[Senate Hearing 114-49]
[From the U.S. Government Publishing Office]
S. Hrg. 114-49
REGULATORY BURDENS TO OBTAINING MORTGAGE CREDIT
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HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
ON
EXPLORING REGULATORY BURDENS THAT ARE RESTRICTING MORTGAGE CREDIT,
INCLUDING RECOMMENDATIONS TO ALLEVIATE THE BURDEN
__________
APRIL 16, 2015
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MIKE CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Dana Wade, Deputy Staff Director
Jelena McWilliams, Chief Counsel
Chad Davis, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Erin Barry, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, APRIL 16, 2015
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Senator Cotton............................................... 4
WITNESSES
Tom Woods, President, Woods Custom Homes, on behalf of the
National Association of Home Builders.......................... 4
Prepared statement........................................... 41
Responses to written questions of:
Senator Heller........................................... 91
Senator Heitkamp......................................... 91
Chris Polychron, 2015 President, National Association of
REALTORS...................................................... 6
Prepared statement........................................... 49
J. David Motley, President of Banking and Mortgage Operations,
Colonial Savings, F.A., on behalf of the Mortgage Bankers
Association.................................................... 7
Prepared statement........................................... 56
Responses to written questions of:
Chairman Shelby.......................................... 93
Senator Vitter........................................... 94
Senator Heller........................................... 95
Senator Heitkamp......................................... 95
Julia Gordon, Senior Director of Housing and Consumer Finance,
Center for American Progress................................... 9
Prepared statement........................................... 69
Additional Material Supplied for the Record
Prepared statement of the American Land Title Association........ 97
Prepared statement of Mark A. Calabria, Ph.D., Director,
Financial Regulation Studies, Cato Institute................... 109
Prepared statement of Paulina McGrath, the Community Mortgage
Lenders of America............................................. 114
Prepared statement of the Conference of State Bank Supervisors... 121
Letter to Committee from Habitat for Humanity.................... 128
Prepared statement of the Housing Policy Council................. 131
Prepared statement of the Independent Community Bankers of
America........................................................ 138
Prepared statement of Nathan Smith, Chairman, Manufactured
Housing Institute.............................................. 149
Prepared statement of Gary Acosta, Co-founder and CEO, NAHREP.... 154
Letter to Committee from Carrie R. Hunt, Senior Vice President of
Government Affairs and General Counsel, NAFCU.................. 156
Prepared statement of the National Association of Mortgage
Brokers........................................................ 160
Prepared statement of the American Financial Services Association 165
Prepared statement of John Taylor, President and CEO, the
National Community Reinvestment Coalition...................... 167
Prepared statement of the Credit Union National Association...... 174
(iii)
REGULATORY BURDENS TO OBTAINING MORTGAGE CREDIT
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THURSDAY, APRIL 16, 2015
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Richard Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
Months ago, this Committee began an examination of the
regulatory landscape facing consumers, lenders, and other
financial market participants. Our goal has been to identify
existing laws and regulations that create unnecessary barriers
to economic growth. Some of these may also inadvertently
restrict the availability of consumer credit or increase its
cost.
Today, we turn our attention to mortgages. Our witnesses
are involved in each stage of the home buying process, from the
construction of the home to its selection in financing. We have
asked them to discuss the state of housing markets across the
country, including which lending laws and regulations are
working and which can be improved.
Five years after a sweeping new regulatory framework
altered the mortgage market in unprecedented ways, I believe it
is time to reexamine its effectiveness and its consequences.
Dodd-Frank's stated intent is to protect consumers, but some of
the regulations promulgated in response to the law have gone so
far, they may actually prevent qualified consumers from owning
a home. And, borrowers who are able to qualify for mortgages
today may face an increased cost of credit due to these rules.
I would hope that we can agree that laws and regulations
that reduce mortgage availability or increase the cost of
credit for those who do qualify are harming, not helping,
consumers. While record low mortgage rates in recent years may
have balanced out an increased cost of mortgage credit due to
new regulatory requirements, this trend will not continue
indefinitely. When interest rates rise, I believe that the
impact of these new rules and regulations on home ownership
will then be clear.
Today, we will consider ways to refine current law so that
it protects consumers while encouraging responsible home
ownership. This should be an achievable bipartisan goal,
because Members of this Committee on both sides of the aisle
have introduced and supported legislation in this area.
I encourage others to consider ways in which we can work
together to make the new regulatory framework true to its
legislative intent of protecting consumers while increasing
responsible access to credit. This goal can be accomplished
without returning to the pre-crisis standards of lax
underwriting and access to mortgage loans for those who cannot
afford to repay them.
In other words, any changes to the law should not erode
consumer protection or encourage irresponsible lending
practices. They should address the issue of creditworthy
customers being denied loans or charged more for them because
of existing laws and regulations. If done properly, such
changes could make our financial system safer by allowing
regulators to direct their limited resources toward more
efficient regulation and ensuring better management of risk.
I look forward to hearing from our witnesses and hope that
their perspectives will help this Committee identify specific
issues that consumers face every day in purchasing homes and
qualifying for credit.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Thanks to the
witnesses, the four of you, for joining us today.
We know the mortgage market is vast, it is complex, and it
is interconnected. Its impact extends from the finances of
individual families in Alabama and Ohio to the stability of the
global financial system.
Go back to 2008 and the years before. Predatory,
irresponsible lenders made dangerous subprime loans and often
ignored a borrower's ability to repay. When the real estate
bubble burst less than a decade ago, families had their wealth
and their equity stripped from their homes, starting a chain of
events that resulted in the financial crisis and subsequent
economic devastation of the Great Recession.
Dodd-Frank provided a common sense fix to the bad practices
in mortgage lending that had been staring us in the face for
years. Now, 5 years later, some are suggesting that we weaken
some of these standards and we head back to there, where we
started.
In 2008, our country learned a painful lesson, that not all
mortgage lending is created equal. Unscrupulous lenders offered
loans that required no documentation, loans with teaser
interest rates that later spiked and undermined a borrower's
ability to repay, and loans where borrowers never paid down
their principal. These practices had devastating results for
families, for communities, for our economy. Borrowers with
these higher-cost loans were foreclosed on at almost triple the
rate of borrowers with conforming 30-year fixed-rate mortgages.
Again, almost triple the rate of borrowers with conforming 30-
year fixed-rate mortgages.
The crisis revealed a host of other harmful practices:
Steering borrowers to affiliated companies, kickbacks for
business referrals, inflated appraisals, loan officer
compensation based on the loan product. These practices offered
little benefit to the borrower. Even more troubling, as
borrowers' cost increased, so did loan officers' compensation.
Members of the organizations testifying before us today felt
the impact of these practices firsthand.
After the housing crash revealed the extent of the
deterioration in mortgage lending standards, Congress stepped
in to do what the market and regulators had refused to do.
Dodd-Frank established a common sense rule that requires
mortgage lenders to ensure that borrowers have the ability to
repay their loans. This means that lenders can no longer make a
loan based on the home's value instead of the borrower's
ability to pay back the loan.
It should be noted that many lenders did not follow this
basic principle during the housing boom. At its peak, 27
percent of loans in this country that were made were subprime
products.
At the risk of making matters even more complicated, we may
be in danger of overlooking other factors that have tightened
credit beyond what Dodd-Frank envisioned. In reaction to the
housing crisis and their own financial positions, the GSEs and
FHA each tightened lending standards and increased fees that
are charged to borrowers. They announced small steps in the
FHA's HAWK program, the GSEs' return to 3 percent downpayments
to expand credit just this winter, but their loan profiles
continue to represent higher FICA scores and downpayments than
historical levels.
Lender overlays, higher eligibility criteria than the GSEs
or FHA, have also made mortgage credit difficult to obtain.
While the Ability to Repay standard was intended to be the base
standard, we heard in earlier hearings that lenders only want
to make QM loans because they provide liability protection, an
additional lender overlay. However, if we expand QM eligibility
in order to protect lenders, we also limit the protections for
a family buying a home.
A mortgage is the largest financial transaction most people
will make in their lifetime. As we have learned across a number
of consumer financial products and services, ensuring that the
mortgage process, servicers, and fees are transparent and
understandable to borrowers is essential if they are to be
successful home buyers and homeowners.
Reviewing regulation for their impact on the market and
possible duplication is important. But, if we do not address
the other challenges that restrict credit, eliminating
important home buyer protections under the cloak of access
turns the clock back to a dangerous 2008.
I look forward to having a conversation about all of the
challenges today, all of the challenges that the housing market
faces and the possible solutions. There is not a single answer
to fix these complicated problems. But, we cannot return to the
days--we cannot return to the days when unscrupulous lenders
could make loans that undermined a borrower's ability to repay
while charging excessive fees and, thus, putting our entire
economy at risk again.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Brown.
Without objection, I would like to enter at this time into
the record statements from the Conference of State Bank
Supervisors, the Housing Policy Council, Independent Community
Bankers of America, National Association of Federal Credit
Unions, the Credit Union National Association, Manufactured
Housing Institute, the Community Mortgage Lenders of America,
American Land Title Association, the National Association of
Mortgage Brokers, and Habitat for Humanity.
Chairman Shelby. Today, first, we will hear the testimony
of Mr. Tom Woods, Chairman of the National Association of Home
Builders. Mr. Woods is currently President of Woods Custom
Homes.
Senator Cotton, you are with us today and you have a
friend. Would you like to introduce him?
STATEMENT OF SENATOR TOM COTTON
Senator Cotton. Yes. Thank you, Senator Shelby.
Today, we have Chris Polychron, the President of the
National Association of REALTORS. Chris is a REALTOR in Hot
Springs. He has been in Hot Springs for 27 years as a leading
REALTOR there, and while we all know him here in this room as
President of the National Association, he has also been a
leading REALTOR throughout Arkansas, serving on the Board of
Directors for the Arkansas Realtors Association, President of
the Arkansas Realtors Association, and President of the Hot
Springs Realtors Association. Also, he has been a leader in the
Hot Springs community and the local Chamber of Commerce, been
President of his local church for almost 20 years, and Chris
and I have known each other for almost 4 years, since our good
friend, Smokey Campbell, introduced us.
Chris, it is great to see you here in Washington, DC,
although I know we both look forward to seeing each other in
Hot Springs sometime soon.
Chairman Shelby. Thank you, Senator Cotton.
Then, we will hear from Mr. J. David Motley, President of
Colonial Savings, who is here on behalf of the Mortgage Bankers
Association.
And, finally, we will hear from Ms. Julia Gordon, Senior
Director of Housing and Consumer Finance at the Center for
American Progress.
Your written testimony, all of it, will be made part of the
record. We are going to start voting in the Senate around 11,
so you proceed as fast as you can with your statements.
We will start with you, Mr. Woods.
STATEMENT OF TOM WOODS, PRESIDENT, WOODS CUSTOM HOMES, ON
BEHALF OF THE NATIONAL ASSOCIATION OF HOME BUILDERS
Mr. Woods. Thank you. The Nation's economic growth depends
on an efficient housing finance system to provide adequate and
reliable credit to home buyers and home builders, at reasonable
rates, and in all business conditions. Home buyers and builders
continue to confront challenging credit conditions triggered by
a zealous regulatory response to the Great Recession.
In response to the crisis, Dodd-Frank mandated significant
mortgage finance reforms and created the CFPB to implement and
supervise many of the new requirements. FHFA, the Federal
banking agencies, and FHA all have taken steps to ensure that
the Nation will never again be at the vulnerability to risky
mortgage lending.
The collective regulatory actions, along with the increased
compliance costs, has severely restricted the availability of
mortgage credit to many creditworthy borrowers. NAHB is
concerned about the effect of regulatory constraints on
originating loans, particularly for small communities, first-
time home buyers, and other underserved market segments.
Smaller banks and independent mortgage bankers are leaving
the residential mortgage business or merging their banks as the
burden of compliance has made it harder and more expensive to
do business. This exodus will reduce competition and limit
consumer choice. Congress must act now to eliminate some of the
barriers to credit availability and support a stronger, more
robust recovery of the housing and mortgage markets.
As the mortgage industry deals with the ongoing issues
associated with the implementation of the CFPB's Ability to
Repay standard, we urge Congress to pass the Mortgage Choice
Act. This common sense legislation would clarify the qualifying
mortgage rules' definition of points and fees and ensure that
consumers can choose the lender and title provider best suited
to their needs.
We also urge Congress to pass the Portfolio Lending and
Mortgage Access Act. This legislation is intended to ease the
ability to repay requirements for community lenders who may
fear regulatory and legal consequences of originating a non-QM
loan and, therefore, may limit access to credit for some home
buyers.
NAHB believes the Federal agencies can and should take
actions to alleviate burdensome regulatory requirements to
consumer access to mortgage credit. One issue that NAHB is
watching closely is the implementation of the CFPB's new
mortgage disclosure forms. The new forms are intended to help
consumers make informed decisions and avoid costly surprises.
NAHB is concerned that any confusion related to the new rules,
compounded by the fear of aggressive enforcement actions, will
negatively impact a buyer's ability to close on a house in a
timely manner.
In addition, lender overlays in the mortgage credit process
have been a major factor in the difficulty that home buyers are
having to obtain financing. Lenders are currently imposing
credit understanding standards that are more restrictive than
FHA, VA, and the housing GSEs require. NAHB encourages further
efforts to increase certainty for mortgage lenders on the
criteria for acceptable mortgage underwriting.
Likewise, fees for Government-backed mortgages continue to
be too high, given that the credit quality of the underlying
loans has increased.
NAHB urges action on two additional fronts that
specifically impact the homebuilding industry, appraisals on
new home construction and access to housing production credit.
Improper appraisal practices, a shortage of experienced
appraisers, and inadequate oversight of the appraisal system
continues to restrict the flow of mortgage credit and impede
the housing recovery. Despite signs of improvement in recent
months, many homebuilders continue to deal with a significant
adverse shift in terms and availability of loans for ground
acquisition, land development, and home construction. Lenders
are reluctant to extend new AD&C credit, citing regulatory
requirements or examiner pressure on banks to shrink their AD&C
portfolios.
Finally, while regulatory barriers can be alleviated by the
various regulators as well as by legislative reform, NAHB
continues to support comprehensive housing finance reform.
Comprehensive legislation would ensure that components of
reform are not at cross-purposes.
Thank you for your opportunity today.
Chairman Shelby. Chris, go ahead.
STATEMENT OF CHRIS POLYCHRON, 2015 PRESIDENT, NATIONAL
ASSOCIATION OF REALTORS
Mr. Polychron. Yes, sir. Chairman Shelby, Ranking Member
Brown, and Members of the Committee, thank you for the
opportunity to testify. My name is Chris Polychron. I am the
2015 President of the National Association of REALTORS, as
Senator Cotton said, from Hot Springs National Park, Arkansas.
I am speaking to you today, however, on behalf of over one
million members of NAR.
In communities across the United States, REALTORS help
citizens from every walk of life achieve the dream of home
ownership. However, millions of home buyers are still on the
outside looking in. The Nation's home ownership rate has fallen
close to levels last seen in 1990, and the number of first-time
home buyers entering the market is at its lowest point since
1987, despite historically low mortgage rates.
Since 2008, we have seen good intentioned but over-
corrected policies severely hamper the ability of millions of
qualified buyers to purchase a home. We have yet to strike the
right balance between regulation and opportunity. We see the
need for reform in four areas, and I will briefly discuss each
now.
The first area relates to Consumer Financial Protection
Bureau. The 3 percent cap on points and fees needs to be fixed.
This cap leads to reduced choices for consumers and prevents
lenders from making qualified, or QM, loans. We also believe
that underwriting standards should not be so restrictive that
they prevent smaller community banks from lending to their
customers.
The second area is specialty markets. Twenty percent of the
home buyers live in rural areas or small towns. We strongly
urge Congress to provide the Rural Housing Service with direct
endorsement authority to accelerate loan processing for
borrowers, and manufactured housing should be encouraged as an
affordable housing opportunity. And, Senator Cotton and others
here, thank you for S. 682.
The third area is short sales and foreclosures.
Streamlining the short sale process will reduce the time it
takes to sell a property and reduce the number of foreclosures.
We also urge Congress to extend the income tax exemption on
mortgage debt forgiveness. On both counts, we would be
protecting our communities from foreclosures, which ultimately
result in seeing a lot of homes that are boarded up.
And, the fourth area is lending policies. Condos are often
the most affordable option for first-time home buyers,
including minority and the elderly. However, both the Federal
Housing Administration and the Government-Sponsored Enterprises
need to address overly restrictive policies. In addition, high
guaranteed fees, or G-fees, are dragging down the first-time
home buyers. Prices should basically be in line with risk.
In closing, let me leave you with this. The Urban Institute
recently estimated that we prevented home loans to four million
qualified buyers between 2009 and 2013. This would not have
happened had we had credit standards similar to the ones we had
in 2001, long before the housing bubble. Instead, four million
families missed out on buying a home because we are taking
protection to an unnecessary extreme. Mr. Chairman, that is the
equivalent of 80 percent of the population of your home State
of Alabama.
No one wants to see the return to the unscrupulous
predatory lending practices that caused the Great Recession.
But, what we can do is balance the common sense regulations
with increasing access to credit.
Thank you for your time. I look forward to answering
questions later.
Chairman Shelby. Thank you, sir.
Mr. Motley.
STATEMENT OF J. DAVID MOTLEY, PRESIDENT OF BANKING AND MORTGAGE
OPERATIONS, COLONIAL SAVINGS, F.A., ON BEHALF OF THE MORTGAGE
BANKERS ASSOCIATION
Mr. Motley. Thank you, sir. Chairman Shelby, Ranking Member
Brown, and Members of the Committee, I appreciate the
opportunity to testify today. I am currently President of
Colonial Savings, a community bank headquartered in Fort Worth,
Texas. I am a past member of MBA's Board of Directors and I
currently serve on the Community Bank Advisory Council for the
Consumer Financial Protection Bureau.
As a four-decade veteran of the mortgage banking industry,
I can tell you from experience that recently enacted laws have
created commendable consumer protections and have made the
market safer. However, new regulatory demands imposed under
these laws have negatively affected the availability and the
affordability of safe, sustainable mortgage credit. Qualified
borrowers, including many first-time potential home buyers,
continue to have difficulty accessing credit.
MBA has consistently supported reasonable requirements to
prevent the repetition of past excesses. However, MBA's data
show that mortgage credit availability remains far below the
levels seen in normal times prior to the mortgage crisis, and
much of this constraint can be attributed to new regulatory
demands on mortgage lenders.
Although the CFPB did good work in developing the Ability
to Repay rule and the qualified mortgage definition, MBA
believes it is time to consider changes to the QM definition.
This will mitigate the adverse impact that initial rule has had
on access to credit for some qualified borrowers. Additional
adjustments to the rule can expand access to sustainable
mortgage credit and ensure that lenders can fully utilize all
four corners of the QM credit box.
MBA believes that changes to the QM should be made
holistically and not based solely on charter type or business
model. Expanded product choices under the QM should not be
limited to certain providers, and the burden should not be on
the consumer to determine which institutions offer particular
types of loans. This will only cause unnecessary consumer
confusion and reduce competition.
To this end, we support several changes to the QM
definition, including expanding the safe harbor, increasing the
small loan definition, replacing the current patch for
Government-backed loans, and expanding the QM to include
certain loans held in portfolio.
With regard to a portfolio exemption, we believe that any
such expansion should apply both to banks and to nonbank
lenders who originate loans for sale to banks or private
institutions that plan to hold them in portfolio. However, in
order to protect against the reemergence of loans with
particularly risky features, such as pay option ARMs, or stated
income loans, or NINJA loans, we believe some of the parameters
of the standard QM definition should be retained for portfolio
QM loans.
We also strongly support legislation that would exclude
title insurance fees paid to lender affiliate companies from
the calculation of points and fees under QM.
Beyond these changes to QM, there are several other areas
that could be addressed to facilitate increased access to
credit for qualified borrowers. First, we strongly believe that
the CFPB should offer authoritative written guidance to
accompany its rules. The absence of timely written guidance
from the CFPB has resulted in confusion and slowed the
implementation process of several important regulations. This
is particularly important in light of the forthcoming TILA-
RESPA integrated disclosure rule that will take effect in
August.
Second, the cost to service mortgage loans has increased
dramatically. This is due to new CFPB rules as well as the
punishing treatment of mortgage servicing rights under the
Basel III framework. Under that rule, banks are required to
hold extraordinary amounts of capital to support the MSR asset,
making it less likely for banks like mine to retain mortgage
servicing. These increased costs directly impact consumer
access to credit and make new mortgage production less
attractive to lenders. To address this situation, MBA supports
Congressional efforts to mandate a study into the effect of
Basel III on mortgage servicing rights.
