Magazine article Mortgage Banking

Top Five Ways the U.S. Government Will Influence Mortgage Banking in 2015

Magazine article Mortgage Banking

Top Five Ways the U.S. Government Will Influence Mortgage Banking in 2015

Article excerpt

The mortgage banking industry has had to manage unprecedented levels of U.S. government intervention in recent years. Prepare for even more in 2015.

Here is our list of the top five ways the U.S. government will influence mortgage banking in 2015, along with three wild cards that could go in any number of directions--including nowhere at all.

1. Ongoing interest-rate uncertainty: Mortgage interest rates actually declined throughout 2014, despite continual speculation to the contrary. A close watch continues on the activities of the Federal Reserve, government debt issuance and other government actions that influence general interest rates and therefore mortgage interest rates.

So much is at stake. Mortgage banking benefits from declining or stable interest rates, which encourage borrowers to purchase homes and refinance existing mortgages. Whatever happens in 2015, though, interest rates will be a game-changer for mortgage banking. They always are.

2. Expanding credit box: Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) are all under political pressure to expand borrower eligibility. Meanwhile, the Consumer Financial Protection Bureau (CFPB) has implemented its affordability rules as the standards and requirements to qualify a borrower's ability to pay. So, how much leeway is there? Can loan-to-value (LTV) ratios go even higher? Can the production of non-Qualified Mortgages (non-QM) pro vide origination growth in any scale without a broad and liquid mortgage credit derivatives market?

Homeownership rates for millennials are low. Will the U.S. government do something to address millennials' student loan debt and create more eligible mortgage borrowers? Policy goals and the cost of risk will increasingly intersect in 2015.

3. The cost/benefit of compliance: The cost of non-compliance has become ever more severe. It is no longer acceptable to follow the herd into potentially risky new revenue streams. Nor is it wise to rely unquestionably on your service vendors' assurances of compliance. The Department of Justice's use of the False Claims Act in 2014 raises the stakes for defects when selling to Fannie Mae and Freddie Mac and having loans insured by the FHA. On the other hand, having a "Good Housekeeping" seal of approval for your firm's compliance will be increasingly helpful in obtaining warehouse financing, equity investment and counterparts to trade with in the secondary market--and it will remove impediments to mergers and acquisitions. But the cost of all of this compliance is also high. Can technology improvements and resolving legacy exposure blunt the larger-scale originators' inherent advantage? This remains to be seen. Mortgage banking firms that earn profits while being proactive compliance risk managers will have an increasing competitive advantage in 2015 and beyond.

4. Revaluing servicing rights: The values of mortgage servicing rights (MSRs) and/or their sale proceeds can make the difference between profit and loss for mortgage bankers. Historically there were always plenty of buyers of MSR assets, with financing leverage widely available, despite price volatility due to shifting prepayment speeds. In recent years, though, banks that were once buyers have become sellers at the same time as MSR leverage availability decreased. Driving the shift were the increased capital requirements of the Basel III international banking guidelines (as supported by the U.S. government), as well as the marketplace's increased concern about Fannie Mae's and Freddie Mac's ability to pull servicing rights. …

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