NAR Lender Roundtable What s Holding Back Financing? March 12, 2013

NAR Lender Roundtable What s Holding Back Financing? March 12, 2013 Since the mortgage crisis several years ago, the leadership and staff of the National Association of REALTORS have been meeting with executives from the largest home mortgage lenders in the United States to talk about the availability of financing for home buyers and other critical lending issues. As part of this dialogue, NAR s point person on mortgage finance issues at the staff level, Charlie Dawson, a policy representative from NAR s Government Affairs division, hosted a roundtable discussion with executives of three of the country s largest lenders: Chase Mortgage Banking, Wells Fargo Home Mortgage, and Quicken Loans. The roundtable was held March 12, 2013, in NAR s Washington, D.C., offices and covered the difficulties home buyers face obtaining mortgage financing, what it will take to get private mortgage capital back into the market in a significant way, and how lenders expect new and upcoming federal rules in mortgage financing to affect their origination, underwriting, and servicing processes, among other things. What follows is an edited transcript of the conversation. Access a REALTOR Magazine video of the roundtable at http://bcove.me/kriv2mdx Charlie Dawson, policy analyst, NAR Government Affairs. Today, we re talking with several lending institutions about credit standards, short sales, and the political and regulatory environment of today s real estate finance market. A lot of people are talking about improving marketplaces, but we still hear from many of our members that the residential lending environment remains difficult. Why is it that lending standards seem particularly tight right now? Shawn Krause, executive vice president, Quicken Loans. Well, the pendulum has definitely swung too far and lenders right now are under a lot of scrutiny with repurchase risk. [Repurchase risk refers to lenders having to buy back loans that are found to be inconsistent with origination standards of Fannie Mae, Freddie Mac, FHA, or other entity backing or investing in the loan.] You have to remember that when a lender makes decisions as a company, they have to do that based on what might come back to them. And with repurchase risk, along with the rules coming out of Washington, we don t know how everything is going to work together. We ve got the 3- percent points and fees test that is going to come about because of the qualified mortgage rule that s going to cause some havoc in the industry, which we re fighting now. [Among the rules are the qualified mortgage (QM) rule, which takes effect in early 2014 and requires lenders to make loans only to borrowers who have a reasonable ability to repay the loan, and the qualified

residential mortgage (QRM) rule, that exempts lenders from having to hold 5 percent of loan they originate for securitization if the loan meets sound underwriting requirements. That rule hasn t come out yet. The 3-percent points and fees test refers to a cap on the amount of compensation to originators.] Charlie Dawson. And Joe [Rogers, Wells Fargo], would you say the same thing? Are lending standards too tight or is it just perception that s out there? What is giving this perception that lending standards are too tight? Joseph Rogers, Jr., executive vice president, Wells Fargo Home Mortgage. In some cases, I don t think standards have swung too far. On the good side, we all made a lot of loans last year. Wells Fargo made over a half a trillion dollars in loans to customers last year. Our retailers served over a million customers, and that means somebody was getting some financing. If you think about it, today the FHA offers 3.5 percent down for loans to $729,000 that does not sound too tight to me. On the other hand, if you re an agent and you re working with self-employed borrowers and working with customers who are used to working with reduced documentation, it s gotten very different for them. So, if it s relative to the standard that people could use reduced documentation and not have to support all of the information to qualify for a loan, it s gotten a whole lot tighter. And it s not likely to change anytime soon. But for those other customers who are well qualified with a decent FICO score, I think credit is readily available. I think all three of our institutions have made a lot of loans and continue to do that. Shawn Krause. One comment to Joe s point about self-employed borrowers with the new qualified mortgage rule. There s what s referred to as Appendix Q, which involves specific underwriting guidelines that will need to be followed. We re still trying to figure out if the guidelines apply to Fannie Mae and Freddie loans, but even for employed W-2 employees, they will be scrutinized even more like a self-employed person. We re going back to the stone ages with self-employed people. They will have to provide financial statements for many years and more. Even training is in question: how much has a person had in training so lenders can know if they can really continue in their role. It s about a hundred pages of underwriting interpretations. Charlie Dawson. From Chase s standpoint, how do you guys see lending standards? Do you think there s an opportunity to broaden credit access to people? Saber Salem, senior vice president, Chase Mortgage Banking. We believe that the standards are appropriate and what we re dealing with is some of the history of where lending standards used to be versus where they are today. As Joe pointed out, our collective institutions are serving a lot of home buyers and as long as a customer can document their income, their assets, and has good credit, we have not seen any deterioration in that segment. Yes, there are pockets, like selfemployed or reduced docs, those are areas that standards have tightened up. At Chase, we look at every customer, look at their entire profile, and try to determine whether they meet our standards or if there are other ways that they can. We re moving back to more of a common sense documented underwriting process. Our goal here is not just necessarily to make the loan but also make sure that buyers can afford it over a long period of time.

