Don't Blame Regs (Yet) for Slowdown
The jury is still out on whether new regulations are slowing down mortgage lending. It could just be the weather.
According to data collected by the Mortgage Bankers Association, applications for purchase money mortgage loans are running 15% behind the association's forecasts for this year, though they increased 12% over January. The MBA had predicted this would be the year when purchase money lending would surpass refinances as the leading type of mortgage lending in the U.S.
Mike Fratantoni, the association's chief economist, said that was likely to still happen but purchase money lending may not be as strong as first supposed. “We forecast a sharp drop in refinances and that has happened, but the growth in the purchase lending, so far, has not been what we expected,” he said last week.
The MBA estimated that 43,000 new homes were purchased in February, up from 38,000 in January and at an annual rate of 533,000.
Fratantoni acknowledged that increased mortgage regulation – such as the qualified mortgage rules from the CFPB – would be easy to blame for the lower than expected numbers, but stressed that there were currently other possible reasons for the slowdown.
The MBA economist noted that the extreme winter weather in large parts of the U.S. could have also played a role, forcing consumers to remain inside rather than go out looking for new houses. In addition, the economic recovery remains slower and gradual when consumers need it to be more vigorous and robust to feel confident about buying a home.
“I don't think it's a great secret that the economic recovery hasn't been what it needs to be,” Fratantoni said.
He added, however, that increased federal regulation of the mortgage industry might be precluding consumers from feeling confident about taking out a mortgage, particularly increased reserve requirements and ability-to-repay rules.
He said the association does track the fallout rate reported by its members, but doesn't routinely make that data available to the public. The fallout rate is the rate at which mortgage applications fail to make it through to closing, and could be an indicator of consumers who begin the mortgage process and then are unable to finish it because they failed to overcome regulatory hurdles.
More data as the year goes on, Fratantoni said, should make the exact situation clearer.
Joe Ventrone, vice president for regulatory and industry relations for the National Association of Realtors, agreed that mortgages are still too difficult to obtain, but he also refrained from blaming new regulations for the slowdown in mortgage lending.
He also cited the weather and the economy as possible likely culprits but anticipated that the regulations may need to be adjusted as more data becomes available.
“It may be that we have to make some changes to the rules if we want mortgage lending to go forward,” Ventrone said.
In particular Ventrone observed that some of the changes in mortgage rules tended to hamper lower- and middle-income borrowers more than upper-income borrowers who can more easily meet the tighter debt-to-income requirements. “Those are just not as likely to pinch a higher-income borrower as much as others,” he said.
Andrea Stritzke, vice president of regulatory compliance at PolicyWorks, an Iowa-based consulting CUSO, agreed that more time has to pass to really measure the impact of the new regulations on credit union mortgage operations and members.
She did note the CFPB has complicated issues credit unions face in mortgage lending by approving rules and then revising them three, four or five times.
“I think credit unions might feel more confident about their ability to lend under the new rules if the agency left them in place without revisions for a bit,” she said.
Stritzke also said some credit unions have put their mortgage lending on hold until they have a better idea of what the new rules will be, and not just the rules on issuing mortgages but also rules addressing how they are serviced.
One thing that may particularly impact credit unions is the way that the new rules have effectively made all mortgage lending resemble credit union mortgage lending.
“Now every mortgage loan looks like a credit union loan,” she said, “so credit unions will need to differentiate their products differently,” she added.
Richard Whitman, vice president of mortgage lending for the 76,000-member, $830 million Texas Trust Credit Union, reported that his credit union has not found increased regulation to preclude purchase money loans but that the purchase money volume has not replaced the refinance loan volume which has largely fallen off.
“I don't doubt that mortgage lending has gotten a little bit tougher,” Whitman said, but added that much of the impact on lower- and middle-income borrowers in Texas Trust's Dallas-area market has come from other lenders pulling products that the credit union never offered, such as interest only loans.
Whitman acknowledged that the new debt-to-income rules for Qualified Mortgage loans tied the credit union's hands somewhat and that might prevent some members from applying.
“We used to be able to do 49% or 46% [debt to income ratio] with a down payment and in the right situations, and of course we can't do that anymore if we want to do a QM,” Whitman said. Under the new rules, a borrower for a qualified mortgage cannot have a debt-to- income ratio higher than 43%.
The credit union has been helped, Whitman said, by a revival of home equity lending as home prices and values in the Dallas-Fort Worth market have revived.
Daniel Hapner, director of mortgage sales for the 83,000-member, $1 billion Meriwest Credit Union in San Jose, Calif., reported that an entirely different set of circumstances was challenging his credit union's purchase money business.
“We have a real inventory problem here,” said Hapner. Situated in one of the country's hottest real estate markets, Hapner said rising interest rates have largely slowed the market more than regulations.
Hapner said higher rates have meant that existing home owners have been slow to sell their current homes with their currently lower interest rates and that, in turn, has slowed demand for new mortgage loans.
In addition, Hapner said, San Jose's very low unemployment rate and relatively strong economy have made the situation worse. “We have many new people moving here and those folks needs to buy homes, but there aren't many available,” he said, explaining the desire was there, up to 100 will come to open house events the credit union sponsors to explain the home buying process.
“But many of those people will not be able to find homes they can buy,” he said. Local media outlets have reported that, on average, a home remains for sale in the San Jose market for only nine days.