Laurie Goodman, who says no analysts have been more critical of bank mortgage practices than her team at Amherst Securities Group LP, is siding with lenders when it comes to a flurry of new rules intended to protect homebuyers.
“We’re piling tighter standards on top of already tight credit standards, and because you have so many different entities responsible for making these rules no one is really looking at the interaction,” said Goodman, who’s based in New York and is a member of the Fixed Income Analysts Society’s Hall of Fame. “The combined effects could be devastating.”
The U.S. Consumer Financial Protection Bureau, Securities and Exchange Commission and Department of Housing and Urban Development are among regulators trying to reshape mortgage lending after poor underwriting contributed to a housing crash that triggered the worst financial crisis in seven decades. The proposals include new tests on borrowers’ ability to repay, guidelines for servicers and rules on origination fees.
Lenders already have been tightening credit standards even as borrowing costs fall to record lows. With the housing market showing signs of stabilizing, after home prices plunged more than 35 percent from a 2006 peak, banks are opposing some of the proposals on the grounds that it will make it harder for them to extend loans.
The concerns raised by Goodman should be taken seriously because she’s not overly sympathetic to the banks, said Representative Brad Miller, a North Carolina Democrat who’s on the Financial Services Committee. Regulators should make sure that requirements intending to protect consumers against abuses don’t make credit unavailable to people who ought to get a mortgage and could afford a home, Miller said.
“I don’t think we have to go back to Ozzie and Harriet mortgages of 20 percent down payment, 30-year fixed rate,” Miller said, referring to a television show that aired in the 1950s and 1960s.
“Everything is being proposed piecemeal and in isolation of other rule makings, so there’s massive amounts of uncertainty,” said Rod Alba, senior regulatory counsel for the mortgage markets division of the American Bankers Association. “What we fear is that pushing everything through the door at once is going to create massive burdens and confusion and is going to create the need to come back and fix a lot of the regulations.”
Goodman, the former head of fixed-income research at UBS AG, joined Amherst in 2008 as the broker dealer specializing in home loan and commercial property debt expanded with banks retrenching because of losses on housing debt. She garnered more top rankings in annual polls of bond investors by Institutional Investor magazine than any other analyst, Austin, Texas-based Amherst said in a statement at the time.
While at Amherst, Goodman has criticized lenders for conflicts of interest, foreclosure and second-lien practices. “I’m not always a sap for the largest banks, almost never am,” she said. “On this particular issue I think they’re dead right.”
Six federal agencies, including the SEC and HUD are jointly responsible for defining which mortgages will be exempt from regulations that would require banks to retain portions of securities created from loans they made, Goodman said in a May 30 report, describing the so-called qualified residential mortgage rule.
Meanwhile, the Consumer Financial Protection Bureau, created by the Dodd-Frank financial reform act in July 2010, has authority under an ability to repay rule and to set guidelines for mortgage servicing more broadly, said Michael Barr, a professor at the University of Michigan Law School and former assistant secretary for financial institutions at the Treasury Department.
“The government should look at the interaction across the different rules,” said Barr. “All of those rules have an influence on the shape and structure of the mortgage market.”
Among the consumer bureau’s proposals are simplified forms showing mortgage terms, tests to verify borrowers’ ability to repay, guidelines for servicers and rules on origination fees.
The majority of the mortgage rules the agency is working on are required by Dodd-Frank and will be finalized in January 2013, Raj Date, deputy director of the bureau said in an e-mail. They’re intended to make the prices and risks of mortgages clearer to consumers and simplify information provided when buying a home, Date said.
“We’re mindful of the cumulative impact of our reforms, and we’re mindful of the important initiatives being pursued by the other federal agencies,” Date said. “All the relevant agencies are collaborating and coordinating well, and for good reason. We all have the same fundamental objective: a mortgage market that actually works, and that doesn’t periodically spiral out of control and wreck the economy.”
SEC spokesman John Nester declined to comment. Calls to HUD and the Federal Housing Finance Agency requesting comment weren’t returned.
The proposed rules come as record-low mortgage rates, rising rents and bottoming home prices spark fresh appetite for homes and loans to buy them.
Mortgage originations in the first quarter rose 5.3 percent to $318 billion from the same period last year, according to Mortgage Bankers Association estimates as homeonwers sought to refinance. Volumes are down from $729 billion in the quarter ending June 2006, a month before home prices in the U.S. peaked on their way to a 35.1 percent decline.
The average rate for a 30-year mortgage fell to 3.75 percent in the week ended May 31 from 3.78 percent, Freddie Mac said in a statement. It was the lowest in the McLean, Virginia-based mortgage-finance company’s records dating to 1971, as concern about Europe’s intensifying sovereign debt crisis drove investors to the safety of government bonds that guide borrowing costs.
“It is good news for the housing market, but the problem for the housing sector isn’t that borrowing costs are high, it’s that banks are unwilling to lend,” said Millan Mulraine, a senior U.S. strategist at TD Securities Inc. in New York.
The number of Americans signing contracts to buy previously owned houses fell in April by the most in a year, the National Association of Realtors said last month. Pending home resales dropped 5.5 percent from March. They rose 15 percent from a year earlier.
Banks have increased lending standards after costs from faulty mortgages and shoddy foreclosures topped $72 billion at the biggest U.S. banks. In the first three months of the year, 5.6 percent of lenders said they had tightened credit standards for long-term, fixed-rate mortgages, according to an April Federal Reserve survey of senior loan officers.
Lenders have been forced to pay investors that bought mortgages and then demanded refunds after finding flaws in the underwriting, including false data about borrower incomes and home values. Such sales to investors typically came with promises, known as representation and warranties, to buy back defective loans
Date of the consumer bureau says the new regulations are also designed to help banks from making loans that people can’t repay.
“Here’s what should be the least surprising lending advice you’ve ever heard: If you are going to lend money, you should probably care about getting paid back,” Date said in a speech April 20 in Los Angeles.
In its announcement last month the agency also said it’s considering rules that would ban the practice of charging origination fees that vary with the size of the loan, and would require that lenders deliver on lower interest rates when a borrower pays an up-front fee in exchange for a discount. Origination fees are charged by lenders and mortgage brokers to cover the costs of underwriting and loan processing.
The various proposals may already have curbed bank appetite for lending as they wait for rule makers to complete the process, according to Amherst’s Goodman.
“You have a very long period of regulatory uncertainty,” she said. “You aren’t getting resolution.”