While the rapid rise of mortgage rates, combined with persistent high home prices, have taken the spotlight as the main factors impeding homebuyers, the actual list is much longer. Chief among them are increased borrowing costs associated with regulatory risk, hazard insurance and state regulations.
The uncertainty that accompanies regulatory risk plays a major factor in the overall cost to a borrower. Well intentioned or not, regulations — particularly those regarding mortgage buybacks on loans with loan defects — leave uncertainty in the market, which results in higher costs for the consumer.
The silver lining: regulators have the power to reduce these costs.
Members of mortgage industry cheered the recent comments from Sandra Thompson, director of the Federal Housing Finance Agency (FHFA), who stated that FHFA expects Fannie Mae and Freddie Mac “to implement a fair, consistent, and predictable process for identifying loan defects and the appropriate remedies.” She also acknowledged the increase in repurchase requests and the fact that “losses associated with repurchasing low interest rate loans can be quite steep.”
Most important, she took concrete action, by protecting rep and warrant protections from defaults precipitated by COVID-mandated forbearance. Achieving the objective cited above of a balanced and transparent repurchase process will be a big help.
The proposed increase in mortgage capital requirements is yet another additional, though hidden, cost for borrowers. The increase, which is far in excess of the internationally accepted Basel III rules, poses a significant threat to regional banks that service larger loans, including mortgages. Traditionally, the liquidity of these regional banks is what allows them to decrease the costs of their loan offerings. A disproportionate increase in capital requirements will simply be passed on to borrowers in the form of more expensive loans as banks absorb the burden of carrying more capital on hand to back up the loans.
Hazard insurance, an increasingly common requirement, is yet another pressure forcing more costs onto homeowners. When lenders issue a loan, they are often required to verify that the potential homeowner is covered not only by a basic homeowner insurance policy but also an additional hazard policy tied to their location. This regulatory requirement necessitates borrowers spend even more upfront to satisfy these requirements. Regulators can reduce this cost by requiring an additional hazard policy only where necessary, and only where it provides a net tangible benefit.
A final area is actions by states and state regulators. An example: in New York, the recent Foreclosure Abuse Prevention Act — however well intentioned — is causing mortgage lenders to be much more stringent in their credit policies. The result: many potential homeowners will be denied a loan.
Another area where the states can help is in expedited regulatory approvals. Many states are taking an inordinately long time to approve mortgage lender change of control requests — a big issue during a period of mortgage consolidation. Another area is approvals for new branches or branch changes of address.
When layered on top of one another, the impact of unnecessary regulations adds thousands of dollars to loan costs or induces mortgage lenders to curtail their credit guidelines. This also forces mortgage lenders to leave the business, meaning less competition and fewer mortgage loan choices for borrowers.
In the absence of national mortgage rate decreases, it falls on regulators to streamline regulatory compliance, promulgate balanced and consistent regulations, and maximize transparency to ensure that lenders clearly understand their obligations in the event of a buy back.
Working in unison, all parties can help more Americans than ever achieve their dream of owning a home. The industry is ready to get to work, but regulators must be ready to join too in that process.
David Stevens is former CEO of the Mortgage Bankers Association and former assistant secretary of Housing and FHA commissioner under President Obama.
Scott Olson is executive director of Community Home Lenders of America.