Third, MBA believes that FHFA should direct the GSEs to
adopt the latest validated credit scoring models on an
expedited basis. The newer models help score borrowers with
limited credit experience, including first-time home buyers.
Using updated models, lenders will be able to extend loans to a
greater number of qualified borrowers.
Finally, in addition to addressing many of the regulatory
hurdles currently facing the mortgage market, MBA believes that
Congress should continue its work from last year to address
comprehensive housing reform.
Again, I am grateful for the opportunity to testify before
you today. MBA commends your efforts to examine the regulatory
hurdles preventing qualified consumers from accessing credit
and we are eager to work with the Committee to improve the
availability of sound mortgage credit for American consumers. I
will take your questions whenever you are ready.
Chairman Shelby. Thank you.
Ms. Gordon.
STATEMENT OF JULIA GORDON, SENIOR DIRECTOR OF HOUSING AND
CONSUMER FINANCE, CENTER FOR AMERICAN PROGRESS
Ms. Gordon. Good morning, Chairman Shelby, Ranking Member
Brown, and Members of the Committee. I direct the Housing and
Consumer Finance Team at the Center for American Progress, a
nonpartisan think tank dedicated to improving the lives of
Americans through progressive ideas and action.
The other witnesses have ably sketched a picture of today's
mortgage market, so I thought I would spend a moment revisiting
yesterday's, when toxic, risk-layered mortgage products
proliferated. These were aggressively pushed on consumers who
could have qualified for more stable and affordable products
and perversely incentivized brokers and lenders to strip home
equity through excessive and deceptive fees.
In the capital markets, investors poured money into the
private label securitization machine in search of yield, while
financial innovations aimed at managing risk actually spread
that risk to every corner of the system.
When the bubble burst, millions of Americans lost their
homes, many unnecessarily due to a thoroughly broken mortgage
servicing system. And, tens of millions more lost jobs,
retirement savings, and, maybe worst of all, trust in the
financial system.
In the wake of the crisis, Congress and the American public
supported comprehensive financial reform legislation to realign
incentives and strengthen oversight. Yet, now, less than a
decade later, the mortgage industry tells us if only Congress
will roll back some of these crucial reforms, they will lend
more.
Yet, more lending without the core Dodd-Frank protections
in place is exactly the wrong medicine for today's ailing
market. If these important guard rails are improved, the
likelihood of seeing a return to predatory and unsustainable
lending is high and any gains in home ownership would be
temporary and possibly dangerous. There will be no true
recovery until public confidence is restored, and a
Congressional about-face on reform will set that effort back
years.
Now, make no mistake. The CLEAR Relief Act, for example, is
no simple tweak to adjust a lending standard. It is an
evisceration of Dodd-Frank's core principle, which says that a
lender should not make a loan unless it has reasonably
determined that the borrower can afford to pay the entire loan
back.
Note that the qualified mortgage definition, or QM
definition, that this legislation seeks to extend is not
actually an underwriting standard like Ability to Repay is. It
is a liability standard. It designates a category of mortgages
so inherently super-safe that lenders need not fear any legal
accountability if the loan goes bad. It excludes riskier
products, such as negatively amortizing or balloon mortgages.
It requires underwriting to the maximum possible payment in the
first 5 years of an adjustable-rate loan. It limits excessive
points and fees. And, it excludes borrowers whose total debt-
to-income ratios exceed a certain threshold.
The legislation would confer this same absolute legal
immunity on loans with virtually any terms and features as long
as they are held in portfolio for 3 years by a bank with less
than $10 billion in assets. And, just note, that definition
covers all but the largest 110 depository institutions in
America and well over half of all mortgage loan originations.
Proponents of this bill argue that because loans are held
in portfolio, lenders have an incentive to ensure a borrower
will succeed, and in the case of small community banks, that
has often been true, which is why those banks have a whole list
of significant exemptions from Dodd-Frank that I have detailed
in my written testimony.
But, larger institutions have a much more checkered past
and far less of an ability to ensure quality underwriting from
all their originators. You will recall that Washington Mutual
was a portfolio lender and its collapse was due entirely to
loans that could not have met current QM status.
What is more, by only requiring 3 years in portfolio, this
product could entice--this could entice lenders to create loans
whose price or other features dramatically increase after the
3-year deadline, just like the ones that brought down the
system before.
Some of these other roll-back efforts are equally misguided
and I discuss them further in my written testimony.
Instead of gutting Dodd-Frank, let us get to work together
on finding more effective and less dangerous ways to increase
access to safe, high-quality mortgage credit. Congress should
complete comprehensive housing finance reform, extend the
Mortgage Forgiveness Debt Relief Act, convert the mortgage
interest deduction to a credit, and allow agencies to support
housing counseling. FHFA and FHA should continue to provide
better demarcation of responsibility, fix the broken servicer
compensation system, and pilot more effective ways to reach
underserved markets.
As memories of the crisis fade, let us not open the doors
to a new round of predatory unsustainable lending. Instead, let
us work together to create a healthier and more equitable
housing market that drives economic growth and promotes
opportunity for America's families.
Thank you.
Chairman Shelby. I thank all of you. Thank you, Ms. Gordon.
I am going to ask each of you to briefly respond to this
question. What are the two top--two or three, I should say--two
or three regulatory barriers that you have identified as
constricting mortgage credit and how should they be fixed, just
briefly? We will start with you again, Mr. Woods.
Mr. Woods. The first, I would say, is it needs to address
the points and the overall cost of the loan, depending--there
is a bill that you have today that is out there to do that, and
I think that would be helpful. It is having a tremendous
effect.
Chairman Shelby. Uh-huh.
Mr. Woods. The second thing is I believe that the
guidelines should always be in writing. We have a real problem
today that many times, and particularly with the auditors and
whatever, there are verbal instructions given as to how they
are to treat a loan, but it is not in writing, so it leaves it
to somewhat----
Chairman Shelby. Is it ambiguous? I mean----
Mr. Woods. It is somewhat ambiguous, and the real problem
becomes, and I am going to speak to this more as a community
banker, you are scared to death about your little bank. You
really do not want to be written up. And, so, you are going to
step back even farther from the line, and when you do that,
that is going to limit the fact of your doing business or if
you will do business.
Chairman Shelby. Basically, you are talking about
certainty, are you not?
Mr. Woods. I am talking about certainty. You are exactly
right. Just tell me what the rules are. I can play by the
rules. But, I cannot play the game if I do not know what the
rules are.
And, then, just the cost of the compliance. And, again, I
am talking mostly smaller community bankers. Certainly, in the
big banks, they have less ability to spread that cost.
Chairman Shelby. That is right.
Mr. Woods. So, if you have to add personnel to a small
community bank, they are not making billions of dollars. They
are making thousands of dollars----
Chairman Shelby. And they are not making loans----
Mr. Woods.----and that one person makes them unprofitable.
Chairman Shelby. And they are not making loans if they are
not----
Mr. Woods. They are not making loans.
Chairman Shelby. Chris.
Mr. Polychron. Chairman Shelby, I would say one area, and
especially, like, in my market in Hot Springs National Park,
Arkansas, FHA has made the restrictions on condo loans to where
very few of our developments qualify for those loans. They are
an excellent opportunity for first-time home buyers, elderly,
minorities, as well----
Chairman Shelby. Tell me why. Are they cheaper, basically,
than a single detached home?
Mr. Polychron. Yes, sir, they are cheaper, A, and they
are--a lot of our young people are wanting to move to the
downtown areas----
Chairman Shelby. And what is the barrier, refusal to make
the loan, or what is it?
Mr. Polychron. Well, basically, the restrictions require
100 percent or a high percent of the whole development before
it can be done. They are usually run by private boards and
those people are not qualified, and as a result, they just do
not finish the process. We have been working with FHA to try to
alleviate that and, hopefully, something will happen soon.
I agree with Mr. Woods, second, that--take GE Finance. They
recently announced they are going out of business because the
cost to do business----
Chairman Shelby. No, they are not going out of business.
They are selling to somebody.
Mr. Polychron. Well, they are selling their----
Chairman Shelby. Yes.
Mr. Polychron. They are going out of the finance business
for us----
Chairman Shelby. Right. Right. Right.
Mr. Polychron.----and, you know, they listed compliance,
regulations, cost of doing business.
Chairman Shelby. Mr. Motley, one or two, your top ones.
Mr. Motley. I think that one of my top points is the
restrictive nature and the very prescriptive nature of the QM
rules themselves, for instance, the 43 percent DTI ratio, and I
will give you an example. Just last week, we had a self-
employed borrower that was making an application with our
company. It was a jumbo loan, so we could not avail ourselves
of the GSE patch. So, this was a jumbo loan. Our investor
required that the loan be QM.
In this particular case, this borrower had been self-
employed not quite 24 months, which is required under Appendix
Q of the QM rule. So, even though we had great income history,
we had a record of good credit, we had good downpayment, all of
that, it did not meet the QM standard because he had--we could
not justify or could not show that he had been self-employed at
that level of income for 24 months, only 23. So, we could not
make that loan.
It did not matter that it was an 80 percent loan. It was
not a high level, high LTV loan. But, that is the kind of one-
size-fits-all in Dodd-Frank that just does not work. We need
some ability to exercise prudent judgment. We are not talking
about going back to NINJA loans. We just want to have the
ability to make prudent loans----
Chairman Shelby. So, you think that is a literal
interpretation of the 24-month deal----
Mr. Motley. I do.
Chairman Shelby.----rather than a little bit of
flexibility, just a little. And, you thought that was a good
loan, did you not?
Mr. Motley. Yes, sir.
Chairman Shelby. OK. Ms. Gordon.
Ms. Gordon. I do agree regarding the uncertainty in a
variety of areas, but I will mention a couple of other things.
One is pricing and downpayment, and that is because we are
suffering from a problem with income and wealth inequality in
this country, especially for communities of color who represent
the majority of home buyers of the future. I would strongly
suggest that we do more risk pooling, particularly Fannie and
Freddie, rather than really excessively tiering the pricing,
but we----
Chairman Shelby. Explain what you mean exactly. You are
talking about----
Ms. Gordon. So, Fannie and Freddie had historically--they
created this national mortgage market so we were not that
dependent on what happened in particular regions of the
country, you know, if one region had a downturn, and they made
mortgages really a commodity. So, there was basically a price
most people in the country kind of knew what their mortgages
would be.
Because of the crisis, when Fannie and Freddie went into
conservatorship, the conservator created this very steep grid
of, you know, you pay a lot more for a mortgage, for example,
if you are only able to afford a smaller downpayment----
Chairman Shelby. OK.
Ms. Gordon.----even though you still have to have Private
Mortgage Insurance to cover that, and that has been a real
problem, particularly for the folks who were hardest hit by the
crisis and who may have less family wealth.
I also hope that the whole mortgage industry can work
together on the problems of wage stagnation and income
inequality because that is just a big part of the market
problem today, is affording a home.
Chairman Shelby. Sure.
I will address this to you, Chris. In your testimony, you
express support for legislation allowing communities to appeal
to the CFPB for consideration as a rural community. You know,
the small towns and the rural areas of America make up a lot of
America, as you testified. Would you elaborate on what could be
at stake if otherwise rural communities are not technically
recognized by the CFPB as rural and so forth? Go ahead.
Mr. Polychron. I can even give you a personal example in my
own State.
Chairman Shelby. OK.
Mr. Polychron. We recently had a State director make a
ruling that one of our areas was no longer rural. We had no
recourse but to go to her, and we ultimately convinced her----
Chairman Shelby. But, you were not urban, though, were you?
Mr. Polychron. No.
Chairman Shelby. OK.
[Laughter.]
Mr. Polychron. And, we finally convinced her that it was
rural. If we had not had the ability to bring that back up,
those people would not have been afforded the opportunity to do
a 502 through Rural Housing. So, I would tell you that other
reasons--there are areas like, take Fayetteville, Arkansas,
where the University of Arkansas is. A lot of that population
is counted in the Census and it would make it look like that
area is urban when it really is not.
Chairman Shelby. It is a distortion, is it not?
Mr. Polychron. It can be a distortion, yes, sir.
Chairman Shelby. OK. I have a number of other questions I
will submit for the record. We are into time constraints.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Ms. Gordon, I will start with you, and then I have a
question for Mr. Motley. Working families trying to buy a home,
as you pointed out, seem to have the deck stacked against them.
Stagnant, slow wage growth, increasing student loan debt
burdens, combined with the recent increase in home values can
reduce a family's ability to save for a downpayment or reduce
their other debts to qualify for a loan. What impact are
these--we have heard about Government regulations as the major
reason, or almost the only reason from other panelists. What
impact are these economic factors having on the housing market?
Ms. Gordon. So far, we have not actually seen any evidence
that the problem in the housing market is the financial
reforms. We have seen quite a lot of evidence that downpayment
requirements and general tightness of the credit box are a
problem, particularly since some of the biggest actors in the
system still use old credit models that do not take new
developments into account. And, we also have seen how a lot of
the uncertainty, the uncertainty about the system generally,
with Fannie and Freddie still in conservatorship, as well as
uncertainty about repurchases, about default servicing costs
and the like, that is really holding the market back.
We really have seen no evidence so far, and there have been
some studies and surveys on this, that QM is really making much
of a difference, and particularly for smaller institutions who
have a number of exemptions. By and large, community banks are
lending the same way they always did.
Senator Brown. Thank you.
Mr. Motley, the title of today's hearing is about helping
borrowers get access to mortgage credit. So far, we have heard
a lot from the panel about what Congress could do to help
lenders. Thank you for that insight and those thoughts.
According to Bankrate.com, the interest rate on a 30-year
mortgage averages around 3.8 percent, even with a 660 credit
score and paying 5 percent down. That sounds like a pretty good
deal by any historical standard.
If the issue, therefore, is not the cost of a mortgage,
what prevents you from making this kind of loan, and how does a
proposal like allowing lenders to charge higher fees give
homeowners--give potential homeowners, give borrowers more
access to affordable credit?
Mr. Motley. Let me answer your last question--I will answer
your last question first. Low- to moderate-income borrowers
typically are going to have smaller loans, smaller purchases.
So, fees, closing costs, are often reflected in fixed amounts
rather than a percentage of the loan. So, a smaller balance
loan is going to hit that 3 percent points and fees cap sooner.
So, if I cannot premium price the loan, raise the interest
rate, to cover some of those fees through premium, then I am
not going to be able to make that loan and stay within the 3
percent points and fees cap and, therefore, a QM.
Now, there is another regulator----
Senator Brown. But, you could make the loan. You just could
not get QM protection, correct?
Mr. Motley. Right. That is correct. So, I have got to weigh
the option of going with a rebuttable presumption risk as
opposed to a safe harbor.
Now, I can only raise the rate so far because there is
another Governor on this protection for consumers. Currently,
in order to stay in a QM state, I cannot go above 150 basis
points above the average prime offer rate. Now, the average
prime offer rate is a lookback. It is an index that was
published, let us say, last week. So, in a rising rate
environment, I am automatically squeezed when I look at that
calculation. So, I need to have that APOR margin, the margin
over APOR, increase so that I can counteract the effect of
potentially rising interest rates.
And you know that interest rates are historically low. They
have been low for a long time. We all think, eventually, they
are going to go up. They have not yet, but that would help, if
we could have a 200 basis point spread over APOR and still
retain QM status, as well as we could handle more small balance
borrowers if we could increase the points and fees cap.
Senator Brown. Well, I think it is--thank you for that
response. I think it is important to remember these mortgage
rules provide legal liability protection. Nothing prohibits you
from making these loans if you think they are good quality
loans and the chances of repayment are high. They really shift
the burden to the borrower to show that a lender knew they
could not pay back the loan.
Obviously, that is the story of QM, understanding that
lenders can go ahead. They can make that loan. They just do not
have the legal liability protection afforded by QM. I think it
is very important to make that point. The Government is not
telling anyone they cannot make these loans. They just do not
get the legal protection afforded by QM, so I think it is
important to note that the lender here is making a business
decision. Is this loan likely to be paid back?
Let me ask one more question with Ms. Gordon. The CFPB
released updated small and rural lender definitions earlier
this year in response to concerns about the previous
definition, as you know. How does the new proposal change the
small and rural lenders that qualify for exemptions? Are there
other exemptions that they already qualify for?
Ms. Gordon. Well, like I said, in my written testimony, I
actually provide a whole list of exemptions that smaller
lenders already have, and the new proposals, I think, will also
be helpful and, to me, really demonstrate how the CFPB is
really trying to take into account the concerns of the mortgage
industry.
I should note on your previous question that there is also
an exception from the 3 percent points and fees cap for loans
under $100,000, which covers quite a lot of the loans that go
to low- and moderate-income people around different parts of
the country, though maybe not right here in Washington, DC.
Another compromise that the CFPB created was as passed by
Congress, there actually was no safe harbor. There was just
something called a rebuttable presumption, which is lawyer talk
for who has the burden of proving what. And, the industry went
into CFPB and said, we really feel like we need this real legal
immunity and they were given that extra that was above and
beyond what the statute had said.
So, there have been quite a lot of compromises with CFPB. I
think in a number of them, consumer groups have worked with
business groups very productively and, I think, will continue
to do so at the CFPB. And, at this point, this is why I do not
think on most of these things we really need Congressional
rollbacks of the actual statute.
Senator Brown. I think the point you make, and then I will
yield, Mr. Chairman, about the cost of homes, you said the
$100,000 figure. The median list price in the Midwest region,
according to the National Association of REALTORS, for home
sales is $152,000. And in the Cleveland area, 9,000 homes--so,
it is not a small sample--it is $128,000. In Akron, it is
$108,000. Across the border in Indiana, it is around that same
price. So, that is a lot of homes, that is the median price.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Cotton.
Senator Cotton. Thank you.
I would like to discuss legislation I cosponsor with
Senator Donnelly that Mr. Polychron mentioned earlier, S. 682,
the Preserving Access to Manufactured Housing Act. Ms. Gordon,
I would like to start my questions with you. Were mortgage
loans a prime driver of the financial crisis in 2007, mortgage
loans to manufactured housing owners?
Ms. Gordon. So, actually, mortgage loans to manufactured
housing owners have been a problem far longer than the
financial crisis. You know, there are two different ways that
those loans can be titled. They can be titled as real estate or
as chattel, and the chattel loans have long had far fewer
consumer protections, and those loans have always been a lot
more expensive than loans for site-built homes.
And, so, the many households who rely on manufactured
housing, which is a really important, as you know--I mean, in
your State--actually, I am looking around the room, in all of
your States, manufactured housing plays a really important role
in some communities. You know, that was in particular need of
consumer protection even before some of the excesses that were
associated with the Wall Street private label securities,
because you are right, the manufactured housing did not really
have that intersection.
I think it is really important to help increase safe and
affordable credit for manufactured housing and, in fact, have
been urging the Federal Housing Finance Agency to include--to
incentivize more and better manufactured housing loans through
their Duty to Serve rulemaking by actually including chattel
loans as well as real estate titled loans, and I think that is
going to be a really important effort, and I have also been
working with some business groups on that.
I do not think the right way to go about solving the very
real problem of credit for those loans is by removing consumer
protections that attach to higher-cost credit.
Senator Cotton. So, I infer the answer to my question is
no, mortgage loans to manufactured housing owners were not a
prime driver of the 2007 and 2008 financial crisis.
Ms. Gordon. Well, they were not a prime driver of what
happened on Wall Street, but they were very much a part of the
lost wealth and foreclosures of families.
Senator Cotton. Were those loans a primary part of
collateralized debt obligations or credit default swaps that
caused the problems that led to the financial crisis?
Ms. Gordon. Absolutely not.
Senator Cotton. You state in your written testimony that if
our legislation passed, the Preserving Access to Manufactured
Housing Act, quote, ``a lender could charge nearly 10
percentage points higher than a prime mortgage rate,'' end
quote. I infer that you think that that is a bad thing.
Ms. Gordon. So, higher-cost loans are sometimes--I mean,
there are a lot of reasons, a lot of good business reasons to
charge higher rates under certain circumstances. But, studies
have repeatedly shown that higher rates are actually in and of
themselves an additional risk factor. So, if you are in a
situation where those higher rates are important and necessary,
giving consumers some extra protections against other predatory
features is really important.
Senator Cotton. Section 1431 of the Dodd-Frank Act empowers
the Consumer Financial Protection Bureau to allow points and
fees up to 10 percent on high-cost mortgages. Do you think that
section of the Dodd-Frank Act is not sufficiently protective of
consumers?
Ms. Gordon. Well, one of--what Dodd-Frank did was they
actually revisited the thresholds that had previously existed
for HOEPA loans, which are the high-cost loans, and those
thresholds had been established at a time where, generally,
rates were really, really high for all mortgages, and they
adjusted them downward to reflect the new rate environment.
