Despite the improving economy, home loans even for well-qualified borrowers are still unnecessarily hard to get and take too long, real estate practitioners say. But lenders take a different view. In a roundtable with three of the country’s largest lenders, home mortgage executives say they’ve ramped up capacity and are making loans quickly for qualified conventional borrowers and they expect to keep doing so even as they gear up for a host of new mortgage lending rules coming out of Washington in the next year.
“We all made a lot of loans last year,” says Joseph Rogers, Jr., executive vice president of Wells Fargo Home Mortgages. “Wells Fargo made over a half a trillion dollars in loans to customers last year. Our retailers served over a million customers. That means somebody was getting financing.”
NAR brought the three lenders together in mid-March for a wide-ranging discussion to get their take on the state of the conventional mortgage market, how long before private lenders get back into the market with non-agency products for conventional borrowers, and what it will take for lenders to get all the new rules coming out of Washington incorporated into their business processes.
The lenders say 2012 was an especially busy year, particularly in the refinance segment, because of ultra-low interest rates and regulatory changes that created a window for borrowers to move into FHA loans. Volume on the refi side could very well dip this year, but on the purchase side, the lenders say they’re making a lot of loans and plan to keep doing so. “All of our companies have been investing very heavily [on meeting purchase demand] and have been rewarded for increased capacity in this business,” says Saber Salam, senior vice president of Chase Home Mortgage.
Looking ahead, once the federal government provides clarity on what it plans to do with the two big secondary mortgage market companies Fannie Mae and Freddie Mac, which have been in conservatorship for the past several years, lenders will look anew at what it takes to get a robust private mortgage market into place.
A lot has to happen, they say, including getting the credit rating agencies back into the business of rating private-label mortgage-backed securities, and that takes time and money, so expect it to be years before we see the return of a substantial market outside agency-backed mortgages. “If we settle the issue of what’s going to happen to Fannie Mae and Freddie Mac, and on the role of FHA, and take out that ambiguity, that will help a lot [in spurring a return of private money inti mortgages],” says Rogers.
Loan standards are about right
Without a doubt, borrowers used to low- or no-doc loans are seeing tighter loan standards today and that is unlikely to change, says Rogers. “But for those other customers who are well qualified with a decent FICO score, I think credit is readily available.”
Shawn Krause, executive vice president of Quicken Loans, says to the extent lending appears tight, it’s because lenders are having to navigate a very confusing repurchase environment. Repurchase refers to when Fannie Mae, Freddie Mac, FHA, and even investors say loans weren’t originated to their parameters and require the lenders to buy the loans back, a costly penalty that lenders say is the result of a changing playing field.
“How you interpret these things makes a big difference, because lenders have been stung through repurchases, after we were trying to do what we were told,” says Rogers. “Now we have a different environment we’re dealing with.”
The lack of clarity on the repurchase rules is contributing to the difficulty borrowers face in obtaining loans, said Salam. “What we’re dealing with is some of the history of where lending standards used to be versus where they are today,” he said.
Capacity is there
The three leaders said they’ve been ramping up their processing capacity to meet demand. Rogers said Wells Fargo last year added 7,000 people to handle purchase applications and that processing time is as quick as possible, generally within 30 days.
Salam says all of the major lenders could process applications much more quickly but they’re constrained not only by the pace of buyers and sellers meeting their obligations, but by rules built into the process over which they have no control. “We could close purchases in 15 days and, trust me, all of us would jump into that process very quickly,” he said.
“Let’s remember that Dodd Frank [the Wall Street Reform law enacted in 2010] wrote statutory language into the bill saying we must document and verify the borrower’s ability to repay,” said Rogers. “Let’s also remember there is much to be interpreted with regard to those rules. How do you interpret someone’s pay stubs? How do you interpret their tax returns?”
Krause said Quicken Loans’ processing times on the purchase side is 30 days on average, “because we are a process driven, technology driven company—and because we built a scalable environment that we can easily add people at our company and know exactly what they need to be working on.”
No easy solution on condos
Financing for condominium properties remains a tough part of the market, and the executives from Chase and Wells Fargo said they compete for this business but it’s not uncommon for projects not to make the cut.
