Whether it was the ongoing fallout from the National Mortgage Settlement; preparation for the Consumer Financial Protection Bureau's new servicing rules; the massive drop-off in refinancing volume due to rising interest rates; the slew of lawsuits and settlements stemming from the sale or transfer of ‘faulty’ mortgages; or implementation of the new Basel III rules, which in turn predicated a major sell-off of mortgage servicing rights (MSRs) in the second half, 2013 was no doubt a year of tumultuous change for mortgage servicers.
So, what do industry leaders think were the top factors that reshaped the mortgage servicing industry in 2013? And what factors do they think will continue to reshape the industry in the coming year? To find out, MortgageOrb interviewed industry luminaries, including Rick Sharga, executive vice president of Auction.com. What follows are Sharga's responses to our questions:
Q: What do you think were the top three factors that reshaped the mortgage industry in 2013 and why?
Sharga: An unexpectedly big factor in the mortgage industry in 2013 was the explosive growth in the sale of MSRs and non-performing loans (NPLs). Many of these sales were made when the large retail banks decided it was time to clear the decks and move on from the problems created during the real estate boom and bust.
Billions of dollars of MSRs and NPLs traded hands, allowing the lenders to move troubled assets off their books, generate capital, and focus on originating their bread-and-butter conforming mortgage loans, or jumbo loans to ultra-qualified borrowers. These sales often represented a rare win/win/win scenario, where the original lender was able to finalize losses on portfolios of loans; investors and special servicers were able to grow their businesses rapidly and profitably; and many distressed borrowers were able to successfully modify loans with their new servicers.
Regulatory change was another major factor in the 2013 mortgage market. Almost forgotten at the end of the year, one of the events that had a major impact on the mortgage industry was the National Mortgage Settlement, which required the top five servicers to pay out over $25 billion, mostly in the form of principal balance reductions.
This precipitated a huge number of short sales, particularly in states that had seen the highest home price appreciation during the boom, and the greatest price depreciation during the subsequent bust. Ultimately, the settlement banks exceeded their commitment through a combination of short sales and loan modifications that included principal balance reductions for distressed borrowers, reducing the number of foreclosures, stimulating real estate sales and creating more lending opportunities in the process.
And it would be hard to discuss regulations in the mortgage industry in 2013 without mentioning the impact made by the Consumer Financial Protection Bureau (CFPB). The bureau's new regulatory rules regarding both origination and servicing were the most far-reaching factors in the industry, even though they don't go into full effect until January.Â
Another major trend in the first half of 2013 was the unexpected continuation of a strong refinance market, driven to a great extent by the federal government's Home Affordable Refinance Program (HARP). Refi volume continued to dwarf purchase loan volume and only began to drop off significantly toward the end of the year, when interest rates jumped. This drop in volume led to massive layoffs by major retail banks and other lenders who depended on refi loans for a large percentage of their loan volume.
As interest rates are expected to go up again in 2014, most analysts are forecasting a huge fall-off in refi volume next year, which will result in far less loan origination business than we've seen in 2012 or 2013.
Q: What do you think are the top three factors that will reshape the industry in 2014 and why?
Sharga: 2014 will almost undoubtedly be the year of the CFPB and the Dodd-Frank Act. The bureau's new servicing and origination guidelines all go into effect in January – and will almost certainly result in credit tightening further, as lenders eliminate any sort of possible risk in order to stay in complete compliance with the ability-to-repay and qualified mortgage (QM) rules. Estimates by most industry experts suggest that between 10% and 20% of loans issued in 2013 will not qualify under the new guidelines. And the stricter and more complex servicing rules will further incent lenders against writing all but the most pristine loans.
There is a good chance that the cost of compliance will prove too high for small and midsize lenders and servicers, so there's likely to be further contraction in the industry. And some of the new rules regarding the cost of loans could devastate an already-reeling industry of mortgage brokers. There's still uncertainty surrounding qualified residential mortgage (QRM) rules, and there's very little appetite among investors to fund new non-conforming loan products until they're sure that these higher-priced loans will be reasonably safe within whatever the new regulatory – and potentially litigious – new world order is.
Another potentially big trend to follow in 2014 is the role of the government. There will be a new chairman of the Federal Reserve and a new director of the Federal Housing Finance Agency (FHFA) in place by the beginning of 2014. We saw in 2013 what the mere rumor of the Fed reducing its bond purchases did to interest rates (and to Wall Street, but that's another story). When the so-called ‘tapering’ begins, it will be interesting to see how high interest rates go, and what the implications are for lenders, borrowers and the whole mortgage industry ecosystem.
Simultaneously, new leadership at FHFA could result in any number of policy changes, and long-rumored ‘reform’ of Fannie Mae and Freddie Mac could be expedited. Since the two GSEs and the FHA account for well over 90% of all loans being issued today, any dramatic change to the structure of those entities – or to their policies and programs – could have monumental impact on the mortgage industry. We can only hope that the Fed, the FHFA, U.S. Department of Housing and Urban Development, and the federal government all work in concert and make whatever changes they determine to be necessary very carefully and thoughtfully, or the results could be devastating to the industry â�¦ and to the overall economy.
Speaking of the economy, it's the elephant in the room. As we continue to struggle toward something that resembles a real recovery, the economy remains too weak to jump-start the housing market. Too few good-paying, full-time jobs are being created, and the participation rate in the jobs market is near a record low. Until those trends are reversed, household formation will remain weak, and home sales will probably not move much beyond the 5.2 million to 5.4 million range per year – hardly a harbinger of high levels of purchase loans. Coupled with a shrinking refi market, this has all the makings of a weak year in 2014.