Chicago Agent takes a look at where we’ve been, where we are, and what is next for the mortgage industry as we move into 2011.
By Jennifer Morrell
We all know that the real estate industry will correct itself over time. The amount of time is needed is another story. The economic climate, legislation and employment have jerked the industry from month to month like a yo-yo. But perhaps the most prevalent influence is the mortgage industry, since real estate buyer confidence takes it cues from interest rates and the availability of loans. While banks may not be paralyzed with fear, the lending reigns are so tight that a significant amount of buyers are sent packing. So how does 2011 look, and what role will politics and legislation, interest rates, and current loan processing trends have on your buyer’s ability to obtain a loan?
Chicago Agent consulted four of industry experts to get straightforward information on red tape involved with getting a loan, and when we might be able to slice through it. We spoke to Dan Bauer, sales manager with MSI; Kiki Calumet, senior mortgage consultant with A and N Mortgage; Paul Jaimes, residential lender with Blue Leaf Lending; and Peter Pappas, senior loan officer, mortgage division with Fifth Third Bank – Chicago. Following is what they had to say.
Chicago Agent: Talk about the changes that took place in 2010, and what will be changing in 2011.
Peter Pappas: Change is always present in the mortgage industry. In 2010, we have seen the industry continue to change in respect to tightening of underwriting guidelines, and the Real Estate Settlement Procedures Act (RESPA) changes as well. Both of these changes have made it more challenging to get mortgages approved, and have made things more difficult and confusing to the borrower. In 2011, we should see the underwriting guidelines and industry changes stabilize, and perhaps even ease a bit in late-2011 or early-2012.
Paul Jaimes: Since I entered the business in 1997, the process has become easier and easier. The introduction of the DU/LP underwriting programs by Fannie/Freddie helped determine the risk level of an individual loan and then increased/lightened the required documentation needed for approval accordingly. In the last year, DU/LP findings are practically thrown out the window, when it comes time for underwriting. Lenders are so paranoid about having to potentially buy back a loan from Fannie/Freddie, due to some technicality, that they are doing a full underwrite on the loan (like they did in 1997). Fannie and Freddie have tightened the box that loans have to fit in to the point that the underwriters are no longer allowed to make a judgment call. If the scenario doesn’t fit the box down to the minutest detail, the deal is dead. Underwriters underwrite to protect the bank/lending institution from buy backs due to technicalities, and not based on whether the loan is going to perform.
The legislation that was implemented in early-2010 has really turned the mortgage industry upside down. I’m more worried about making sure I have the correct dates on each document, and [whether] I’ve disclosed everything properly, more than anything. I understand the intent to make sure the consumer is properly informed, and we certainly want to make sure the consumer is protected by fraudulent practices. But, the majority of loan officers left in the business have always put the borrower’s interest first, and all of the over-disclosure just makes the process extremely cumbersome for everyone involved. In an effort to protect the consumer from the few bad apples who left the business when subprime went away, the rest of us apples are getting beat up. Ultimately, the consumer pays as well through added aggravation, long turn times, and higher rates/fees as originators pass on the costs to them.
Dan Bauer: The year 2010 has been turbulent for the mortgage industry. It would take pages for me to go into all of the industry changes. Below are two legislative changes that dramatically affected the industry in 2010 and will continue to change the mortgage industry in 2011:
The first major legislative change immediately affected the general practices of lenders. Starting in January 2010, the new RESPA-GFE-HUD-1 rules implemented Jan. 1, 2010, brought about great changes in the way lenders disclose loan terms to the client. The Good Faith Estimate (required to be disclosed to all consumers) increased from one to three pages in length. Some of the additions to the estimate were good ideas with good intentions. However, many of the changes made the estimate even more confusing to the client. The disclosure definitely held the lender more accountable to the consumer as it relates to the up-front estimation of the total fees associated with a particular mortgage transaction.
The passing of the Dodd Frank Bill and the Federal Reserve’s Final Rule Amending Regulation Z in late-2010 are each going to affect loan officer and lender compensation in 2011 and beyond. The exact changes that will result from these bills are still unclear. Many lenders are trying to figure out what these changes will mean to their business models moving forward. Both the bill and final rule are confusing as to exactly how lenders should implement the proposed changes. In my opinion, it does appear that these bills will reduce competition among mortgage lenders. This will lessen the consumer’s ability to negotiate the terms/cost of a loan with the lender.
