Denise Leonard
‘Limitations’ imposed

Struggling housing and lending markets and major changes to laws and regulations affecting mortgage lenders and brokers will make their mark on the Bay State in 2008, shifting the nature of competition and significantly affecting consumers.

Answers to whether changes on the horizon will be positive depend on whom you ask.

“With an already-hurting housing market Â… having these types of limitations put on in addition is going to have a major ripple effect [on mortgage brokers], and we don’t know yet all of what it will be,” said Massachusetts Mortgage Association Executive Director Denise Leonard, speaking of Attorney General Martha Coakley’s newly implemented lending regulations.

Many lenders, including national companies such as Wells Fargo, are limiting or eliminating the yield spread premium compensation option for Massachusetts brokers to comply with the regulations’ provision prohibiting conflicts interest between brokers and borrowers. Yield spread premiums are the difference between the interest rate for which a borrower qualifies and what they are charged. The higher rate may cover such things as broker compensation or loan closing costs. Leonard said this could especially hurt smaller “mom-and-pop” broker businesses that now more likely will have to sell products that compensate them through “points” (percentages of the loan cost), which translate into more cash due at closing for borrowers. That will equal fewer loan options for consumers who don’t have the money to pay closing costs upfront, she said.

Coakley contends that her regulations merely codify practices that are already illegal under Massachusetts law, and has said their intent – per her office’s mandate – is to help consumers.

They are meant to help curb “the most egregious and unfair practices” in lending that resulted in consumers ending up with loans they didn’t fully comprehend and couldn’t afford, she said at a Dec. 18 press conference announcing clarifications meant to help brokers and lenders understand the new rules.

But at least 15 lenders have pulled out of or reduced product offerings in Massachusetts because of the regulations, which took effect Jan. 2 (see related story on Page 6).

Massachusetts lenders say tightening underwriting standards that began late last year – whether due to market changes or regulation – are putting their stamp on loans being made now.

“The loans being done right now are really the cream of the crop – high credit scores, lower debt ratios. They’re really being scrutinized. We’re going back to old-school [manual] underwriting,” said Winchester-based Amerihome Mortgage Co. Production Manager Brian Driscoll.

Also changed in 2007, but for the most part taking effect this year, are net-worth requirements for Massachusetts-licensed brokers and lenders, which have been increased the Division of Banks for the first time since 1992; requirements subprime adjustable-rate loans borrowers, who as of Jan. 31 will be required to have in-person counseling from a nonprofit agency and opt in to the loans in writing under a new state law; and rights of borrowers in early stages of foreclosure. Starting May 1, under a new state law, borrowers will be allowed a 90-day “right to cure,” giving them the ability to try to resolve their payment difficulties without incurring attorney and other lender fees during that period.

Mortgage originators who don’t work at banks also will have to be licensed in Massachusetts for the first time in 2008 under new state law. Individual loan originators will pay $500 per license, with fees to be used for borrower counseling and regulatory enforcement, and their names will be entered in a national computer database.

The Division of Banks, through the Conference of State Bank Supervisors, has been working on the database since 2003. It debuted in Massachusetts and six other states on Jan. 2. DOB Chief Operating Officer David Cotney said it’s hoped most states will be on board by 2009.

Mortgage industry trade groups, including the MMA and the Massachusetts Mortgage Bankers Association, support the licensing provision, but local company owners are split on whether the $500 fee is too high.

Consumer advocates are applauding one provision in the new state law that imposes requirements similar to those of the Community Reinvestment Act on non-bank mortgage companies for the first time. The intent is to ensure that lenders make credit available in even-handed fashion throughout the areas they serve.

“Not enough attention has been paid to that,” said Jim Campen, executive director of Boston-based Americans for Fairness in Lending. “I think it will be important in the coming year.”

Attorney Kenneth Ehrlich, partner at the Boston law firm Nutter, McClennen & Fish and co-chairman of its Banking and Financial Services Group, writing in Banker & Tradesman last month, said the CRA-like provision will be among the ones that “hits licensed mortgage companies the hardest.”