Joseph Rogers. What I heard was Saber and myself looking in the present day, and maybe in the past a little bit, and I heard Shawn looking into the future a little bit by speaking to the regulations that have been written and still need to be interpreted. This will be difficult for agents, quite honestly, because they ll deal with a whole host of other lenders that will interpret the rules slightly different. And they ll implement the rules on different schedules, because systems don t always work together. QM goes into effect on January 14, 2014. That does not mean that all of us on that day will start to implement. We have technology systems. We have underwriting and training to do. We ll all have to work through that, which will create uncertainty and create issues for our agents, unfortunately. We ll have to work hard to communicate what we re doing, why we re doing it, and how we re doing it, and then the agents will have to be listening hard. It ll be an educational process for all of us in the industry to stay up to speed on these kinds of things, so that we can in fact guide our customers and consumers appropriately for what they re going to need to do to be qualified for a loan. Charlie Dawson. Let me go back to something that you said, Shawn. It has to do with repurchase risk. Fannie Mae and Freddie Mac came out with a new framework on January 1. How has that impacted lending standards? How has that changed your prospective in terms of lending to certain customers? Shawn Krause. Well, the standards have definitely helped us to feel more comfortable, but Joe brought up something about lenders being on different pages over the next months as we re all trying to interpret these rules. Just because Quicken Loans might feel comfortable with the new framework that Fannie and Freddie and FHA came out with, another lender may interpret that differently. And that s why you may see such a difference in the market. The same applies to the qualified mortgage and all of the other rules that have or will come out. The attorneys at these companies may be interpreting the provisions differently. There s also their appetite for risk. That s what each company is going to be deciding. So, it s going to be a rough first year next year as everyone works through these rules and we ll have to see who gets the first case brought against them. Who gets to be the first one to be interpreted? Charlie Dawson. How long does implementation of the rules take? At what point can people start saying that their attorneys have gone through the rules? Saber Salam. This is a hypothetical question. What actually helps are the actual dates. We back through those dates and look at our systems, our credit policies, and how we want to underwrite and approve the loan and what implication it has on our systems. We come up with not only an understanding of the ruling. We also have to come up with how we actually implement it within our process. If it s a defined date, we will hit that date from the implementation prospective. We may or may not be able to implement everything that was part of this rule, given the breadth of it. If we re not able to get the certain segments of it, we usually use an exception process to handle those. Charlie Dawson. Let s talk about lender capacity. How has that affected timelines in terms of closing? Is there an idea that maybe we can increase our capacity on the mortgage banking side to serve more purchasers, or do you think you re comfortable right where the staffing is at this point?

Joseph Rogers. We ve been adding staff since 2009. At Wells Fargo we have increased our staff 175 percent and a lot of that was on the loss mitigation side but we have added over 7,000 people just in the last year on the fulfillment side for the front end of our retail business. And so, actually, we ve seen our timelines come down dramatically, and I think it s very true that for us personally, refinance timelines did extend; purchases not so much. We had created a model in which we always supported the purchase market. We work hard to stay with our agents and view that as part of our model, and that may be a little bit different than other lenders. Two things one: we created an environment so that the timeline did not extend our purchases and we make sure from a pricing prospective that we extended our purchase pricing to make sure that the economy kept going. We recognize that sometimes you moderate supply and demand by price. We didn t want that to affect the purchase market, because we think that s really important to the economy in general to move forward. We re pretty excited about that. Clearly, right now I think we re seeing less volume as an industry. I don t want to speak for everybody else, but generally buying is down a bit. When you look back at last year, multiple things happened. One, you had the lowest interest rate environment ever, but you also had two different major programs where there was what I would call a three-year back log. You had HARP 2 in February and that meant for states like California, Arizona, Nevada, Florida big mortgage states and all over the rest of the country, people who were not eligible before all of a sudden wanted to refinance. And then HUD made the decision, effective on June 11 of last year, that anyone with a case number issued before June 1, 2009, could do a streamlined refinance and take advantage of the lower mortgage insurance payment (MIP). The impact of all three of those things was, there was this huge crush of business all at one time, so that put a lot of lenders back on their heels a little bit. Like I said, we always want to make sure we re on our toes relative to the purchase market. Shawn Krause. I have a comment about that too. At Quicken Loans, we ve always had separate purchase teams and so all of the people that focus on purchase, from the mortgage banker, which is a loan officer at our company, all the way through to the closing are separated from the refinance team, so that closings are not affected. Our term times throughout this whole process because we are a process driven, technology driven company and because we built a scalable environment that we can easily add people and hire people at our company and know exactly what they need to be working on was 30 days or less. And to the point of implementation of all of the rules, one thing that concerns me over the next year is that all of the technology and compliance people at companies are going to be focusing on these rules. You ve got servicing, you ve got high-cost rules, you ve got the QM rule, and we re going to have the QRM rule that s coming out. So, so all of these technology compliance people are going to be tied up. And what concerns me is that innovation for consumers is hopefully not going to have to take a back seat but most of our technology is going to be focusing on getting these rules out because we have to have them ready by January 14. And if we cannot get them ready, what does a lender do? They will limit what they will introduce and then worry about working on the other stuff later, which could limit what actually qualifies for a mortgage. Because when you re going through those rules you have you to see how much time it takes to program your [technology processes].