“Depending on the condominium and depending on our relationship with the customer, we’re making some adjustments in terms of how we’re looking at some of those projects,” said Salam. “But, by and large, these condos have to be viable not just for the lender’s sake or the investors’ sake, but the management has to be viable for the consumers’ sake.”
Rogers said a lot of projects don’t have the operational structure in place to make it possible for lenders to participate. “We’ll look at their marketing plan [and other criteria], but not every condominium project is created equal,” he said.
Private market will take years to return
The lenders said a lot has to happen before a structures is in place for a robust return of private, non-agency-backed lending to be a significant part of the market. That’s not to say no private lending is going on. Rogers said all of the major lenders, including his bank, Wells Fargo, and Chase, are making a lot of loans for their portfolio today. “We have the capacity to do portfolio lending and we do a lot of portfolio lending,” he said. “But overall, in the long run, to have a full market, you’re going to need to have securitization come back. And that means a lot of things have to happen, which includes creating that certainty about the role the GSEs.”
Rogers said lenders need to know what Fannie, Freddie, and FHA will look like “to know what space there is for us” before they can position themselves for that. But even once that’s known, there’s no infrastructure to handle a private market right now. Lenders have to develop products and processes, which requires an investment in resources and money that won’t pay off for years, and there needs to be the creation of a broader securitization infrastructure, too. That starts with the rating agencies getting back in as well as other parts of the system that makes it all work. “I think we’re still years away from that, quite honestly,” Rogers said.
Krause said that, even once loans are again being made and packaged into securities, they won’t be for everyone. “The private market is not necessarily going to bring exactly what the government is providing today,” she said. “You’re going to have to put more for a down payment in the private market. It’s probably going to be higher credit scores. It’s probably going to require higher interest rate.”
Rules to dominate lender focus
In the near term, lenders won’t even have the resources to focus on that until after all the federal rules that are in the works come out. “One thing that concerns me over the next year is that all of the technology and compliance people at companies are going to be focusing on these rules,” said Krause. “You have servicing, you have high-cost rules, you have the QM rule, and we’re going to have the QRM rule that’s coming out. So, all of a company’s technology compliance people are going to be tied up. And what concerns me is that innovation for consumers is hopefully not going to have to take a back seat.”
These federal rules include the qualified mortgage (QM), which requires lenders to underwrite loans to a standard in which borrowers have a demonstrated ability to repay, and the qualified residential mortgage, which gives lenders an exemption from having to hold onto 5 percent of the value of loans they originate for securitization if the underwriting meets federal standards. Those standards aren’t known yet, but NAR would in general like to see them meet the QM standard, which came out in early 2013 to take effect in early 2014. NAR doesn’t like everything in the QM rule, but on the whole it takes a broad-based approach that is workable.
Other rules include loan servicing standards, changes to loan limits, and capital standards proposed as part of the international Basel Accords.
It will take a good year and a half for lenders to get their processes, training, and technology in place once all the rules are out, so in the near-term, getting set up for compliance will take the bulk of their focus. “A few years ago, we would spend 90 percent of our technology dollars on things we wanted to do that would advance the business,” said Rogers. “Today, we focus a hundred percent on things we have to do.”
The good news is the rules are finally starting to come out after years in the making and lenders are already getting familiar with them and starting the process.
Yet a big question mark remains: what will the lender space look like after all the rules are out. With thousands of pages of regulations to comb through and plenty of places for lenders to get tripped up, will smaller lenders, including community banks, even have the capacity to stay in the mortgage lending business? Big banks like Wells Fargo and Chase, Rogers said, have the resources to dig through the rules and set up processes to conform to them, but how many smaller lenders can do that? “I really worry about what I call, “too small to play,”” Rogers said. “Given the 806 pages for QM, the 3,500 pages of regulations that came out in the last month-and-a-half—and we haven’t seen RESPA /TILA or QRM yet—how do the smaller lenders, the community banks who want to get into the space, navigate that place?”
How that questions gets answered in the year ahead could be critical for your customers trying to buy a home.
Access a transcript of the roundtable on REALTOR® Magazine Online.