The 1977 federal law has been controversial in the banking and credit union industry, in part because of the hefty cost of documentation and compliance.

Campen said he envisions major Bay State mortgage lenders – which today originate the lion’s share of mortgage loans in the state compared with banks and credit unions – beginning to offer products that help lower-income borrowers get a loan without the higher interest rates and corresponding danger of foreclosure.

“I can see a Countrywide or a Mortgage Network beginning to offer the Soft Second loan,” he said. The state-subsidized loans feature below-market interest rates. Borrowers do not have to pay points and the loans rarely result in foreclosure, Campen said.

“Only banks offer them now,” he said. “There’s no question it’s because of CRA.”

Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance, said it will take time for mortgage companies to adjust to CRA-like oversight, but he hopes some will be excited about the opportunity.

“Companies will now get a public rating from the commissioner of banks. We would like to see them identify themselves and say, ‘we are in this to excel,'” he said.

Opportunity Ahead

Massachusetts Credit Union League board Chairman Jim Blake said the woes of national subprime mortgage lenders spell opportunity for credit unions.

Many large, high-volume lenders went out of business or severely curtailed activity in 2007 after loan delinquencies increased dramatically. Lenders began running out of money, while investors who had funded the loans got skittish and stopped adding to the pool or demanded the lenders repurchase nonperforming loans with money they no longer had.

For credit unions and community banks, that means fewer competitors and the chance to fill the mortgage-lending needs of those who once might have gone to a subprime lender, said Blake, who is president and chief executive officer of HarborOne Credit Union in Brockton.

Some 26 percent of current subprime loan-holders in New England have credit scores, loan-to-value ratios and incomes that actually qualify them for prime rate loans, according to a recent Federal Reserve Bank of Boston study.

HarborOne isn’t the only institution interested in helping new borrowers who might once have gone to a subprime lender, or borrowers with subprime loans who are qualified to refinance into a better one. Five large, regional banks recently announced they were putting up $125 million in cooperation with the Federal Reserve Bank-Boston to help subprime borrowers who could face difficulties in the future refinance into more stable loans.

Douglas A. Bowen, president and chief executive officer of PeoplesBank in Holyoke, predicted banks will face “significant headwinds” in 2008, in part because of deepening subprime mortgage fallout.

Banks will be able to help some former subprime customers into refinance loans, he said, but they can’t help them all.

Organizers of rescue loan programs meant to help delinquent subprime borrowers out of a jam, including one introduced by quasi-state agency MassHousing in September, are finding most cannot afford even conventional loans with lower and more stable interest rates.

Bowen said the subprime loan fallout also is spilling into the U.S. credit card industry, which he said saw a 20 percent increase in delinquent loans in October 2007 compared to the same month a year earlier. Blake said he expects job losses in the housing industry – a result of fewer consumers being able to get mortgage loans these days – will exacerbate the problem.

“You are going to see a migration of delinquency into loan portfolios [other than mortgages],” he predicted, because so many people’s jobs, and incomes, have been tied to the mortgage industry.

Massachusetts Bankers Association Senior Vice President for Government Affairs and Trust Services David Floreen said while he’s looking forward to a year that’s a bit lighter than last – since 2008 marks the second year of the state’s two-year legislative cycle – the coming year could still bring surprises.

Floreen said experience has taught him that every year, one or two things turn up that consume lots of attention but never could have been predicted earlier.

This year’s example was TJX Cos., he said, referring to the national retailer’s consumer data hacker disaster that sparked several lawsuits, including one the Massachusetts Bankers Association settled in December.

MBA hopes to push forward a couple of bills that will help “enhance” Bay State financial institutions’ trust departments in the coming year, Floreen said, making the business climate for their operations more friendly.

“The whole investment services industry and wealth management is a really big piece of the financial services community in Boston,” he said.