And, I should note that the CFPB actually has extremely
broad exception authority to virtually everything in the
statute, and working with the CFPB continues to make sense, and
they have continued to balance interests pretty well. But, I do
not think there is any reason to revisit the statute, no.
Senator Cotton. So, I would note that our legislation
simply acknowledges the economic fact that mortgage loans for
manufactured housing are often a quarter of the cost of homes
for site-built, or site-built homes, and the origination costs,
though, do not always fall that low and, therefore, these fees
can be somewhat higher.
Mr. Polychron, would you like to describe the importance of
manufactured housing in places like Hot Springs National Park,
Garland County, in Arkansas?
Mr. Polychron. Yes. Manufactured housing is a big part of
it, especially for minorities, for people that cannot afford
the higher-priced homes. I would submit that even if the cost
was, say, ten basis points higher, a lot of times, that
manufactured home buyer can still purchase a home and have
payments less than he would with a higher-priced home, and I
think that individual would like that option.
Senator Cotton. Would it be fair to say that, sometimes,
that can even be lower than what they might be paying for rent
in places like Arkansas?
Mr. Polychron. It would be by far. Rents have gone sky high
in our State, mainly because the difficulty to get credit. I
foresee renters at some point, hopefully soon, converting to
home ownership again.
Senator Cotton. Thank you.
Chairman Shelby. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Chairman, I think about this topic and I go back to the
time we were here, where mortgage lending was at the heart of
the financial crisis and borrowers of modest means received
risky subprime loans they could not afford as financial
companies chased profits and left taxpayers on the hook for the
downside. And, we know the damage that the crisis caused.
Families lost their homes, their jobs, their savings.
Businesses had to close their doors and communities were
devastated by foreclosures.
So, the crisis reminded us how important a healthy mortgage
market is to our economy, not just to financial stability, but
to families' ability to build wealth and strong communities.
And, as our economy continues to recover, the pathway to home
ownership, I believe, must remain open and affordable.
Now, I understand no legislation is perfect, and in areas
where regulations are an obstacle, we should look to improve
them. At the same time, it can be tempting to blame regulation
for broader market challenges or to use unrelated problems as a
pretext for rolling back consumer or financial stability
protections. So, I look forward to working with my colleagues
on the Committee to find ways to improve access to credit, but
to consider all the elements of that.
In that context, Mr. Woods, in your testimony, you
discussed the recent moves by Fannie and Freddie to back well
underwritten loans with downpayments as low as 3 percent in
cases where borrowers can demonstrate their ability to repay
and other compensating factors. As, I think, almost everyone
here knows, saving for a downpayment can be a significant
obstacle for a family to purchase a home. Would you say that
this decision by Fannie and Freddie represents a positive step
by giving a greater number of creditworthy borrowers an
opportunity to responsibly and affordably purchase a home?
Mr. Woods. I think it is a very responsible--I am sorry. I
would say it is a very positive step. There is one indicator
out there that for years stands out when we talk about the 3
percent, or 2, or wherever you are at. VA loans perform quite
well, and they are zero down loans, and they have always
performed, but they have some other guidelines within them that
help that process. Plus, that individual has some training in
responsibility.
Senator Menendez. Mm-hmm. Do our other witnesses agree?
Ms. Gordon. Absolutely. I think that the ability to get a
home with a lower downpayment is absolutely critical for
today's home buyers. And, I want to note that what is really
important when you are thinking about lower downpayments is
making sure you are not layering other risks in there. It was
not low downpayment products that caused the crisis. It was the
risk layering. And, so, that is why, especially when it is so
important right now to have these low downpayment products,
because families really do not have that much wealth, that is
why it is absolutely not the time to ease up on the other
protections.
Mr. Motley. Senator, I agree with Ms. Gordon completely. As
long as the 97 percent loan is prudently underwritten, we are
not layering risks, I think it is a good step toward reviving
the housing market.
Senator Menendez. Mm-hmm.
Mr. Polychron. And, Senator, I would concur. I would also
add that the lowering of the FHA fees from 1.35 to 0.85, you
know, on a $200,000 house made a difference of $90 a month, and
it certainly brought more first-time home buyers into the
market.
Senator Menendez. Good. Now, let me ask you another
question. Almost all of you discussed in your testimony how
updated credit score models can improve loan underwriting and
expand access to a broader population of potential buyers,
particularly in underserved communities. The developers
estimate these new models can provide scores for anywhere
between 15 and 40 million previously unscored consumers.
Can any of you share with me what are the biggest obstacles
to widespread adoption of the newer, better models? Is it
implementations by the GSEs or is it other factors?
Mr. Motley. In my opinion, it is implementation by the
GSEs. They just have not gotten around to technologically
utilizing those models.
Ms. Gordon. Well, there are some other obstacles, as well,
which is that particularly rent reporting, which is a big part
of the newer experiments with scoring more people, you are
relying on a lot of private landlords, often mom-and-pop
landlords, to do that reporting, and I think that is going to
be a challenge to make sure it is done right. But, I think it
is really important and will allow many more people to be
scored.
On scoring utilities, I think there are some special
problems there that you have to really make sure you have
consumer protection. Many folks benefit from utility subsidy
programs, particularly in the colder States, and utility
companies are well known for a lot of billing problems. So,
this has to be done carefully, but I think both FICO in
updating their models and VantageScore have been really working
on this quite carefully and it is very important that Fannie
and Freddie get contemporary with this.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Motley. And, I would just follow up with that, is that
for years, we have used alternative credit like you are talking
about with utilities, with a rent bill, something that is not
reported to the credit bureau. But, being able to have this put
into a system and actually graded will assist us in evaluating
borrowers who have thin credit.
Chairman Shelby. Thank you.
Senator Sasse.
Senator Sasse. Thank you, Mr. Chairman.
Ms. Gordon, not to keep you in the crosshairs the whole
time, but I appreciated some of your comments about PMI and
mortgage insurance. I think that many of the comments that you
have made, though, about the possibility of exemptions from
Dodd-Frank, I wish we could have the time to take you to a
small town in Nebraska and you could sit with some community
bankers. And, so, I wonder if we could do that as a thought
experiment.
Many of these folks do not have any sense that they were a
contributing factor to the fall of 2008. It is not entirely
clear to me if you think they are guilty. They think that they
are guilty in the eyes of Washington and lots of regulations
that they cannot navigate. I will not bore you with all the
technical archana, but in a lot of towns in Nebraska, the
average mortgage is well under $100,000, and I have sat with
these community bankers and it does not make economic sense for
most of them to be writing mortgages at all. They do it as a
community service, but it is not an economically viable
business.
Could you explain, in small town Nebraska, where a lot of
mortgages are less than $100,000, do you think they did
something wrong in the run-up to 2008, and if so, what?
Ms. Gordon. I do not see small community banks as the root
of the problem in 2008. I would love to work with you on a
positive agenda for helping smaller institutions be
competitive. I think it is important to note that smaller
institutions have been declining for decades, long before the
crisis, and a lot of that is because the economics of the
business right now tend to, you know, push toward larger
institutions where you can spread the fixed costs better.
I think there is quite a lot that can be done in the area
of technology to help bring down the costs of compliance,
because, I mean, we could get rid of all of Dodd-Frank
tomorrow, but there would still be myriad other regulations
that banks would have to comply with and a lot of that is
susceptible to technology. Some of the larger institutions have
the resources to do that.
And, I think it is really important, and that regulators
should be involved in this, too, in trying to make sure we are
developing the infrastructure of sort of off-the-shelf, cloud-
based resources that can be used.
I have talked to a lot of small lenders. I know when they
think about replacing their technology systems, that sounds
almost insurmountable to them, and this is true in the small
nonprofit sector, as well. Unfortunately, it just has to be
done to keep current, and I would love to work on a positive
agenda to help do that for that sector. I think that sector is
very important.
Mr. Motley. And, if I could follow up on that just a little
bit----
Senator Sasse. Please.
Mr. Motley.----talking about the infrastructure necessary
to incorporate and to build these regulatory requirements into
our systems. You know, 2 years ago, we had three people in our
compliance area. We had two workers and an administrative
person. We now have 12 people in our compliance area.
And, when you think about TRID, a 1,700-page document,
well, my goodness, we had to hire all those people so they
could read it, so they could figure out how to implement it and
figure out how to--what does this mean to the business process
every day. And, then we have to go train on it, and we have to
make sure that our loan officers know how to do it.
And, specifically with TRID, you have got this new waiting
period between the time that you issue a closing disclosure and
the time that you can actually close on the mortgage or
consummate the mortgage. That means that real estate agents,
builders, title people all have to be trained. So, this is a
tremendously difficult task that we have in front of us to try
to implement TRID.
So, it is just to say what Ms. Gordon is saying, is that
the training burden of implementing these regulations is really
quite great. And, I would follow with that and say that we are
hopeful that we can get the CFPB to delay via rule
implementation of enforcement on this TRID rule, because we
have really been inundated over the last 24 months with myriad
new rules and we are up to here. We are choking. We are about
to drown.
Senator Sasse. That is helpful.
I have got less than a minute left, so Ms. Gordon, could we
go back to you just for a minute. So, then, go upstream one
step. Give the 45-second--I think that is all the Chairman is
going to let me have--give the 45-second answer to what was the
contributing factor of the housing bubble for lower-income and
middle-income families in rural places where housing is cheap.
What regulatory problem was not being addressed that they
contributed to that required any new regulation in 2008.
Ms. Gordon. Well, here is what happened, and this is what
is so important now, is those small community banks did not
cause the crisis, but their larger brethren, in fact, did, and
what we have seen during the lobbying before Dodd-Frank was
passed, during Dodd-Frank, and after Dodd-Frank is, actually,
you see a lot of institutions that are not the kind of banks
that you are talking about kind of hiding behind the skirts of
those banks and using them as an excuse to get out of the
regulations that are really important for the institutions that
were, in fact, involved in the shenanigans that ultimately led
to the crisis.
Senator Sasse. So, just to interrupt for a second, though,
but, I think, in earlier questioning, you said there are
potentials for exemptions from Dodd-Frank and from other
regulatory regimes that could be applied to these people. Let
us not talk about whether or not big banks did some--were bad
actors and they are hiding behind the small banks. I am asking
you, why was there new regulation necessary on mortgage
products for $50,000 and $75,000, period? These exemptions
could be used, but they are not being used. So, what was the
problem that required these new rules to be applied to lower-
income and middle-income people in places where housing markets
are cheap?
Ms. Gordon. So, lower-income and middle-income people were
the victims of this crisis and what we had to do was regulate
the products. You know, the page six----
Senator Sasse. And, so, those products are evaporating----
Ms. Gordon. Page six has a list of the exemptions which
were put in there because we know a lot of those community
banks have a model where they make the 3- or 5-year balloons,
right. They do--you know, they may service fewer than 5,000
loans. They have a lot of exemptions here, but the fact is,
when you regulate an industry, you have to regulate for the
vast middle of the industry and this is--I think these
exceptions are a very appropriate way, and if there is a reason
that they are not using those exceptions or taking advantage of
them, I think that is a training and education and regulatory
issue we should work on.
Senator Sasse. Yes. I do not think that is accurate. I
think there were mortgage products that were available with 15
to 20 pages of paperwork that are now hundreds of pages, and I
think your answer is, regardless of whether or not there is a
problem, let us empower bureaucrats, and then later you can
come and supplicate before the bureaucrats and see whether or
not you can get a carve-out. That is not what is happening,
though. The access to mortgages is being reduced and eliminated
in rural communities, and the argument is, you could go and ask
for regulators to later give you the freedom to offer products
that were not a part of the problem.
Ms. Gordon. So, if you look at who is originating mortgages
right now, actually, small institutions are originating more
than ever and their profits on mortgages are increasing faster
than the profits for any other sector of banks making
mortgages. So, you know, I hear that there is an issue. Many of
these exemptions were baked into Dodd-Frank. These were not
just regulatory decisions. Others were regulatory decisions
made after they heard from representatives of these small
banks. But, I do not see why an exemption is different than not
having the rule. The fact is, you do not have to do the rule if
you have an exemption.
Senator Sasse. I wish we had more time. Thank you.
Chairman Shelby. Mr. Motley, let me pick up on something
you said, then whatever you want to add, and then I will
recognize Senator Warren. You said a minute ago, as I
understood it, that you had to go from 2 people to 12 people on
compliance, is that correct?
Mr. Motley. Yes, sir.
Chairman Shelby. That is six times the cost of personnel.
Mr. Motley. Yes, sir.
Chairman Shelby. Somebody has to pass that on or you go out
of business, right? It is added to the cost of doing business.
Mr. Motley. Yes, sir. It is added to the cost of doing
business. I am not doing any more loans, but I have more
compliance----
Chairman Shelby. Is there not some way, picking up Senator
Sasse's comments, to streamline these regulations and put them
in plain, unambiguous English where people will know what is
certain there and what is not? Could it be----
Mr. Motley. Yes, sir----
Chairman Shelby. It looks to me like----
Mr. Motley.----I believe it is, and we support holistic
fixes, not carve-outs for individual things.
Chairman Shelby. No, no----
Mr. Motley. We want some holistic fixes that allow lenders
to have underwriting guidelines that are prudent.
Chairman Shelby. When you say fixes, you mean certainty and
guidelines?
Mr. Motley. Yes, sir.
Chairman Shelby. OK. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
You know, I agree with a lot of what has been said here
today. Access to mortgages is painfully tight, especially for
people who are not well to do, and we should find responsible
ways to increase access to credit. I am there.
But, once again, there are a lot of proposals that are
being pitched as improving access to credit that are really
about letting the mortgage industry dig deeper into consumers'
pockets, and I think a good example of this is the Mortgage
Choice Act. After the crisis, Congress decided that a lender
could get the protection of the Qualified Mortgage Rule only if
the points and fees on a mortgage were less than 3 percent of
the loan amount. Now, if the lender is affiliated with the
title company, the cost of title insurance through that
affiliate counts toward the 3 percent cap, which makes sense
because most of the cost of title insurance is commissions, and
most of that revenue is going to find its way back into the
lender's pocket.
You know, the 3 percent cap is an important step toward
fixing the broken noncompetitive market for title insurance.
For other forms of insurance, not title insurance, where there
is a competitive market, between 50 and 80 cents of every
premium dollar goes to paying out claims. But, for title
insurance, according to the GAO, it is five cents, one nickel
out of every dollar that is collected.
The GAO also reports that more than 70 cents on every
dollar is pure commission for the title agents. Subjecting
affiliated title insurance costs to the 3 percent cap should
help bring some competition and lower these artificially
inflated prices.
Now, Mr. Motley, as you know, the Mortgage Choice Act would
blow up the 3 percent cap by exempting the affiliated title
fee. It says that you can separate it and get money from two
different sources. In your testimony, you claim that applying
the cap to affiliated title insurance fees has made, quote,
``low-balance loans serving low- and moderate-income borrowers
much costlier to originate and, consequently, less available to
consumers.'' In other words, the cap--that is the part this
part of your testimony is about--is making it harder for people
to get low-dollar loans.
Now, I care a lot about the question about access to low-
dollar loans, so I have looked closely at the data since the 3
percent cap went into effect last year and I just cannot find
any data to support that claim. I have also asked companies to
give me some data to back up the claim, but so far, nobody has
done that.
So, I notice that you do not cite any data in your
testimony and I would like to know what data you are looking at
to support your claim.
Mr. Motley. Senator, I am actually considering the
combination of the affiliated title insurance--we had an
affiliated title insurance company. With the new rule, as you
have stated, we were required to include the title insurance
premium, and I would disagree with you in the sense that the
title insurance premium in Texas, anyway, is the vast majority
of the total fees charged to a consumer. It is not a minority.
It is the majority of those costs.
Senator Warren. Well, all I can do is look at the
Government Accountability Office report on this----
Mr. Motley. OK.
Senator Warren.----and that is that for title insurance,
the amount that is paid out is a nickel for every dollar
brought in. If you have got better data than the GAO, then
please bring them in.
Mr. Motley. OK. I will get back to you with that. But, with
regard to the----
Senator Warren. I would like you to.
Mr. Motley. With regard to the affiliated title insurance
question, I had a title insurance--we had an affiliated title
insurance company for about 6 or 8 years. One of the reasons
that we had that title insurance affiliated company is because
we felt like we could provide better service to our mortgage
customers, particularly in a refinance scenario, where I could
actually meet or beat the costs of a competitor by using my
affiliated title----
Senator Warren. Mr. Motley, since we have very limited
time, let me just stop you right there. I have no doubt that
you can get revenue from your title insurance company and you
can get revenue from your mortgage lending business. The
question I am asking is what data you have to support your
claim in your testimony in which you said specifically, low-
balance loans serving low- and moderate-income borrowers are
much costlier to originate and, consequently, less available to
consumers because of the 3 percent cap. I cannot find any data
to support that and I just want to know what you are using.
Mr. Motley. Thank you. Let me say that what happens is,
with an affiliated title company, I have got to include those
affiliated title charges in my loan origination cost, so that
becomes part of my costs and fees. So, at a certain level, I go
over those caps.
Senator Warren. I understand that, that you are not going
to get as much money. The question is, why does that stop you
or raise the cost? Do you have any data to support----
Mr. Motley. Well, it is not just that I may not make as
much money. It is also a competitive issue, because when I look
at my affiliated company and my disclosure to the borrower on
my good faith estimate, my costs are going to be higher than if
I used a non-affiliated company, or if someone else was
comparing my disclosure to a non-affiliated company.
Senator Warren. I am going to take that as you have no
data, other than how you describe your business model on how
you make money. Maybe I should just ask this----
Mr. Motley. I will try to get--I will get back to you with
some data.
Senator Warren. I would be delighted to see that.
Let me ask this another way. Data from both Fannie and
Freddie Mac and the mortgage industry show that the average
mortgage origination fees are under 1 percent of the loan
amount. So, that means for a $100,000 loan, a lender can
typically charge more than $2,000 for title insurance and still
be under the cap. Since claims are only eating up about five
cents of every premium dollar, that leaves about $1,900 in
commissions before you hit the cap. Is that not enough?
Mr. Motley. Senator, you are asking me about the commission
structure with title insurance companies and I am not involved
in that business anymore.
Senator Warren. Well--thank you. I just want to say, the
Mortgage Choice Act should not fool anyone. The CFPB has
already exempted the vast majority of smaller lenders from the
QM rule, including the points and fees cap, for any loan they
hold on portfolio. So, this is really about bigger lenders.
This is about trying to get bigger fees from consumers. It is
about preserving a cash cow for the mortgage industry and not
about access to credit and I urge my colleagues to oppose this
bill.
Chairman Shelby. Senator Corker.
Senator Corker. Thank you. This is an interesting hearing.
Mr. Motley, a large group of us on this Committee wrote a
letter to FHFA about the Common Securitization Platform they
are developing, asking to make sure we had enough outside
advising, if you will, to make sure that it was not just
crafted only for Fannie and Freddie's use. Do you think it
would be appropriate for somebody from the mortgage industry to
actually participate in that panel?
Mr. Motley. Yes, sir, I do.
Senator Corker. OK, and just for the record, I hope that is
something that we will pursue.
I want to follow up on Senator Warren's comments. What I
see happening here is people, generally speaking, on my side of
the aisle are trying to develop legislation to change the rules
of Dodd-Frank to create better access to mortgages, if you
will. What I see happening on the other side of the aisle is
that Senators, instead of pursuing it that way, they are trying
to create better access to mortgages by trying to get FHA and
Fannie and Freddie and others to loosen up on the Government
side. So, it is an interesting thing. Republicans are trying to
write legislation to fix it, but what is happening is my
friends on the left are trying to push the federally owned
entities from getting them to do the same exact thing. So, both
of us, if you look at it, really, both of us are trying to
create access to credit. We are just doing it in different
ways.
And, I would just like to ask the question, would it not
make more sense, instead of maybe us pursuing this route and
then pursuing that route, would it make more sense for us just
to go ahead and do comprehensive housing finance reform and
create certainty and solve the problem once and for all? I
would just like for the witnesses to potentially respond to
that.
Mr. Motley. It absolutely would.
Mr. Woods. It would.
Mr. Polychron. [Inaudible.]
Ms. Gordon. I support comprehensive housing reform, as you
know, but we would also still need the regulatory protections
of Dodd-Frank.
Senator Corker. Yes. Well, that was not the question, so--
--
[Laughter.]
Senator Corker. So, I think--really, as I hear this,
really, it is pretty fascinating. I mean, I do not think my
friends on the left would disagree that they are constantly
urging Mel Watt and urging Fannie and Freddie and FHA to make
access to credit more available by not using legislation. This
side of the aisle is pursuing it the other way.
