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» VISIT US ONLINE @ DSNEWS.COM POINT—COUNTERPOINT B anks say consumer demand for home financing remains mired in the downward spiral that's forced so many Americans from their homes, and while lenders concede that underwriting criteria now is more stringent than six years ago, they rebuff the notion that it's because the enormity of the crisis scared them straight. Rather it's more of a lesson learned … and applied. For now, banks contend they just hold borrowers to a standard that translates to low default risk while keeping credit flowing to those who are creditworthy.  On the other side of the debate, discouraged consumers and their agents say banks have an iron-grip on money and restrict capital at a time when the market so desperately needs a shot of liquidity, locking creditworthy borrowers out of homeownership and impeding both the housing and economic recoveries. DS News tapped two industry practitioners operating on the front lines with their fingers on the very pulse of the marketplace to share some insight. Has the pendulum truly swung too far in the direction of rigid lending standards, or should we be thankful that the conditions and mindset of the post-crisis market lend themselves to averting a repeat of our previous mistakes? According to John Walsh: I wouldn't say banks are necessarily afraid to lend because we all need to lend to make money. I mean that's the whole idea. The idea is to make loans. I think what banks are afraid of nowadays is making mistakes. Banks are more afraid to make mistakes these days because of the buyback pressure; the chance for buyback is significantly heightened, so we're certainly more cautious these days. I would say we're more afraid to make a mistake on, say, a HARP [Home Affordable Refinance Program] 2.0 loan, for example. Then all of a sudden you have a loan that's 125 LTV [loan-to-value ratio] that's no longer a sellable loan, and it's going to cost you $150,000 to get out of it. That's generally the underlying tone of most banks and mortgage companies out there, that underwriting is geared toward not making mistakes—all the fraud detection and prevention tools available now, the effort to obtain additional comps and appraisals, greater scrutiny of borrowers' incomes, assets, and large deposits—it's all to minimize mistakes at the point of origination and ultimately, hopefully, minimize defaults and the number of bad loans banks have to deal with. Banks' cautiousness makes it more difficult for people to get loans these days, that's for sure. But again, it's not that we're afraid to lend; we're afraid to make mistakes. Perhaps lenders on the whole have become overly cautious. Their partners within the industry recognize this and are taking steps to lift some of the hindrances that may constrict lending. For example, the Federal Housing Administration (FHA) made it so that default numbers on its streamlined refinance product no longer go into Neighborhood Watch calculations. The reason lenders used to be afraid to take on FHA Streamlines is because if you had anything that was derogatory, the new lender of the refinanced loan was held accountable. Even if the account was hit with something that was no fault of the lender—the borrower loses their job, for example—it would go into the lender's Neighborhood Watch numbers as a derogatory account. The reason everyone was afraid to do FHA Streamlines was that anything tied to that loan that came up derogatory was a mark against you, and there was a chance FHA would cut you as an approved lender. So one of the things they decided to do in order to enhance lending of the FHA Streamlined product—which is a good product—was remove that risk from the equation. No longer would it be counted against you if something out of your control caused the loan to go bad. That's a positive for the industry. Lenders are more apt to take part in the FHA Streamlined program now. More changes like that would be very beneficial for ensuring more homeowners and homebuyers receive the financing they need. According to Rick Sharga: If I were a bank, I would certainly be afraid to lend in today's market. And for a variety of reasons, ranging from a quickly evolving regulatory environment—and not in a friendly way—to headline litigation and market-based risks, to the relative instability of underlying assets and even contract law. I think there's two anecdotal pieces of evidence that suggest lenders are, if not outright afraid, certainly reluctant to lend these days. One is the fact that there's virtually no lending in the mortgage business that is not conforming lending. If it's not something that can be underwritten by the FHA [Federal Housing Administration], by Fannie or Freddie, it's simply not being written in any large or meaningful numbers. There's virtually no jumbo lending going on and virtually nothing going on where the borrower doesn't meet the strict compliance requirements of conforming loans and agency-backed loans. The other is the rapid retreat from the mortgage market of most of the major banks, and that is apparent everywhere, from the origination part of the business to warehouse and correspondent lines, where Bank of America, Citibank, and GMACAlly, among others, are notable for the fact that they're withdrawing from various parts of the lending market. So you see a lack of lending to people who really should qualify for loans but don't meet some requirements of the agencies and the fact that these major lenders are getting out of the mortgage business not just at the origination end but also at the back end. The other fear is the unknown—what's going to happen in the regulatory environment as CFPB [the Consumer Financial Protection Bureau] gains more traction, as various aspects of Dodd-Frank get implemented, and the whole notion of things like Basel III and what that means to a bank in terms of one's financial requirements and reserve requirements if it's going to be issuing these loans. And certainly you have that looming specter of a really unfavorable if not outright hostile regulatory environment, which lends itself, by the way, to more active litigation by consumers and consumer advocates who will probably be able to leverage some aspects of the CFPB regulations to pursue lenders more easily. And if all that wasn't enough, the underlying collateral that backs up these mortgage loans is still more or less unstable. While we're starting to finally see a little bit of movement toward home price stability, it is certainly too early to suggest that the market has turned and home prices are on their way back up. So you're lending, in many cases, on an asset that may or may not be worth the loan amount in the near future. The momentum toward large-scale principal balance reduction makes even the notion of your mortgage contract somewhat tenuous. If you're a lender or a note holder in today's market, the fact that we have consumer advocacy groups, politicians, even legislative bodies calling for large-scale principal balance reduction suggests that the loans you write today are essentially unstable and may be declared to be worth less than what was borrowed. It's a very toxic loan environment right now for large banks that are, frankly, very unsympathetic and pretty easy targets. If we're going to see a return to broader-based lending, then the likelihood is we're going to see the void filled by non-bank lenders who are willing to take on a little bit more risk and may not be subject to exactly the degree of regulatory constraint that some of the larger banks are. 77

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