Stewart Larsen, the head of mortgage banking at Bank of the West, is quick to defend the profits banks are making from mortgage lending these days.
Over the last couple of years banks have been slammed with regulations that have cut into their earnings, including caps interchange fees on debit cards, restrictions on overdrafts and new credit card rules that prevented them from raising interest rates and fees willy-nilly.
Profits from mortgages have been the saving grace of the banking industry, and Larsen, like many bankers, is concerned that new rules aimed at protecting consumers will instead crimp lending and cripple a nascent housing recovery.
"Margins are strong but it's really profit with honor," says Larsen. "Think about all the regulations that have limited banks' ability to earn income. We are really helping a lot of Americans restructure their personal balance sheet and this would be denied to people under normal circumstances."
The $62.6 billion-asset Bank of the West, a unit of BNP Paribas, lends in 19 states and keeps nearly all mortgages in its own portfolio, though it sells some fixed-rate loans to Fannie Mae. The bank's third quarter net income rose 23% from a year ago to $156 million, driven largely by low interest rates that have fueled an industry-wide refinancing boom.
Larsen expects refinancing activity to remain strong at least through the middle of next year - and perhaps even longer if Congress extends its Home Affordable Refinance Program, which has paved the way for borrowers who are underwater on their mortgages to refinance.
Beyond that, the future of mortgage lending depends largely on policymakers and how they craft regulations in the wake of the housing bust. The Mortgage Bankers Association has called on policymakers to create a new position to coordinate housing policy,
"It seems there are a lot of things going on but there's nobody in control," says Larsen. "We seem to have a lot of regulatory activity with no central theme or guiding principal. It's created a layer of uncertainty. I yearn for the old days when you just had to worry about running the business."
For now, though, Larsen is focusing on things he can control.
Though Bank of the West wasn't implicated in the robo-signing scandal in which large mortgage servicers were found to be rushing through foreclosures, it is nonetheless putting in place new servicing standards ahead of proposed rules expected in January from the Consumer Financial Protection Bureau.
Larsen says it will take 18 months the industry average to adopt a slew of "best practices" that have been recommended for the industry. That includes examining its entire servicing process from clarifying the bank's mortgage statement to ensuring proper communication with customers to verifying the accuracy of monthly mortgage statements.
The five largest servicers have already revamped their standards, and nine others that were under consent orders from the Office of the Comptroller of the Currency are in various stages of implementation. But because some of the changes involve significant investments in technology, other servicers may not have started the process yet, says Diane Pendley, a managing director at Fitch.
"The servicers are still in a little bit of a quandary as to what the final servicing standard rules will be," Pendley says.
"Our own internal idea was that if the big guys had to settle this, there are some best practices that we can all benefit from," Larsen says. "We're investing heavily in resources to help us be compliant and that's become a big part of the business."
Also consuming much of his energy is the so-called qualified-mortgage rule that the Consumer Financial Protection Bureau is expected to finalize by Jan. 21. The rule requires that lenders verify a borrower's ability to repay a loan unless the loan falls under the definition of a qualified mortgage. The rule will establish a set of standards defining a borrower's creditworthiness, including debt ratios and employment status.
Lenders have complained that the threat of litigation will force them to increase the cost of a home loan if the CFPB does not give lenders a safe harbor from legal action.
"I don't know if the consumer understands how far this pricing could go," Larsen says. "The lender can't bear that cost and they have to put it into the equation which will drive interest rates back up."