO of the Mortgage Bankers Association, said.
While delivering the trade association's annual state of the industry report on Wednesday, Stevens said lenders will shy away from mortgage origination if the QM rule is finalized in 2012 without a clear safe-harbor provision shielding financial firms from liability.
The MBA leader said lack of regulatory certainty is keeping mortgage lending in the doldrums, with many qualified homebuyers not able to secure financing from risk-adverse institutions.
The QM rule at issue says all borrowers must have the ability to repay loans issued to them. Stevens said the MBA agrees with this provision, but believes QM is not specific enough in its current drafting, creating a gray area where lenders will back away, fearing future liabilities.
"There has to be a clear bright line — or safe harbor provision — that says if you underwrite the mortgage to these standards, you have a safe harbor," Stevens said. He said specifically the language of the QM rule could be better defined, adding that "the challenge is the QM has broad definitional language."
Stevens said regulators also need to define what "ability to repay" means to ensure lenders know how to fall within the ambit of safe lending barriers. "This is not an act or recommendation to blindly defend or create an environment of past years where reckless behavior was occurring. Today, the concerns are about excessive credit lending restrictions," Stevens said.
Stevens also tackled the risk-retention rule, which forces lenders to retain a 5% risk on securitized mortgages unless those home loans are identified as qualified residential mortgages. "We support risk retention," Stevens said. "The challenge is the QRM (or the exemption to the risk-retention requirement) went a step further than fixing the underwriting. They added loan-to-value and debt-to-income ratios, but the legislation (Dodd-Frank) did not ask for DTI or LTV. They also added a 20% downpayment restriction."
Stevens warned that first-time homebuyers and families without disposable income will not have the down payment capabilities to meet the QRM standard, which will force more borrowers away from the private market and into Federal Housing Administration or other government programs.
"The final QRM rule is close to being finalized," he said. "If it's not pulled back, it will have significant downstream effects that will affect the housing industry for years to come."
Stevens said two other elements need to be met to kick-start lending: a commitment to offering some type of 30-year, fixed-rate mortgage and sound mortgage servicing standards. Stevens is hopeful a massive mortgage servicing settlement that attorneys general are now crafting involving the nation's major mortgage servicers will create a clear framework for national mortgage servicing standards.
Jay Brinkmann, chief economist for MBA, says mortgage originations in 2012 are expected to drop to $992 bilion from $1.26 billion last year. He anticiaptes a drop in the refinance market and a flat home purchase market, that will either stay the same or rise somewhat. Those estimates do not include the possibility of a HARP program expansion this year.