Mortgage industry professionals wonder whether the incoming administration of President-Elect Donald Trump and the 115th Congress will take action on government-sponsored enterprise (GSE) reform and a rollback of banking regulations. Although there is much agreement that something needs to be done with Fannie Mae and Freddie Mac, people have different suggestions for what to change. Meanwhile, as legislators announce proposals to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act, some in the industry say there likely will not be a full repeal of the 2010 law that added some mortgage-related regulations and created the Consumer Financial Protection Bureau (CFPB), but there will be some changes that could help loosen credit.
For GSE reform, please stand by
In December, members of the House Financial Services Committee introduced bills proposing to alter the status of Fannie Mae and Freddie Mac. One was H.R.6500, the Moving Housing Forward Act, introduced by U.S. Reps. John K. Delaney, D-Md.; John Carney, D-Del.; and Jim Himes, D-Conn. The other was H.R.6487, the Taxpayer Protections and Market Access for Mortgage Finance Act, introduced by Reps. Ed Royce, R-Calif., and Gwen Moore, D-Wis. Both bills propose pilot programs for Fannie Mae and Freddie Mac. The Moving Housing Forward Act would test a pari passu – meaning equal footing – finance pricing structure for credit risk transfers. The Taxpayer Protections and Market Access for Mortgage Finance Act would expand mortgage insurance to lessen risk for the enterprises. The bills were referred to the House Ways and Means committee.
Meanwhile, Steven Mnuchin, Trump’s nominee for U.S. Treasury secretary, says he supports the idea of Fannie Mae and Freddie Mac being released from government control. Both have been in conservatorship since 2008, and the Treasury has been taking the entities’ profits, via the net worth sweep, since 2012.
Some industry experts say the GSEs must still exist in some form. “There definitely needs to be a continued role for government in the secondary market,” says Joseph Pigg, senior vice president and senior counsel for mortgage finance for the American Bankers Association (ABA). “Whether it’s Fannie and Freddie or some successors, that’s an open question. It needs to be explicit, it needs to be paid for, [and] it needs to be well regulated so that lenders of all sizes have equitable access.”
Pigg says the ABA is currently taking a look at powers granted to the Federal Housing Financing Agency (FHFA) under the Housing and Economic Recovery Act (HERA), which created the FHFA in 2008. HERA was enacted only a few months before the GSEs went into conservatorship in 2008. “We never really operated for any length of time under HERA in a regular market,” Pigg says. “We want to see what kinds of authorities are given to FHFA to make sure that’s sufficient to regulate capital to play that traffic cop role.”
Others agree that equitable access is an important detail in GSE reform.
“We think it is important for the new administration and Congress to establish the GSEs as public utilities, with all their fees and charges subject to regulatory approval, for the GSEs to have, and meet, strong capital standards and for the GSEs to continue to offer all lenders equal access and equal pricing,” says Glen S. Corso, executive director of Community Mortgage Lenders of America. “We think a large portion of this can be accomplished administratively and the rest through narrow-targeted legislation by Congress.”
Others say the most serious challenge the GSEs face is a lack of capital. According to the terms of the conservatorship agreement, Fannie and Freddie are supposed to have zero capital in 2018.
“Clearly, there’s a need to do something,” says Clark Packard, counsel and government affairs manager for the National Taxpayers Union in Washington, D.C. “As currently structured, GSEs pose enormous risk to taxpayers and the broader financial system.” At the very minimum, Packard says, Fannie and Freddie should be forced to hold higher levels of capital to serve as a buffer against any possible credit losses before they are released from government control.
Nonprofits hope that any changes will help borrowers. “What happens to the GSEs will have profound impacts on the ability of working-class families to attain the American dream of homeownership, to build wealth and to close the racial wealth gap in our country,” says Paulina Gonzalez, executive director of the California Reinvestment Coalition in San Francisco. “We believe GSE reform must include a clear obligation to ensure that the affordable housing needs of working families and communities are met and that reforms should not be motivated by a desire to pad the pockets of hedge fund investors who bought shares in the GSEs with an expectation of obtaining windfall profits.”
Matt Clarke, chief financial officer and chief operating officer for Churchill Mortgage, thinks the incoming administration will take steps to slowly move the GSEs out from under the government’s control, which will allow the entities to be independent, while also maintaining the existing multiple-entity structure. “They recognize the value of competition in a capitalist economy,” he says.
Clarke adds that the GSEs can work to create a smarter model of qualifying for a mortgage. “In today’s small-box lending world, the algorithms are in charge,” he says. “There are many people – such as small-business owners and other professionals – who have solid cashflow but don’t qualify for a traditional mortgage due to technicalities in their financial or tax structures. I believe the next administration will see that and effect positive change.”
Jeff Bode, CEO and president of Addison, Texas-based Mid America Mortgage, cautions that the proposed “recapitalization and release” of the GSEs, which Mnuchin is a proponent of, will be a windfall for the hedge funds that bought the Fannie Mae sub-debt. “It will be interesting to follow the money at this point. I believe that independent mortgage bankers will need to have a louder voice in Washington, and we are looking to fund our own lobbyist to that end.”
Legislating away the CFPB
Lenders are also paying attention to promises to roll back regulations such as Dodd-Frank.
Deregulation, Bode says, will be a slow and grinding process because the Senate is not filibuster-proof. (The incoming Senate does not have 60 senators of the same party.) “My gut feeling is that, even if we have a four- or eight-year Trump administration, that will not spur big banks to aggressively reenter the Federal Housing Administration lending space because the memory of False Claims Act lawsuits is still relatively fresh and will probably inhibit those folks from jumping back in too quickly,” he says.
