PERSON OF THE WEEK: Jim Gallagher is senior vice president of Wingspan Portfolio Advisors, a Dallas-based diversified mortgage services company. In addition, he is the executive in charge of Wingspan Lender Services, the company's mortgage processing, underwriting and closing services division.
MortgageOrb interviewed Gallagher to get his views on the Consumer Financial Protection Bureau's (CFPB) upcoming qualified mortgage (QM) rule, including how lenders and outsourcers will be impacted.
Q: How much of an impact will CFPB's QM rule have on the housing market as a whole?
Gallagher: The long answer entails a full analysis of the particulars of the rule and the fine points of consumer behavior, along with lender experience in an environment that basically labels non-QM loans unacceptable to the overwhelmingly largest investors, Fannie Mae and Freddie Mac. Opponents focus on the unintended consequences of the rule and foresee even more restrictive credit for worthy borrowers than exists at present. Proponents say that they are trying to rebuild confidence for both consumers and future investors by making certain that loans can be repaid. Industry observers are concerned that the QM rule stifles an already anemic economic recovery by hampering housing transactions.
The short answer to the question is nobody knows for sure.
While it seems logical that we should be doing everything we can to give mortgages to creditworthy people who desire to own homes, we have already learned that bad things can happen when housing and lending become overheated. Are we too restrictive presently in making loans? Certainly, even the CFPB's Richard Cordray acknowledges that. QM, or something like it, was inevitable, but only experience will tell if the rule goes too far or not far enough.
Q: Will the final QM rule make it more difficult for small-to-midsize lenders and credit unions to originate non-QM loans? Will it lead to an increasing portfolio lending trend?
Gallagher: QM will not make it more difficult to originate non-QM loans, but it will certainly make it more difficult to sell them. A robust secondary market may spring up for non-QM conforming loans, particularly those that are well conceived and impeccably underwritten. But it will almost certainly lead to more portfolio lending for those lenders able to fund the loans and keep them on the books. This is always easier for depository institutions than it is for mortgage bankers, of course.
Loans not meeting QM standards are by no means bad loans, but they are not as liquid by virtue of not conforming to the new standards and so will carry yield premiums to attract investors. Smaller lenders, notably regional banks and credit unions, have leeway on several aspects of the QM rule, including debt to income. They can therefore sell these loans like QM-conforming transactions, but for others, it appears a vast number of non-QM loans will end up in portfolios.
Q: How will the QM rule affect origination speed and underwriter processes on the front end? Is more time necessary to complete the transaction from point-of-sale to closing due to the new rule? What type of preparation is necessary for the CFPB's QM rule, and how are originators preparing for it?
Gallagher: Origination technology will help on process velocity to a great extent, but when underwriting standards are modified to require more screening, it is predictable that cycle times will be affected. Additional detail will logically add to the effort required to complete the transaction. It will be interesting to see whether point-of-sale people will be as interested in QM loans with their limitations on income opportunities, and how the new complexities will affect rejection frequency from the government-sponsored enterprises. At least with the Uniform Mortgage Data Program, lenders are made aware of rejections more quickly than previously, so they can deal with them right away.
When cars were simple under the hood, more people did their own work because it was easy to do. Today's cars are so complicated and technologically advanced that experienced mechanics are often needed to perform what used to be simple tasks. In the same way, the layers of new detail added to loans originated after Jan. 1, 2014, will make the origination process more complicated.
Q: Why has loan origination fulfillment outsourcing become more popular with lenders, and how is that trend affected by the new rules and investor requirements?
Gallagher: Origination outsourcing is becoming more popular with lenders because of greater flexibility and simplicity in staffing and other economic areas. The right outsourcer is one with advanced technology that allows complete, real-time transparency and instills great confidence for lenders of all sizes. At the same time, outsourcing brings enormous economies of scale with very exacting service levels in regard to the expertise and background knowledge of the workers performing the process tasks. With lenders and servicers experiencing continued fluctuations in head count requirements, it is difficult to plan for ebbs and flows in demand.
Large lenders find outsourcing to carefully selected companies an ideal way to deal with overflow and the consolidations they must make to achieve financial goals. Mid-market lenders use outsourcing to make their expansion plans achievable and benefit from variable versus fixed-cost scenarios. Smaller lenders find advantages in using proven, professional outsources that are accustomed to high-touch dealings with customers under stressful situations.
The new rules will likely mean greater borrower contact frequency, taking more time and effort. The better the people are at talking to borrowers, the more smoothly the process will be after QM takes effect. Regardless of lender size, a good borrower experience is tremendously important to future business, and QM will not change that.