I've interviewed Scott Stern, CEO of St. Louis-based Lenders One and the head of the recently created Community Mortgage Lenders of America, on a number of occasions, and I've always been impressed by his well-defined observations of how the industry is operating. Stern has never struck me as being someone who lapses into hyperbole, so I was particularly concerned in an interview we did last week when he began to wave a huge red flag over the Financial Stability Improvement Act, a new piece of legislation snaking its way through Congress.
‘This is the most devastatingly awful bill ever to rear its head over the mortgage industry,’ says Stern, adding that the legislation's passage would ‘decimate the mortgage industry.’
Certainly, these are pretty strong words, but I suspect they are not overheated or melodramatic.
The proposed Financial Stability Improvement Act requires all lenders to retain a percentage of the credit risk on any loan that gets sold into the secondary market. Furthermore, the bill requires the entities that buy mortgages and issue mortgage-backed securities to retain a percentage of the credit risk, too. The original legislation proposed a credit risk retention of 10%, though talk is underway in Congress to lower that number to 5%.
However, Stern doesn't see 5% as a viable alternative. ‘Even the compromises are bad,’ he says. ‘We don't see any good outcome from this at all.’
Stern tells me that the Financial Stability Improvement Act serves no practical purpose whatsoever. ‘The bills that Washington is passing now should've been passed five years ago,’ he continues. ‘Those problems were already solved – now they're passing bills to solve problems that don't exist.’
Indeed, Stern is on target in regard to the quality of today's residential mortgages. If there was one good thing to arise from our current crisis, it is the knowledge that the loans being originated today are the strongest and safest in the history of the industry. Quality control, due diligence and risk management procedures are being enacted with a hitherto unseen level of gusto and comprehension. The notion that these mortgages are riddled with toxic credit risk is silly.
Likewise, the evaporation of the private-label secondary market is a main problem that has yet to be adequately addressed by Washington. Putting new limitations on the few private sector sources that remain operating will not encourage the return of secondary market entities that are not government-sponsored enterprises.
Furthermore, these restrictions will put a crimp on the smaller lenders who are just now entering the residential home loan and/or those who are filling gaps left in many markets by the disappearance of larger originators. Stern, in his leadership of the Community Mortgage Lenders of America, sees the independent community-level mortgage bankers being particularly vulnerable if this legislation passes.
From my perspective, I would add that the smaller credit unions, which are just now getting active in mortgage origination, may think twice about going further if they are saddled with these requirements.
The Mortgage Bankers Association (MBA) has also weighed in with a letter to House legislators requesting that the risk retention aspects of the bill be dropped in favor of the provisions in the already-passed HR 1728, which is an amendment to the Truth in Lending Act that establishes clearly defined standards for mortgages. The MBA was just as strong as Stern in denouncing the proposed bill, writing that its ‘broad requirement for risk retention for all creditors and securitizers would have particularly dire consequences for the mortgage markets.’
Stern and the MBA are fighting the good fight to keep this legislation from passing, and I would urge mortgage bankers to pay closer attention to this issue and not to be shy about voicing any possible concern with their elected officials in Washington. If mortgage bankers agree that this legislation is ‘devastatingly awful’ and can produce ‘dire consequences,’ then they need to get on the telephone or fire off some letters and e-mails to let the federal government know this proposal will not help the recovery of the industry.
In a case like this, leaving the complaining to another person or a trade group is inadequate. As more and more voices protest this legislation, it will become harder for Congress to ignore the calamity that the bill's passage could produce.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
[i] (Please address all comments regarding this opinion column to firstname.lastname@example.org.)[/i]