Why lenders won’t ease up on mortgage lending standards just yet

by Rachel.Norvell22 Oct 2014
Since the housing bust, the focus on high loan quality coupled with the heap of red tape on originators has lead lenders to become twice as shy about mortgage lending. And despite recent efforts made by government officials to ease uncertainties about regulations, lending criteria probably won’t ease up any time soon.

David Zugheri, co-founder of Houston-based Envoy Mortgage, said the rules and regulations have weighed heavily on the mortgage industry, especially small lenders. “We are going to have to work through it together as an industry, and it’s going to take a while,” he said. “If I had to single out one group that is hurt the most by the rules and regulations, it would be the small lenders.” 

Zugheri added that although lending standards were not strict enough before the bust, they are now too tight. “The pendulum swung way too far to the left in 2005, and now it is going way too far in the other direction.”

The Wall Street Journal used an interesting analogy to sum up the attempts made by officials to persuade lenders to relax their mortgage lending standards. “No matter how many times Lucy pulled the football away, she always managed to persuade Charlie Brown to trust hope over experience and try to kick again.”

Will the industry learn to trust again?

So, can the industry be quick to trust that the Federal Housing Administration will keep the football in place?

Earlier this week, Federal Housing Finance Agency Director Mel Watt and U.S. Housing and Urban Development Secretary Julian Castro pledged to help provide lenders more certainty about when they would face liability for defaults on loans insured by the FHA.

The clarification is part of a broader push to unlock tight credit after lenders had to repurchase tens of billions of dollars of bad mortgages they sold to Fannie Mae, Freddie Mac and private investors.

To avoid such costs in the future, lenders have put in place tight mortgage standards that intentionally overshoot Fannie and Freddie requirements. The result is the tightest credit market Americans have seen in 16 years.

Regulations weigh heavily on the industry

The industry has also had to deal with a plague of regulations since the bust, which MBA Chairman Bill Cosgrove publicly noted during the MBA Convention & Expo on Monday.

“As an industry, we’ve proven we need to be regulated. However, the regulatory avalanche of today’s Washington isn’t working and we are seeing the results in today’s marketplace,” said Cosgrove. “We all need to come back to center -- policy makers, regulators, consumer groups and our industry -- to achieve a healthy balance that the American economy desperately needs.”

Lenders reported a nearly 30% median increase in compliance costs compared with 2013, according to Fannie Mae’s Third Quarter Mortgage Lender Sentiment Survey of senior mortgage executives. Lenders also reported increased reliance on outsourcing due to increased regulations and associated costs, particularly in relation to post-closing quality control review and servicing.

Credit will loosen, eventually

New York City-based investment banking firm, Keefe, Bruyette & Woods, predicted earlier this month that Americans will have to wait three more years before receiving a mortgage gets easier. The firm said that’s the minimum amount of time it will take for Congress to reach an agreement over the future of Fannie Mae and Freddie Mac. The GSEs own or guarantee almost half of all U.S. mortgages.

Zugheri of Envoy Mortgage, which operates more than 60 retail branch locations across the U.S, said he believes credit has to loosen from here. “Eventually private capital will come in and expand private label bond markets, and once this happens, credit should expand and more loans will be made,” he said. “Credit will keep expanding and five to 20 years from now we could see a crunch all over again, because that’s how the lending ecosystem works. It ebbs one way or the other, but rarely does it stand still."



  • by Carolyn Bailey | 10/22/2014 9:40:58 AM

    Greed was the primary component in the ongoing Great Recession. Unless lenders' actions are constantly scrutinized, we will have a repeat !



  • by Graham Montigny | 10/22/2014 9:55:30 AM

    Was it not Mr. Barney Frank of the Dodd-Frank fame who while Bill Clinton was in office told the mortgage industry to loosen its standards to create the ownership society in America? Lucy and the football is correct. The basic reality of the world is about 67% of people are up to the requirements of homeowner ship. You know, hold a job, mange your money, pay your bills, do a budget, fix things that break. Any more than this and the inevitable foreclosures will come. You cannot change human nature or behavior. You cannot legislate honesty and morality.

  • by AppraisalPro | 10/22/2014 10:38:38 AM

    An analysis of recent HMDA data shows that there is a HUGE gap in the approval rates between lenders. Some lenders have approval rates on non-conventional mortgages of as low as 11%, where the typical rate is between 60-80% from larger lenders.

    Mortgage TrueView found that just an additional 10% of approved mortgages would increase a lender's revenue significantly.

    There was a specific smaller lender with 3,700 mortgage applications, with only 12% (445 mortgages) approved. If that lender were to increase its approvals by 8% to just a 20% approval rate (740 mortgages), the lender would see an additional $150,000 in revenue (based on a conservative $500 profit per mortgage).

    Mortgage TrueView also looked at a larger lender. This lender had 150,000 applications and approved 93,000 mortgages (62%). The lender saw revenues of $46.5 million (based on the same conservative $500 profit per mortgage). If that lender increased its approved mortgages to 108,000 (just 10%), it would reach revenues of $54 million dollars.

    Mortgage TrueView believes the huge discrepancy between approval rates of large lenders and small lenders is based off three determining factors: bias in the approval process, borrowers aren’t qualified, but mainly – mortgage denials are due to the lenders’ process itself – and how they execute it.

    Lenders with higher mortgage approval rates – and higher revenues – tend to have very strong technology, or strong non-conventional lending programs (or both). The more streamlined the process – the more mortgages (ie more revenue) a lender is able to produce.


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