Working in and around the mortgage industry for much of my career with lenders of all sizes and characteristics has revealed many similarities. Sure, there are differences, though a mortgage loan is a mortgage loan, and a homeowner is a homeowner. That last point is very important: the business we are in is about helping people become homeowners.
Intricately and deeply woven into the fabric of our country, homeownership defines who we are as a people and as a nation. More practically, it is the single most important means of building individual wealth. More realistically, it is also in jeopardy. While community banks and credit unions have their differences, both are community lenders facing enormous regulatory pressures on many fronts, including mortgage lending. Their ability to do what they do well-put people in homes-is likely to be hindered by the intensity of the regulatory environment. It is also an opportunity to work and learn together about successfully lending in the next era of housing finance.
Here's the reality: 2014 rings in a host of new mortgage regulations, including the Qualified Mortgage (QM) Rule that works in conjunction with the yet unfinished Qualified Residential Mortgage Rules (QRM). Boiled down, the intent of QM and QRM is this: loans will only be made to borrowers who can repay them by lenders who have a vested interest in ensuring they do. This is the very definition of lending-make only those loans that will be paid back. The deleterious effect these regulations will have on housing finance and the economy is ample reason credit unions and community bankers should put aside their differences and work together to lessen their impact.
Four Things To Think About
The QM and QRM rules should not apply to community lenders for several reasons:
1) Guilt by association. There were, with the emphasis on were, bad actors in the mortgage business before the housing crisis. Most of them scurried off when the collapse began. Yet, like the classroom full of good students who are punished for the actions of the few troublemakers, community lenders are being sentenced to QM and QRM detention. Picking on those that did not cause the problems makes as much sense in this context as it does in every similar situation. QM and QRM are intended for troublemakers who no longer exist, making them de facto irrelevant.
2) Business Model. Business model defines how lenders lend. Most community lenders are first-party lenders meaning a relationship likely pre-dates the mortgage transaction. Community lenders have every incentive to make loans to borrowers who will repay. Making a loan a borrower cannot repay affects the broader customer relationship and puts its future at substantial risk. The QM Rules are irrelevant for community lenders because community lenders, by definition, lend to those with the ability to repay.
3) Product mix. Product mix defines what lenders offer. Community lenders, for the most part, did not make the types of loans that led to the housing crisis and the recession. Why? Just like the how of lending, offering products that set borrowers up for default is simply not in their best interest. Conventional/conforming loans are boring, unexciting and safe. Banks and credit unions specialize in them because they perform. The QM Rules are irrelevant because banks and credit unions do not offer these products.
4) Skin in their communities is skin in the game. QRM Rules require lenders to retain a portion of the credit risk on every mortgage they sell. The so-called skin in the game approach is meant to ensure lenders will only make loans that will be repaid. (An interesting concept, though impractical in practice since it will severely restrict every lender's capacity.) It also overlooks a fundamental characteristic of many community lenders: they already have skin in the game because they have local mortgage loans on their books. Skin in the community in the form of local loans on their books is skin in the game. Fifty-four percent of credit union loans, for instance, are real estate related. QRM requires even more investment, which will restrict lending and limit homeownership, one of the most important engines of our economy.
Good Thought, Wrong Approach
Size of institution or number of loans granted are measures that have been or are being considered for exemption from QM and QRM. Good thought, wrong approach. The type of lending in which an institution engages is the better basis for an exemption, and, on that basis, credit unions and community banks have something very much in common, and something worth fighting for together.
Back to the most important reason for banding together: the reason we lend. Helping consumers achieve the American dream of homeownership is what credit unions, community banks do. The combination of QM and QRM is difficult for lenders and expensive for borrowers. Financing a home is harder and more costly than ever before.
The true cost of regulation, which is borne by borrowers, is masked by today's low rates. QM and QRM add to the cost and availability of credit. This reason, more than any other, is reason enough to put aside differences and work together to lessen the impact of these latest changes. There's time to extend the olive branch, though not much. Why wait?
Michael Detwiler is CEO of Mortgage Cadence LLC. For info: www.mortgagecadence.com.