And, I do not know. You know, we have heard this, it is
often quoted--it is too often quoted--we seem to finally do the
right thing after pursuing every other route. I just think we
are kind of spinning our wheels and trying to avoid the essence
of what needs to be done here, and that is housing finance
reform done that creates certainty for all of you, right? I
mean, this would sort of be over and done, and I hope that once
we get through playing around, if you will, with the issue,
dealing with the fringes, we can get to that, and with that, I
have no other comments, unless you want to make one, Mr.
Polychron.
Mr. Polychron. I would, if I could, Senator Corker.
Chairman Shelby. Go ahead.
Mr. Polychron. The only thing as a practitioner that I
would be caution--I would be fearful of tax reform is--and I
know in your bill----
Senator Corker. I did not say anything about tax reform.
[Laughter.]
Mr. Polychron. Well, house reform.
Senator Corker. Well, housing and tax reform are very
different.
Mr. Polychron. I understand.
Senator Corker. OK.
Mr. Polychron. But, at the same time, anything that would
impair a practitioner from a 30-year mortgage is a no-no. I
mean, it is just going to hurt our business.
Senator Corker. Well, I do not think anybody that I know of
on this panel has seriously proposed any legislation that would
do away with a 30-year mortgage.
Mr. Polychron. Yet.
Senator Corker. Has anybody up here done that?
Mr. Polychron. Not yet. No, sir.
Senator Corker. All right. Thanks a lot. I appreciate it.
[Laughter.]
Chairman Shelby. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman, and thank
you to the panelists for your testimony. I apologize. There was
a simultaneous hearing in the Armed Services Committee and I
had to be there.
Ms. Gordon, Dodd-Frank established numerous protections for
borrowers, particularly middle-class borrowers, and the changes
that are being proposed, if enacted, how would they affect sort
of the middle-class borrower, in your view?
Ms. Gordon. Well, a number of the changes we have talked
about today would make mortgages both more expensive and more
risky. I mean, just to go back to the Mortgage Choice Act for a
second, or the so-called Mortgage Choice Act, affiliates were a
big part of what was going on in the run-up to the crisis.
There were kickbacks and upselling rampant throughout the
system, which ends up making a mortgage more expensive than it
has to be, and it is very anti-competitive. It is always
interesting to me that that is not seen on all sides of this
room.
And, Dodd-Frank could have made the choice to simply ban
these affiliate arrangements. It did not do that. It just said,
if you want to be in that super safe category of QM mortgages,
you cannot go above this points and fees cap, which seems to me
to be a fairly minimal and very reasonable way of enabling
affiliate relationships to continue, even though they could
have gone another way.
Particularly this question of all portfolio loans being QM,
I think that is especially dangerous, just because with a QM
loan, there is nothing anybody can do about it if it goes bad,
and you do not want to kind of blow open this whole exception
where any kind of loan, no matter how dangerous or risky it is,
suddenly gets this special legal immunity. And, I think that is
especially important for folks who are not going to have the
money to hire a big fancy lawyer and for whom, really, every
dollar out of their budget matters. We want to get them as
fairly priced credit as we can.
Senator Reed. Thank you.
Let me just, to Mr. Polychron and Mr. Motley, ask a
question, because we are all looking at, on both sides, access
to credit for borrowers that are capable of sustaining the
credit. And, one of the factors that I am hearing in Rhode
Island, particularly for first-time young home buyers, is this
extraordinary student debt. So, when they walk in to see you,
they could have a job. They could be decent and hard working
and we could have all these QM regulations, but you are just
going to say, sorry, you owe $180,000. How much is student debt
really squeezing the mortgage market or denying people a
mortgage loan? Are you seeing it? Mr. Motley.
Mr. Motley. Yes, sir, we are, and statistics, I think, from
your organization, the REALTORS Association, show that the
percentage of first-time home buyers in today's purchase money
market is about 29 percent, whereas, typically, that is above
40 percent. So, we are certainly seeing a smaller piece of the
market being comprised of first-time home buyers. We are
required--if there is a repayment on that student debt, we have
got to include it.
Senator Reed. Right.
Mr. Motley. And, so, we are seeing it affect credit.
Senator Reed. And Mr. Polychron.
Mr. Polychron. And I would agree with that. In fact, it was
into the 50s. It was 56 percent first-time home buyers at one
time, and it has definitely affected it, as you would expect.
Senator Reed. And, I would presume--you know, this goes to
the access to credit. Legitimately, you cannot give loans to
these young people, typically young people, although nowadays
maybe not so young, because they just are carrying so much
debt.
So, one of the consequences in terms of your business, but
also in terms of the opportunity to own a home, is not related
directly to QM or anything else. It is this huge, staggering
student loan debt, which Senator Warren and Senator--I am
looking down on my colleagues on both sides are trying to deal
with--and I think that is important to note.
Again, I think we want to look carefully and listen to the
issues that are arising, but I think we want to tread very
carefully in terms of making changes that would disrupt the
market.
And, the other thing, too, is that, I hope, that over the
last few years, despite all of these factors, my impression is
that we are seeing fairly substantial profitability in the
industry. Is that the case, Mr. Woods, with community banks,
or----
Mr. Woods. I think that community banks are struggling. I
think they are doing better today than they were 4 years ago or
5, but I do not know that they are doing better. But, if you
look at a long historical line, that is true.
I wanted to point out two other things with your question
on the entry-level buyers and the credit.
Senator Reed. Yes, sir.
Mr. Woods. I want to point out to you how important that
is. The truth of the matter is, if the entry-level piece of the
market is not working, the rest of the market will not work,
because the entry-level buyer, while he may buy my new house,
he more likely will buy a used house----
Senator Reed. Right.
Mr. Woods.----and the owner of that used house will move up
to another and another. Many times, we have transactions that
have three and four transactions behind them. So, you cannot
overlook how important that segment of the market is.
I would like to point out one other thing that I think
exacerbates the situation, and at least in the crash, if you
want to call it that, was a big part of it. Back to community
banks. In many cases, the regulators came in and simply told
the community bank that they had to cut their portfolio of
construction loans, whether they are model homes or spec homes
or whatever. In many communities, that is the only loan that
bank is making that makes any money. Their community is growing
and they are trying to help that.
You go in and all of a sudden you tell the builder, you
have got to get rid of your specs. We will not renew the loan
on the specs. You just dumped a bunch of things on the market
and now our competition is going to drive down the prices of
all the other houses.
Second, when you take away the models, you have just put
that builder out of business. That may have been one of the
largest employment bases in that community, and the real
problem is for the banker, when he tries to force that
customer, he can only force his best customer out of the bank.
It is the only one that might stand a chance of going and
getting a loan at another bank. However, in this situation,
that rule was for everybody. So, immediately, that whole access
was cutoff, and I do not want that to go unnoticed.
And, what I have seen as a homebuilder, and if you look at
our testimony, the real problem is we cannot get loans today.
So, we cannot start that engine back up.
Senator Reed. My time has expired, but I want to thank you,
Mr. Woods, for making that very important point. It is not just
the fact that the young 25-year-old college graduate cannot get
the loan to buy the first house. It is that that first house is
stuck and they cannot move to the second bigger house and the
third house, et cetera.
Ironically, maybe the solution to this problem is not
messing around with these rules but is making sure that people
are not coming out of college with $180,000--or graduate school
with $180,000 worth of debt.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Heller.
Senator Heller. Mr. Chairman, thank you, and to you, the
Ranking Member, and also to our expert panel that we have with
us today. Thank you for taking time and being here with us.
I want to comment, if I may, just a little bit on what
Senator Corker said earlier, and emphasize that he has worked
very hard on trying to get some comprehensive reform in the
housing industry and it is something that I supported. I worked
with him, with both sides, Warner, Tester, others seeing the
necessity of this.
And, I think that the key to all this happening and
happening right is one thing that you said, Chris, and that is
to ensure that every American, especially young families, have
access to a 30-year mortgage. I think we all agreed on that.
But, we also agreed that there needs to be a secondary market
for a backstop. I think the committee, that group that was
working together, also recognized the importance of a secondary
market, making sure that these securities could be traded, but
with the rules and regulations necessary to assure that we do
not have 2008 all over again. No State was hurt harder in that
recession than the State of Nevada, and I think that you are
well aware of that.
I want to go back to something that the Chairman and the
Ranking Member discussed earlier in this, and I am just taking
a look at the CFPB's rural and urban designation map. The CFPB
has been trying, and, frankly, unsuccessfully, to define what
rural and what urban is. In fact, at one point, CFPB even said
that Yucca Mountain was in an urban area. Now, I will support
that designation if that keeps nuclear waste out of the State
of Nevada----
[Laughter.]
Senator Heller.----but I think they did reverse that
particular decision.
I am looking at this map and I am seeing communities like
Pahrump, Mesquite, Moapa Valley, Fallon, I mean, these are very
small, very small communities. Fernley, Yerington, Minden, you
can go on and on, Dayton, they are all listed.
Senator McConnell and I have introduced legislation similar
to what the House did. In fact, the House passed legislation
that would allow rural constituents to make an appeal and
present information to the CFPB and challenge their rural and
urban designation. That passed the House, I think with a 401 to
1 vote.
I would like to get from you, one, do you think there ought
to be an appeals process, and number two, starting with you,
Mr. Woods, whether or not you would support this legislation.
Mr. Woods. I would, and I do believe there should be a
process for appeal. There has to be. Mistakes are sometimes
made and they need to be pointed out and a way to correct them.
Senator Heller. Thank you.
Chris.
Mr. Polychron. And, I addressed this a little earlier in
that I agree with you 100 percent. We actually had an incident
in Arkansas that precipitated that. You know, the appeal does
not mean that they are going to hear eight million appeals. I
think the facts are going to speak for themselves, whether they
qualify or do not qualify, and in many cases a decision will be
able to be made quickly. So, I strongly believe in the appeal
process.
Senator Heller. I listed eight of them, so----
[Laughter.]
Senator Heller. Mr. Motley.
Mr. Motley. I agree with the appeals process, and I would
also urge you to emphasize that consumers will reap the most
benefit from this Act if the types of loans identified by CFPB
as being critical for meeting the credit needs in rural areas,
including loans that do not meet the 43 percent debt-to-income
ratio, are considered qualified mortgages if either they are
held in portfolio or sold to a creditor that holds them in
portfolio.
Senator Heller. Thank you.
Ms. Gordon, I would love to get your support.
Ms. Gordon. Well, so we have not taken a position on that
legislation. The whole issue of rural designation is, of
course, one of those things that is rife with complexity among
a variety of agencies administering a variety of programs that
go well beyond just housing-related programs.
I will note we have been very engaged with FHFA on their
Duty to Serve rulemaking, where strengthening credit to rural
communities is a really important part of what Congress asked
them to do there. They are, in the process of that rulemaking,
also looking at the question of rural designation, and I think
that is a really important place to intervene, as well.
Senator Heller. Thank you. Thank you.
I know I am a broken record here, but about 25 percent of
the homes--more than 25 percent of the homes still in Nevada
are underwater. We have lost probably half of our community
banks in the State, probably half of our credit unions, also,
so you can imagine--in fact, I would say that I think the
statistics show that about 8 percent of the homes sold in the
State are short sells.
Mr. Polychron, you are well aware of the Mortgage Debt
Relief Act and the attempts of that. I call it ghost income,
where the IRS is trying to tax individuals for income they have
never seen. What would be the impact to the housing industry if
the Mortgage Debt Relief Act were to expire at the end of the
year?
Mr. Polychron. It would be big, and I thank you for
sponsoring that. You know, the thing I have never understood
about that is that someone that has a home that he sells for a
profit, or she sells for a profit, is not taxed, yet the
individual that is underwater, that takes a loss on that home,
does get taxed. I mean, where is the fairness in that? I have
never understood that. But, it is there, and without it, those
people are going to be renters again. So, I support your bill.
Senator Heller. Mr. Polychron, thank you for your comment.
Mr. Chairman, my time is up, but again, I want to thank the
witnesses and for holding this hearing. Thank you, Mr.
Chairman.
Chairman Shelby. Thank you.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you all for your insights from your various professions and
organizations.
I do think that there is common cause on this Mortgage Debt
Relief Act and the concern about short sale streamlining that
was mentioned earlier.
One issue that has not really been explored too much here
today is the Preserving Access to Manufactured Housing Act. I
gather a version of it passed in the House, so we may have more
discussion here.
In Oregon, we had, long before the 2008 crisis, a real
challenge in our manufactured housing park industry, and the
way it worked is people would buy a home, a new home, to be
placed into a park. They would buy a park package. But, what
they did not realize is the rent could be raised at any time
and there was fairly much a shortage of supply in this park
world, plus a lot of the parks would only allow a new home to
be placed in their park.
And, so, after someone had moved in, then the park would
raise the rent or, alternatively, raise the utilities. And, for
every $100 of rent or utilities per month that were raised, it
diminished the value of the house by $20,000. You can imagine
how quickly your new house was worth very little.
So, therefore, the lenders who might lend for these
particular homes were very nervous about it, so they wanted to
do short-term loans. They wanted to do very high interest rate
loans, which made a lot of sense because there was enormous
risk embedded in this. People did not own the land and they did
not control the rent and they did not control utilities.
And, we looked at a number of ways to try to avoid this.
What we heard time and time again from owners in these parks
was, if I had understood how this works 6 months ago, I would
never have bought this house. And, so, we had different
proposals to--how could owners understand the deal they are
getting into, the fact that the rent is not controlled, the
utilities are not controlled, the fact that you cannot move
your house to another park, the fact that moving your house, if
you can find another park that would take it, would be
extraordinarily expensive, because it is really operated as a
predatory operation.
And, then when a person had to sell their home because the
rent had raised sufficiently, the only person who would buy it
would be the park owner. The park owner would then lower the
rents and sell the house to a new family.
So, this is the type of predatory operations that do not
serve low-income families well, and I can certainly understand
why lenders would be very reluctant to enter into that world,
or only at extraordinarily high terms, but then were charging
much more. As the expression goes, it is expensive to be poor.
You are paying far more in interest than an ordinary person.
Should we be addressing any of these factors, and how does
this affect this conversation about changing the terms of the
loan parameters for lending on manufactured housing that is
placed into a situation where you do not own the land or
control the utility or rent costs? Would anyone like to comment
on that?
Mr. Polychron. Do you think some of these could be an
exception, I mean, just maybe to Oregon? I am not singling out
Oregon, but, I mean, you know, I have not experienced that in
my own State, and I do not know if you all have experienced
that, either.
Mr. Woods. I do not have any experience in it, so I am
afraid I am not a very good----
Senator Merkley. OK. Very good.
Ms. Gordon. I mean, I will be happy to speak to this. I do
not think it is unique to Oregon that the folks in investor-
owned communities have problems with security of land tenure
and with rising costs and all sorts of other rules, like if you
want to sell your unit, you cannot put up a sign, or, you know,
there are all kinds of rules that are very difficult.
I think that is why you have seen a movement toward
resident-owned communities, where the decisions are made with
the best interest of the owner residents in mind, and that is--
it is particularly important now as FHFA writes this Duty to
Serve rule that they use their market power, because Fannie and
Freddie both do lend in this area and should be probably doing,
or finance in this area, and should be doing more of that. It
is important to use that power to make sure that there are
better rules of the road for investor-owned communities and for
chattel lending, as well, to make it much safer.
It is very predatory. There was a discussion earlier about
whether manufactured housing caused the 2008 financial crisis.
But, manufactured housing has its own crises. You know, there
was a statistic in a recent article that in the year 2000,
75,000 manufactured homes were repossessed and that is
something of an epidemic. We would not stand for that in site-
built housing.
So, this is especially not the time to be removing more
protections in that area. We should be thinking about what
additional protections we can provide, because this is an
important source of potentially affordable housing when it is
done fairly.
Senator Merkley. Yes. That is what I want to emphasize--is
this really is an option for so many folks who are looking for
a less-expensive house, but when that dream of owning your
house turns into a nightmare, and particularly many seniors
located into this situation and then discover, well, your rent
is going to go up $200 this year. Well, there went $40,000 of
equity, now you cannot sell the house, et cetera, it becomes--
then it does become a nightmare that really does not serve low-
income Americans well. So, I just wanted to draw attention to
that as we consider how we might modify the financial
strategies related to this.
Mr. Motley. Senator, we at the MBA think it is a very
important State issue and we would like to review it and review
your concerns earlier.
Senator Merkley. Thank you, and I look forward to working
with you all. I think we all want the mortgages to be
affordable but not predatory, so they become a form of wealth
construction or addition in America, really part of the
American dream, but not predatory wealth-stripping strategy.
Thank you.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Mr. Polychron, one of my experiences as a small business
owner for a couple decades, it seems, maybe even a little
longer in my lifetime, it appears the time with my gray hair
that I had to cutoff----
[Laughter.]
Senator Scott. It is just not that funny, though. Anyway--
--
[Laughter.]
Senator Scott.----just a quick question for you, sir. As an
insurance guy working in business, one of the things that I
experienced with my couple thousand customers is most wanted
customization. They wanted the ability to have a serious
conversation about their set of needs and then to have a
product designed for it. It appears to me that we are really
heading in the exact opposite direction, where one size fits
all. A case in point, the debt-to-income ratios of the 43
percent rule.
From my perspective, it just appears that, while well
intended, the fact of the matter is that perhaps we are going
to carve out a major segment of the population that would be
creditworthy if they were able to consider more factors. The
classic example from my life was when I started my business, I
had to have a relationship loan from my lender, who took a
chance. It appears to me, while that was a business loan
experience, that allowed me or afforded me the opportunity to
get a mortgage.
The fact is that we are, through this trying to synchronize
and harmonize and standardize everything, we are going to
eliminate those very opportunities for worthy individuals who
may not fit into the cookie cutter box that we think we are
building on their behalf to actually have access to loans. Has
that been your experience in the field?
Mr. Polychron. Well, what you did not know about me is that
I was a bank president in another life, and, you know, a lot--I
do not think this has been discussed enough today. We had Mr.
Cordray at a meeting with NAR earlier last year and one of the
things that I kept hearing was underwriting, and I will tell
you that when I was a banker, Underwriting 101 was basically
the ability to repay. And, I do not think what we are doing
enough of is good underwriting, and I still think that was the
primary cause of the bubble. It was not necessarily some of the
rules and regulations that have come forward, but truly the
fact that, you are right, we need more opportunity for the
millennials, et cetera, who are the primary borrowers, or
buyers of homes right now. We have to open that up, and I think
good underwriting would take care of a lot of it.
Senator Scott. Mr. Motley, I see you shaking your head.
Mr. Motley. Senator Scott, I would like to just follow up
on that, and I gave an example earlier about the restrictive
one-size-fits-all nature of the 43 percent back-end ratio. It
does not fit for everybody and we should not rely on it as the
only source of underwriting. Instead, we need to be able to
make holistic changes to the QM rule that will allow us to
exercise prudent judgment in making good, sound underwriting
decisions. That does not mean that we go back to the days of
stated income, stated asset type loans at all. It just means
that we have a little bit more flexibility to evaluate the very
situation that you discussed earlier.
Senator Scott. It appears our rush toward the one-size-
fits-all for a State like South Carolina, which so much of my
State being rural areas, where manufactured homes in the rural
areas, or throughout, frankly, the State of South Carolina are
consistent, and yet many of the rules that we are seeing
promulgated would restrict access to capital. And, when you
look at the challenge of growing wealth in this Nation, there
is a great disparity, primarily because of the value of the
home and the value of that home ends up on a calculation on
your net worth. So, from my perspective, the rural communities
are being impacted negatively by the direction that we are
heading.
One final question before we get to the other witnesses. It
seems to me that the impact on minorities and their ability to
be a part of the qualified mortgage conversation is very
strong. It is as if we prevent minorities from getting
mortgages because of Dodd-Frank. Then the Government comes in
to bankers and says, why are you not doing more lending? And
then you get penalized for that, and then the Government
creates another set of rules forcing you to do something that
seems to be in great contradiction to the very Dodd-Frank
standards that we are setting.
Mr. Woods.
Mr. Woods. I think your comment is right on, and I think
that is one of the cases where we look at the fact that the
rules or the regulations are not in--in misalignment, if you
will, the fact that there are a lot of unintended consequences.
The rule itself was for a good reason----
Senator Scott. Yes.
Mr. Woods.----but nobody looked beyond that to start to
say, yes, but it will not work in these kind of communities, or
it will not work under these kinds of loans.
You know, back to the community banker, and I have a great
respect for them, one of the things that the community banker
has as an advantage, if he is a true community banker--be
careful, there are a lot of people calling themselves community
bankers that are not, OK--the true community banker knows his
community. He is involved in the school board and the Chamber
and he has a reason to have his bank be successful and the
community be successful, because it is going to make his bank
more successful.