Joseph Rogers. All of the rules weave into each other. A few years ago, we would spend 90 percent of our technology dollars on things we wanted to do advancements in the business. Today, we focus a hundred percent on things we have to do. Charlie Dawson. A lot of people look at how long it takes to get to closing. We have one leadership team member who always likes to say, Why can I close a car loan in 48-hours or less? But it takes 30 days or 45 days to close a home mortgage loan. This goes back to the capacity issue. Saber Salam. I m going to talk about it at a couple of different levels. First of all, we re focused in different ways on prioritizing our purchase transactions, because they re time sensitive and there s a buyer and seller involved, there are moving trucks involved. At Chase, we have a completely separate process for purchase versus refinances, and the purchase team never has to compete for resources with the refi side. To your question about capacity, the industry generally has been short capacity and part of it is because interest rates have been historically low and part of it is related to the much higher demand for FHA-type products, so there s a different qualification that underwriters and appraisers have to have to be able to fulfill those. The capacity constraints are more technical competencies that some of these individuals have. I think all of our companies have been investing very heavily and have been rewarded for increased capacity in this business. With regard to your second question about obtaining a car loan in 48 hours, the fact that it takes 45 days is in large part because of the structure of the transaction You know there s a buyer and there s a seller. The seller has to make arrangements to move out, so this part of it is driven by the buyers and sellers. The other half of it is driven by the need to get an appraiser out there. We also want to make sure that all of the documentation to approve the customer is in the file. Usually, when you re buying a car you may need a much smaller set of documentation and then you have arrangements for the buyer, the seller, and the attorneys. We could close purchases in 15 days and, trust me, all of us would jump into that process very quickly. Shawn Krause. I mean there s a ton of regulation around mortgages and there s not a ton of regulation around buying a car. You can t even close a loan before seven days from an application even if you wanted to because of the rules. Joseph Rogers. Let s remember that Dodd Frank [Wall Street Reform law] wrote statutory language into the bill saying we must document and verify the borrower s ability to repay. Let s also remember there is much to be interpreted with regard to those rules. How do you interpret someone's pay stubs? How do you interpret their tax returns? How you interpret these things makes a big difference, because lenders have been stung through repurchases, lots of purchases, lots of losses, after we were trying to do what we were told. Now we have a different environment we're dealing with. How you calculate income may differ. How liberal is someone going to be on calculating two years worth of income? Is the income increasing or decreasing? When was the last time that they have in fact had an audited financial statement done? Do you take the last two years of tax returns or do you take something else? What if someone has parttime income or what if somebody has a second job? How long have they had it? With putting

