Mortgage Lending in 2014 What Are the Drivers Brinkmann
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Mortgage Lending in 2014 and Beyond:
What Are the Drivers?
Jay Brinkmann*
Chief Economist and
SVP, Research & Education
Mortgage Bankers Association
*Comments and opinions are solely those of the
presenter and do not necessarily represent official
positions of the MBA or its members.
2
Five Major Drivers Impacting the Market
1) Higher severity costs will continue to lower
acceptable default rates and thus tighten credit
criteria.
2) Lending will be concentrated inside the CFPB
safe harbor definition or go to FHA.
3) The cost of originating a mortgage will continue
to go up. Which business models survive?
4) Banks will increasing weigh the legal and
reputational risks of mortgage banking against
reduced volumes and profitability.
5) The securitization and servicing models are
being challenged by QRM and Basel III.
3
1) Causes of Higher Severity Costs
1) Regulatory requirements for how to deal with defaulted
borrowers driving up servicing costs.
2) Lengthened legal timelines, particularly in judicial
foreclosure states.
3) Zero-tolerance in buyback demands from GSEs and
False Claims Act actions by FHA.
4) Liability under ability to repay provisions of QM for non-
safe harbor loans. Legal costs plus potential legal
damages.
4
6.22
2.13
4.09
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00(Percent, NSA)
Judicial States
Non-Judicial States
Difference
Loans in the Process of Foreclosure by Judicial
and Non-Judicial States
Source: MBA National Delinquency Survey
5
2) CFPB’s Qualified Mortgage Rule
• The ability to repay rule puts considerable potential liability
on lenders who lend outside of the safe harbor guidelines.
• A successful lawsuit against a lender would likely cost in
the range of $180,000 to $200,000.
• The legal defense expenses on unsuccessful suits would
likely run in the range of $40,000.
• Per loan profits are in the range of $2,000, and will likely
be lower in a lower volume environment.
• Is the risk of a non-safe harbor loan worth it?
6
3) Loan Production Costs Going Up
7
Retail Apps per Underwriter per Month
188
152
134
165
126
103
124
113
75
60
193
120
102
124
99
112
82
94
72
57
0
50
100
150
200
250
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Large Lenders Small Lenders
Source: MBA/STRATMOR Peer Group Survey
8
4) Reputation Risk
What are the reputational risks for being in the mortgage
business? What is the potential damage the value of the rest
of the franchise?
• Servicing complaints
• Fair lending
• DOJ and HUD actions on disparate impact claims
9
2011 Data Show Net Exit from Business
6,500
7,000
7,500
8,000
8,500
9,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Number of Institutions Reporting HMDA Data
Source: FFIEC
10
5) Basel III Risk Weights for Residential Mortgages
11
Basel III Impact on Mortgages Held in Portfolio
Funding examples for 95 LTV mortgage with MI:
Category 1 Mortgage Category 2 Mortgage
Mortgage 100$ Mortgage 100$
Funded with Cost Funded with Cost
Deposits 96$ 2% Deposits 96$ 2%
Equity 4$ 15% Equity 4$ 15%
Total cost 2.52% Total cost 2.52%
Under Basel III: Under Basel III:
Funded with Cost Funded with Cost
Deposits 92$ 2% Deposits 84$ 2%
Equity 8$ 15% Equity 16$ 15%
Total cost 3.04% Total cost 4.08%
Increase: 0.52% Increase: 1.56%
12
Impact of Basel III on Mortgage Servicing Rights
Basel III will make it very expensive for banks to hold
mortgage servicing rights:
• MSRs more than 10% of Tier 1 capital must be deducted
from equity. Given fluctuations in MSR values due to
interest rates, the size of this deduction is unknown from
quarter to quarter.
• Remaining MSRs carry a 250% risk weight.
• MSRs plus most deferred tax items are limited to 15% of
Tier 1 capital.
13
Impact of Basel III on Banks with MSRs
14
Conclusions
• Higher severity costs are tightening credit and increasing
operational costs and compliance complexity favor big banks
and other large-scale operations, BUT
• Reputation and legal risk may cause them to pull back. Smaller
independents have been better at originating purchase
mortgages, BUT
• The regulatory complexities and potential QM liabilities and
increased GSE & FHA fees point toward putting more loans into
bank portfolios, BUT
• The increased Basel III capital requirements (and interest rate
risk of long-term, fixed rate mortgages) make that expensive,
particularly for riskier mortgages BUT
• Basel III requirements on MSRs and potential QRM retained risk
requirements make securitization a problem, BUT
• ?
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