And there is no--and there is nothing in all of these that
allows for that insight. You cannot put that insight on a loan
form, where he knows the individual.
Senator Scott. Exactly.
Mr. Woods. He made that relationship loan.
Senator Scott. Hence the relationship lending experience
that I have had.
I know my time is up, Mr. Chairman.
Chairman Shelby. Thank you, Senator Scott. That is a good
point.
Senator Donnelly, you have been very, very patient.
Senator Donnelly. Thank you, Mr. Chairman. In this seat,
you have to be.
[Laughter.]
Chairman Shelby. I have been in that seat.
[Laughter.]
Senator Donnelly. Before he leaves, I want to mention, Mr.
Scott has real world experience working in small business and
trying to make markets go.
I used to serve, Mr. Woods, on a school board, which can
occasionally be a challenging endeavor, as they say. But, for
the State I am from, Indiana, manufactured housing is really
important. It is important in a number of ways, for the people
who want to live there, and then we have over the years
traditionally had a great history of being one of the producers
of the product. I have toured the plants. I have been with the
workers, spent time with them. And, the goal is, how do we
provide affordable housing to families who, you know, they are
not going to be building the McMansions on the Potomac River.
These are our families who work hard every day and have the
same American dreams, though, that everybody else has. And, so,
access to credit in a responsible way is obviously a key.
I have been a sponsor of a bill, Preserving Access to
Manufactured Housing, and so the question is, how do we do this
in the most responsible way, that nobody wants to open up a can
of worms again. I voted for Dodd-Frank, but I voted for it to
provide safety and stability, not to make it impossible for
certain markets to have loans.
You know, what we have seen, or what I have seen and what I
have heard from folks, they are small--you know, the companies
that I deal with in my home State are usually small, family-
owned enterprises that are building these homes. There has been
a dry-up of small dollar loans on these kind of things.
And, so, as we look at this, Mr. Polychron, I want to ask
you, could you tell us why it is important to ensure consumers
have more affordable access to manufactured housing, if you
would?
Mr. Polychron. And I would even suggest a way maybe we get
there, if that is OK.
Senator Donnelly. That would be terrific. We have no magic
answers here. We are looking for----
Mr. Polychron. Arkansas, too, is a lot like Indiana, and a
large percentage, especially in our rural areas, depend on
manufactured housing. I think Ms. Gordon mentioned earlier, we
had a symposium on credit access recently at the National
Association of REALTORS, and one of the subjects we have
touched on a little bit today were different credit scoring
systems, such as FICO 09, VantageScore, which take into account
rents paid, utilities paid, and can actually raise a person's
credit score to where they could qualify for these type loans.
I think it is an area we certainly need to research more and
explore.
Senator Donnelly. Because the thing we do not want to do is
we do not want to put folks in a box with a payment that cannot
be made. That does not help----
Mr. Polychron. Good underwriting, again.
Senator Donnelly. It does not help any families. It does
not help the home companies. So, what we are trying to do is
thread the needle of, in effect, how do we do this. And, I am
not willing to say, and I know the Chairman is not, that small,
you know, relatively small compared to some others, you know,
loans of $30,000, $40,000, that they should not be made,
because those people have the same hopes and dreams, and, then,
so, how do we do this in an affordable way.
Mr. Woods, do you believe Congress can have lending
restrictions that make sense on this while still protecting
consumers and the economy from the dangerous practices we ran
into?
Mr. Woods. I think it is possible. I think--again, I do not
know that much about that piece of it, but I can----
Senator Donnelly. Well----
Mr. Woods.----some of the comments before. The good rules
can be made. They need to be made with common sense and they
need a lot of input and we need to look at all the aspects.
Senator Donnelly. Mr. Polychron, to that same question. Do
you feel this needle can be threaded so that we have
regulations that make sense, that provide appropriate
restrictions and also make a profit for the people who have to
write the papers?
Mr. Polychron. My opening comments were about balance and
finding that in the middle, and I think, with enough work, we
can reach that balance. Yes, sir, I do.
Mr. Motley. Senator, we agree. MBA would welcome the
opportunity to figure out a way to thread that needle.
Senator Donnelly. OK. And, Ms. Gordon, I know there are
certain parts of the bill that you do not support, and I
understand that from your written testimony. The FHFA, the Duty
to Serve rule required by the Housing and Economic Recovery Act
of 2008, can you talk a little bit about how the Duty to Serve
will enhance accessibility and affordability of manufactured
housing.
Ms. Gordon. Well, what I hope it will do is make sure that
both Fannie and Freddie have an obligation to ramp up their
work in this area so that there are more ways to access safe
and affordable financing for manufactured homes and for
community owners that run responsible communities.
I think what is important and what FHFA can do is they can
sort of set a best practices standard, if you will, to ensure
that where they are putting their backstop, their guarantee, is
on the type of lending that has the features that people need
to be successful, you know, security of land tenure, adequate
notice before rent increases, the ability to sell their unit if
they need to move. You know, there is a whole variety, and I
would be happy to work with your office on the list that we
have provided to FHFA on this.
You know, if I could wave my magic consumer protection
wand, of course, I would make most of these loans titled as
real estate. But, for some reason, not everybody seems to be
planning to listen to me on that, and so I think it is
extremely important that we not just completely write chattel
loans out of this rule, but that we use the market power that
Fannie and Freddie have to establish this safer standard of
those loans so that people in this situation are able to access
responsible credit.
And the reason--the dispute I have with some of the
provisions of the proposed legislation really just has to do
with not wanting to strip consumer protections from people who
may have very, very high rate loans, because those can be
dangerous and can be abusive and can put families in a
situation that they do not expect. But, I would be very happy
to work with you and your other colleagues on ways that we can
open up that credit in a responsible way.
Senator Donnelly. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
When I first purchased my home in Fort Pierre, South
Dakota, it was just after I had left working as Governor for 8
years. We were told that in the area that I purchased my home,
there were no comps. The bank would have to hold my loan on
their books. As a result, I had to pay a higher interest rate.
Now, I suspect it might also have not helped that I was now
seen as not having a stable job history, having just left one
job and picking up another job.
[Laughter.]
Senator Rounds. I have heard that same story, though, from
other South Dakotans. If you live in a rural area and you do
not have comps, odds are that if you can get a mortgage, you
will face higher mortgage interest rates.
Another South Dakotan told me that he is also facing a
similar situation. Because his loan cannot be sold into the
secondary market, he is also paying a 1 to 2 percent interest
rate premium for a loan with a 6-year term and a balloon
payment. This is essentially a tax on living in rural America
and another example of the red tape that is making it harder
for people to own homes.
Another example--and I thank my colleague, Senator Heller,
for his leadership on this particular issue--residents in rural
communities like South Dakota that I have mentioned often use
balloon payments to finance home purchases. CFPB says this type
of loan is abusive, but they have made an exception for parts
of the country that the CFPB defines as rural in nature.
The CFPB took two attempts, but even after their second
try, the CFPB still does not define towns like Lead, South
Dakota, population 3,109, or Sturgis, South Dakota, population
6,683--other than during the Sturgis Motorcycle Rally when it
goes to 600,000 for a period of 2 weeks--they consider both of
those as not being rural. That is thousands of people who will
have severe difficulties getting a loan.
This rule makes no sense and the practical result is that
if your bank has to hold a mortgage on its books and you need a
balloon payment, you will not be able to get a mortgage in
towns like Lead or in Sturgis.
In South Dakota, the community bankers rely on
relationships and knowing their customers. Another effect of
these new rules is that it does not matter how well you know
your customer.
Another example is a constituent was looking to buy a home
and went to a community bank where they had done business in
the past. His father had passed away and he was due to inherit
several thousand acres without a mortgage. Because at the
moment he applied for the loan this individual's debt-to-equity
ratio was not acceptable, he could not get a loan and that
community bank lost his business and he had to go looking
elsewhere.
We need to take a look at all of these rules, all of these
regulations, and, well, and ask the question, do they make
common sense?
I want to thank all of our witnesses here today. I want to
ask them, aside from the fact of if you really had the
opportunity to start out by eliminating the CFPB and starting
over again, which rules do you think are the most egregious and
which rules do you think constrain access to mortgage credit
the most?
Mr. Motley. I would be happy to start with that. I think
that the QM rules are too prescriptive. They incorporate a one-
size-fits-all debt-to-income ratio. They restrict points and
fees to too great an extent and lenders need to have more
flexibility to accommodate the kind of loans that you are
talking about.
Senator Rounds. Yes.
Ms. Gordon. Well, this may not be the answer you are
looking for, but I actually think that by turning the qualified
mortgage definition, which was never meant to be the box that
everybody had to fit in--when CFPB, at the mortgage industry's
request, turned that into a safe harbor, it had the unintended
consequence of having all of these loans feel like they had to
fit in that box. The purpose of the Ability to Repay rule was
to provide exactly the kind of flexibility that you are talking
about, to know your customer, and as long as you are
documenting that what the customer, in fact, is saying to you
is true, that you would be able to make loans that did not at
all look like that QM definition.
And, I know nobody here is asking to roll back that safe
harbor. But, the answer is not to give everything a safe
harbor, because then you will go back to irresponsible lending,
and that might not happen in your community banks, but it will
happen in other institutions that do not have those same
community ties as yours do. So, that is really important.
I will add, since I did not get an opportunity to say this
before, I completely agree that just the 43 percent bright line
is a problem and that compensating factors are really
important. And, I will note again, when CFPB was implementing--
Congress did not put that 43 percent in the Dodd-Frank statute.
That was something that CFPB did when it was implementing the
rule at the request of industry groups that went in and said,
bright lines. We need bright lines. We cannot do this unless we
have bright lines. And then they got a bunch of bright lines--
--
Senator Rounds. For fear----
Ms. Gordon.----and now folks are saying, oh, well, you
know----
Senator Rounds. For fear of litigation.
Ms. Gordon. Well, for fear of litigation, which, by the
way, I would be interested if anybody can show me any kind of
onslaught of litigation under Dodd-Frank on the consumer side--
--
Senator Rounds. If I could----
Ms. Gordon.----because I have not seen that.
Senator Rounds.----and I know my time has expired, but,
sir, would you care to----
Mr. Motley. I would just point out that the safe harbor
allows more security and less potential for litigation, not a
rebuttal of presumption. Lenders are subjected to a defense of
foreclosure, private right of action, punitive actions. It is--
a safe harbor loan is far safer and it is marketable. A
rebuttable presumption--there is no market for a rebuttable
presumption loan in today's world. So, there is a reason that
we want to have safe harbor protections, because it is a more
marketable loan. It allows banks to sell that loan into the
secondary market, which they cannot do right now.
Chairman Shelby. Go ahead, Senator.
Senator Rounds. Thank you. I did not know whether anyone
else wanted to comment on that or not, but I am over my time,
but with your generous accommodation----
Chairman Shelby. Go ahead.
Mr. Polychron. The only thing I would comment on, A, about
your appraisal process earlier, I concur with you 100 percent.
Appraisals still cause a huge problem in our State and we would
like to see that process strengthened.
I think I would still go back to credit scores. The average
credit score, you know, in 2013 was over 750. Last year, it was
over 740. I still think going back to using a different method
of scoring, credit scores, could certainly help more than
almost any other thing.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Rounds.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
A lot has been covered, obviously, and I have been
listening to this discussion of rural, and we have been able to
work this through with Consumer Finance, and so we now have our
definition that works, so give them a call. Maybe they will, a
Governor, maybe they will work it out with you.
One of the things that I want to point out, because we have
been talking a lot about manufactured housing, and we are
talking about real estate versus chattel lending. The
difference that is hugely important to the consumer is the
nonrecourse nature of a mortgage versus chattel lending. And,
so, you could, in fact, if you overburden or put too much debt
on a borrower who is financing a manufactured home, you could
be indenturing them for a long time. They cannot simply walk
away from that debt. In most States, they cannot. And, so, we
just need to be really careful as we pursue the manufactured
housing, understanding that it does not have the same kind of
characterization that mortgage lending does. So, I just want to
kind of put that down.
I am concerned about creditworthiness, and manufactured
housing plays into this, as you have said, Chris, about that--
or, I think it might have been you, Tom--that we begin with
that lower level and then work up. We are looking at twin
homes, condos, you know, apartment buildings, small first-time
homeowner kind of operations that then move up. That is true
for manufactured housing. Some of my folks live there for 50
years, but many transition out to a regular mortgage and a
regular home.
Going back to credit scoring, one of the things that is
happening now is in the world of big data looking at algorithms
and looking at not whether you paid your bill or whether you
have a bank account or, you know, what did you buy yesterday?
Where do you shop? And, so, I want you to comment a little bit
about this trend to try and analyze creditworthiness looking at
big data and algorithms and different kinds of inputs and
whether you have seen any movement in that direction or if this
is a 10-year-out problem.
And, Mr. Woods, maybe start with you.
Mr. Woods. I think it may be the 10-year-out problem. I am
intrigued by that kind of data. I think it plays into, as I
say, the community banker. You know, those relationship loans
that were first made in many cases were made because that
banker knows the granddad and the dad and the uncles and they
are a hard-working family and they pay their bills and it is
just built into their nature. But, that young person that walks
in there certainly does not have the credit and all the other
things that he would need to have a 750 credit score.
One of the other things I thought interesting that we
passed over, they would allow loans at 660, but nobody is
making them, you know. They are making them at 750 and above. I
defend the fact that I came from some pretty humble beginnings.
I would fight the fact that there are a lot of people in those
lower scores that pay their bills. They pay them on time----
Senator Heitkamp. Yes.
Mr. Woods.----and that is their genetic----
Senator Heitkamp. And an independent community banker who
has been in that community, who has a relationship that goes
way back, knows which family. I say this all the time in North
Dakota. You could have a banker, a client or customer comes in
and you look at the financial statement. It checks all the
boxes. There is no way you are going to give them a loan. The
guy who owns the body shop down the street who you know has
always paid his bills, because you know his community
reputation, you want to give him the loan and you do not want
to be dinged for it in an examination, or you want to be able
to do what you have always done in your communities, and so I
do not think anyone is more sympathetic, coming from a town of
90 people, than I am about what that means for relationship
banking.
But, I am concerned about creditworthiness. We hear this
over and over again, and it is not just student debt. It is
depressed wages. It is the whole nine yards that challenged
millennials and young people.
And, then, it is a change in consumptive behaviors. Are
they really looking for those loans? Are they looking to the
shared economy? And, how do we reach out to those folks,
because we know that is also a way that they can build equity,
that they can build a future. And, this is a big part of
solving our retirement problem, as well.
And, so, we--I am going to associate myself with Senator
Corker. I was on that effort last time and urge the Committee
Chairman to give us another go at the great work that we did
last Congress. I think it will help solve and analyze a lot of
these problems.
And, so, I want to thank you all. I am going to submit some
questions for the record, with the Chairman's appreciation and
approval, and thank you for the work that you do in your
communities and thank you for the work that you do on behalf of
consumers.
Chairman Shelby. Senator Merkley, do you have any other
questions?
Senator Merkley. Mr. Chair, I think the points have been
quite well explored and it is very important to American
families, this challenge. Home ownership is just an incredibly
important part of families moving into the middle class, and
getting it right in a fashion which empowers families and does
not prey on families is what this conversation is all about,
and thank you for bringing your insights to bear.
Chairman Shelby. I want to, on behalf of the Committee, I
want to thank all of you. We have had, I think, a very good
hearing, a lot of participation. We appreciate your input and
your willingness to come to share, and let us try to solve some
of these problems that you pointed out here.
The Committee is adjourned.
[Whereupon, at 12:07 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF TOM WOODS
President, Woods Custom Homes
on behalf of the National Association of Home Builders
April 16, 2015
Introduction
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, I am pleased to appear before you today on behalf of the
National Association of Home Builders (NAHB) to share our views on
regulatory burdens to obtaining mortgage credit. My name is Tom Woods,
and I am a home builder from Blue Springs, Missouri and NAHB's 2015
Chairman of the Board. We appreciate the invitation to appear before
the Committee on this important issue.
NAHB represents over 140,000 members who are involved in building
single family and multifamily housing, remodeling, and other aspects of
residential and light commercial construction. Each year, NAHB's
builder members construct approximately 80 percent of all new housing
in America.
The ability of the home building industry to meet the demand for
housing, including addressing affordable housing needs, and contribute
significantly to the Nation's economic growth is dependent on an
efficiently operating housing finance system that provides adequate and
reliable credit to home buyers and home builders at reasonable interest
rates through all business conditions. At present, home buyers and
builders continue to confront challenging credit conditions weighed
down by a zealous regulatory response to the Great Recession. In
addition, the ongoing uncertainty over the future structure of the
housing finance system has intensified these challenges. This statement
will examine several cases where Government regulation and other
developments have impeded the ability of the housing sector to recover
from the historically steep downturn and meet the credit needs of home
buyers and home builders.
The housing finance system is governed by statutes and regulation
overseen by a myriad of Federal agencies. In response to the recent
financial crisis, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank) mandated significant mortgage
finance reforms and created the Consumer Financial Protection Bureau
(CFPB) to supervise and monitor many of the new requirements.
Additionally, the Federal Housing Finance Agency (FHFA), the Federal
Housing Administration (FHA) and the Federal banking regulators all
have taken steps to ensure the U.S. economy will never again be as
vulnerable to ``risky'' mortgage lending. The collective force of the
actions taken by these agencies, along with the lingering doubts and
uncertainty of market participants, has resulted in an undue
restriction on the availability of mortgage credit to many creditworthy
borrowers.
While there have been some actions taken by the individual agencies
to mitigate the overly tight lending conditions, the housing sector is
still struggling to return to normal. NAHB believes there are
additional steps that can be taken to eliminate some of the barriers to
credit availability and support a stronger, more robust recovery of the
housing and mortgage markets while still employing balanced reforms to
protect the housing market from another crisis.
Factors Constraining Availability of Mortgage Credit
While mortgage rates remain near historically low levels, access to
mortgage credit is limited to home buyers and homeowners with pristine
credit histories who can qualify for Government-backed programs.
Presently, FHA, the Department of Veteran's Affairs (VA), Fannie Mae
and Freddie Mac (the Enterprises) account for an overwhelming majority
of mortgage originations.
Today's tight lending conditions are keeping more buyers on the
sidelines even as the housing market strengthens. As discussed below,
significant new regulations, lender credit overlays, high fees and
other factors continue to impact the availability of mortgage credit.
At a time when housing affordability has been at record favorable
levels, more buyers should be entering the housing market. However,
many creditworthy borrowers are not able to take advantage of these
opportunities. As more new rules are implemented, consideration should
be given to how the cumulative impact of this imposing regulatory
environment will adversely affect the availability of mortgage credit
and housing market and economic activity.
Regulatory Constraints
The regulatory environment for mortgage lending is undergoing
significant changes as regulators implement new rules mandated by Dodd-
Frank. Uncertainty about the eventual impact of these regulations and
the cost of compliance are key factors in tightened access to mortgage
credit.
Total loan production costs continue to escalate and NAHB is
concerned about the effect of the additional regulatory cost to
originate loans in today's environment, particularly for smaller banks
and independent mortgage bankers. Many of these smaller originators
serve rural communities, first-time home buyers and other underserved
market segments. NAHB members are hearing that many smaller banks and
independent mortgage bankers are choosing to depart the residential
mortgage business, and in some cases, closing or merging their banks.
This exodus will cause less competition and provide consumers with
fewer choices.
Ability to Repay Rule
The implementation of the final Ability to Repay (ATR) standard by
CFPB, which took effect on January 10, 2014, defined new lender
underwriting requirements for mortgage loans and liabilities. However,
the rule has created new hurdles for borrowers, especially low- to
moderate-income buyers and self employed borrowers that are under
increased scrutiny due to the debt-to-income calculation and more
stringent documentation requirements.
The ATR rule establishes standards for complying with the ability-
to-repay requirement by defining a ``qualified mortgage'' (QM). The QM
standard is intended to balance protecting consumers from unduly risky
mortgages and providing lenders more certainty about potential
liability. Lending outside the QM box still is allowed, and in fact,
the CFPB is encouraging lenders to make non-QM loans. Lenders, however,
must balance being exposed to increased litigation risk with expanding
their non-QM product offerings. To the extent that lenders will remain
cautious during the transition and beyond, creditworthy borrowers may
not have access to affordable mortgage credit, or may be left out of
the credit box all together. According to a Fannie Mae survey released
in August 2014, 80 percent of lenders said they do not plan to pursue
non-QM loans or prefer to wait and see.
As required by Dodd-Frank, FHA and VA released separate QM
definitions for loans insured or guaranteed by these agencies. As the
HUD and VA QM definitions allow for lenders to follow current FHA and
VA underwriting criteria, this has helped keep credit flowing.