Kiki Calumet: In 2010, the industry went back to the more traditional methods of underwriting loans. Basically, if you want to borrow money, you are required to show documentation that proves you can afford to pay this back. The guidelines are tightening substantially, after more than 10 years of basically giving money away to whoever applied for a loan. In 2011, the greatest change will be the Financial Reform Act, effective in April. Ironically, this bill, like many passed, was written with good intentions but will limit the choices consumers have and, in the long run, favor the large banks. It will take quite a while to determine the full effect.
Chicago Agent: How difficult is it to get a loan?
Pappas: It is more difficult to get a mortgage loan these days than, say, three years ago, although 2010 was a record year in loan closings, due to the interest rates hitting historic lows. I do believe that this year, we will start to see this tightening begin to loosen a bit, which will make it less challenging for borrowers to get a loan.
Jaimes: It is extremely difficult to get a loan. There are plenty of programs that, on the surface, are liberal enough to accommodate most potential borrowers. But, the process is time consuming and invasive. What used to take me two weeks can sometimes take as long as 90 days. Common-sense underwriting no longer exists, so if the loan scenario is outside of the Fannie/Freddie/FHA box, no matter how obvious it is that the loan would perform, it ends up as fall out. If a borrower is financing more than $417,000, few investor options are available to begin with, and rates are significantly higher than Fannie/Freddie. Borrowers are required to put down a significantly larger down payment.
Bauer: Loan documentation standards have definitely increased since the days of sub-prime and alt-a lending. If you cannot document your income and have a credit score lower than 620, it has become nearly impossible to obtain mortgage financing. However, anyone who can clearly document his income, offer a modest down payment and demonstrate an average credit score rating or higher can get a mortgage loan without much difficultly.
Calumet: It is not necessarily hard to get a loan. However, in lieu of the fall out, banks have raised the minimum requirements needed to qualify for a loan, which excludes a large segment (perhaps for the better) that was once able to qualify. Unlike the past, all aspects of the loan need to be documented, such as income, assets and employment. After all, on average here in Chicago, an applicant is asking to borrow $275,000.
Chicago Agent: What needs to change to make the process of getting a loan easier? Has the short sale/foreclosure process improved at all, and can it improve?
Pappas: What lenders think and what the industry will allow are two different things. It would be nice to go back to how the industry was three years ago, but that is not going to happen, due to today’s industry regulations. On the other hand, the changes made in the industry over the past three years should strengthen it in the long run.
In regard to short sales and foreclosures, the industry was blind-sided by the huge number of these during the past couple of years. I think we will see improvements this year in getting these transactions through the system quicker. We already are seeing loans getting approved faster initially than in 2009 and 2010.
Jaimes: Fannie/Freddie need to let the underwriters have more latitude regarding the quirky scenarios that often arise. Underwriting should be based on potential for the loan to perform, rather than some strange technicalities. I think the underwriter should communicate how he came up with the decision. But at this point, he has no option but to kill deals in order to protect the lender/bank from buybacks.
The short sale/foreclosure process just takes too long. When I have borrowers request a pre-approval letter so that they can make an offer on a distressed property, I assume there is about a 5-percent chance the deal will be accepted and closed within the next six months. I’m still seeing primarily bottom feeders on the buy side, making low-ball offer after low-ball offer. The process takes so long that they can basically shop around while multiple banks are taking their time reviewing, and then denying, the offers. It looks to me like the process is just going to take longer. It might sound cold, but I think the borrowers should be held a bit more accountable for the fact that they aren’t paying their mortgages. They signed the note clearing stating that if they don’t pay, they have to get out. They should get out and get it over with.
Bauer: I believe you can look at this question from a few different viewpoints: I believe banks/lenders are looking for more clarity and consistency in the secondary market. The amount of loan “buybacks” from secondary investors results in lenders demanding their underwriters to heavily scrutinize every file. This can lead lenders to require certain property values to be re-certified and requests for additional layers of loan documentation from the consumer or other third parties associated with the transaction. These unexpected requests can cause delays in the loan process and frustration from all ends of the transaction. If lenders are able to obtain consistency and clarity from the secondary market, this will ultimately trickle down to the loan application experience and should create a much more clearly defined lending market
I would say the short-sale/foreclosure process has not seen much improvement in 2010. Some banks have streamlined their efforts to move things faster, but on the whole, many are still trying to figure things out and dealing with surging short-sale/foreclosure volume levels.
