The MBA annual convention in Chicago earlier this week represented something of a return to the heady days prior to the global financial crisis. Mortgage originators and the vendors that serve them are seeing renewed volumes, mostly by reason of the current refinancing boom.
Here is a quick rundown of some key issues that were discussed.
I. Dodd-Frank Implementing Regulatory Definitions:
There are several separate regulatory projects that include a definition of which mortgage loans are "in the box" for favorable regulatory treatment.
Many in the industry expect that the final definitions will establish the limits of nearly all mortgage lending in the country, so these boundaries are important. They hope that these regulatory definitions end up identical to one another. If not, they think the narrowest will end up establishing the market.
The three important definitions that are the subject of fairly intense discussions among regulators and industry groups are:
- Qualified Mortgage (or "QM"), which defines the kinds of loans that will have a safe harbor or a strong presumption of compliance with the applicable consumer finance laws, assuming the new CFPB forms of disclosure are used. Other loans would subject the originator to potential future claims for rescission and damages. Many expect that the QM definition will largely define the market. The issue of whether QM compliance will be a safe harbor or merely a presumption is also of concern.
- Qualified Residential Mortgage (or "QRM"), which defines loans that, if sold or securitized, require a 5% loss retention ("skin in the game") by the seller.
- Category 1 Residential Mortgage Loans under Basel III, which are risk-weighted between 35% and 100%, as compared to other residential loans, which get a risk-weighting between 100% and 200%.
MBA's leadership recommends the creation of a "housing czar" in the government, who would coordinate the many initiatives that potentially impact housing, including these three definitions, in a way that will reduce unintended consequences.
II. Future of the GSEs:
There is broad concern in the industry about how to shrink the federal government's role in the mortgage market. The challenge is how to bring private capital back into the sector.
Nobody wants a financing vacuum, which would drag down the larger economy, but some people think that the private capital will not invest until there is an opening created by a diminished role for the government in some categories of loans. Other people think the capital will not come back even if that opening is created, until the regulatory rules are clearer. And still others think the capital won't come back until interest rates cease to be artificially low.
III. Basel III:
Much concern was expressed about Basel III. Banks may be forced to dump (1) mortgage servicing receivables (MSRs), (2) mortgage-backed securities (MBS), and (3) whole mortgage loans. All of these asset categories are proposed to have much higher risk-weightings in the Basel III regime.
MSRs would be particularly hard-hit, reputedly as punishment to the U.S. banks (which tend to hold MSRs more than European banks do) for precipitating the global financial crisis.
IV. Ending of the Refinance Boom:
The MBA members - both mortgage originators and the vendors that serve them - are benefiting from the boom in refinancing. But when prevailing rates begin to rise, their business volume will slide. Nobody was ready to predict the industry environment that will follow.