The final ATR rule included a 7-year window in which loans that are
eligible for purchase by Fannie Mae and Freddie Mac are considered
qualified mortgages. This provision will expire in 2021, or when the
conservatorships of the Enterprises end. This provision of the ATR rule
also has aided the continued flow of conventional mortgage credit
through this transition period. With the Enterprises still purchasing a
large percentage of mortgage originations, the market may not
experience the full effect of the ATR rule until 2021 or when the
conservatorships of the Enterprises has ended.
Since issuing the final ATR rule, the CFPB has made several
amendments to the rule to address the practical implementation of the
rule. Most recently, CFPB proposed beneficial amendments relating to
small creditors and rural underserved areas.
An area that continues to be of concern to NAHB is how the final
ATR rule requires lenders to calculate the 3 percent cap on points and
fees. The final ATR rule includes closing charges paid to affiliated
settlement service providers in the 3 percent cap on points and fees,
while the points and fees charged by unaffiliated companies are not
included. NAHB strongly objects to this disparity and has urged CFPB to
exclude points and fees paid to affiliated firms when calculating the
limit. Many home builders and lenders have established settlement
service affiliates such as mortgage and title companies to facilitate
home purchases for consumers. Requiring affiliate fees and points to be
included in the 3 percent cap creates disincentives to establish these
beneficial relationships. Affiliated and non-affiliated settlement
services should be treated equally. NAHB adamantly believes that fees
and points from affiliated firms should be excluded in the 3 percent
cap, thereby giving equal treatment to affiliated and non-affiliated
settlement service providers. We strongly urge the CFPB to implement
such an exclusion.
H.R. 685, the Mortgage Choice Act, introduced in February, and
passed by the House on April, 14, 2015, would amend the Truth-in-
Lending regulation to clarify the final QM rule's definition of points
and fees. The specific adjustments provided in the bill would clarify
that title insurance charges by a title insurance provider affiliated
with the lender and a homeowner's escrowed insurance premiums do not
count toward the 3 percent cap on the points and fees limit for a QM
loan. The bill is intended to help more sound loans pass the QM test
and ensure that consumers can choose the lender and title provider best
suited to their needs.
Representative Andy Barr (R-KY) recently introduced H.R. 1210, the
Portfolio Lending and Mortgage Access Act. The legislation is intended
to ease the ATR requirements for community lenders who may be fearful
to originate non-QM loans and, therefore, may limit access to credit
for home buyers in their communities they believe to be creditworthy.
This bill would amend the Truth-in-Lending regulation to provide that a
loan satisfies the ATR requirement if the loan remains in the
originating lender's portfolio. Banking regulators would be required to
treat such a loan as a QM, if the lender has, since the loan's
origination, held it on its balance sheet and all prepayment penalties
with respect to the loan comply with specified limitations.
NAHB believes the concepts behind each of these bills have merit
and should be passed by both the House and Senate as methods to ease
the components of the ATR rule with the most potential to restrict
mortgage credit.
Qualified Residential Mortgages
The implementation of the Credit Risk Retention rule, also mandated
by Dodd-Frank, was finalized in 2014 and aligns the definition of a
qualified residential mortgage (QRM) with the QM. Though the rule is
not effective until December 2015, NAHB believes aligning the QRM with
the QM has many benefits. Establishing one streamlined regulation,
instead of having two separate sets of underwriting criteria, will
alleviate confusion in the marketplace and will help provide clarity
and transparency for home buyers, lenders, investors and other housing
market participants. Aligning QRM with QM levels the playing field,
promotes liquidity in the mortgage market and allows access to credit
for a diverse range of home buyers, particularly first-time and low- to
moderate-income home buyers. Additionally, the underwriting criteria
and product limitations contained in the QM will promote more prudent
lending and will provide investors with an assurance that the loans are
sustainable.
Integrated Mortgage Disclosures under the Real Estate Settlement
Procedures Act and the Truth in Lending Act Proposal--``Know
before you owe''
In December 2013, the CFPB finalized new mortgage disclosure forms
that are intended to help consumers make informed decisions when
shopping for a mortgage and avoid costly surprises at the closing
table. The new forms will become effective August 1, 2015. The rule
applies to most closed-end mortgages but does not apply to home-equity
lines of credit, reverse mortgages or mortgages not attached to real
property. The rule also does not apply to loans made by a creditor who
makes five or fewer mortgages in a year.
For over 30 years, Federal law has required lenders to provide
consumers with a Good Faith Estimate of closing costs and a Truth-in-
Lending disclosure of the loan's annual percentage rate, total finance
charges and total loan payments within 3 days of applying for a
mortgage loan. The law also required the two different forms to be re-
disclosed shortly before closing on the loan. The information on these
forms was determined to be overlapping and the language inconsistent.
As directed by Dodd-Frank, the CFPB updated and integrated the forms
based on extensive consumer and industry research.
The new combined forms are called the ``Loan Estimate'' which is
provided at application and the ``Closing Disclosure'' which must be
provided at least three business days before the consumer closes on the
loan. Any change to the information provided on the form that is made
during that 3-day period will restart the 3-day waiting period (with
limited exceptions). NAHB and other housing industry stakeholders are
concerned with the practical outcome of transitioning to the new forms,
particularly that there is no opportunity under this regulation to
comply early, which means that industry will not be able to test
systems, in real-time, in real circumstances, until after August 1.
NAHB joined with other industry groups and recently wrote CFPB Director
Cordray to encourage the agency to announce and implement a
``restrained enforcement and liability'' or ``grace period'' for those
seeking to comply in good faith with the provision after August 1
through the end of 2015.
NAHB members depend on the certainty of a smooth closing process
and NAHB is concerned that any confusion related to the new rules,
compounded by the fear of aggressive enforcement activities, will
negatively impact the ability to close on a home in a timely manner.
Lender Credit Overlays and Buy Back Risk
Lender overlays in the mortgage credit process have been a major
factor in the greater difficulty potential home buyers are having in
obtaining financing as lenders impose credit underwriting standards
that are more restrictive than those required by FHA, VA, Fannie Mae
and Freddie Mac. These credit overlays are employed due to heightened
lender concerns over forced loan buy-backs on mortgages sold to Fannie
Mae and Freddie Mac and/or greater required indemnifications on FHA-
insured and VA-guaranteed loans.
When lenders sell loans to entities, such as Fannie Mae and Freddie
Mac, and through the FHA/VA/Ginnie Mae securities process, they are
required to make assurances that they have performed the appropriate
level of due diligence on the loan application, and the lenders agree
to buy back a loan if it is discovered that they were at fault in their
underwriting process. These representations and warranties (``reps and
warrants'') have been a standard practice in mortgage lending.
In the aftermath of the collapse in the housing market, the
underwriting of delinquent loans was alleged not to have met the
established criteria of FHA, the Enterprises, and other secondary
market entities. As a result, lenders have faced a protracted struggle
with these agencies about the buy back of loans that have been deemed
ineligible for Enterprise guarantees or Government insurance based on
the finding of faulty due diligence practices. Lenders complain that
the criteria triggering buy-back demands by Fannie Mae and Freddie Mac
and insurance claims rejections by FHA and VA are unclear and
inconsistent. The resulting uncertainty has caused lenders to employ
underwriting standards that are more restrictive than those required by
FHA, VA, Fannie Mae and Freddie Mac. These lender ``overlays'' have
closed the credit window to many aspiring home buyers who actually meet
the loan qualification requirements established for these programs.
The recent sharp increase in borrower credit scores since 2001 is
an indication of how lenders have responded to concerns about how the
Federal agencies will implement repurchases and indemnifications. A
recent report from the Urban Institute (UI)\1\ found that credit has
become much less available to borrowers with lower credit scores. From
2001 to 2013, the share of new purchase borrowers with FICO credit
scores below 660 declined from 28 percent to 11 percent; those with
FICO scores between 660 and 720 remained at 28 percent of the total.
Meanwhile the share of borrowers with FICOs above 720 increased from 44
percent to 62 percent of the total. The UI report estimates that as
many as 1.25 million fewer mortgage purchases were made in 2013 than
would have been made had credit availability been the same as in 2001.
For 2009-13, UI estimates that 4 million more loans would have been
made based on 2001 credit standards.
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\1\ The Impact of Tight Credit Standards on 2009-13 Lending. http:/
/www.urban.org/research/publication/impact-tight-credit-standards-2009-
13-lending.
---------------------------------------------------------------------------
The weighted average credit score for loans purchased by Fannie Mae
and Freddie Mac in 2014 was 744, while in fact, both Fannie Mae and
Freddie Mac have a minimum credit score requirement of 620 for most
purchased mortgage loans.
FHA will insure mortgage loans with credit scores as low as 500
under certain scenarios. However, according to the 2013 State of the
Nation's Housing Report,\2\ in 2007, borrowers with credit scores below
620 accounted for 45 percent of FHA loans. By the end of 2012, that
share was under 5 percent.
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\2\ The State of the Nation's Housing 2013. www.jchs.harvard.edu/
sites/jchs.harvard.edu/files/son2013.pdf.
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Similar trends are evidenced in the share of first-time home buyers
which accounted for only 28 percent of home sales in February 2015,
well below the historical average of about 40 percent. In the new home
market, NAHB survey data indicate the current share of first-time
buyers is only 16 percent compared to an historic average of 30
percent.
In 2014, the Enterprises' regulator, FHFA, and FHA announced
efforts to clarify and, in some cases, ease, the reps and warrants and
identification of loan defects that will trigger enforcement actions
against lenders. NAHB anticipates positive results from these
modifications and is hopeful to see lenders originating to the
underwriting specifications of the agencies rather than implementing
their own, more strict, standards.
Alternative Credit Scores
It is possible that the use of alternative credit scores could
offer lending opportunities to borrowers currently lacking access to
mortgage credit due to a low or inaccurate FICO credit score. Fannie
Mae and Freddie Mac have been directed by FHFA to assess the
feasibility of using alternative credit score models in their automated
loan-decision models. The Enterprises are planning to study the costs
and benefits associated with VantageScore 3.0 and FICO Score 9.
To generate a traditional credit score, a borrower must have one
trade line that is at least 6 months old, with a balance on it. Fair
Isaac Credit Services, Inc. estimates that 50 million U.S. consumers
have credit histories that do not meet that requirement. These
potential borrowers are disproportionately Hispanic (24 percent),
African American (14.6 percent), and recent immigrants. However, it is
estimated these 50 million people have a history of paying regular
bills such as rent, utilities, insurance, and telecommunications.
FICO Score 9's primary enhancement is its separation of medical
debt collection from other unresolved debts. As a result, Fair Isaac
estimates that a consumer with the median credit score of 711 whose
only negative collection issue is medical-related will see his or her
credit score increase by 25 points. FICO also recently announced a new
credit score based on a consumer's payment history with
telecommunications and utility bills. The new score could help
applicants who don't use credit often but are responsible with other
monthly payments.
VantageScore 3.0 claims the ability to calculate a score for 30 to
35 million previously ``unscoreable,'' or ``thin file,'' consumers.
VantageScore requires just 1 month of credit history and less frequent
updates than the current FICO score used by the Enterprises. Credit
scores can now be made available to consumers who are brand new to
credit, those who only use credit occasionally and people who have not
used credit at all recently. The VantageScore 3.0 credit score also
ignores all paid collections, as well as any collections, paid or
unpaid, under $250.
HUD Secretary Castro also has stated that FHA is exploring the use
of new credit scoring models that use nontraditional factors, such as
rent and utility payments, to determine creditworthiness. The potential
use of alternative credit scoring models by FHA and the Enterprises
could help to open the credit box.
Fees
Fees for Government-backed mortgages continue to be at an increased
level, even though the credit quality of the underlying loans has
increased significantly, as evidenced by the high FICO scores
referenced earlier. These higher fees are usually passed on to
consumers, making it more expensive for borrowers to obtain a home loan
or, in some cases, even preventing them from qualifying for a loan.
In the wake of the housing downturn, FHA steadily and significantly
increased its upfront and annual mortgage insurance premiums (MIP). The
annual MIP on a typical 30-year FHA loan (LTV less than 95 percent and
loan amount below $625,500) was raised six times in 5 years and had
reached 130 basis points by April 2013 compared to 50 basis points in
April 2010. Further, FHA also terminated the policy that allowed
borrowers to stop paying mortgage insurance premiums after their loan
reaches 78 percent of its original value. As a result, the cost of an
FHA loan over the life of the loan had become higher than that of a
conventional loan with private mortgage insurance, which borrowers can
stop paying when the LTV reaches 78 percent of original value.
NAHB strongly supports FHA's announcement in January that,
effective with case numbers dated on and after January 26, 2015, it
would reduce its annual upfront MIP by 50 basis points to 80 basis
points on FHA loans with LTVs less than 95 percent and loan amounts of
$625,500 and below.
At the direction of the FHFA, Fannie Mae and Freddie Mac have been
increasing their guarantee fees (g-fees) that are charged to lenders to
protect against credit-related losses. G-fees charged by Fannie Mae
averaged 62.9 basis points on new single-family originations in Q4
2014. This is a significant increase over 2012 in which the average was
39.9 basis points.
In addition to the g-fees, Fannie Mae and Freddie Mac continue to
charge adverse market fees and loan level pricing adjustments. Fannie
Mae and Freddie Mac have charged a 25 basis point adverse market fee
since March 2008 for whole loans and mortgage loans delivered into MBS.
The loan level price adjustments, which have been charged since 2009,
add delivery fees to mortgages purchased by the Enterprises. The
delivery fees which vary based on credit score and loan-to-value ratio
range from 25 to 325 basis points. This translates into a 6 to 80 basis
point increase in mortgage financing costs.
In June 2014, FHFA requested input on setting the g-fees. NAHB's
comments to FHFA opposed a further increase in g-fees and urged that
affordability should be a significant consideration in setting g-fees.
NAHB's comments also included a recommendation for the Enterprises to
eliminate the upfront adverse market charge and loan level price
adjustments. Current market conditions in which defaults and
foreclosures are declining and housing markets nationwide are improving
have rendered these charges obsolete.
Though FHFA still is in the process of reviewing and considering
comments received on the g-fee request for input, NAHB is hopeful that
Director Watt will make an announcement soon that will provide for
lower fees to lenders and, ultimately, home buyers.
Downpayments
In an acknowledgement that high downpayments are a significant
impediment to some borrowers, especially first-time home buyers, last
October FHFA Director Mel Watt directed the Enterprises to begin
purchasing 3 percent downpayment mortgages from creditworthy borrowers.
Fannie Mae began purchasing 97 percent LTV mortgages in December and
Freddie Mac's purchase program began in March.
NAHB agrees with Director Watt's assessment that 3-percent
downpayment mortgages can be made safely by imposing strict credit and
underwriting standards that ensure borrowers have strong credit and
meet income, asset and employment requirements. Also, a recent Urban
Institute analysis found that the default rates on 3 to 5 percent
downpayment loans and 5 to 10 percent downpayment loans purchased by
the Enterprises are similar.\3\
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\3\ Urban Institute, Why the GSEs' Support of Low-Downpayment Loans
Again is No Big Deal. http://www.urban.org/urban-wire/why-government-
sponsored-enterprises-support-low-down-payment-loans-again-no-big-deal.
---------------------------------------------------------------------------
Appraisals
The housing recovery also has been impeded by ongoing problems in
the U.S. residential appraisal system. While lenders, Federal banking
regulators and federally related housing agencies implemented
corrective measures in response to valuation breakdowns that came to
light in the wake of the Great Recession, and Congress mandated
additional measures in the Dodd-Frank Act, these steps did not address
fundamental flaws and shortcomings of the U.S. residential appraisal
framework. Improper appraisal practices, a shortage of experienced
appraisers and inadequate oversight of the appraisal system continue to
restrict the flow of mortgage credit and retard the housing recovery.
NAHB is not advocating that appraisals should be higher than the real
market. Rather, our goal is to establish an appraisal system that
produces accurate values through all phases of the housing cycle.
The principal focus of reforms to-date has been on eliminating
undue influence on appraisers to produce inflated valuations that
facilitate transactions. However, when home prices began declining,
improper appraisal practices exacerbated the slide in values. Some
appraisers used distressed sales--many of which involved properties
that were neglected and in poor physical condition--as comparables in
assessing the value of brand new homes, without accounting for major
differences in condition and quality. Without such adjustments, the two
housing types are not comparable. The inappropriate manner in which
distressed sales were utilized distorted home valuations. Use of the
cost and income approaches in conjunction with the comparable sales
approach could mitigate such distortions.
The dramatic increase in the use of Appraisal Management Companies
(AMCs) is another factor contributing to inaccurate appraisals. Some
AMCs have reduced appraiser compensation, which has led to more
activity by appraisers with less training and experience, and shortened
turnaround times for valuations to as little as 48 hours. These changes
have had a significant adverse effect on appraisal quality.
Other challenges facing the appraisal industry include shortcomings
in appraiser training and experience in dealing with new construction
and green building. Additionally there is insufficient new
construction, energy efficient and green building data available to
appraisers and current valuation practices do not provide a process for
expedited appeals of inaccurate or faulty appraisals. Oversight of
appraiser qualifications and appraisal practices falls to the
individual states, and many jurisdictions have inadequate resources to
adequately perform this function. In some states, fees collected for
appraiser licensing and certification are swept into a general fund and
are not utilized in appraisal/appraiser oversight and enforcement.
NAHB has been a leading advocate for correcting the valuation
process and has undertaken a number of actions to raise awareness and
address the adverse impacts inaccurate appraisals are having on the
housing sector. NAHB has conducted five Appraisal Summits to provide
opportunities for the agencies and organizations that establish
appraisal standards and guidelines to join housing stakeholders in a
constructive dialog on major appraisal topics of concern.
Through the Appraisal Summits and feedback from builders and others
in the field, NAHB has identified the following key areas of focus to
improve current appraisal requirements and practices, which are
presented in a white paper entitled A Comprehensive Blueprint for
Residential Appraisal Reform, which contains the following
recommendations:
Strengthen Education, Training and Experience Requirements for
Appraisers of New Home Construction, including:
The establishment of greater education, training and
experience requirements for those who are assigned appraisals
of new construction to ensure that lot values and building
costs, including those for energy efficient, green building and
other evolving new construction techniques and mortgage
products, are fully considered in valuation of new home
construction.
The incorporation of the qualifications for appraisers of
new construction into appraisal regulations and guidelines of
the bank regulatory agencies, Fannie Mae, Freddie Mac, FHA, VA,
and USDA.
Improve the Quantity and Quality of Data for New Construction through:
Establishment of an appraisal database system for new
construction.
Standardization of loan level valuation data by Fannie Mae,
Freddie Mac, FHA, VA and
USDA in their Uniform Appraisal Dataset (UAD).
Expansion of the UAD to include new construction, energy
efficient and green building data standards. Develop New
Appraisal Standards and Best Practices for Conducting
Appraisals in Distressed Markets by:
Modifying current appraisal practices and procedures to
consider all three approaches to value--cost, income and sales
comparison--in appraisals of residential properties to mitigate
distortions and volatility.
Giving greater weight in distressed markets to alternative
means of valuation, such as the cost-based approach to value.
Revising banking agency guidelines to require the appraisal
entities used by financial institutions to avoid the use of
distressed sales as comparables for new construction sales and,
if distressed sales are the only comparables available, to make
adjustments to accurately reflect possible condition and stigma
issues associated with distressed properties.
Develop Processes for Expedited Appeals of Inaccurate or Faulty
Appraisals through:
Federal agency adoption of an appeals structure similar in
design to that of the Department of Veterans Affairs Loan
Guaranty Service Home Loan Program.
The establishment of more efficient, timely and effective
processes for State and local appraisal oversight.
The establishment of a timely value dispute resolution
process that is fair, balanced and appropriate to allow
interested parties to appeal appraisal values when appraisal
techniques and/or assumptions are incorrect.
Strengthen Oversight of Appraisal Activities through:
Streamlining and coordinating the current regulatory
framework to devote adequate resources and ensure effective
oversight and enforcement.
Full implementation of appraisal mandates in recent Federal
legislation addressing:
Appraisal independence
Customary and reasonable fees
Mandatory reporting of appraisal standards violations
Strengthening of State appraisal oversight and
enforcement of regulations
Dispute resolution
Establishment of best practices for effective and
consistent appraisal practices, policies and procedures.
NAHB stands ready to work with appraisal, housing and financial
stakeholders to address the real challenges we face in restoring the
public trust in how we build, transfer, value and finance the American
consumer's most valuable asset. Solving these issues, in the short and
long term, is a critical step toward establishing an efficient and
sustainable housing finance system.
