As head of the Mortgage Bankers Association, David H. Stevens spent the last year warning that excessive and ill-considered regulation could drag down the mortgage market.

As the new head of SunTrust Mortgage, he'll have to face that regulation head-on.

Stevens, the former commissioner of the Federal Housing Administration, last week said that he would leave the MBA after little more than a year. He will take over SunTrust's (STI) mortgage operations in mid-July, taking on a business that is still struggling with credit quality and repurchase requests — and trying to comply with new government requirements.

The mortgage industry is in "a state of over-regulation, which could ultimately result in the blockage of credit altogether," Stevens told American Banker in an interview last week.

Though he said it would be "premature" to talk about his plans at the $172.3 billion-asset SunTrust, Stevens said he chose the Atlanta bank primarily because regional banks have made it through the financial crisis with far less damage to their reputations than the biggest banks have suffered.

"Every bank in America has to deal with mortgage issues," Stevens said. "You can look at the in-foreclosure inventory across the country and there's still a lot of work there."

SunTrust has made noticeable improvements in credit quality and noninterest expenses in the last year. But like most banks, it is still struggling to contain mortgage repurchase costs, reduce non-performing loans and increase the volume of home purchase loans.

"From a growth standpoint, the key was to look for a bank platform that was committed to mortgages, and I do like the regional bank profile," Stevens said, adding that SunTrust has "been able to take a look at both the legacy issues, which every bank is dealing with, and separate that from how they do the business on a go-forward basis."

Stevens arrived at the MBA last May, after spending two years as commissioner of the FHA, where he increased enforcement actions against mortgage lenders. His decision to jump to the mortgage industry's trade group last year raised some eyebrows, and a series in American Banker examined emails suggesting Stevens and his deputies had maintained cozy ties with the industry while at the FHA.

"I went to the MBA because I thought there was a lack of cohesive voice for mortgage management in Washington," Stevens said last week. "I wanted to create a common voice on critical issues. I wanted to make sure we thought about our reputation. And I wanted to have the MBA return to its role of actually caring about responsible home ownership while creating a common voice for the industry."

He added that he is leaving the MBA much sooner than he had planned to, "but this unique opportunity to return to the private sector would not wait. I leave a stronger MBA and will continue to be an active member and advocate" in the industry, as "an employer running a large substantial mortgage platform."

In a wide-ranging interview with American Banker last week, Stevens weighed in on a wide array of issues facing the mortgage industry, including the "qualified mortgage" rule, the government's role in the housing market and the future of the FHA.

What's the biggest issue that the industry is dealing with right now?

DAVID STEVENS: We have to create protections for consumers going forward and make sure that we have rules the industry can operate under and be willing to lend in — that's the dynamic tension and risk.

What is your view of the Consumer Financial Protection Bureau pushing back the release date last week of its "qualified mortgage" rule until the end of the year?

It's a good idea as long as the rule was delayed for the right reasons. The wrong reason would be delaying it because of the timing of the [presidential] election. That would be a reason for concern and an indication of how impactful the final rule can be and how divisive it can be. It's a really important rule and the greatest victim of the QM rule is the exact consumer we're trying to protect, the first-time homebuyer without large wealth or one who may have lost their job.

The good news is that the debate has brought out a profound recognition of the downstream impact that this rule could create. The extended time will give [CFPB head] Richard Cordray and his team more time to look at the data and how it could impact responsible well-qualified borrowers.

If you look at the qualified mortgage rule, regardless of the "ability to pay" issue, all types of products from option arms to balloon payments to no doc/stated income loans are entirely eliminated forever. By eliminating these product features we have basically solved 95% of the problems that created the housing bubble. The experimentation of untested credit models and the layering of risk caused the problems in the first place. But the eagerness to stop any risk may have gone too far and may result in the U.S. having the tightest housing finance rules in the world. It's the 'ability to pay' definition and the safe harbor debate that will impact who gets to buy a home and who doesn't.

You've held various roles in private industry and government. Who is to blame for the current dysfunction of the housing market?

