Thursday, December 09, 2010
Kill Or Cure?
Title: The New Age of Mortgage Lending: Dramatic Changes from Dodd-Frank.
From the blurb:
From applications to appraisals, disclosures to secondary market operations, HMDA reporting to fair lending, product offerings to underwriting standards - virtually every aspect of the business will be affected, and the regulatory changes have already begun.This is more of an "awareness" program than coverage, because most the regs have not been written, and some that have been written are in dispute and will likely be changed.
Register Now! The many statutory and coming regulatory amendments will cause many lenders to question whether they should stay in the mortgage business, or if they do, to what extent. This is more than a compliance event: it is a larger, business-related decision, since the changes go far beyond just new disclosures.
Mortgage lending will become both more risky and more expensive as a result.
Here's an example of the complexity:
Q: What is a "qualified mortgage," and why is this term so important?Theoretically the legal changes in reform should have contained exclusions and protections for small banks (Bankers Online caters to community banks), but in fact this theory breaks down on examination. For example, some CBs originate directly for Fannie. But their in-house loans are often much riskier, and you do have to charge more or ultimately you will go broke.
A: Under Dodd-Frank, a "qualified mortgage" is a loan containing no risky provisions, such as balloon payments or negative amortization (among others), and has a rate that doesn't exceed certain higher-rate thresholds.
The concept of "qualified mortgage" is critically important for two reasons: (1) if a mortgage loan is considered "qualified," it should be exempt from the risk retention requirement, meaning originators won't have to retain any credit risk after selling the loan to an investor; and (2) qualified mortgages enjoy a presumption of compliance under new TILA standards, meaning they won't undergo the same degree of regulatory scrutiny.
In the end, lenders choosing to make mortgage loans that aren't considered "qualified" will choose to take on a much greater degree of risk than those that don't. Is your bank prepared to do so, and if not, what will the cost be?
It is very unsafe to write longer-term loans that you can't sell in the open market, which will always be dominated by the larger institutions. Thus, theoretical safe harbors for community banks do not, in fact, exist.
I expect financial reform to take out another 400-500 community banks. That's on top of the 600 minimum that are going to die because of the debt implosion.