Phil LaTessa SyracusePhilip LaTessa SyracuseThe Funding SourceThe Funding Source Syracuse

Should we ease mortgage credit lending standards?

Sales and mortgage originations are down. There is a lot of talk of mergers, acquisitions or closing of companies down in a response to lower profit, higher costs and lower volume.

Most lenders are not making money in FY 2014 according to most surveys. Loans per branch and per loan officer are lower than they were a year ago. Many loan officers already took a hit on compensation, as have their employers. Low volume and tight margins have made for serious income reduction for most in the industry.

This fall and winter volume is expected to remain stagnant. And, many senior managers have plans in place for what happens if the mortgage industry has another slow Q1 2015 as occurred in this year.

To get your arms around what lenders are doing today – the MBA announced that 85% of all loans contain between 800 to 1200 pages of paperwork, per file. However, just five years ago only 3% of all files had that many pages of documentation – and that was for the harder files that required additional work. Regulatory changes and lenders taking defensive measures against consumer fraud and regulatory audits are demanding a more intensive underwrite.

Due partly to tighter standards of lenders, home sales are stagnant. The auto industry, which had carved itself out of many of the same regulatory requirements that was imposed on others, has loosened lending standards and auto sales have increased.

Is it time to ease up?

Fed Chair Yelln said market conditions are “abnormally tight” while officials at the White House met with bank executives to see how lending standards can be loosened.

So while auto production is on fire, the most new construction is apartment buildings – as more and more individuals opt to rent over buy new or existing housing stock.

Lenders who faced severe financial, regulatory, and other legal hits from the government have tightened credit. Banks face high costs for defaulted loans and as such lend only to the best borrower.

Many lenders who previously lent to borrowers who were challenged in the 5-C’s of mortgage underwriting do not do so today. They set their low bar to the middle of the road borrower cutting out the rest.

No question lending in the early to mid 2000’s was too loose. It almost seemed as if any borrower with a heartbeat received a loan. However, since 2009, the mortgage market has been under siege from numerous sides. Regulators have sued and threatened criminal lawsuits, borrowers have sued, and community groups have formed anti-mortgage lending stances. Meanwhile, individual borrowers, group of individuals using straw borrowers, unethical employees, unethical loan officers, realtors, and appraisers and closing attorneys, have fleeced lenders

So, the reaction to close off the spigot is a natural one. Especially for larger lenders who have paid billions of dollars to the federal government.

Meanwhile, The U.S. Attorney General is pressing congress to change legislation that caps whistleblower awards at 1.6 million dollars under the Financial Institutions Reform Recovery Enforcement Act to encourage additional reports and assistance in the prosecution of claims against financial institutions. According to the U.S. Attorney General, risky behavior by financial institutions is on the upswing and by encouraging more complaints and whistleblowers it will enable the government to deter future violations.

By way of background, FIRREA is becoming the government’s new-favorite weapon to utilize against financial institutions in connection with mortgage based claims. FIRREA authorizes million-dollar penalties against individual officers of institutions for engaging in fraudulent acts that have the ability to impact federally chartered banks. Moreover, the definition of "fraudulent" is very loose, with government agencies taking the position that gross negligence equates to fraud. Due to the leniency in its application and the extreme penalties that can be imposed personally on officers of banks and non-depositories, the fact that the government wants to increase financial incentives to facilitate additional whistleblower claims is certainly not positive news for lenders.

Nonetheless, the U.S. Attorney General's request comes at the same time that the new Department of Housing and Urban Development Secretary and others in the administration are pressing for safe harbor rules for lending. Certainly, increasing the propensity for whistleblower claims will not encourage more private capital into the mortgage markets or less stringent credit requirements. It would appear that the new HUD secretary and U.S. Attorney General should have their own conversation before speaking to Congress and the med

However, we should look at the standards that were in place in the 1990’s through the early 2000’s before the NINJA and No Incomes became available to anyone. It’s time for lenders and regulators to work together and put strong safe harbors in place so that lenders feel that the government is regulating fairly and not to take funds or grab headlines. It’s time that borrowers, including individual ones, or anyone who commits mortgage fraud face charges. Too many people have not been charged who have been involved in mortgage fraud as the focus has been on companies and larger banks.

The result could be a saner lending environment. Lenders will know regulators are watching and will enforce. However, they won’t be punitive for the sake of flexing regulatory muscle. Borrowers will see people who commit mortgage fraud actually face the penalties that are on the fine print of a 1003 instead of walking with no charges or ACD’s.

Banks and Bankers can then set their risk tolerance levels as it relates to DTI in conformity with agency guidelines and lend on the sound principals that served our nation so well from the 1930’s to the mid 2000’s when boutique loans opened the floodgate to the destruction we witnessed.