We are currently in the middle of a housing crisis. That’s right…I said it. Industry experts, economists and even consumer groups have predicted one would emerge, albeit this is not what they expected and it is certainly sooner than anticipated.
Yes, the word crisis is harsh and alarmist, but it accurately reflects the complete void of focus on housing as an opportunity by Washington policy makers, including the actions of the regulators and enforcement officials that are narrowing the credit box. Fact – there is a shortage of affordable housing (both rental and owned) and the homeownership rate today is at its lowest point in over two decades. Today’s environment is not encouraging credit expansion. It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.
What’s the number one issue choking off access to affordable credit? Regulating through enforcement and it’s happening on a case-by-case basis. The guessing game for businesses to know if and when they may be penalized has produced the most defensive lending posture in years. This atmosphere of the unknown; this environment of fear and trepidation rather than an environment of constructive engagement and compliance have a steep cost. And we’re not just talking costs for compliance or production. We’re talking costs for any mistake, even a minor one that may have no bearing on the efficacy of the loan, making lenders even more conservative in lending. It’s impacting the willingness of lenders to take the risk even to some who would otherwise qualify for their dream to obtain a home. The regulatory environment is failing the very borrowers policymakers set out to protect – young families, thriving generations of new Americans, first time homebuyers; all the while driving up rental costs as homeownership lags and rental demand soars.
Lenders must have clearer guidance on the rules and a better understanding of what will constitute an enforcement action. We have made some progress working with regulators on issues such as rep and warrant, FHA defect taxonomy and the supplemental ratio, but it’s not nearly enough.
Some regulators appear to have an enforcement-first strategy, instead of providing clear rules and guidance – particularly regarding unfair, deceptive, or abusive acts or practices – UDAAP actions – which expose lenders to “regulation by enforcement action.” Lenders are being subjected to zero-tolerance policies, but don’t have the necessary guidance to comply with some regulations. Refusal to clarify the rules in writing by the regulators including the CFPB leaves lenders in a position for massive penalties for minor mistakes.
The CFPB should be applauded for granting the enforcement delay and the just announced 60 day delay on the implementation date of the TILA/RESPA Integration Disclosure rule (TRID). With the number of stakeholders involved in home buying process, there will undoubtedly be problems. In particular, the borrower could be affected in many ways should a closing date get pushed back (consider the cost of month-to-month rent or not having a place to go at all). Industry stake holders – lenders, borrowers, vendors, sellers, title companies, etc., – need time to work through the initial issues before severe penalties compound the problem.
The mortgage lending industry has acknowledged and taken accountability for the role we played in actions that led to the meltdown. Lenders have paid hundreds of billions in settlements. We’ve also made tremendous change in controls, compliance, and to improve the consumer experience. Now it’s time policymakers – the vast network at the federal and state level – account for their role in the recovery. It’s time to acknowledge the flaws in policy, corrections needed to the rules, and the impacts of going too far.