Six Top Mortgage Banker Concerns
By Rod J. Alba
Jhe mortgage industry is expecting a rebound in the coming months. While the sources of concern in mortgage transactions are varied, they will all require close attention (and in some cases calibration by bankers) to ensure profitability in the months ahead.
Rates. Topping the list of concerns expressed by panelists and participants at the recent American Mortgage Conference increased interest rates. The immediate concern is decreasing production volume and increasing competition through affiliations and non-banking arrangements (joint ventures, marketing services agreements, etc.). Inflated interest rates have turned 2022 into a “transition year,” shifting the industry from a refinance market to a buy market. According to keynote speaker Mike Fratantoni, chief economist of the Mortgage Bankers Association, there is no guarantee how much the Federal Reserve will raise interest rates. He observed that inflation is expected to persist. “Although labor markets are strong, inflation rates are high, creating ambiguity about where interest rates will eventually settle,” Fratantoni said.
Affordability. This main concern contributes to the second: rising house prices and loss of affordability. According to the latest release of the Case-Shiller index, which tracks home prices in 20 major metropolitan areas, home prices rose 20.2% year-over-year, while the index for Home prices from the Federal Housing Finance Agency showed that the price of homes purchased with GSE loans rose 19.4% year-on-year. This means that expenses are rising across the board for anyone wanting to buy a home – and low-income populations will suffer the most. “High home values coupled with rising interest rates create a real challenge for affordable housing,” said Teresa Gregory, president of Traditions Mortgage in York, Pennsylvania-based Traditions Bank and chair of the Mortgage Markets Committee of over there. “A lender on our committee reported that customers in his market can afford about 65% of the home they could afford last year,” she observed.
Loan viability. Following the economic trends above, bankers have also identified the long-term viability of servicing home loans as a looming concern. The concern, according to Gregory, is that rising prices are stressing families and weakening their ability to manage mortgage credit. “Maintenance operations will have to be attentive to this development,” she warned.
Ratings. The fourth concern identified by lenders is the increase in appraisal shortages affecting several housing markets. Banks are reporting that valuation options are shrinking in many jurisdictions, causing difficulties in closing door-to-door transactions. “Home purchases can be significantly delayed and may even fail if you can’t find licensed, licensed home appraisers,” said Tyler Gilday, senior vice president of Mascoma Bank and vice chairman of the Mortgage Markets Committee of over there. Reviewers report that they are facing greatly increased demands and are charging more in an attempt to reduce the number of orders. “In light of this shortage, the price of valuations is rising very sharply,” Gilday said. Market experts say appraisers are retiring hastily and not being replaced at rates that will support increased demand.
Maintenance. The fifth concern mentioned at the conference was the ongoing challenges with mortgage service enforcement and compliance. Even though it appears that the worst of the COVID-19 pandemic is behind us, servicers should still expect significant loss mitigation activity, and therefore robust and compliant loss mitigation processes. must remain at the forefront of the concerns of repairers. “Simply put, regulations related to loss mitigation are large, complex and ever-changing, and repairers must be prepared to manage them with increased attention from regulators,” said Jason Bushby, Partner at Bradley. Carl Pry of Treliant added that “regulators will also focus on charging mortgage service charges, fair service, limited English proficiency issues, foreclosures and credit reports.” In short, regulators will emphasize mortgage servicing activities, which pose high risks for service banks.
Political environment. Finally, a major source of unease stems from the increasingly anti-banking tone of the CFPB. ABA President and CEO Rob Nichols opened the conference by detailing some of the office’s most troubling comments and actions. First, Nichols pointed to a request for comment on what the CFPB calls “junk fees” in which he relies on a series of deeply flawed premises about the market for consumer financial services and the use of fees. well disclosed and highly regulated. Second, Nichols pointed to recent changes to the exam manual that significantly expand the scope of the CFPB’s enforcement powers beyond those assigned by Congress. Finally, Nichols criticized the quiet release of revised Rules of Practice for Administrative Arbitration that allow Director Rohit Chopra to make decisions in enforcement actions that effectively allow the Director to play both prosecutor and judge in all cases. Together, these actions point to a “carefully choreographed” media campaign designed to unfairly scare consumers and serve as a pretext for a politicized enforcement agenda, Nichols said.
Looking ahead to the second half of 2022, bankers and mortgage lenders will face a variety of headwinds. These challenges will affect all markets, but will have local distinctions that will be important for market participants to understand as they navigate the uncertain road ahead.
Rod J. Alba is SVP for Real Estate Finance at ABA.