Reform Is Needed, But Not For CU Lenders
PHOENIX-The "best" mortgage reform bill would be "no" mortgage reform bill, according to Paul Stull, SVP of strategy and brand for $1.3-billion Arizona State CU.
"Regulation is not welcomed by most credit unions, because it reduces our ability to create home ownership opportunities for our members," he said. "Credit unions did not create this situation but are being penalized by regulation unevenly applied."
Still, Stull acknowledged that, "I doubt I'll get my wish of no mortgage bill," and said that any mortgage reform has to include enforcement where it is needed. Proposals that "sweep with a broad brush" and "hit everybody" do not work, he argued.
"We are forgetting who created the problem-mortgage brokers who worked with appraisers and who rushed for profits during the bubble. They qualified people for loans they could not afford, they made false statements about money and deposits, and they falsified appraisals," said Stull. "These practices were not done by responsible financial institutions. The laws that burden credit unions that didn't create the problem won't help, they need to focus on the bad actors."
One of Stull's proposals is for a "suitability test" for a potential borrower. Brokers are penalized for putting people into investments that are not suitable, he said, suggesting something similar is needed for mortgages.
"Don't put borrowers in a loan that is going to explode on them in a couple of years," he offered as an example. "That would be easy for credit unions to comply with because we don't do those things, but it would hold the mortgage brokers' feet to the fire."
According to Stull, one reason why the housing crisis unfolded is mortgage brokers are largely unregulated because states do not have the ability to provide oversight. As a result, he asserted the states are "somewhat complicit" in what happened.
"Credit unions are highly regulated, mortgage brokers are not," he said.
One popular discussion point in mortgage-related legislation has been a proposal to limit all mortgage offerings across the U.S. to "plain vanilla products." The justification being "exotic" mortgage loans were the root of the problem. However, Stull noted, such restrictions would serve to limit consumer choice, which he said means "no one wins."
"Credit unions should have the option of helping members by creating products that help them get into home ownership," Stull said. "We have been very creative with some of our loans, but our track record is we don't use it to put members into something they cannot afford."
Both ACUMA's Dorsa and Stull questioned the risk-retention proposal mandated in the Dodd-Frank Finance Reform Bill, sometimes referred to as Qualified Residential Mortgage (QRM) requirements. A QRM is a home loan that includes such provisions as a 20% down payment. All mortgages must meet QRM standards, otherwise mortgage lenders would have to retain 5% of all home loans originated and packaged for securitization.
Stull said the proposal "sounds good" on its face, but he foresees that it will hurt smaller institutions such as CUs.
"Credit unions would not be able to hold an interest in all their mortgages," he said. "They'll be cut out of the market, which would mean only large, national lenders will hold mortgages and then we'd be right back in too-big-to-fail territory. It is not a bad idea, but it has unintended consequences that could make it backfire."
Five Big Banks Get Their Way
Dorsa said the risk-retention rule "was pretty much written by the five big banks.""They are trying to rush it through legislatively and it will work for them because that is the way they do business," he said. "They are prepared for the risk retention." June 10 is the close of the comment period on QRM, and Dorsa said ACUMA is asking its members to offer comment on the regulation and be proactive.
"I suspect the largest credit unions will be OK with the QRM rule, but it could push some from the next tier out of mortgages. I don't want to ask for a carve-out, because we don't want to seem inferior," said Dorsa. "We need to look at it and figure out how to comply with it, because Congress is not going to go against BofA and Chase and the other big lenders who control 80% of the market."