Some say onerous rules, not the fear of lawsuits, are constraining credit. Just look at the ability-to-repay and qualified mortgage (QM) standards, says Richard J. Andreano Jr., practice leader of law firm Ballard Spahr’s Mortgage Banking Group. “The industry would favor revisions to the rules to make them more workable,” he says. “No one is advocating going back to the prior decade where folks forgot basic underwriting principles, but now, it’s tighter than it needs to be, and that’s creating too tight a group of people who can get approved. That’s not good for people who should get approved and not good for the economy.”
The industry has had some victories in getting requirements dialed back, Andreano says. In October 2016, in PHH v. CFPB, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit issued a ruling overturning a penalty the CFPB had imposed on PHH for violating the Real Estate Settlement Procedures Act and its anti-kickback rule. “The bureau was not going to win that,” Andreano says. “It was contrary to HUD guidance and to precedent. To take precedent and ignore it and enforce their new interpretation – that was viewed by the industry as overly aggressive, unwarranted and unfair, and the D.C. court agreed.”
Also, the panel ruled the CFPB’s structure of having a single director is unconstitutional. That’s an easy fix, says Paul Merski, group executive vice president of congressional relations and strategy for the Independent Community Bankers of America. “There is general support for moving the CFPB from a single director to a five-member bipartisan board commission, so I think that will be something that will advance pretty early, quickly, in the new 115th Congress,” he says. Specifically, he says, the Financial CHOICE Act (H.R.5983) that Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, has advanced would restructure the CFPB.
Another area that is ripe for quick action, Merski says, is a change to QM rules so that any mortgage kept on a bank’s balance sheet would get automatic QM status. The move would particularly help community banks. “I think the community banks are well positioned to see regulatory relief on the mortgage finance front in 2017,” Merski says. “I think there has been a lot of support for doing something to address the onerous mortgage lending rules the CFPB has been churning out.”
Craig Nazzaro, a consumer regulatory attorney with Baker Donelson in Atlanta, agrees that the CFPB will likely be revamped in the near future through legislation such as the Financial CHOICE Act. Changes will include moving from a single director to a commission and changing the funding structure. “The effect will be a CFPB that becomes more stable, providing rules and guidance that can last, without constant challenges,” he says. “This would lead to a normalization and hopefully a lowering of compliance costs, which have skyrocketed for lenders in the first five years of the CFPB’s existence. This, in turn, should lower the cost of borrowing to the end consumer and ensure that all consumers have access to credit.”
It is important to keep the CFPB, some say. “There is a need for a financial regulator focused on consumer risk, and the costs associated with eliminating the CFPB would be dramatic and too burdensome for the industry,” Nazzaro says. “What I don’t want to see is [a] CFPB led by a director who is removed by each change in administration. This would feed regulatory volatility, as each incoming director would realign the priorities of the bureau with their own ideals, and the only thing more costly than overregulation to the financial industry is volatile regulations.”
Braden Perry, a former federal enforcement attorney who is now a regulatory and government investigations attorney with Kansas City-based Kennyhertz Perry LLC, says although Trump has threatened to reverse Dodd-Frank, that likely will not happen. Perry does anticipate a systematic review of the myriad rules and regulations the CFPB enacted. “A few things I see that may be affected is the across-the-board compliance,” he says. “Many regional or smaller banks face astronomical compliance costs due to Dodd-Frank and the heightened provisions for risk. But these banks weren’t responsible for the activity associated with the risk, and compliance costs are hurting the smaller-scale banks.”
Another area that will see change is the regulations governing arbitration and disputes between consumers and financial products and services. In 2016, the CFPB proposed a rule that would prohibit mandatory arbitration clauses, which the bureau called “contract gotchas.” This is a very controversial rule, Perry says, and he adds that people in the industry think it could be reversed.
“With the Trump administration, anything is on or off the table,” Perry says. “But as Washington, D.C., is, it will likely take extraordinary effort and significant time for significant change to occur.”
The CFPB has several proposed changes, says Ken Goodgames, CEO of Transformance Inc., a financial education nonprofit in Dallas. In August 2016, the CFPB finalized new measures that require servicers to provide certain borrowers with foreclosure protections more than once over the life of the loan; clarify borrower protections when the servicing of a loan is transferred; provide important loan information to borrowers in bankruptcy; and help ensure that surviving family members and others who inherit or receive property generally have the same protections under the CFPB’s mortgage servicing rules as the original borrower.
These will enhance protections for borrowers and consumers. “Each of the amendments is specifically designed to address fair and just treatment from the mortgage servicing industry,” Goodgames says. “During the Great Recession period, there were countless – and even untold – stories of homeowners who were treated unfairly by the mortgage banking industry. The responses and actions borrowers received from the banking industry were not proportionate to the situation on the ground. The CFPB has undertaken admirable measures to ensure that scenarios like this don’t happen again.”
Mat Ishbia, president and CEO of United Wholesale Mortgage, does not think there will be any major changes to rules, or a loosening of credit, anytime soon. “I think the market is actually in a good place, and there are enough conservative rules to protect against major delinquencies but loose-enough standards that qualified people can buy a home for a relatively low amount of money down,” he says. “I think the market is in a great place and prepared for a big purchase year in 2017.”
Nora Caley is a freelance writer based in Denver.