I have this completely dysfunctional relationship with Washington DC. As much as politics enfuriate and disgust me, I am completely drawn like a moth to the flame of the amazing power that this city and its inhabitants posess. My fascination of the history here is only thwarted by the fascination of the history being made here. As I return home to Arizona, I have had the opportunity to reflect upon the experiences of the week, process the overwhelming amount of political stimuli I was subjected to and focus my thoughts to the enormous battles we face as an industry trying to eradicate ourselves from the massive mistakes of the past.
The education packed week began with the Certified Mortgage Banker (CMB) Society Meeting and a tremendous presentation by HUD's Single Family Program Director, Meg Burns, who dispelled many of the journalistic myths about FHA. She began with the topic of FHA's financial health. As FHA has been pushed to the forefront in the financial crisis, with it's market share exploding from less than 5% to more than 30% of the business in the blink of an eye, it's mandated 2% capital requirement was not met. The press has blamed this on increased defaults and has spread fear of a threat to the insurance fund. The truth is that as FHA's portfolio has grown, so has the amount of the mandated capital reserve requirement. The reports of a significant increase of defaults has also not been accurately reflected in the press to account for the year over year increase in sheer volume. In fact, the credit quality of FHA's portfolio has significatly increased over prior years by almost a 50 points in average FICO scores. FHA has addressed the need to increase capital reserves by recently implementing an increase in the Up-Front FHA MIP from 1.75% to 2.25%. They are also supporting the FHA Reform Bill which would allow them to increase the annual (monthly) premium and reduce the up front premium.
I was also able to hear from several key members of Congress. Rep. James E. Clyburn (D-SC), who's role as the Majority Whip is to track the sentiment among party members for key legislation supported by the party's leader, spoke about understanding the difference between a bi-partisan bill and a bi-partisan vote. Both Rep. Paul Kanjorski (D-PA) and Senator Bob Corker (R-TN) spoke specifically to the topic of the massive regulatory reform bills being passed between the House and the Senate. Rep. Kanjorski, who chairs the House Sub-Committee on Capital Markets, Insurance and GSE's, spoke about the need to implement what has become known a as the Volcker Rule. This proposal was initiated by Economist and former Federal Reserve Chairman Paul Volcker to prohibit a bank or institutions that owns a bank from engaging in proprietary trading that isn't on behalf of its clients. It would also prohibit a bank from owning or investing in a hedge fund or private equity fund, as well as limits the liabilities that the largest banks could hold.
Senator Corker who sits on the Senate Banking Committee spoke of his experiences of working with Chariman Dodd to create a bi-partisan regulatory reform bill but was "left at the alter" so to speak, when the Democrats pulled the plug on bi-partisan work to consummate a bill that would quickly make it out of committee. “It is pretty unbelievable that after two years of hearings on arguably the biggest issue facing our panel in decades, the committee has passed a 1,300-page bill in a 21-minute, partisan markup. I don’t know how you can call that anything but dysfunctional,” were Senator Corker's sentiments. His main concerns for the senate bill fall into three areas, 1) lack of consumer protection, 2) poor underwriting in the past has only been addressed through risk retention rules that limits the leverage that the secondary market provides and 3) the fact that risk retention is a good soundbite but it will shut down liquidity in the market. The Senate bill is expected to be put to a floor vote as soon as the end of this month.
Finally, the Assistant Secretary for Financial Institutions for the US Treasury, Michael Barr commented on comprehensive financial reform. Currently, there are 7 different agencies that regulate the mortgage process, it is Mr. Barr's opinion that there needs to be a strong regulatory body to fill in the gaps of the fragmented oversight. He also feels that additional regulation is required of the financial markets to address the derivative market and contain swaps, an investment equivalent of the "Don't Come" line bet in craps. He thinks regulatory reform needs to also address the concept of "Too Big to Fail" with regulation in place to break down entities that can be sold off, if they are not compliant. This is something that would be paid for by fees assessed to the companies by the government.
Mr. Barr also proposes that lending institutions need "skin in the game" and explains that they must have risk retention to avoid making "risky" loans. None of this is to overshadow individual state regulation but add a federal standard "floor" that would allow states to regulate above and beyond.
It only took listening to Assistant Treasury Secretary Barr to get my passions riled enough to spend the entire next day raising awareness and the mortgage industry's concerns with 7 of the 10 Arizona political leaders in DC. In full campaign mode, John McCain wlecomed us with similar concerns over the far-sweeping Senate Regulatory Reform Bill as did the representatives from Jon Kyl's office. On the House side, revenue concerns were raised with the tax credit extension as well as an additional extension for the private mortgage insurance deduction which will sunset this year. Ending the day, we met with Rep. Jeff Flake, who is one of my personal favorites, to review the concerns with HR 4173, the reform bill that is so fully supported by the administration and the Treasury (at least Mr. Barr from the Treasury) and elicits tremendous concerns for me.
My anxiety is that of Risk Retention and the antecdotal message of "skin in the game." Ask any mortgage banker and they will tell you, we already hold skin in the game through buy-backs, reps and warrant requirements of lenders, FNMA/FHLMC and our warehouse lenders. Although this is presented as a risk control measure for risky underwriting decisions in the secondary market, it is blanketed to ALL mortgage lenders. New rules from the banking regulators and the SEC will require creditors to retain at least 5 percent of the credit risk associated with any loans that are transferred, sold or securitized. Thus a mortgage origination entity must capitalize 5% of their originations. In lay terms, if a locally owned mortgage company originated $1,000,000 in loans in a month, they must have $50,000 held aside. $10,000,000 a month would need $500,000 for risk retention. This is in addition to all the capital reserve, net worth and regulatory requirements already in place. Not only will that force most, if not all, independent mortgage lenders out of the business, it will create another liquidity crisis for the large depository lenders as there will be additional capital will be required. How do you think that capital will be raised? By increasing the required profit for each loan which translates into much higher costs to the consumer. Many see this as a massive move to eliminate competition by the big banks, but I feel that the banks will suffer as well. Just imagine your only option for a loan being Wells Fargo or Bank of America.
The other fear is the creation of one more entity created to monitor and regulate the mortgage industry. There are already 7 regulatory bodies who impact our business and the lack of communication and cooperation between them has already damaged our economy. The time, energy and cost that a new organization would generate does not fix the problem of the regulatory enforcement deficiencies that we have. As Rep. Marsha Blackburn expressed this morning on "Meet the Press", the Goldman Sachs lawsuit is a prime example of what went wrong in our country. What Goldman is accused of was a violation of CURRENT regulatory law of which is overseen by the SEC. We already have too many regulators not enforcing the already complicated patchwork of laws that we have, and the fix is to add another regulator?
I understand the concern of "Too Big to Fail." We certainly don't want to bail out any more corporate entities with taxpayer money, however, creating a reserve in which banks must pay fees to fund ultimately has the consumer paying that expenditure anyway through increased fees and costs passed along by the banks. I would agree to keep the requirement that says "Be a Bank or Be a Hedge Fund, it's your choice but you can't be both." Just don't try to fools us simple consumers that it won't cost us any money.
I will wrap up by repeating what I predicted in an article for AAR in February, the landscape of real estate finance in the future has not yet been finalized. The decisions that are made in Washington DC today and in the near future will determine how it will look. My commitment to being a voice for my industry, my customers and myself is once again solidified through my exasperation of the political process. I can't reiterate enough the importance of individual involvement. Don't let your future be determined by those like Michael Barr who wish say "I'm with the government and I am here to help."
I want to be the lender of choice for your customers so if I can be of assistance to you or your clients, please feel free to contact me at amy@amyswaney.com
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