A glimmer of hope for a booming real estate market

Although rapidly rising mortgage rates, combined with persistently high housing prices, have become one of the biggest factors holding back home buying, the list is much longer. Chief among these are increased borrowing costs associated with regulatory risk, risk insurance and national regulations.

The uncertainty that comes with regulatory risk plays a major role in the overall cost to a borrower. Well-intentioned or not, regulations – particularly those regarding mortgage buyouts on defaulted loans – leave room for uncertainty in the market, leading to higher costs for the consumer.

The positive side: regulators have the power to reduce these costs.

Members of the mortgage industry welcomed recent comments from Federal Housing Finance Agency (FHFA) Director Sandra Thompson, who said the FHFA expects Fannie Mae and Freddie Mac to “implement a fair, consistent and predictable process for identifying loan defaults and appropriate remedies. ” She also acknowledged the increase in redemption requests and the fact that “the losses associated with the redemption of low-interest loans can be quite significant.”

Most importantly, it took concrete steps, protecting representatives and mandates from defaults precipitated by the COVID-imposed forbearance. Achieving the above-mentioned goal of a balanced and transparent buyback process will be of great help.

Another additional, albeit hidden, cost to borrowers is the proposed increase in mortgage capital requirements. This increase, which far exceeds the internationally accepted Basel III rules, poses a significant threat to regional banks that service larger loans, including mortgages. Traditionally, it is the liquidity of these regional banks that allows them to reduce the costs of their loan offers. A disproportionate increase in capital requirements will simply be passed on to borrowers in the form of more expensive loans, as banks take on the burden of having more capital to back loans.

Another pressure that imposes additional costs on homeowners is hazard insurance, an increasingly common requirement. When lenders provide a loan, they are often required to verify that the potential homeowner is covered not only by a basic home insurance policy, but also by an additional hazard insurance policy tied to their location. This regulatory requirement requires borrowers to spend even more upfront to meet these requirements. Regulators can reduce this cost by requiring additional risk policy only when necessary and only when it provides a tangible net benefit.

A final area concerns the actions of states and state regulators. One example: In New York, the recent Foreclosure Abuse Prevention Act – as well-intentioned as it may be – requires mortgage lenders to be much stricter in their lending policies. Result: many potential owners will be refused a loan.

Another area where states can help is with expedited regulatory approvals. Many states are extremely slow to approve change of control requests from mortgage lenders – a major problem during times of mortgage consolidation. Another area is the approval of new branches or branch address changes.

When they overlap, the consequences of unnecessary regulations add thousands of dollars to loan costs or cause mortgage lenders to restrict their lending guidelines. It also forces mortgage lenders out of the industry, meaning less competition and fewer mortgage choices for borrowers.

In the absence of a decline in national mortgage rates, it is incumbent upon regulators to streamline regulatory compliance, promulgate balanced and consistent regulations, and maximize transparency to ensure lenders clearly understand their obligations in the event of a redemption.

By working in unison, all parties can help more Americans than ever realize their dream of owning a home. The industry is ready to get to work, but regulators must also be ready to join this process.

David Stevens is the former CEO of the Mortgage Bankers Association and former Assistant Secretary of Housing and Commissioner of the FHA under President Obama.

Scott Olson is executive director of Community Home Lenders of America.