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» VISIT US ONLINE @ DSNEWS.COM INDUSTRY INSIGHT POINT-COUNTERPOINT According to Dave Liniger Undoubtedly, lending regulations are considerably tighter today than they were pre-crisis. As a respected mortgage lender so adeptly described it, the housing downturn did to mortgage lending what national security concerns did to the airport screening line. After the attacks of Sept. 11, travelers found themselves confronted with a barrage of new screening measures that created countless headaches. However, over the recent years, the cumbersome process of removing shoes, belts, laptops and liquids is now tolerated and expected, and passengers have adjusted to the new normal. In the same way, lenders have learned how to navigate today's tighter, more scrutinized and regulated mortgage environment. Although neither airport security nor the mortgage approval process is easy or even practical, both passengers and lenders have learned to cope and we have all learned that life goes on. POINT— COUNTERPOINT According to Ivy Zelman GROUND FORCES The Dodd-Frank Consumer Protection Act was designed to safeguard consumers' financial interests. However, the unintentional consequences will certainly make home loans more rare, more expensive, and more difficult. It is encouraging that regulators and legislators both are beginning to realize this. Negotiations are taking place that will hopefully result in commonsense policies regarding qualified mortgages, appraisals, and legitimate closing fees, which are among the many aspects of Dodd-Frank. What this market desperately needs is commonsense regulation and lending. Let the pendulum come to rest in a balanced position. Housing policies should truly safeguard consumers without stifling economic growth. With all the recent political rancor and division, I'm hoping this isn't too much to ask of our leaders. I'm hoping that very soon, lending comes more in line with market realities. This will allow housing activity to return to traditional, sustainable levels and promote much-needed economic improvement. After all, this is what really benefits the consumer. BEST PRACTICES If you're not certain that mortgage, lending standards are too restrictive, just take a look at the current market The reaction of the lending industry to the housing crisis was to overreact. The pendulum of reason has swung too far in the opposite direction. Despite unbelievable interest rates and favorable home prices, the housing industry is contributing only 2.5 percent to overall GDP, a level that makes it impossible to lead the country out of recession. Even for those who initially qualify for a mortgage, the battle is not won. More than 10 percent of signed sales contracts fall through before closing. This is most often due to additional documentation required by the lender, which many homebuyers say goes way beyond what they expected. If we could bring just these deals to the closing table, home sales would be 10 percent higher than they are today. Unfortunately, many potential homebuyers won't even consider the challenging process. They have heard the horror stories. They have decided they could never qualify and don't wish to undergo an exasperating exercise. Investors avoid the process too. In the last couple years, real estate investors have made the difference in many markets around the country and have spurred the housing recovery. The number of investors in this market has reached a record level, and their method of payment is also at a record level. A full 77 percent of them pay cash. And it's not just well-heeled investors avoiding the lending process. More homebuyers than ever before are paying with cash. Why would they do this when interest rates are lower than any of us has ever seen? There is something wrong with the process. You also have to ask yourself why lenders would reject large numbers of borrowers, force others to buy with cash, and alienate so many from entering the market. Not only are they slowing the housing recovery, and by extension the overall economic recovery, but they are also losing good customers. The government's reaction can be characterized as an overreaction. It has placed more stringent regulations on lenders, with more on the way. Regulations aimed at ending overly-liberal lending were certainly warranted, and have resulted in tighter credit availability today than five years ago. However, much of today's elevated stringency is attributable to continued uncertainty about future, pending regulation rather than the current rules recently put in place. In response to the ongoing uncertainty, lenders have gone over and above the new regulatory regime, creating credit overlays on top of regulated guidelines, which has restricted lending more than policymakers anticipated. This is an industry-wide phenomenon. Even borrowers with large amounts of cash assets have difficulty accessing capital from lenders today. Lenders simply do not know the rules of engagement for the mortgage industry as regulators continue to debate the next step. Lenders are bracing themselves for whatever potential change may be announced tomorrow. In short, they're still uncertain about what new rules and requirements may be coming down the line and it shows. I agree that lending is stringent today, but I differ on where the constraints are coming from, and it's not from the regulation itself. It starts with the regulation causing uncertainty. Take the Federal Housing Administration (FHA), for example. FHA will insure a mortgage for a person who has a 580 credit score, but right now, there's not a loan that's getting down to 580 and making it into FHA's portfolio. You're not going to hear anyone in the mortgage industry today say "Oh no, it's not bad out there. There are plenty of loans to be had." Who's going to say that right now? Lenders are keenly aware of the rules of engagement, and right now, they're dealing with millions of dollars in repurchases—loans that are being put back to them that they originated by the book at the time, doing everything exactly as they were told by the GSEs and other investors. But now that the rules of engagement have changed, these same loans are being put back and lenders are being forced to take a hit because underwriting criteria was looser back then and there's no statute of limitations that come with those loans. The mortgage industry needs clarity on rules and regulations. Although recent policy changes have been steps aimed at reducing uncertainty, there is still more than can and should be clarified and defined so that lenders can get back to extending mortgage availability to credit-worthy borrowers. MARKET PULSE T he year ended with the housing market signaling that the future is promising for a full and robust recovery, but while home prices are steadily increasing and homes are staying on the market for shorter periods of time, the truth is that it's still pretty difficult for many Americans to access credit. While all parties agree that something had to change from the loose underwriting standards of the pre-crisis days, some wonder if regulators have over-reached in their eagerness to bring effective positive change to the market. Dave Liniger and Ivy Zelman weigh in on how much is too much when it comes to lending restrictions. 57

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