Mortgage Lenders' Many Headaches
September 30, 2013 8:00 AM
The CFPB's new rules on originations rank at the top of mortgage lenders' worries these days, but they have plenty more. Scores of home equity lines of credit made during the height of the housing boom are on the verge of re-setting. Regulators are demanding that lenders improve oversight of home appraisers. And Fannie and Freddie are cautioning lenders not to sell them anything other than pristine loans. Here are six issues that are keeping mortgage lenders up nights.
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GSEs' Mandate: No More Defective Loans
Fannie Mae and Freddie Mac have created new quality control programs to flag problem loans early. The government-sponsored enterprises are electronically validating 100% of the loans they purchase. Lenders will be subject to loan reviews and risk assessments, and if loans have any defects at all, lenders will be asked to take them back much sooner than they would have in the past. Lenders say they will need to hire more staff to help them comply with the new mandate, which takes effect in January.
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Flaws in Appraisal Oversight
The Office of the Comptroller of the Currency says it sees serious deficiencies in many home appraisals and is ordering banks to beef up their oversight of the appraisal process. Many banks lack an audit, quality control or internal control function to even be able to evaluate the performance of their appraisal programs, according to Darrin Benhart, the OCC's deputy comptroller for credit and market risk. Fannie Mae also says it is still finding serious flaws in appraisals and is urging lenders to provide more consistent data.
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Shock from Home Equity Lines
Home equity lines of credit are a major risk to banks because many of the 10-year loans made in the boom years of 2004, 2005 and 2006 will start coming due next year. Many of these loans are interest-only, so borrowers will have to start making principal payments as well. The OCC is urging banks to help them refinance or restructure to avoid payment shock.
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Loosening Lending Standards
The Federal Housing Administration's Commissioner Carol Galante shocked lenders with a rule change in August that allows borrowers who lost their homes to foreclosure or a short sale to qualify for a new home loan within a year. Lenders are concerned that even if a government agency loosens credit standards, they will still be on the hook if the loan goes bad.
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Fair-Lending Clampdown
Regulators are cracking down on fair-lending violations. Nonbank lenders are at the biggest risk because often they do not analyze data for fair lending criteria. Regulators are urging all lenders to hire fair lending compliance officers to improve quality control and ensure all borrowers are treated in a consistent manner.
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Lower Conforming Loan Limits
Ed DeMarco, acting director of the Federal Housing Finance Agency, wants to reduce the size of loans that Fannie Mae and Freddie Mac can buy. The current limit is $417,000 in most areas but $625,000 in high-cost cities such as Los Angeles and New York. Limits were raised during the housing crisis but never fell back to lower levels and lenders are concerned that lowering them now would slow the housing recovery.
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