There have been a select few real estate professionals (lenders, realtors, attorneys) who have been determined to gain a much better understanding of the short-sale/foreclosure process. When a client has professionals representing him who fully understand the process, the transaction can and usually does go much smoother.
Calumet: To put this in perspective, people qualifying for loans today are perhaps the most qualified in more than 30 years. Once this all comes full circle, the process may smooth out and perhaps more common sense will come back to underwriting. As for short sales, currently, most of these large institutions are not yet capable of handling the amount of REOs that they hold, and they’re not staffed accordingly. As for foreclosures, this is not all on the lenders. In Illinois, a foreclosure has to be approved by the courts, thus can potentially slow the process down. Ideally, you want to clear up this inventory as soon as possible, so the market can hit bottom, and we can start with a better foundation.
Chicago Agent: What is the “no-lend list” and how does it impact lending, if at all?
Note: A “no-lend list” has been described as a list of “blackballed” developments, sent by a specific bank that has decided not to currently lend for these properties. Other banks, however, are still lending for the properties, which reinforces the buyer’s benefit to shopping different lenders. Examples of reasons a development might make the list include “too many renters of the units,” “numerous short-sales/foreclosures,” and “development is partially a hotel.” Two of our sources had never heard of the list.
Pappas: Borrowers with credit score under 600 will continue to find it extremely challenging to get a mortgage loan, since the subprime market collapsed. Many of the subprime loans served a good purpose, but many in the industry misused these loans, and the rest is history. I truly wish some of these loans were brought back, with tighter guidelines and more control.
Calumet: There is not necessarily a “no-lend list.” Remember that the majority of guidelines are set forth by Fannie Mae and Freddie Mac, the government-sponsored entities that all major lenders sell to and abide by. In the past 10 years, a lot of associations have gone bankrupt with low owner occupancy rates, reserves and investment concentration. This has caused a huge block of bad loans because of the past lax guidelines in lending. Now, the guidelines set forth simply want an association to be financially sound with proper insurance and cash reserves, and a high percentage of owner occupancy, as these have proven to perform better. In the long run, this only benefits the borrowers as it offers more security that their investment is stable.
Chicago Agent: Regarding politics, what impact will Republican control have on the industry?
Pappas: I don’t think this will have any major impact on the industry. Politics really don’t matter; this is all about markets and the health of the global credit system. We do have a balance of power now, which is usually a good thing for the country, provided we can work together.
Jaimes: I really don’t think it will make much of a difference. The damage has already been done by legislation that kicked in this year. Politically, rolling back legislation that is meant to protect consumers is bad business. The new legislation impacts brokers and correspondent lenders much more negatively than it does the big banks. The big banks have the money to lobby for or against changes, and they don’t care how long it takes to get a loan approved. There is no real incentive to push for change.
Bauer: Republican control will have a positive impact if they can create a level of regulatory stability for private sector businesses. I believe the regulatory landscape has been so confusing over the past two years that many businesses have halted their growth plans and are simply waiting to see what regulations take place and how they affect the marketplace. The lending industry has been hit with massive legislative changes. I believe most banks/lenders are looking for clear guidance from Washington, D.C., before they can actively pursue their growth strategies as it relates to residential lending.
Calumet: Most politicians really do not understand the day-to-day intricacies of lending, and it would be better if they did not pass the current legislation. But in the end, it simply comes down to who has a more powerful lobby: the large banks or the mortgage banks. Unfortunately, it is the large banks. In the end, the consumer pays.
Chicago Agent: Was the bailout money from 2010 necessary, and how are banks really using this money?
Pappas: In regard to the bailout money, this was a smart and necessary thing to do. Without it, we could have sunk into a depression. I don’t think we will see any bailouts in the near future. We are already seeing signs of improvement with the economy, so I think they will have a wait-and-see game plan.
Jaimes: The bailout was necessary for the purpose of keeping us from a total collapse of the financial system. It worked. But, instead of implementing new laws to protect the consumers and keep the banks from repeating what we went through, it might make more sense to simply enforce the laws that we had before. As a lender, I’d rather keep the process easy for the good borrowers and good lenders, and then just punish the bad guys severely.
I’d give the government an “A” for keeping us from total implosion, but a “D-” for how they have negatively impacted the way business is done moving forward.