Regulatory Constraints to Housing Production Credit
Despite signs of improvement in recent months, many home builders
continue to deal with a significant adverse shift in terms and
availability of land acquisition, land development and home
construction (AD&C) loans. Lenders are reluctant to extend new AD&C
credit citing regulatory requirements or examiner pressure on banks to
shrink their AD&C loan portfolios as reasons for their actions. While
Federal bank regulators maintain that they are not encouraging
institutions to stop making loans or to indiscriminately shrink their
portfolios, reports from NAHB members in a number of different
geographies continue to suggest that bank examiners in the field are
maintaining a more aggressive posture.
According to data from the FDIC and NAHB analysis, the outstanding
stock of 1-4 unit residential AD&C loans made by FDIC-insured
institutions to residential construction businesses rose by $1.158
billion during the fourth quarter of 2014, a quarterly increase of 2.32
percent. On a year-over-year basis, the stock of residential AD&C loans
is up 17 percent from the final quarter of 2013. Despite these gains,
AD&C lending remains much reduced from years past.
The current stock of existing residential AD&C loans of $51.2
billion now stands 74.9 percent lower than the peak level of AD&C
lending of $203.8 billion reached during the first quarter of 2008.
However, the count of single-family homes under construction is down
only 33 percent from the first quarter of 2008 compared to today. Thus,
there exists a lending gap between home building demand and available
credit. This gap is being made up with other sources of capital,
including equity, investments from non-FDIC insured institutions and
lending from other private sources, which may in some cases offer less
favorable terms for home builders than traditional AD&C loans.
Concentrations in Commercial Real Estate Lending
In general, the Federal banking regulators have been reminding
financial institutions to adhere to the December 2006 bank regulatory
guidance Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices issued by the Office of the Comptroller of the
Currency (OCC); the Board of Governors of the Federal Reserve System
(Federal Reserve); and the Federal Deposit Insurance Corporation (FDIC)
(collectively ``the Agencies'') in which the Agencies specified
criteria they would review to determine when a bank was exposed to
potential CRE concentration risk. A financial institution is considered
to have a high CRE concentration, and thus subject to the Guidance, if
it exceeds or is rapidly approaching the following thresholds:
If loans for construction, land development, and other land
loans equal 100 percent or more of total capital, the
institution would be considered to have a CRE concentration and
should have heightened risk management practices.
If loans for construction, land development, and other land
loans secured by multifamily and non farm nonresidential
property (excluding loans secured by owner-occupied properties)
equal 300 percent or more of total capital, the institution
would be considered to have a CRE concentration and should
employ heightened risk management practices.
The guidance emphasized that the 100 percent and 300 percent
thresholds are not to be considered as limits or caps on bank CRE
lending but rather are intended as guidelines for banks and their
examiners in determining appropriate loan underwriting and review
systems, risk management practices and levels of reserves and capital.
NAHB continues to raise awareness in Congress about the lack of
AD&C financing and the possible adverse economic impacts of this
situation.
Basel III
In mid-2013, the U.S. Federal banking agencies approved a new
regulatory capital regime for all federally insured banking
institutions. Referred to as Basel III, the new requirements increase
the quantity and quality of capital for all federally insured banking
institutions and will impose additional capital thresholds for the
largest banking organizations. Basel III was effective for the largest
banks beginning January 2014; compliance for community banks was
mandatory beginning January 2015.
Basel III revised the definition of High Volatility Commercial Real
Estate (HVCRE) and required HVCRE financings to be risk-weighted at 150
percent up from 100 percent. AD&C loans considered HVCRE financings
which generally will include commercial real estate projects with an
LTV greater than 80 percent and borrower-contributed capital of less
than 15 percent of the project's ``as completed'' value.
HVCRE loans do not include:
(1) One-to-four residential property; or
(2) Commercial real estate projects that meet certain prudential
criteria, including with respect to the LTV ratio and capital
contributions or expense contributions of the borrower.
The new HVCRE capital requirement is affecting the ability of
community banks to provide financing for AD&C loans using traditional
methods and will impede the ability of banks to make high quality AD&C
loans to builders and developers. As AD&C lending finally begins to
recover, NAHB is extremely concerned that this rule introduces a
significant new impediment to further improvement.
Cost of Regulation
NAHB appreciates the Committee's focus on regulatory activities
that are adversely impacting the housing credit availability. Along
with the challenges faced by home buyers and home builders in securing
financing, regulatory burdens impose costs on the development of land
and the construction/remodeling of homes, both multifamily and single-
family, that are passed along to home buyers/homeowners and renters
through higher costs for housing, both in terms of prices and rents.
New regulations are being developed that impact all aspects of home
building. For instance, the housing and construction industry is
actively engaged with OSHA, EPA, FEMA and other agencies on new
regulations which could drive up the cost of housing further.
NAHB survey data of builders has demonstrated that, on average,
regulation imposed during development accounts for 16.4 percent of the
price of a home built for sale; regulation imposed during construction
accounts for 8.6 percent of the price. Thus, in total, 25 percent of
the price of an average single-family home built for sale is
attributable to regulation imposed by all units of government at
various points along the development/construction process. Most of
these burdens are associated with permitting, land use, and
construction codes, however, other financial burdens impose costs on
the construction process and contribute to an increased cost of
housing.
In turn, higher housing costs ``price out'' households from home
ownership. For example, according to 2014 estimates from NAHB, on a
national basis, a $1,000 increase in home prices leads to pricing out
just slightly more than 206,000 individuals from a home purchase. The
size of this impact does vary widely across States and metro areas,
depending on population, income distributions and new home prices.
Housing is an important source of economic growth and job creation;
and regulations are limiting home builders' ability to grow and
contribute positively to the economy. As of the final quarter of 2014,
housing's share of gross domestic product (GDP) was 15.2 percent, with
home building yielding 3.1 percentage points of that total.
Historically, residential investment has averaged roughly 5 percent of
GDP while housing services have averaged between 12 percent and 13
percent, for a combined 17 percent to 18 percent of GDP. While these
shares tend to vary over the business cycle, clearly housing is an
important factor in a healthy economy. Job creation is one of the
important ways that housing contributes to GDP. NAHB estimates that
building an average new single family home creates 3.05 jobs; building
an average new multifamily rental unit creates 1.16 jobs; and every
$100,000 spent on residential remodeling creates 1.11 jobs. Therefore,
the cost and availability of credit for builders and home buyers has a
direct impact on the ability of housing to contribute to economic
growth.
All of these issues must be factored into the cost of housing. As
the cost of housing increases and the credit box remains tight, home
buyers and renters will have fewer safe, decent and affordable housing
options.
Conclusion
NAHB supports steps to ensure that mortgage lending occurs in a
safe and sound manner, with appropriate underwriting, prudent risk
management and sound consumer safeguards and disclosure. NAHB continues
to advocate for comprehensive mortgage finance system reform. While we
believe regulatory barriers can be alleviated to some degree by the
various regulators of the system as well as by specific legislative
reforms, comprehensive legislation would ensure that components of
reform are not in contradiction, but will work together to offer the
hoped-for result; minimum disruptions to the mortgage markets while
ensuring consumer protections.
______
PREPARED STATEMENT OF CHRIS POLYCHRON
2015 President, National Association of REALTORS
April 16, 2015
INTRODUCTION
Thank you for the opportunity to testify today. My name is Chris
Polychron. I am the 2015 President of the National Association of
REALTORS (NAR). A REALTOR for 27 years, I am an executive broker with
1st Choice Realty in Hot Springs, specializing in residential and
commercial brokerage.
While we have seen great progress in our economic recovery, access
to affordable mortgage credit remains a problematic obstacle for
prospective home buyers. The number of first-time buyers entering the
market is at the lowest point since 1987, despite historically low
mortgage rates. The Nation's home ownership rate has fallen almost to
levels last seen in 1990. Today, the number of homes purchased annually
remains less than 70 percent of what was purchased prior to the real
estate bubble and subsequent collapse.
Credit remains tight as lenders remain leery of taking on risk. NAR
has long supported strong underwriting standards that require all
mortgage originators to verify the borrower's ability to repay the loan
based on all its terms, including taxes and insurance. However, there
remain some unnecessary regulatory burdens that are preventing
qualified, credit-worthy borrowers from obtaining the American dream of
home ownership. These fall into four specific areas:
Consumer Financial Protection Bureau Issues
Specialty Markets Challenges
Short Sales and Foreclosure Matters
Lending Policies
CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) ISSUES
NAR appreciates the CFPB's approach in proposing regulations that
recognize the balance between access to credit and responsible lending.
We support regulations such as the Qualified Mortgage (QM) rule to
ensure that borrowers can repay their mortgage. We generally believe
that these rules have created certainty in the mortgage market and have
encouraged increased mortgage liquidity and availability, while
ensuring consumers are afforded necessary protections. However, we
believe there are certain changes that can be made to existing rules
that will promote a safe, but more robust housing market.
3 PERCENT CAP ON POINTS & FEES NEEDS TO BE FIXED
This year, the U.S. House Financial Services Committee passed H.R.
685, ``The Mortgage Choice Act.'' This bill is identical to legislation
that passed the House last year. This legislation is a bipartisan
compromise that reduces discrimination against mortgage firms with
affiliates in the calculation of fees and points in the Dodd-Frank
Ability to Repay/Qualified Mortgage rule. The QM rule sets the standard
for mortgages by providing significant compliance certainty to QM loans
that do not have risky features and meet certain requirements. A key
requirement is that points and fees for a QM may not exceed 3 percent
of the loan amount. The inherent discrimination in this rule arises
from the fact that under current law and rules, what constitutes a
``fee'' or a ``point'' varies greatly depending upon who is making the
loan and what arrangements are made by consumers to obtain closing
services. As a result of these definitions, many loan originators
affiliated with other settlement service providers are not be able to
make QM loans to a significant segment of otherwise qualified
borrowers.
The discrimination in the calculation of fees and points is being
felt by consumers who are seeing reduced choices and added obstacles in
their transactions. A Spring 2014 NAR survey of affiliated mortgage
lenders revealed almost half experienced problems due to the ATR/QM
rule. When the 3 percent cap was cited as the cause, a significant
number had certain services outsourced or were not able to complete the
transaction. Where services were outsourced and charges known to the
lender, nearly half of loans (43.8 percent) included higher fees. NAR
strongly urges the Senate to introduce companion legislation and work
to pass the bill this year.
RESPA/TILA REFORM MUST BE ENFORCED SLOWLY
On August 1, 2015, significant Real Estate Settlement Procedures
Act (RESPA) and Truth in Lending (TILA) changes go into effect during
the busiest transaction time of the year. There will no longer be a
Good Faith Estimate (GFEs) or Truth in Lending disclosures. Those two
forms have been combined into a single ``Loan Estimate'' or ``LE.''
While NAR is supportive of this harmonization, there will be
unanticipated problems and issues uncovered in the implementation. NAR,
as well as other industry groups, have urged CFPB to provide for a
restrained enforcement period on the RESPA-TILA integration regulation,
and have asked them to clarify TILA and RESPA liabilities under the
regulation.
COMMUNITY BANK LENDING SHOULD BE ENCOURAGED
Ensuring community banks can continue to maintain good
relationships and provide mortgage credit to their customers without
being overloaded with regulations intended for more complex financial
institutions is an important goal.
NAR supports strong underwriting standards and believes that all
mortgage originators should act in ``good faith and with fair
dealings'' in a mortgage transaction and treat all parties honestly.
This idea is at the core of community banks which base their
reputations on a relationship-lending model. These standards had been
the basis for offering mortgage credit for decades until the mid-2000s
which saw a proliferation of lenders offering mortgage products that
were unstainable for most borrowers.
In May 2005, NAR adopted principles that warned that consumers were
being taken advantage of by intemperate, and often predatory, lending.
We acknowledged then too that, in a credit-driven economy, the
legislative and regulatory response to lending abuses could go too far
and inadvertently limit the availability of reasonable credit for
borrowers. Unfortunately, this restriction of credit was exactly what
the market experienced. As a result of lenders and regulators over-
correcting in response to the abuses in the middle of the previous
decade, NAR called on the credit and lending communities and Federal
regulators to reassess the entire credit structure and look for ways to
increase the availability of credit to qualified borrowers who are good
credit risks.
Noting the importance of both of these principles, NAR supported
the balance that the January 2013 mortgage rules achieved including
strong consumer protections, the promotion of mortgage liquidity, and
important ability-to-repay standards. One compliance option allows the
creditor to make a reasonable and good faith determination that the
borrower has a reasonable ability to repay the loan and related
obligations, based on verified and documented information based on all
its terms, including taxes and insurance.
The CFPB's proposed amendments recognize that community banks have
a long history of this common sense approach to underwriting and that
the relationship-lending model is one that should be maintained. Of
course, any exception to the general rule must be limited and not
become the general rule; moderating regulatory burdens for small
lenders needs to be balanced with maintaining principles of strong
underwriting based on a borrower's ability-to-repay.
SPECIALTY MARKETS SHOULD HAVE SPECIAL CONSIDERATION
As stated, we believe that exceptions to the CFPB rules must be
made on a very limited and specific basis. Certain markets may warrant
that type of consideration. Rural communities and manufactured housing
loans fall into this category.
RURAL COMMUNITIES
Rural citizens face unique challenges finding access to credit.
Almost 20 percent of the U.S. population lives in rural areas or small
towns and nearly all of the counties with the highest poverty rates in
America are rural. NAR recognizes the uniqueness of rural communities
and the key role that housing plays in building strong communities.
REALTORS who live in and serve these communities also understand the
need for specialized programs to meet the needs of Americans living in
rural areas.
The CFPB has updated its own definition of a rural community for
lending policies. NAR supports the recent changes they have made, but
also believe communities should be able to petition the CFPB to be
considered rural. To this end, NAR supports S. 871, the ``Helping
Expand Lending Practices in (HELP) Rural Communities Act'', introduced
by Majority Leader McConnell (R-KY), along with Senators Heller (R-NV),
Capito (R-WV) and Paul (R-KY). This bill will allow communities to
apply for a designation as a rural community. There are a number of
factors to be considered when determining if a community warrants a
rural designation--and some factors commonly used can be misleading.
For example, the population determined by the census is a common tool
used to determine a communities' rural nature. But institutions like
prisons and colleges can distort the actual population of a community.
This legislation does not require the CFPB to grant a rural
designation, but simply allows communities to apply for
reconsideration.
The Association also support changes to the process by which loans
are approved under the Rural Housing Service (RHS) of the Department of
Agriculture. Today, every RHS loan must be reviewed and approved by
staff of the Rural Housing Service. In recent years, RHS staffing has
been dramatically reduced, and borrowers have experienced significant
delays in loan approval. Both the Veterans Affairs loan guaranty and
the FHA mortgage insurance program utilize private lenders for direct
endorsement. Providing RHS with the authority to approve direct
endorsed lenders would create great efficiencies for the Service and
for home buyers. RHS, in turn, would have additional staff time needed
to focus on a strengthened lender monitoring process and risk
management. NAR strongly urges Congress to provide RHS with direct
endorsement authority to ease burdens on the agency and accelerate loan
processing for borrowers.
MANUFACTURED HOUSING LOANS
Nearly 20 million Americans live in manufactured homes. These homes
are often a more accessible and affordable way for many people to buy
their own home. Manufactured housing has come a long way with respect
to the features and quality of life it provides homeowners. Today,
manufactured homes blend seamlessly into many markets or neighborhoods.
In many areas of the country, particularly rural communities,
manufactured homes are the only type of quality affordable housing
available.
The Dodd-Frank Act regulations have mistakenly resulted in
manufactured homes becoming less available as an affordable housing
option. We support S. 682, the ``Preserving Access to Manufactured
Housing Act'', introduced by Senators Donnelly (D-IN), Toomey (R-PA),
Manchin (D-WV), and Cotton (R-AR). This legislation will preserve
manufactured housing as an affordable housing option without reducing
important consumer protections.
S. 682 clarifies the difference between manufactured housing
manufacturers and loan originators, and ensures that low-dollar
manufactured housing loans are exempt from Home Ownership and Equity
Protection Act (HOEPA) standards. The costs of originating and
servicing a manufactured loan are not much different than those of a
more traditionally built home, even though the loan itself is often
much smaller. Therefore, the closing costs of a manufactured loan as a
percentage of the loan are much higher than the percentage on a more
expensive home. This can cause manufactured housing loans to violate
caps in Dodd-Frank and be categorized as ``High-Cost,'' or predatory.
S. 682 will exempt manufactured loans from this label.
FORECLOSURES AND SHORT SALES REMAIN PROBLEMATIC
Too often, short sales are still a story of delay and unrealistic
views of current home values, resulting in the potential buyer
canceling the contract and the property going into foreclosure.
Enormous amounts of time are spent on potential short sales that
ultimately result in foreclosures. Even if successful, the process
usually takes many months and countless hours and often requires re-
marketing because buyers lose patience and terminate the contract.
CERTAINTY IS NEEDED TO MAKE THE SYSTEM WORK
NAR believes that the short sale process would significantly
improve with the passage of S. 361, ``The Prompt Notification of Short
Sale Act,'' introduced by Senators Brown (D-OH) and Murkowski (R-AK)
last year. This legislation requires servicers to decide whether to
approve a short sale within 30 days of completion of the file. The bill
attempts to prod servicers to make the short sales process more
efficient by setting standards and penalizing them for inadequate
performance. Streamlining short sales will reduce the amount of time it
takes to sell the property, improve the likelihood the transaction will
close, and reduce the number of foreclosures. This will benefit the
lender, the seller, the buyer, the community.
TAXPAYERS NEED RELIEF
Today, more than 5 million families remain in a home that is
``under water.'' While Congress provided relief in recent years,
uncertainty exists for these homeowners today. For many of these
homeowners, a short sale or workout is the most viable option. However,
the income tax exemption on mortgage debt forgiven in a short sale or a
workout for principal residences was extended late last year
retroactively, but expired at the end of 2014. Not having this relief,
many families will simply walk away and accept a foreclosure on their
home. This is contrary to the goal of every policy designed to keep
people in their homes and prevent foreclosures.
Unless remedied, homeowners who participate in a workout or short
sale will have to pay tax on ``phantom income'' from forgiven debt.
This is not only unfair but harms families, neighborhoods and
communities. NAR urges all Members to extend this provision of the tax
code. Without this provision, distressed homeowners will decide to take
a pass on opportunities for workouts with the lender or short sales,
opting instead for continued delinquency or possible default until
foreclosure, or simply to walk away from the property. This will
destabilize the communities where such homes are located.
LENDING POLICIES CONTINUE TO CONSTRAIN ACCESS TO CREDIT
Loan pricing and lending restrictions also are making it more
difficult for credit-worthy borrowers to purchase a home. We believe
that these types of rules should be directly commensurate with actual
risk. Borrowers should not be subject to higher fees or burdens that
are unnecessary.
CONDO RESTRICTIONS PREVENTING HOMEOWNERSHIP OPPORTUNITIES
Condominiums often represent the most affordable options for first-
time home buyers, including minorities. However, the Federal Housing
Administration (FHA) and the Government-Sponsored Enterprises (GSEs)
have significant restrictions on the purchase of condominiums. However,
NAR supports developing policies that will give current homeowners and
potential buyers of condos access to more flexible and affordable
financing opportunities as well as a wider choice of approved condo
developments. Specifically, we have five areas of concern.
1. Owner Occupancy--FHA requires that a condominium property be at
least 50 percent owner occupied. FHA's ratio greatly limits the
number of condominium buildings available to credit-worthy
borrowers. This policy is also self-fulfilling. If a building
has less than the 50 percent owner-occupancy ratio, sellers of
units have fewer buyers who are eligible, leading them to rent
out their unit rather than sell. This makes it difficult for
many buildings to achieve the 50 percent requirement. By way of
contrast, the GSEs do not place limits on the owner-occupancy
of a condominium project if the borrower is buying it as a
primary residence. NAR strongly urges FHA to eliminate this
requirement to open up more properties for FHA-eligible buyers.
2. Project Approval Process--FHA requires the entire condominium
project to be approved prior to a buyer purchasing a unit. This
certification process is costly and time-consuming, and
difficult for the often volunteer boards of condominium
buildings. Less than 20 percent of all condominium properties
nationwide have FHA approval.\1\ NAR strongly urges FHA to
reduce the burdens associated with project certification. NAR
also recommends that the spot loan approval process be
reinstated to allow purchases in some buildings that do not
have FHA certification.
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\1\ Based on estimates derived from FHA's condo lookup tool as of
2/24/15.