that 43 number out there (total debt-to-income under the qualified mortgage rule], that's a hard number. I think lenders will look at that and want to judge for themselves and how their investors will look at that. The investors today can say, Yes, we'll take that, and I'll interpret it that way. But, our experience has been over the last three years that, maybe, what they told us in the past didn't turn out to be quite the same situation when things might have gone the other way. Shawn Krause. Today, 43 [maximum debt-to-income] is the back-end number. We ran data in the last three years of loans and I just got this data last night, so I haven't dug deep. But approximately 30 percent of the loans would not be deemed to be in the safe harbor [of the qualified mortgage rule].... A lot of them fall out because of the points and fees test [in the QM rule]. The three percent fees and points test is a problem. And remember the loan level and price adjusters that are charged they are not considered a bona fide discount point, so you can't exclude up to two of those, or whatever the rule is. Joseph Rogers. I think QM does a pretty darn good job of getting the right balance between consumer protection and access to credit. It s not perfect and we know that it could ve been a lot worse, but it s a relatively level playing field. It s probably better off for the low- and moderateincome customers than for nonconforming jumbo customers. The example would be that, if you re getting a 95 percent loan that has a relatively good FICO score let s say it s 740 and it s gone through Fannie and Freddie Mac at $470,000 in Chicago and you happen to be at 45 percent DTI, that gets through to the automated engine (Fannie Mae s Desktop Underwriter and Freddie Mac s Loan Prospector]. You re good to go. If you re in Chicago on the North Shore and you re putting down 50 percent and you have an 830 FICO and you ve got $3 million dollars left over and your [DTI] ratio is 44, that s not a qualified mortgage. So, I think it s interesting that you re going to find the high end borrowers with a lot more disposable income are going to have a little more difficulty adapting to the new rule than maybe the low- to moderate-customer will. Charlie Dawson. Let's talk about the role of Fannie Mae and Freddie Mac, because they re playing such a large role in the mortgage market. One, do you feel that it's an outsized role? Two, what do we need to do to bring private marketing back in? Now loan limits are going to again come up as a point of contention because the QM rule allows for this exemption for Fannie and Freddie. The higher you keep the loan limits, the more safe harbor loans you can make. What do we do to kind of reduce the size of FHA, Fannie and Freddie knowing there's QM out there, QRM what steps need to be taken to do that to reduce that role? Shawn Krause. One thing to keep in mind as we discuss this topic is the private market is not necessarily going to bring exactly what the government is providing today. So, you're going to have to put more for a down payment in the private market. It's probably going to be higher credit scores. It's probably going to be higher interest rate, because, remember, the government has been buying all of the mortgage bank securities. They're subsidizing and creating equity in the market. So, it's going to be a different market when the private market comes in, because it's difficult for the two to compete right now.

Joseph Rogers. I'm not sure we're in the position that the agencies should get smaller or not. I think we need clarity on the role of FHA, Fannie, and Freddie. I think if we settle the issue of what's going to happen to them, and take out that ambiguity, that will help a lot. That will tell people, Okay, now I know what the playing field is, and now I know what my space is and how I can get there. I think we're still years away from that, quite honestly. Securitization is the life-blood of this industry. Both Saber [Salam of Chase] and I represent these very large institutions. We have the capacity to do portfolio lending and we do a lot of portfolio lending, but overall, in the long run, to have a full market, you're going to need to have securitization come back. And that means a lot of things have to happen, which includes creating that certainty about the role the GSEs. And bringing back the private market is not a function of raising g-fees [government guarantee fees], which seems to be happening on a monthly basis, and making the cost of credit that much more expensive. The infrastructure has to come along, and that takes time and it takes money. People have to decide, do they want to invest in that infrastructure today? And if they do, they're not going to get a payoff for a few years. The earlier we get certainty as to the common market place, the earlier we will see that livelier market. Saber Salam. We're all zeroed in on the opportunity to lend, and so there are banks and other people who will lend where there's a demand. As the rest of the economy improves and consumer demand gets larger, people will look around and say, Where are my other options to lend? That s where we are going to need the securitization to be. Along the same line, the previous model of Fannie, Freddie, they did play out well. But now we're in a situation where 90 percent of the financing is coming from these entities and there s clearly an opportunity to do some reform here and to attract more private capital. Both the past was not sustainable and where we are today, with 90 percent of market share going to the agencies, may not be sustainable. There should be a role right in which the GSEs provide some kind of catastrophic backing, much like the model of the FDIC. Again, Fannie, Freddie, and FHA: they've done a very good job delivering and helping deliver very affordable loan terms to first-time home buyers and some markets. There's definitely a role that these agencies can play in a very constructive way, but making sure that the rules and their roles are clear is really going to help bring new capital back in. Charlie Dawson. If I can stay with that just for a second, because we have so many people talking about reducing the size of government in mortgage lending. I know the condo market is different, because we're talking about the asset itself rather than just the borrower in lending. When will we see more private capital purchase participation in a space like condos where there has been a restriction among Fannie, Freddie and FHA? Joseph Rogers. We're doing that. We work with a lot of developers right now and we'll take a look at their projects. We'll look at their marketing plan, but not every condominium project is created equal. They have different velocity in terms of sales and if we can project certain things, we can approve projects, and we're doing that right now across the country. We're not out there waving a flag and things like that, but we're working with our developer partners to in fact create financing for people before they are actually eligible for a sale in the secondary market.

