Are mortgages becoming a commodity?
Is ATR/QM another step towards a homogenized industry? Is mortgage lending becoming more and more a commodity product and practice? Are their available lending products and programs available to fight back against the commoditization of mortgages?
In a slight break from the normal compliance topic, today we wanted to share some thoughts on a more general concern--whether or not the regulations are pushing the mortgage industry into a one-size- fits-all commodity market.
Are we headed towards a commoditized mortgage industry? Is our long-term future less profitable because regulations are stifling innovation and creating a cookie-cutter market?
Traditional Notions - No.
You may have read the opening paragraph and found yourself shaking your head in disagreement. After all, mortgages are complex and shaped by a borrower's unique circumstances. The numbers on a credit report, or any other one-size-fits-all prediction tool, paint big pictures. These tools often miss the smaller but important details of the painting. For example, a borrower may have good credit, even if he missed some payments. Maybe his spouse passed away during the missed payments period; a computer would not have picked up that personal and explainable circumstance.
Unfortunate Possibility is that, Yes
However, it's hard to avoid the possibility that mortgage regulations are limiting creativity and making it more difficult to create custom, individualized mortgage lending solutions.
The overall trend of mortgage regulations (accelerated by Dodd-Frank and the CFPB) is to restrict flexibility in (#1) pricing and (#2) product offerings--and this is happening in some of the following ways:
- 30-year terms are encouraged by QM (leading lenders to drop 35- and 40-year products)
- Interest-only discouraged by QM
- High points & fees discouraged by QM and HOEPA
- Prepayment penalties drastically limited by both ATR/QM and state law (at least in Mass.)
- 1/1 and 3/1 ARMs are discouraged (QM requires loans to be underwritten at max. possible rate that could apply in first 5 years...leading lenders to drop anything under a 5/1 or 7/1)
- Asset-based income calculation is not allowed under appendix Q (for regular QM loans) - leading to less flexibility for high- asset/low-income borrowers (e.g., baby boomers, trust beneficiaries)
- Pricing is limited in several different ways - HOEPA (high- cost), HPMLs, state regulations, and "higher-priced" QMs
ATR Rule limits ability to invent new products
As John Battaglia of Cambridge Mortgage pointed out to Richard Cordrary (whose response was, "Interesting point, I hadn't thought of that before")- the ATR rule limits innovation in the mortgage market because it is difficult to defend a loan as "reasonable" if it has no track record. The ATR rule requires lenders to prove a loan was "reasonable" based on historical evidence of underwriting standards. How can a lender prove a loan was reasonable if there was no historical evidence of underwriting, i.e., if it was a new product? Example: Bank introduces 40-year mortgages for the first time (not protected by QM). Borrower defaults in 5 years, argues it was unreasonable to make loan. Bank has never done 40-year mortgages before, so has little or no evidence to support its decision.
Summer 2015 Integrated Disclosures
Also expect the Summer 2015 integrated disclosures to push towards commoditization of the mortgage industry in a (#3) way- by enabling mortgage shopping. When Director Cordray visited Boston, he stated that the "overall purpose" of the new integrated disclosures was to make it easier for the borrower to shop the mortgage around. (Of course--what are they shopping? The disclosures highlight interest rate and closing costs...so it enables borrowers to shop around based on price, not service, closing speed, etc.).
So what happens when you place restrictions on pricing, product offerings, and simultaneously enable shopping based on price (rather than service)? Sounds like the recipe for a commodity.
Can't forget technology
We can't blame the regulations alone...technology also threatens to commoditize the mortgage industry. How long before loans are approved by a computer? A recent Oxford University study found that loan officers have a 98% chance of being replaced by computers within the next 1-2 decades (scroll to bottom of page 71 to see LOs).
Fighting back!
How do you distinguish yourself with less flexibility in pricing and product offerings, and a greater amount of shopping going on? Although, the regulations' strict limitations on what products your company may provide may have you feeling discouraged at best, and suffocated at worst, you have not been relegated to a one- size-fits-all service quite yet.
You can fight commoditization with:
1- Customer Service
Speed - what's stopping you from closing loans in 40, or even 30, days?
Visibility
Communication methods - are your loan officers answering tweets, Facebook posts, commenting on Instagram?
Access
2- Niche Products
Construction - construction lending is harder to commodotize because it poses increased risks to the lender and every project is unique
Renovation
Extended locks
State housing agencies - are you partnering with MassHousing, RIHousing, MassHousing Partnership?
Stretch the credit box - have you considered lowering your minimum credit requirement?
We've seen some major players accepting 600 and even 550 FICOs
This presents its own problems and may not be wise with ATR liability looming overhead (maybe a good idea for your QM loans only?)
*Agency/Government Loans
The fight against commoditization will be especially tough with agency and government product, where any distinctions will be virtually non-existent.
In other news:
In an addendum to our construction financing newsletter, the CFPB informs us that using the renewal method (as described briefly in newsletter) is the safest way to ensure that a construction phase is exempt, and indicated that using an escrow account to disperse any leftover funds after 12 months (to avoid changing the maturity date) would not work. They won't give this in writing, but tell us this is the advice they're currently giving across-the-board.
No doubt we could use some help in the humor department, so thanks to Jeff Lipes from Rockville Bank for sending along ABA's list of "lighter side" humor including this joke from Jimmy Fallon: "The World Cup is coming next summer and it was just announced that the U.S. soccer team has a really tough schedule. They play against Germany, Ghana and Portugal. Americans were pretty upset. They said, 'There's gonna be soccer on TV again?'"Good stuff...thanks, Jeff
With the fluctuations in overtime/minimum-wage rules as applied to loan officers and the 2014 changes to the federal LO compensation rules, this is a great time to review LO comp. plans to make sure yours is compliant + competitive. A non-compliant comp. plan risks tainting your entire portfolio of loans. If the Federal Register isn't fun reading for you, or you don't want to spend a week working on this, outsource this fun task to us and we'll give you a personalized LO comp. plan that is compliant + competitive for a reasonable flat fee based on the size of your operation. Feel free to e-mail or call me directly.
PHH is not making an attempt to use the "non-standard to standard" refi. exemption from the ATR/QM rules...it appears that this exemption, as we predicted, is not worth the hassle-- makes us wonder, if even PHH has written this off, why would any of our clients take time to train employees on this or add it to policies/procedures? (see the middle of page 2 on the PHH document above) Remember when the FDIC said making non-QM loans was not a safety & soundness concern? Well, we're hearing the first question for banks originating non-QMs is nonetheless, "Can you show us an analysis of why those are safe loans to make
Making everybody happy is impossible, but making them all mad is a piece of cake. Whether that's your clients or your competitors (or your readers), it's best to know what you're up against. That's not exactly a new thought, considering the following quote is potentially as old as 500 B.C.
If you know the enemy and you know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
- Sun Tzu, the Art of War
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**These are our opinions. We're not authorized, or willing, to express those of others.**