Http:// Consumer Financial Protection Bureau Impact on Mortgage Lending Ellen Harnick NC Housing...

http://www.responsiblelending.org

Consumer Financial Protection Bureau

Impact on Mortgage Lending

Ellen HarnickNC Housing Coalition Conference

October 15, 2014

http://www.responsiblelending.org 2

About Self-Help & CRL

Self Help Credit Union, since 1980 Lending to low-wealth communities People of color, women, rural residents $6 billion in loans to almost 70,000 families &

organizations

Center for Responsible Lending, since 2002 Use lending experience to shape policy Protect homeownership & family wealth


Who cares about homeownership?

Still the best means of wealth-building for low-to-moderate- and middle-income families.

Neighborhood and family stability depends on it.

Strongly tied to educational opportunities. Housing and mortgage markets are key to

stability for national economy.

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Recent history

13 million foreclosures 93 million neighbors’ homes

impacted Average neighboring home

loses $21,000 in value $2 Trillion in lost home

equity— $1 Trillion lost by

communities of color

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How we got there

Incentives to steer borrowers into risk-layered loans.

Liar Loans. Based on repeated refinancing

and hope of home price appreciation.

2/28 Hybrid Adjustable Loans. Equity stripping high costs. Prepayment penalties when

refinancing before rate increase.

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http://www.responsiblelending.org 6

2-28, $200,000 ARM(Remember these?)

Subprime Adjustable Rate Mortgage Payment Shock(No Change in Interest Rates)

$-

$500

$1,000

$1,500

$2,000

$2,500

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ly P

ay

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(Pri

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0%10%20%30%40%50%60%70%80%90%

Po

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Monthly Payment $1,405 $1,918

Post-Tax DTI 61% 83%

Teaser Rate Fully Indexed Rate

Source: CRL Calculations


Doing Better—Principles

Don’t makes loans borrowers can’t afford. Align borrower and originator interests. Avoid dual market. Avoid unduly restricting credit. Bright line rules so lenders know what to

expect. Consider loss mitigation before foreclosure.

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Avoiding Mistakes of the Past

OriginationsAbility to RepayStable Loan Products

ServicingReasonable chance to get back

on track.8


Origination basic standard

For all loans, lenders must make:

“Reasonable and good faith” determination of ability to repay at the time the loan is originated (e.g., lender not responsible for unanticipated job loss.).

Based on verified, documented info.

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ATR: Must Verify and Document8 Underwriting Factors:

Current or reasonably expected income or assets; Current employment status; Monthly payment on the covered transaction; Monthly payment on any simultaneous loan; Monthly payment for mortgage-related obligations; Current debt obligations, alimony, and child support; Monthly debt-to-income ratio or residual income; Credit history (can be non-traditional, e.g. rental hist)

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Qualified Mortgages

Qualified Mortgages are presumed to satisfy the “ability to repay” requirements.

All QM loans are required to meet specified product standards.

Once loans meet these product requirements, the CFPB’s final rule provides 4 pathways to QM status.

Based on how the loan’s APR compares to the average prime offer rate (APOR), the loan will either have a safe harbor or rebuttable presumption of compliance.

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QM: What Loan Terms?

Fully amortizing – no IOs or Neg Am;No teaser ARMS – must be underwritten so borrower can afford maximum rate for 5 years;No more than 3% in points and fees, with adjusted thresholds for smaller loans; Term no longer than 30 years;Prepayment Penalties only on fixed-rate loans or non-higher-priced ARMs, only for 3 years, no greater than 2% of loan for first 2 years and 1% for third year—and must offer consumer an alternative without a PPP.

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4 Paths to QM Status (in addition to product requirements)

1. “Back end” DTI no greater than 43%; or

2. Satisfy requirements for: purchase by GSEs (in conservatorship) or FHA insurance or guarantee by VA, USDA or RHS (eg Automated Underwriting System); or

3. Small creditors that hold mortgage in portfolio for at least 3 years, must consider DTI or residual income, but are not limited by 43% DTI; or

4. Small creditors making balloon loans in rural areas (temporarily extends beyond rural loans)

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Qualified Mortgage Presumption

QM loans are presumed to satisfy the Ability to Repay requirement.

Prime rate loans: The presumption is conclusive.

Higher cost loans: Borrower can present court with evidence to try to rebut the presumption.

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Loan Officer Compensation:Limits apply to QM & non-QM

Prohibition on Steering Incentives: Compensation cannot vary based on loan terms (except loan amount).

Why?: “The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans. What would you do?” - William Dallas, CEO Ownit Mortgage Solutions (1/2007)

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Servicing Standards

Servicers must provide periodic statements, and notice of interest rate adjustments.

Must respond to borrower requests for information and address borrower notices of “covered errors.”

Limitations on force-placed insurance. Good faith effort to talk to borrower soon after delinquency. Provide opportunity for loss mitigation before foreclosure

starts; no f/c sale while reviewing a timely loss mit. application; borrower can appeal denial.

Continuity of contact (can’t bounce from rep. to rep.). 16


CFPB Loss Mitigation RulesOutreach to borrower

Loss Mitigation Outreach 36 days to inform about available

loss mitigation options45 days written notice about

delinquency and info on housing counselors

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CFPB Loss Mitigation RulesDenial of Modification

Denial Notification – must state specific reasons Appeal Rights –

14 days to appeal May appeal only if complete application was

received 90+ days before foreclosure sale Different personal evaluating appeal Decision on appeal within 30 days

Right to Seek Actual Damages for Violations


CFPB Loss Mitigation Rules Foreclosure

Dual-Track Restrictions: Pre-foreclosure – Can’t pursue foreclosure

until a borrower is 120 days delinquent Post-foreclosure – Can’t go forward with

the foreclosure sale, if the borrower submits a complete loss mitigation application 37 days before the foreclosure sale


CFPB Loss Mitigation Rules Continuity of Contact

Continuity Requirements:

Servicer has 45 days to assign personnel to assist borrower with available loss mitigation options.


What will all this mean?

Broad definition of QM provides protection for lenders.

Bright-line QM rules provides certainty. Eliminating high-risk practices protects borrowers. Reducing unsustainable lending protects home

values and community stability. Avoid foreclosure where possible. Stability in the housing market is essential for

national economic recovery.

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Challenges—Access to CreditHMDA data for 2013

African-Americans got just 4.8% of all purchase mortgages (down slightly from 2012, well below pre-crisis levels of ~ 7%.)

Hispanic borrowers got 7.3% of all purchase mortgages (slightly down from 2012).

LMI borrowers got fewer purchase loans in 2013 (742,660) than in 2012 (763,190).

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More Challenges

African-Americans, Latinos and LMI borrowers still mostly served by government-backed loan programs, not the private market.

FHA price increases. FHFA recently proposed changes to Fannie/Freddie

pricing structure. Result is rising prices for households least well-

served by the private market.

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And yet . . .

By 2025, nearly half of first-time homebuyers will be households of color.

To be successful, lenders have to find ways to better serve these communities.

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Looking ahead

The mortgage market is recovering, slowly. Refinancing declined from 2012 to 2013, but

purchase mortgages increased slightly. Lender risk is greatly reduced by QM rules, and by

GSE policy changes re buy-backs. Some lag time in lender reaction; should see more lending.

Some good programs slowly getting going—e.g. Fannie Mae “My Community Mortgage.”

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What are you seeing? …

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