3. Delinquent Dues--Following the housing crisis, a number of
condominium and homeowner associations have units that are
behind in paying their dues. Both FHA and the GSEs restrict
approval of properties where more than 15 percent of the units
have delinquent dues. While NAR appreciates the need to make
sure properties are properly capitalized with appropriate
reserves; dues payment should not be a sole determinant. Some
associations may have compensated for delinquencies by building
reserves or taking other steps to ensure that delinquencies are
not impacting their financial stability. This requirement
should NOT be a determining factor, but instead be a part of an
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overall review of a property's finances.
4. Commercial Space--Multi-use properties and new ``town center''
developments are very popular, and lauded by HUD as creating
benefits for communities in providing easy access to amenities
and transportation. Yet, condominium associations with
commercial space are restricted from approval by both the GSEs
and FHA. The GSEs limit commercial space to 20 percent, but
provide waivers. FHA's limit is 25 percent, also with allowable
waivers. The current policy hinders efforts to build
neighborhoods that have a mix of residential housing and
businesses with access to public transit. The Association urges
FHA and the GSEs to lift these restrictions.
5. Transfer Fees--FHA has a policy that prohibits FHA mortgage
insurance on any property that has a transfer fee covenant.
Fees that increase the costs of housing can disenfranchise
those who wish to obtain the American dream; however, fees that
provide a direct benefit to homeowners and improve the property
are legitimate and should be permitted. The blanket policy used
by FHA can greatly disadvantage the millions of homeowners
living in community associations, making it much harder for
them to sell their homes. FHFA has previously dealt with this
issue, following a thoughtful and lengthy rulemaking. FHFA's
final rule on transfer fee covenants establishes a clear,
national standard to protect homeowners from equity-stripping
private transfer fees while preserving the preeminence of State
and local governments over land use standards.
FHA should accept a mortgagee's compliance with FHFA's transfer fee
covenant regulation as compliance with relevant FHA mortgage insurance
program rules, guidelines and requirements. Any additional and
potentially conflicting Federal standard on transfer fee covenants by
FHA will cause confusion in the housing market and require community
associations to amend governing documents. Amendments to community
association covenants, conditions, and restrictions can be difficult to
execute and by statute generally require legal counsel and the approval
of at least a supermajority of owners. We urge FHA to mirror FHFA's
rule, and prohibit only those fees that don't benefit the homeowner and
association where they live.
There are additional concerns related to condo rules including
investor ownership, concentration limits, and pre-sale requirements
that also should be changed. REALTORS were pleased to see a recent
notice by Fannie Mae, loosening some restrictions. We look forward to
the publishing of FHA's upcoming condo rule and are hopeful that it
will loosen many of the current restrictions.
Condominium unit mortgages are among the strongest performing in
the FHA portfolio. According to FHA data from 2014, the national
serious delinquency rate for condominium projects is 0.89 percent
versus 1.17 for single-family homes.\2\ Condominiums are often the most
affordable option for first-time home buyers, or older homeowners who
wish to downsize. We strongly believe that qualified home buyers should
not be prevented from this option, simply due to mortgage restrictions.
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\2\ Serious Delinquent Rates, Retrieved April 13, 2015, from
Neighborhood Watch, Early Warning System. https://entp.hud.gov/sfnw/
public/.
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HIGH G-FEES STILL HURTING CONSUMERS
High guarantee fees (g-fees) and loan level pricing adjustments
(LLPAs) charged by the GSEs are negatively impacting the housing
recovery. These Enterprises buy single-family mortgages from mortgage
companies, commercial banks, credit unions, and other financial
institutions. A key revenue component for the GSEs is a g-fee received
for guaranteeing the payment of principal and interest on their
mortgage backed securities (MBS). The g-fee is a significant factor in
determining profits earned from this credit guarantee. The g-fee covers
projected credit losses from borrower defaults over the life of the
loans, administrative costs, and a return on capital.
Continued increases in g-fees and upfront borrower costs will
extend a trend of reduced access to mortgage credit, which is counter
to a principal duty of the FHFA Director under the Housing and Economic
Recovery Act of 2008 (HERA). Continuing to increase the fee will mean
that larger numbers of consumers, many of them first-time home buyers,
will be forced to pay substantially higher mortgage rates, or be left
with limited housing finance options. NAR believes borrowers who are
either purchasing a home or refinancing their existing mortgage using
conventional financing are being charged excessive fees due to policy
goals that go beyond protecting taxpayers from GSE losses.
NAR is especially concerned with the disparate impact the changes
will have on first-time home buyers and other traditionally underserved
borrowers. These families are more likely to bear the brunt of these
fees, either because they have thin credit files and traditional credit
models do not reflect payments toward housing expenses and utilities;
or because they often make smaller down payments than do other
borrowers.
FHFA seems to believe that by raising costs for loans purchased or
guaranteed by the GSEs, they can lure private sector capital back to
the mortgage market. However, we believe this policy does not account
for the aversion to, and lack of trust in, issuers of private mortgage
backed securities that many investors still harbor since suffering
tremendous losses during the recent housing crisis. This lack of trust
remains and is hard to quantify. When increasing fees, the GSEs must
include performance measures to ensure they are meeting the goal of
increasing private sector participation. In addition, the Agency should
examine other factors that are holding back the private market in
conjunction with the Treasury Department. The National Association of
REALTORS believes that future data will show that the effect of
raising fees will simply be increased costs to home buying taxpayers
who can afford to become homeowners, and that the true effect will be
redirection of more mortgage loans to FHA without a robust private
sector return.
CONCLUSION
The Urban Institute recently reported that ``If credit standards
had been similar to those of 2001, more than 4 million additional loans
would have been made between 2009 and 2013. The missing loans grew from
500,000 in 2009 to 1.25 million in 2013.''\3\ While we generally
support recent regulations such as QM, policies still exist that
unnecessarily constrain lending to credit-worthy borrowers. While no
one wants to see a return to the unscrupulous, predatory lending
practices that caused the Great Recession, some modifications of
existing regulations may be necessary to ensure a robust housing
market.
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\3\ http://blog.metrotrends.org/2015/04/million-mortgage-loans-
missing-2009-2013-due-tight-credit-standards/
?utm_source=iContact&utm_medium=email&utm_campaign=Housing
%20Finance%20Policy%20Center&utm_content=HFPC+newsletter+4%2F8%2F2015.
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Adjustments to rules issued by the CFPB including 3 percent cap on
points and fees, enactment of RESPA/TILA harmonization, and encouraging
responsible community bank lending will help provide consumers with
valuable protections and safe access to affordable credit. Small market
areas such as rural and manufactured housing must also be provided with
flexibility appropriate to their market conditions. Americans who
continue to struggle with underwater mortgages or mortgages they simply
cannot afford should be provide protections and given certainty so they
can make decisions appropriate for their families. Last, loans must be
priced to reflect actual risk, and unnecessary restrictions must be
removed to allow families to achieve the American Dream of home
ownership.
Thank you for allowing me to share the view of the National
Association of REALTORS, and we look forward to working with you.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM TOM WOODS
Q.1. A major issue for many potential home buyers and
homeowners is flood insurance. Right now, homeowners
essentially have no option but to buy Government-backed
National Flood Insurance Program policies to meet mandatory
purchase requirements. The Biggert-Waters flood insurance bill
Congress passed had the unintended consequence of making it
more difficult for private insurers to provide private flood
insurance and for lenders to accept those policies. Right now
lenders are being forced to reject many residential private
flood policies. Senator Tester and I have introduced
legislation in the past that would try to solve this problem.
I would like to know, Mr. Woods, if you support the
development of a private flood insurance market that meet
mandatory purchase requirements and could this help increase
home ownership because consumers will have more insurance
options?
A.1. Thank you Senator Heller for your question regarding
NAHB's support of the development of a private flood insurance
market that meets mandatory purchase requirements and if this
could help increase home ownership because consumers would have
more insurance options.
NAHB does not have policy on State-regulated insurance
markets; however, we would welcome open competition and a
vibrant private market.
In NAHB's experience, without the NFIP, many communities
would be unable to provide affordable housing to many of their
citizens. One of the leading causes of the housing
affordability problem is the shortage of buildable land. By
guaranteeing affordable flood insurance, the NFIP allows
communities to use land that would otherwise be too costly due
to high flood insurance premiums. Through the NFIP, flood
insurance policies remain available and affordable, and
residential structures can be constructed in floodplains as
long as they are built to withstand flooding.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP FROM TOM WOODS
Q.1. Overlapping regulations in our mortgage markets have the
potential to constrain credit and prevent otherwise worthy
borrowers from qualifying for mortgages. That said, the
Consumer Financial Protection Bureau (CFPB) has attempted to
accommodate small and rural communities, institutions, and
their customers during the rulemaking process by issuing a
number of exceptions for these areas and revising rules when
the existing regulations have proven unworkable or unduly
burdensome. Below, find a list of regulatory accommodations
that have been made by CFPB. How successful has each action
been in providing relief, to what extent is each measure
deficient, and what steps can the CFPB take to improve each
provision? Please provide any data or other information to
support your position.
a. LSmall Creditor QM: Established a Qualified Mortgage (QM)
Option that provides loans originated by small
institutions--assets of less than $2 billion and make
fewer than 2,000 loans annually--and held in portfolio
for a minimum of 3 years a safe harbor.
b. LBalloon QM: Created a QM option for mortgages with
balloon payments that are originated by small creditors
in rural or underserved areas.
i. LEscrow: Exempted small creditors who operate
predominantly in rural or underserved areas from
requirements to establish escrow accounts for higher
priced mortgage loans.
c. LRural Definition: Incorporated industry feedback and
expanded the definition of rural, using Census blocks.
The revised definition would designate the entirety of
North Dakota--except for the census blocks of three
major towns--as rural.
A.1. Thank you Senator Heitkamp for your question on the
Consumer Financial Protection Bureau's (CFPB) efforts to
accommodate industry concerns through the rulemaking process.
NAHB supports balancing mortgage lending standards and consumer
protections and appreciates that the CFPB has made a concerted
effort to solicit feedback from industry on the practical
implementation of the 2013 mortgage rules. NAHB commends CFPB's
efforts to monitor the impact of the new mortgage rules and
appreciates that the CFPB is willing to adjust the rules in
response to concerns in areas where improvements are needed.
NAHB supports the actions that CFPB has taken to provide
relief to small financial institutions and those institutions
lending in rural and underserved areas. NAHB believes that
raising the loan origination limit for determining eligibility
for small creditor status, along with the expanded definition
of rural and the additional provisions, will provide small
financial institutions with more flexibility in meeting the
unique needs of the communities that they serve.
However, tight lending conditions continue to keep buyers
on the sidelines even as the housing market recovers. At a time
when housing is affordable and interest rates are low, more
buyers should be able to enter the housing market. However,
many creditworthy borrowers are not taking advantage of these
opportunities. This impact is evidenced by the reduced
participation rate of first-time home buyers that has dropped
to 30 percent of the purchase market\1\ from the historical
rate of about 40 percent of sales.
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\1\ National Association of REALTORS (NAR) Press Release.
Existing-Home Sales Lose Momentum in April. May 21, 2015. Retrieved
from: http://www.realtor.org/news-releases/2015/05/existing-home-sales-
lose-momentum-in-april.
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NAHB believes that a healthy housing market includes broad
participation from all population segments. NAHB has encouraged
the CFPB to further investigate the impact of the new mortgage
regulations, including the debt-to-income ratios and
documentation requirements, on entry level buyers and other
important market segments to ensure that creditworthy borrowers
are able to access mortgage credit. Broader availability of
safe and responsible credit increases home ownership
opportunities and provides benefits to the housing market and
the overall economy.
NAHB believes that the CFPB should take additional steps to
address today's tight lending environment, such as adjusting
the QM 3 percent cap on points and fees to exclude fees paid to
affiliated businesses, and to provide a reasonable hold-
harmless period for enforcement of the of the CFPB's TILA-RESPA
Integrated Disclosures (TRID) regulation for those that make
good-faith efforts to comply.
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RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY FROM J. DAVID
MOTLEY
Q.1. You testified that loan officers employed by nonbank
lenders are required to be licensed under the SAFE Act. Your
testimony advocates for a transition period for new loan
officers of nonbank lenders to work while they are earning
their certification, so long as these employees were previously
loan officers with another institution.
How could this particular proposal aid in the expansion of
mortgage credit of the reduction in the cost of credit? Based
on the average time period to complete this transition, how
long should this transition period last?
A.1. The Secure and Fair Enforcement for Mortgage Licensing
(SAFE) Act, enacted in 2008, mandates a nationwide licensing
and registration system for residential mortgage loan
originators (MLOs). Some of the objectives of the SAFE Act
include creating increased accountability for MLOs, greater
consumer protection, and providing home buyers with tools to
help them select their loan officers. Unfortunately, in its
current form, the SAFE Act creates a two-tiered licensing
system that impedes the mobility of mortgage loan officers
(notwithstanding the fact that Federal depositories are
required to conduct regular job-specific training for their
consumer-facing employees).
The SAFE Act requires MLOs employed by nonbank lenders to
be licensed, which includes pre-licensing and annual continuing
education requirements, passage of a comprehensive test,
criminal and financial background reviews conducted by State
regulators, and registration in the National Mortgage Licensing
System and Registry. By contrast, MLOs employed by federally
insured depositories or their affiliates must only be
registered in the NMLS, and do not have to meet testing and
specific education requirements.
This two-tiered structure creates a significant
disincentive for loan officers to transition from a depository
to a nondepository. These MLOs must wait for weeks, or even
months, while they meet the SAFE Act's licensing and testing
requirements--despite the fact that they have already been
employed and registered as a loan officer at a depository.
Nonbank lenders or independent mortgage banks (IMBs)
typically focus exclusively on mortgage lending. In recent
years, large depository-institutions have moved away from the
home purchase business and toward other types of mortgage-
related business, including refinancing, servicing portfolio
retention, and making more jumbo and adjustable rate loans that
can be held for investment. In contrast, from 2008 to 2013, the
IMBs' share of the home purchase market grew from 25 percent to
40 percent with a particular focus on providing loan products
for first-time home buyers and underserved borrowers.
A small amendment to the SAFE Act to require States to
issue transitional licenses to registered loan officers seeking
employment with nondepositories would help to eliminate the
delays and hurdles in hiring highly qualified loan officers to
work for IMBs and focus their efforts on providing home
purchase mortgage credit. These individuals should be able to
continue originating loans for 120 days after leaving their
bank employer (and while beginning their work for an IMB).
Similarly, a State-licensed loan originator in one State who
takes a similar position in another State would have a 120-day
grace period to obtain a license in the new State. This 120
period is based on the amount of time it typically takes for an
MLO to receive a license and is also consistent with laws in
States that have already passed legislation to permit
transitional licensing.
This narrow and simple solution creating transitional
licenses would eliminate a significant impediment to IMBs
hiring highly qualified bank loan officers. IMBs have made the
commitment to provide mortgage credit to a broad range of
creditworthy borrowers. By increasing labor market mobility,
loan originators could freely move to lenders that are best
able to serve their clients through competitively priced
products that will insure more qualified borrowers access to
credit.
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RESPONSE TO WRITTEN QUESTION OF SENATOR VITTER FROM J. DAVID
MOTLEY
Q.1. Mr. Motley, In your statement you assert that ``New
servicing rules have dramatically driven up the cost to service
loans and driven down efficiency in servicing operations'' and
cite that loans serviced per full-time employees have decreased
from 1,638 in 2008 to 790 in 2014. Moreover, you cite that
direct costs to service each loan have increased from $173 per
loan in 2008 to $309 in 2014, and costs to service loans in
default have risen from $423 per year in 2007 to $2,214 in
2014.''
Which regulations have most directly increased the cost and
amount of time to service these loans?
A.1. It is difficult to isolate one particular regulation as
the direct driver of the significant increase in servicing
costs, due to the sheer number of new regulations from Dodd-
Frank as well as the increased costs associated with the volume
of foreclosures following the 2008 financial crisis. Costs have
increased across the board but particularly in the areas of
collections, loss mitigation, recordkeeping, borrower
communications, vendor management, servicing technology, and
quality control and quality assurance.
There have also been large increases in compliance costs in
this time period as servicers implement the myriad new Federal
and State requirements as well as the costs associated with the
National Mortgage Servicing Settlement among the larger
servicers. The CFPB's broad and prescriptive servicing rule
necessitated costly system overhauls, training expenses, and
ongoing compliance outlays and has certainly played a role in
the increased costs of servicing.
The effect of implementing regulations is also demonstrated
by the increase in costs of servicing performing loans as well
as nonperforming loans, suggesting that the impact of the new
regulatory paradigm will be continued to be felt well into the
future.
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RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM J. DAVID
MOTLEY
Q.1. A major issue for many potential home buyers and
homeowners is flood insurance. Right now, homeowners
essentially have no option but to buy Government-backed
National Flood Insurance Program policies to meet mandatory
purchase requirements. The Biggert-Waters flood insurance bill
Congress passed had the unintended consequence of making it
more difficult for private insurers to provide private flood
insurance and for lenders to accept those policies. Right now
lenders are being forced to reject many residential private
flood policies. Senator Tester and I have introduced
legislation in the past that would try to solve this problem.
I would like to know, Mr. Motley, if you support the
development of a private flood insurance market that meet
mandatory purchase requirements and could this help increase
home ownership because consumers will have more insurance
options?
A.1. The Mortgage Bankers Association supports the development
of a private flood insurance market that meets mandatory
purchase requirements. A competitive and sustainable flood
insurance market will expand available insurance options, lower
costs, and increase the number of at-risk properties that are
insured. Increased private sector involvement can also serve to
shift some of the burden of post-disaster recovery and
rebuilding from taxpayers to the private sector thereby
limiting the Federal Government's exposure to flood loss.
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RESPONSE TO WRITTEN QUESTION OF SENATOR HEITKAMP FROM J. DAVID
MOTLEY
Q.1. Overlapping regulations in our mortgage markets have the
potential to constrain credit and prevent otherwise worthy
borrowers from qualifying for mortgages. That said, the
Consumer Financial Protection Bureau (CFPB) has attempted to
accommodate small and rural communities, institutions, and
their customers during the rulemaking process by issuing a
number of exceptions for these areas and revising rules when
the existing regulations have proven unworkable or unduly
burdensome. Below, find a list of regulatory accommodations
that have been made by CFPB. How successful has each action
been in providing relief, to what extent is each measure
deficient, and what steps can the CFPB take to improve each
provision? Please provide any data or other information to
support your position.
a. LSmall Creditor QM: Established a Qualified Mortgage (QM)
Option that provides loans originated by small
institutions--assets of less than $2 billion and make
fewer than 2,000 loans annually--and held in portfolio
for a minimum of 3 years a safe harbor.
b. LBalloon QM: Created a QM option for mortgages with
balloon payments that are originated by small creditors
in rural or underserved areas.
i. LEscrow: Exempted small creditors who operate
predominantly in rural or underserved areas from
requirements to establish escrow accounts for higher
priced mortgage loans.
c. LRural Definition: Incorporated industry feedback and
expanded the definition of rural, using Census blocks.
The revised definition of would designate the entirety
of North Dakota--except for the census blocks of three
major towns--as rural.
A.1. MBA believes it is time to consider changes in the QM
definition to mitigate the adverse impact the CFPB's Ability to
Repay rule has had on access to credit for some borrowers. In
this regard, MBA appreciates the CFPB's efforts regarding the
Small Creditor and Balloon QM as well as the Rural Definition
identified in your question. Nevertheless, MBA believes changes
to the QM definition are better made holistically and not
limited to certain lenders based on charter types or business
models. Consumers should not be forced to discern which
institutions offer particular types of loans and their choices
should not be limited to particular providers. Stratification
of the market by establishing different underwriting standards
for some lenders and not others only causes unnecessary
consumer confusion and will lessen competition. A holistic
approach to revising the QM would ensure a competitive market
for all types of QM loans, and would not burden the consumer
with figuring out which lenders offer which QM products.
Accordingly, as detailed in our testimony we believe: (1) in
addition to adding certain protections against the re-emergence
of loans with risky features such as pay option ARMs, stated-
income underwriting, and short-term balloon terms, any new
portfolio QM also should be made available to all originators
that process, fund and sell these loans to a bank (or REIT)
that will retain the loans in portfolio for the required
holding period; (2) the spread over the APOR for defining a
safe harbor QM should be expanded to 200 basis points; (3) the
definition of smaller loans should be increased to $200,000,
with adjustments for inflation and a sliding scale that permits
progressively higher points and fees caps for these smaller
loans; (4) the right to cure or correct inadvertent errors be
extended to DTI miscalculations and typographical and technical
errors and omissions; and (5) title insurance fees paid to
lender-affiliated companies should be excluded from the
calculation of ``points and fees'' under QM just as such fees
to non-affiliated companies are excluded.
Additional Material Supplied for the Record
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