There are more entities involved in the mortgage space now than [ever before] in history. I've never seen a world where so many regulators, so many state legislators and legal entities, from state attorneys general to the Department of Justice, are all involved in mortgage finance, and that's creating excessive levels of uncertainty in the market. There's a role for Washington to play in clearly defining who's on point for select issues on a national scale, because without that we're going to have a continuous morass of players that can cause greater confusion.

Unfortunately the person who ultimately pays the price is the consumer, because all the costs of uncertainty get passed to the consumer through higher-cost loans or tighter credit, because lenders become afraid to lend. There are whole companies that have left the market, like MetLife (MET), or that have scaled back, like Bank of America (BAC), which creates less competition.

Where are we now in terms of resolving the legacy mortgage issues?

We've gone through stages. When I first joined the administration we were in the position of stopping the bleeding, because home prices were free-falling and it was about creating programs to prevent foreclosure. The Dodd-Frank Act hadn't been passed yet. Now it's transitioned to trying to find a pathway for certainty in the market. What concerns me is that now we're at a point where it's a state of over-regulation, which could ultimately result in the blockage of credit altogether. So it's about getting the dynamic tension right between consumer protection and lending.

By the way, [regulators and policy-makers] are all well-intentioned, but it's just creating confusion. Too many are wearing the hat of trying to come up with a solution for the future of housing finance.

What should the role of government be in the mortgage market?

I've always believed there's a role for a government guarantee, because for people to invest and to bring capital into the U.S they need the government guarantee. Private capital is opportunistic. I believe that the role of government is too big in the mortgage finance system, so creating certainty as the economy recovers is extremely important to ensure that private capital will want to come back in. I still don't see a clear path for that. We saw today [June 1] that the unemployment rate increased and the market overreacted. The euro is still clearly in crisis. Until we see some broader stability in the U.S. economy, we're going to have this volatility. We're in a huge eco-system of the world economy, and until there is a broader theme of stability, we will have a continued need for this large role of the government in the housing finance system.

But we've been here before. I started in the early 1980's, when interest rates were 16% and lenders weren't lending and FHA was a huge part of the market. It made up 50% of the market in Texas, Oklahoma and Colorado. People said at that time the economy would never recover and it did. This one will recover as well, it's just going to take a while. This is a much deeper broader and national recession.

You played a role in the settlement early this year between the five largest banks and federal and state regulators. Were you happy with the outcome?

Happy isn't the right word. I was working on the settlement in the very beginning. It was a very complex negotiation that involved five very sophisticated financial institutions and knowledgeable legal entities in Department of Justice and state attorneys general. It was a large group of highly-skilled people. This has been a terrible housing recession that everybody from the banks to policy makers would go back in time and wish they could change. The real challenge is getting through this to make sure this never happens again but also doesn't overly constrain home ownership.

What about the dire predictions that the FHA will need a bailout of $50 billion from taxpayers?

The screams from the highest rafters that FHA was going to cost the taxpayers $50 billion have not come about. They haven't cost taxpayers a penny and FHA is still operating under its own self-sustaining capital. Unlike Fannie Mae, Freddie Mac, or the banks, FHA has had no TARP funds and is fully self-sustaining on its own capital reserves and that's going through the worst recession. It's pretty difficult to accuse them of doing something wrong when there were so many failures. Will they make it through the rest of the recession on its own capital? The odds are better than even that they will. Lehman failed, Countrywide failed, Washington Mutual failed and Wachovia failed — and they all had TARP funds.

I didn't respect FHA as much working there as I do today. Collecting a mortgage insurance premium on every loan is much different from the government-sponsored enterprises getting a guarantee fee. It gives FHA a greater cushion from default risk. My hope is that the current administration and future heads of FHA don't pull back the credit characteristics and policies we put in place to tighten the portfolio. They need that revenue in to protect the taxpayer.

I also think the loan limits are too high and when they raised them for FHA and not the GSEs it created a disparity that is really not healthy for the long-term. Of course, they do very few loans above $700,000 but there should be considerations around whether there should be a larger down payment for higher loan amounts.

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