Bauer: I believe much of the bailout money was unnecessary and simply a waste of tax payer money. One of the bailout measures I believe to be necessary was the execution of the Troubled Asset Relief Program (TARP) Fund. In my opinion, if the government had not created this fund, we could have seen the collapse of many more financial institutions. This would have had a devastating impact on our worldwide economy, not to mention the real estate/lending industry here at home. However, even the TARP fund should have been better managed by our government. I believe there should have been more rules and conditions established for the banks that took the money. Overall, I believe the government has done a below-average job in identifying the problems with our economy (especially as it relates to the housing market) and enacting legislation that effectively and efficiently targets our primary economic issues.
Calumet: It is too soon to know if the bailout had a positive effect. It certainly has not helped employment numbers as advertised. In one sense, the government bailed out the “too big to fail” institutions that made a lot of poor decisions in the past, thus rewarding this. If a bailout were the answer why not simply spend money like this all the time? Ideally, a strong economy does not need cheap money, as the Fed has relentlessly taken on by keeping rates low. An environment for sound investment is preferable, which would entail a tax code that does not punish income and investment.
Chicago Agent: Have we truly hit the bottom in terms of rates, and will they rise this year as many predict?
Pappas: It is extremely difficult to forecast the future of interest rates. It really depends on how the economy recovers.
Jaimes: I think we saw the bottom a couple months ago. Rates will stay relatively low until the economy really turns around and the housing market turns around.
Bauer: I believe we have hit the bottom with respect to mortgage interest rates. While I do not suspect home loan rates will rise dramatically in 2011, it does appear the Fed will utilize the full $600 billion allocated to Quantitative Easing 2 (QE2), which will continue to push bond prices down and interest rates up. Additionally, if we continue to see the positive economic reports of late, I wouldn’t be surprised to see mortgage rates climb to 6 percent in 2011. However, I would remind consumers that, historically speaking, a 6-percent mortgage rate is still a great rate.
Calumet: I never thought we would ever see rates this low. Even with the current rise in the past two months, interest rates are still at historic lows. I believe too much focus has been placed on this once again, and not on creating a favorable environment for investment. I remember back in January of 2001 when the first refinance boom began. Borrowers were scrambling to refinance their 30-year fixed rates at 7.5 percent. Back in the late-‘90s, when Chicago’s real estate market was booming before all the extremely lax lending, a 30-year fixed rate was at 8.5 percent. No one cared, because the economy was strong.
Chicago Agent: How is the lending industry helping to shape the real estate industry as a whole, and how will it affect the market in 2011?
Pappas: The mortgage industry is shaping the real estate industry by educating borrowers and helping them understand what they can truly afford, in terms of a new home. In the end, borrowers will be better off with all the new guidelines and regulations. The year 2011 will prove to be a turning point for the real estate market and will see an increase in purchase closings.
Jaimes: As a whole, I think the lending industry is holding back the real estate market. The process is too imposing now. Even if rates are low, it is just too difficult to get a loan. Most people don’t want to go through the pain to get financing.
Bauer: The lending and the real estate industries are essentially tied together. When there is uncertainty in the lending industry, this can cause consumers to halt their short-term real estate plans, resulting in a slowdown of the real estate market. We have been witnessing this connection first-hand over the past two to three years. We have seen inventory levels rise and home values drop, as banks scale back their lending to consumers, and try and understand what loans can be delivered to the secondary market.
I believe we will see a continued drop in home values in 2011 as there are a large number of distressed homes sales still yet to come. However, I believe most lenders are planning for an increase in the purchase market in 2011. Most consumers have done a lot of refinancing over the past two to three years, and I believe we will see most residential mortgage activity swing toward an increase in purchase transactions moving forward. Similar to 2010, 2011 will still be a great time to buy residential housing.
Calumet: Guidelines are so strict that borrowers today are laying a solid foundation for the industry and the economy as a whole. The default risk moving forward will be low and this should be something positive to build on moving forward. It is important now that borrowers are well informed about their potential purchases and understand what they are getting into. For years at A and N, we have made it a priority to educate our clients and be specific about the whole process, so they are comfortable with their purchases. That is why, in an industry where other mortgage companies have faced challenges, A and N continues to grow and thrive.
Senior Mortgage Consultant
A and N Mortgage
Blue Leaf Lending
Peter P. Pappas
Senior Loan Officer, Mortgage Division
Fifth Third Bank – Chicago