ABA Banking Journal - May/June 2015 - (Page 59)
> MORTGAGES
The Future of Residential
Lending: Key Factors
BY JOSEPH J. REILLY
THERE ARE TOO many key factors
driving the future of real estate lending
to list and describe on one page. But
here are the few that BuckleySandler
believes will be most important:
Managing repurchase risk/False
Claims Act. Perhaps the most
obvious factor will be the element
of repurchase risk and, relatedly for
loans insured or guaranteed by federal
agencies, indemnification and False
Claims Act risk. Since the financial
crisis, lenders have been forced to
repurchase and/or reimburse the
government for billions of dollars of
mortgages. The heavy price paid in
connection with buybacks and related
indemnity demands is fresh in lenders'
minds and is a strong incentive to
make only the highest quality loans
going forward. Because repurchase
risk is a driving factor of tightening
credit, the industry's ability to inject
more certainty and transparency into
the repurchase process could be a
major determinant of whether credit
will be loosened.
The need for clarity and transparency
is particularly acute with respect
to FHA loans. A key factor for
indemnification and False Claims
Act risk will be the enforcement
posture of the Justice Department
and individual U.S. Attorney's
Offices, which do not always appear
to act in sync with housing policymakers' goals of making loans to
underserved borrowers.
Future of Fannie Mae and Freddie
Mac. Repurchase risk is so important
because the secondary market
drives origination activity-indeed,
even portfolio-focused lenders want
to know that market is liquid. But
the future of the biggest players in
that market, Fannie Mae and Freddie
Mac, is now up in the air. How
and when Congress addresses the
future of Fannie Mae and Freddie
Mac, now in their eighth year of
conservatorship, will therefore
dramatically affect the liquidity of
the secondary market and, thereby,
the future of real-estate lending. But
what Congress will choose and when
it will act are, frustratingly, impossible
to predict with accuracy.
Will tight credit standards increase
fair lending risk? And will the
Supreme Court change the law of fair
lending? Because of repurchase risk,
increased regulation and mounting
penalties and costs associated
with even minor violations, credit
standards for today's residential
mortgage are tight. The resulting
restricted access to credit for lowand middle-income borrowers, of
course, disproportionately affects
minorities, which further widens the
gap in homeownership rates between
whites and minorities, who make
up a growing share of the first-time
homebuyer market. Unless credit
standards ease, then we may see an
increase in fair lending challenges-
or at least an increase in fair lending
compliance costs.
This analysis, however, is based on
fair lending law as of this writing,
which permits "disparate impact"
as a theory of liability (in addition to
"discriminatory intent"). By June, the
U.S. Supreme Court will have decided
in the Texas Department of Housing
case whether the disparate impact
theory remains viable under the Fair
Housing Act. If the Court rejects the
disparate impact theory, fair lending
compliance programs will likely
become less intense.
Lender entry into the non-QM space.
A number of incentives are expected
to continue to tempt lenders to enter
the non-Qualified Mortgage space,
including interest-only products for
high net worth individuals, alternative
income documentation for selfemployed borrowers, and higher
upfront costs for borrowers on the
lower end of the credit spectrum.
However, this market will likely remain
fragile until greater comfort develops
regarding regulatory expectations,
litigation risk, and repurchase risk.
Judicial decisions on ATR/QM
challenges, however, could take years
to materialize.
If there is a common theme for the
factors here, it is the question of
how much each of them will cause
credit standards to remain tight,
and whether a restricted market will
increase fair lending risk.
JOSEPH J. REILLY is the author
of The New CFPB Mortgage
Origination Rules Deskbook,
free to ABA members, and
a partner at BuckleySandler,
LLP. Visit buckleysandler.com.
aba.com/BankingJournal | ABA BANKING JOURNAL
59
http://www.buckleysandler.com
http://www.aba.com/BankingJournal
Table of Contents for the Digital Edition of ABA Banking Journal - May/June 2015
CHAIRMAN’S VIEW
UPFRONT
ECONOMIC OUTLOOK
LEGAL BRIEFS
PICTURE THIS
CELEBRATING A TRADITION OF INNOVATION
SOUND RISK CULTURE
AN INTERVIEW WITH FDIC’s MARTIN GRUENBERG
NEW RESPA/TILA MORTGAGE DISCLOSURES
BANK DOMAIN ROLLOUT
INVESTOR PERSPECTIVE
MARKETING/RETAIL
PAYMENTS
ADVOCACY
ABA COMPLIANCE CENTER INBOX
CYBERSECURITY
MORTGAGES
OPERATIONS
BOARD MATTERS
FROM THE STATES
BANKER RECOMMENDED READING
INNOVATIONS IN SOCIAL RESPONSIBILITY
INDEX OF ADVERTISERS
ABA Banking Journal - May/June 2015
https://www.nxtbook.com/naylor/BAKS/BAKS0318
https://www.nxtbook.com/naylor/BAKS/BAKS0218
https://www.nxtbook.com/naylor/BAKS/BAKS0118
https://www.nxtbook.com/naylor/BAKS/BAKS0617
https://www.nxtbook.com/naylor/BAKS/BAKS0517
https://www.nxtbook.com/naylor/BAKS/BAKS0417
https://www.nxtbook.com/naylor/BAKS/BAKS0317
https://www.nxtbook.com/naylor/BAKS/BAKS0217
https://www.nxtbook.com/naylor/BAKS/BAKS0117
https://www.nxtbook.com/naylor/BAKS/BAKS0616
https://www.nxtbook.com/naylor/BAKS/BAKS0516
https://www.nxtbook.com/naylor/BAKS/BAKS0416
https://www.nxtbook.com/naylor/BAKS/BAKS0316
https://www.nxtbook.com/naylor/BAKS/BAKS0216
https://www.nxtbook.com/naylor/BAKS/BAKS0116
https://www.nxtbook.com/naylor/BAKS/BAKS0615
https://www.nxtbook.com/naylor/BAKS/BAKS0515
https://www.nxtbook.com/naylor/BAKS/BAKS0415
https://www.nxtbook.com/naylor/BAKS/BAKS0315
https://www.nxtbookmedia.com