While the market downturn has brought business challenges over the past several years, it’s also brought monumental legislative and regulatory changes.
At more than 2,300 pages, and with 243 required rulemakings and numerous required studies, passage of last year’s Dodd-Frank Act imposes a tsunami of challenges for the mortgage industry and ushers in a new era for consumers. American Land Title Association (ALTA) has been deeply involved in helping to shape several provisions of the Dodd-Frank Act that will transform the mortgage market.
GSE Reform
The collapse of the housing bubble at the end of 2006 and eventual placement of mortgage giants Fannie Mae and Freddie Mac (GSEs) into federal conservatorship two years later focused the national spotlight on the role of the federal government in the housing finance system. While months of hearings, legislation and rule-making will determine the final destinies of Fannie Mae and Freddie Mac, changes are already being discussed within Congress and by the GSEs’ regulator that will ultimately change how business is done in the secondary mortgage market.
Passage of the Dodd–Frank Act put the ball in motion to reform the GSEs by requiring Treasury to conduct a study and make recommendations on ending the conservatorship of Fannie Mae and Freddie Mac.
In February, the Obama administration published its three-option plan to reform Fannie Mae and Freddie Mac. The administration’s primary goals are to pave the way for private capital, address fundamental flaws in the mortgage market and more effectively place government support for affordable housing. Republicans on the House Financial Services Committee have also proposed various bills aimed at ending taxpayer bailouts, adding transparency and reducing costs.
During this process, ALTA has reminded members of Congress that private property rights and the integrity of real estate transactions must continue to be protected. Absent reasonable standards to underwrite legal title to the collateral used to secure mortgage loans, mortgage lending will become riskier, and the quality of the information that is contained in documents that identify legal title to real estate will erode. In several bills proposed to reform the GSEs, language has been included requiring title insurance to transfer title-related risks to state-licensed title insurance companies for all conventional mortgages to be collateralized.
Inclusion of this language is further evidence that members of Congress agree with the common-sense idea that collateral underwriting standards need to be maintained in the future housing finance system. Inclusion of this ALTA-supported language is due in large part to meetings ALTA members had with members of Congress during the Federal Conference and Lobby Day in March.
Qualified Residential Mortgage
A portion of the Dodd–Frank Act sets out a new requirement that forces lenders to retain 5 percent risk for any loans they sell on the secondary market. Exempted from the act’s risk-retention requirements, however, are mortgage-backed securities composed entirely of certain high-quality, lower-risk mortgages known as Qualified Residential Mortgages (QRMs).
It was left to the regulators to define a QRM, and as it now stands,. the proposed rules would require future homebuyers to put down at least 20 percent of the purchase price of a home and meet strict income requirements to qualify for loans with the lowest interest rates.
ALTA believes that by proposing an artificially narrow QRM and requiring a minimum 20 percent down payment, millions of credit-worthy borrowers will only be eligible for mortgages with higher interest rates and fees — without the protections against risky loan features.
The justification of qualified residential mortgages is to generate a finance structure that encourages responsible lending and borrowing. However, ALTA believes that the proposed regulation misses the mark because it does not require lenders to undertake common-sense underwriting steps to identify and establish who possesses the legal right to the property.
Underwriting the real property that will serve as collateral for the mortgage loan is a fundamental part of the underwriting process and can be achieved by utilizing a title search backed by a title insurance policy to investigate, identify and analyze the state of title to the collateral, thus reducing risk of loss for investors.
The QRM will shape the future of the mortgage market by determining the types of mortgages commonly available to borrowers. The proposal will move a substantial amount of business from the private sector to the government, driving more borrowers to the FHA. It could also mean further consolidation among lenders, thus disrupting competition in the mortgage industry.
Consumer Financial Protection Bureau
It’s been less than two years since the industry was forced to spend millions of dollars to alter processes and software programs to use the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement mandated under RESPA Reform. The Consumer Financial Protection Bureau (CFPB) will require the industry to undergo the process of producing and learning new forms once again.
One of the CFPB’s first priorities is to create a new mortgage disclosure that combines the Truth in Lending Act (TILA) disclosure and the Real Estate Settlement and Procedures Act’s Good Faith Estimate (GFE), with the goal of developing a form that is easier for both consumers and the industry to use. The CFPB released its first prototypes of the combined disclosure form on May 18. Finding harmony between simplifications and providing detailed information to help consumers make informed choices when obtaining a loan remains the highest hurdle. ALTA’s task force is already combing through the forms and preparing a detailed critique at the request of the CFPB. Prototypes for a new HUD-1 Settlement Statement are expected in the months ahead.
Looking Ahead
The voluminous Dodd-Frank Act poses many challenges. The sheer number of rules still in the pipeline means more changes for the industry. The breadth of changes coming to the lending industry is profound. Title insurance and closing providers who understand the challenges of their clients and anticipate the effects on their own business will be better prepared to navigate the new mortgage market.
Jeremy Yohe is director of communications for the American Land Title Association. Email: jyohe@alta.org.