Saber Salam. Chase has a similar principle. Depending on the condominium and depending on our relationship with the customer, we're making some adjustments in terms of how we're looking at some of those projects. But by and large, these condos have to be viable not just for the lender s sake or the investors sake, but the management has to be viable for the consumers sake. Some of these protections are built in from the consumers prospective. I mean, even though they can afford something, if the building doesn't have the resources to maintain itself, it's not a good situation for the consumer either. So it's a delicate balance trying to figure out which projects are viable. Charlie Dawson. There aren t a lot of people who want to take on the condominium as an asset. Joseph Rogers. They're not flow businesses; they're businesses that have already been done and that have been taken off of somebody else's shelves. So, you haven't seen anything from a forward- looking prospective yet. And that's what I was saying earlier: [a securitization infrastructure] has to be constructed. I really worry about what I call, too small to play, not because community banks are not good lenders or good people or anything else. But, given the 806 pages for QM, the 3,500 pages of regulations that came out in last month and a half and we haven't seen RESPA /TILA or QRM yet. How do the smaller lenders, the community banks who want to get into the space, navigate that place. Shawn Krause. [These smaller lenders are] too small to comply, because the amount of money and time to make sure you're following all of these rules [is cost prohibitive]. Joseph Rogers. Lenders like ourselves can afford a lot of attorneys, a lot of people, and a lot of technology. Saber Salam. Going back to the condo space, I firmly believe that some of the rules have actually been good, because they pushed back on condo associations, flood insurance, and reserve requirements. Every so often I talk to a customer who's unhappy about why we're pushing back on a project that's not approved. My feedback to the customer is, It s in your best interest to make sure [the project is viable]. I've shared this with real estate agents. It's in your best interest to make sure that these projects meet agency guidelines, because that actually opens up liquidity, not just for Chase but for everybody. Charlie Dawson. Let's talk about short sales. Our members report they take a long time. Have you seen timelines come down? Saber Salam. The short answer is timelines are coming down, because as an industry, you've got a lot of information that is now available to all the real estate professionals. By and large, [lenders] that have a huge amount of defaults are trying to figure out how to move this process faster internally. Joseph Rogers. We've seen it come down a lot. The rule that I think Fannie Mae has, once a lender has a bona fide offer, a complete customer package, and the customer is given the

information, we have to give them a decision within 30 days and our term times are down to 14-15 days on average right now. Shawn Krause. A lot of times a servicer is the middle man and they're still waiting for and need an approval from an investor, so that may drag times out in certain cases. But when we have a short sale, we get the same information we do for a loan modification. It's all the same now right. We put it through the process like we always do and at Quicken Loans, we've won the J.D. Powers award three years in a row for a primary mortgage originator with our customer service. We've taken the process from the beginning, starting with our front-end process, and put it on the back-end process for the servicing. So, if we do have a loan mod or short sale come through, it involves that same process. Charlie Dawson. A lot of people have talked about streamlining the short sale process along with modifications. I know a lot of servicers have gotten better on loan modifications. What steps are you guys taking to improve upon those processes? Saber Salam. The biggest challenge as an industry is getting the customer to call us when they're experiencing a financial hardship. We're trying to reach that customer as early in the process as possible, up to 14 or 15 days in terms of past their due date. We've also have created 28 of what we call Chase Home Ownership Centers, where we re encouraging customers to come in and have a conversation with a counselor that could help determine whether a modification, refinance, or a short sale is an appropriate option for them. But, engaging that customer is [a challenge]. Just to give you a little flavor: of the loans that go through the default process, we try to contact the customer in some cases more than a hundred times before they end up in one of these dispositions. But the biggest challenge that we see is getting consumers to respond back to lenders to walk them through their financial situation, which is when we can actually determine what the right option is for the customer. Joseph Rogers. We find that when we get touch with the customer, we will do something for them seven out of ten times. We've had over 860,000 modifications since 2009. We've also done workshops all around the country, because of the fact that customers sometimes do not want to reach out are afraid and don't necessarily want to deal with a person at an 800 number. We brought major efforts to major cities around the country, where they'll have 500, 2,000, 3,000 people come through and typically about half of those people when they come to the workshop and deal with us will get an answer that day. They walk out with smiles and we treat them with respect and they're dealt with in privacy. We bring the technology right to their hometown, where they can come in and talk to us so they can have all the information with them.