Industry between softer market, harder rules

There might not be any industry more directly affected by increasing foreclosure rates than mortgage lending.

Nationally, a number of large subprime lenders have recent thrown in the towel – some ending their subprime lending business, others being sold. Few of the large national lenders heavily vested in the subprime market have escaped the effects of the foreclosure squeeze.

Locally, mortgage lenders say they are faring well but are facing a wave of new legislation aimed at curbing fraud and consumer-unfriendly lending practices.

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On June 1, Gov. Bill Ritter signed into law five bills aimed at tackling the foreclosure problem. Of those, four were directed toward the mortgage lending industry:

• House Bill 1322 – defines definitions of fraud and disclosures of fees, costs and rates.

• Senate Bill 85 – prohibits mortgage brokers from improperly influencing real estate appraisers

• SB-203 – requires registration of mortgage brokers, to become licensing on Jan. 1, 2008.

n SB-216 – creates a “duty of good faith and fair dealing” for mortgage brokers.

For some in the industry, the legislative singling out of the mortgage lenders and brokers is a step taken too soon.

“There are so many moving parts,´ said Bill Kidwell, president of the Colorado Association of Mortgage Brokers. “To pass five bills that single out an industry won’t (address the issues).”

Kidwell and Julie Piepho, senior vice president for Cornerstone Mortgage and secretary and treasurer of the Colorado Mortgage Lenders Association, both feel that a study should be commissioned to look at what is causing the foreclosure problem here in Colorado.

“We have asked the General Assembly repeatedly for a study to determine the cause and effect (of the rising foreclosure rates),” Kidwell said. “The big thing we would like to see is an industry study that would allow the industry, the regulators and the legislators to decide what needs to be done.”

Legislators: Act now

Erin Toll, director of the Colorado Division of Real Estate, is tasked with enforcing many of the new regulations on the mortgage industry. She said that the mortgage industry was advocating for a study, but that legislators felt that action had to be taken sooner rather than later.

“To me, it was like, ‘Let’s analyze it until it dies,'” she said of the industry stance.

Instead, the Colorado Legislature started the regulatory wheels in motion last year when it passed a bill requiring mortgage broker registration. Until then, Colorado was one of two states that did not have some type of mortgage broker registration program. The deadline for registration was Jan. 1, and more than 5,000 brokers are now registered.

The second round of legislation that was signed this year expands the registration program, eliminating exemptions for Federal Housing Authority mortgage brokers and others. Toll said the elimination of the exemptions could affect an additional 14,000 brokers.

On Jan. 1, 2008, all registered brokers will become licensed brokers – the only difference will be in name. However, going forward with licensure will require pre-licensing education, continuing education and carrying errors-and-omissions insurance coverage, according to Toll.

The undertaking of enforcement will be huge, but Toll said the division is poised to handle it. In addition to the needed legal resources, the Division of Real Estate will receive four to five additional full-time employees to assist with enforcement.

“We will be able to handle this system,” Toll asserted.

There are still some issues to iron out, however, the largest of which is how to define what constitutes a “reasonable, tangible net benefit” for the consumer. Under SB-216, lenders will be responsible for determining if the product they are selling their customers is in the customers’ best interest.

Toll said she is currently putting together a task force to determine how this provision should be interpreted. The industry is already well represented on the task force, but she is still looking for consumer groups to join the discussion as well.

Market forces at work

Legislation aside, the mortgage lending industry is also faced with the challenges of a softening residential market.

“Certainly the mortgage industry has faced some challenges this year and even last year,´ said Greg Osborne, regional vice president for Wells Fargo Home Mortgage.

Osborne points to the obvious issues with performance of subprime and adjustable rate mortgages. Foreclosures are always a possible outcome for borrowers. However, a larger than anticipated number of borrowers have been unable to perform on their mortgages – putting the squeeze on the home-buying market and mortgage lending activities.

“This has caused some shock waves throughout our industry,” Osborne said.

This spring, Wells Fargo Home Mortgage announced it would eliminate around 500 positions nationwide. Colorado operations were unaffected as most of the cuts came out of North Carolina, Arizona and California. A company spokeswoman cited declining loan volumes as the reason for the cuts.

While volumes are down, data from the Mortgage Brokers Association suggests that business might be rebounding. The industry trade group’s Weekly Mortgage Applications Survey shows that mortgage loan application volume for the week ending May 25 was up from the same period last year.

Up in ARMs

However, it appears that either borrowers or lenders are shying away from adjustable-rate mortgages. The percentage of mortgage activity related to ARMs is down. For the week ended May 25, ARMs represented 17.7 percent of the activity, while it made up 30.7 percent of the activity during the same period last year.

Osborne said that the biggest change for Wells Fargo and for the industry has been a tightening of underwriting standards, specifically in certain market segments. The underwriting changes are being driven by the secondary market – investors who buy the mortgages from the lenders are looking closer at risk versus return.

“The industry is very cautious right now and that’s probably a good thing,” he said.

Piepho agrees that industry self-regulation is occurring. She said that there appears to be less demand now, but that the mortgage industry is cyclical so fluctuations are expected. For his part, Osborne is optimistic about the future.

“I think we’ve seen the worst of it,” he said. “It’s still a great time to buy a house. Historically, the rates are still low.”