November 16, 2020|CFPB, Credit, Fair Lending, GSEs, LO Comp, Mortgage Industry, Virus Response
I was asked for my thoughts on implications for the mortgage business under a Biden administration in 2021. So, to ensure predictive infallibility, I cracked open a “Magic 8-Ball” and consumed the contents[1], and then set a new record for Musing footnotes.
Farewell 2020!
As we approach the new year, just remember that 2020 is the year the quarterback who is the GOAT[2] at last minute scoring drives, visibly forgot what down it was with the ball and a chance to win at crunch time. Yes, the year 2020 was summed up perfectly by Tom Brady’s utter confusion. Stay focused and optimistic, but still wear your masks and pray we all make it out alive in the days of 2020 that remain.
Trust the process.
I realize the timing of my comments before the current President has conceded[3] may disturb a few readers who don’t share my faith in the overall fairness of this country’s elections[4]. I generally trust the process, not the people, but not everyone can be grateful to have a spouse who worked at the polls in Wisconsin until 1:00 am counting ballots on election night or a law partner and longtime friend[5] who authored an amicus curae filing for a Pennsylvania case at the Supreme Court. Still, I have no doubt that after thorough investigation, any material concern with the election results or voter fraud will be proven unwarranted[6].
COVID doesn’t care who’s President.
That said, people commonly overestimate the impact the Presidency on many things. The impact of COVID-19 on the mortgage business, on the other hand, will govern regardless who is in the White House (or Congress). With vaccines on the way, many of 2020’s forbearances will become 2021’s foreclosures. Unfortunately, not everyone is going to find work again. Many borrowers will get back on track, but servicers will be swamped with default and modification work. Speaking of staying in homes, I think we can all agree that even if vaccines enable in-person conferences and make the office a safe place to go again, work from home, electronic signing, remote closings, and other things enabling distant work and customer interaction are here to stay.
Meanwhile, if you believe that today’s renters are tomorrow’s homeowners, you’re going to have fewer qualified first-time home borrowers in 2021. COVID related forbearance was mandated not to negatively impact credit scores for homeowners, but no such grace has been offered to renters (or borrowers who did not have federally backed mortgage loans) and, due to job and income losses hitting renters harder as a group, renters will likely have lower credit scores as they seek homeownership. COVID related income and job losses have impacted minority communities at much higher rates, so the racial disparities in lending are going to be further exacerbated by income and credit score impact at a time when there should be more openness to solutions to reverse those disparities. I have more thoughts on fair lending issues below.
How could Biden change the game?
First, while I hope no one reads my Musings for interest rate predictions[7], I can still offer financial insights. For example, thanks in part to a rash of public offerings by mortgage companies, it’s common knowledge that industry is having a banner year for profits; perhaps too good. With a President (and Democratic Party) promising to tax the rich, I’d suggest that an industry that has directly benefitted from COVID related government support through aggressive monetary policies (and which still is blamed for the last recession), will need to keep an eye out for “special treatment”[8]in any tax legislation.
The most direct impact from a Biden presidency, however, will likely be on the leadership and direction of the federal agencies that regulate the mortgage industry. Specifically, both FHFA and CFPB are likely to see new directors installed[9]. I don’t have any unique insights on names for those positions, but I expect that the confirmation process in a likely Republican majority Senate[10]will inhibit some of the more divisive people from being nominated.
FHFA, the GSEs and COVID foreclosure relief
FHFA, for example, is likely to refocus on fair and affordable housing issues and it is hard to imagine that the privatization efforts of the current director will proceed. Notably, the CEO of Freddie Mac resigned, signaling to some knowledgeable observers (such as David Stevens) that the privatization efforts are essentially DOA. As a result of COVID widening minority homeownership disparity, as well as the first-time homebuyer credit issues I noted earlier, I would expect the GSEs to enable more flexible underwriting terms for borrower’s credit impacted by COVID[11]. Exactly how the FHFA and GSEs will respond to the massive need for accommodations and the increase in foreclosures once moratoria are lifted is uncertain, but I would expect a HAMP/HARP type program from the GSEs and or FHA to be proposed (after a new FHFA Director is installed) to keep more people in their homes (even if Congress is unable to agree on another stimulus).[12]
CFPB changes
While a new FHFA Director is likely to keep the GSEs in status quo, CFPB is likely to get a new director with a potential whipsaw effect like what we saw in late 2017 when Mick Mulvaney took over after Richard Cordray resigned. Regardless of who the new director is, however, I don’t expect the mortgage industry will face the same focused regulatory wrath from CFPB as it did in the Cordray era on the heels of the meltdown. Payday, student lenders, debt collectors and consumer data sellers, on the other hand, might want to run respectable businesses and prepare for a “new sheriff”. That is not to say that mortgage lending will go unnoticed. In particular, servicer handling of forbearance exits will be scrutinized carefully. Also, the recent Townstone Financial case discussed in a previous Musings could be a harbinger of the kind of aggressive fair lending enforcement likely to return. Finally, I am less hopeful that any flexibility will be offered on the Loan Originator Compensation Rule than I was last February.
Fair lending needs new ideas.
We have roughly 50 years of affordable housing programs and fair lending enforcement spanning multiple Democratic and Republican administrations, yet the racial housing gap persists. In fact, we are moving backwards. The numbers reflect acceleration of the gap following Dodd Frank’s consumer protections and COVID will only accelerated disparities further. Is this clear evidence of pernicious institutional racism by a mortgage industry that should be punished for these disparities?
Well, based on my own observation, virtually the entire mortgage industry has internalized a sincere desire to do better in fair housing[13], so the idea that any racism is intentional is something I simply don’t see. History has shown that aggressive fair lending enforcement does nothing to improve the gap (although it may contribute to the internalization of the desire to do better that I observe). Regardless, we need the ability to offer new solutions without fear of the adage, “no good deed goes unpunished”. The playbook of the last 50 years hasn’t worked. I hope Biden’s housing policymakers and enforcement officials recognize that creativity, experimentation and new approaches are needed, not more of the same.
[1] No one told me that you can just get the Magic 8-Ball answers online now. Also, the Google machine says that the blue stuff inside the 8-ball is dyed alcohol, so I’m a bit loopy. Please kids, don’t try this at home.
[2]Greatest of all time. Muhammad Ali and Michael Jordan are the GOAT too.
[3] I suspect anyone waiting for this to occur will need to wait a very, very long time.
[4] This is true even though I grew up in the 43rd Ward of Chicago. Chicago politicians used to hold rallies at cemeteries and in seances to bring out the dead persons’ vote (cue rimshot). “Vote early and vote often” was “The Machine’s” slogan.
[5] Katten & Temple, LLP name partner Nancy Temple is the best. You may notice our educational resumes are quite similar, but she’s the person you want representing you in court. Go Illini!
[6] Any credible allegation of vote rigging or fraud must be taken seriously, thoroughly investigated and never brushed off as inconsequential, even if the ultimate outcome would be the same.
[7] Call Rob Chrisman or Barry Habib if you’re looking for that. kind of prediction.
[8]Remember the windfall profits tax?
[9]The legal reasoning of SCOTUS’ Seila Law case will likely be applied to enable Biden to also dismiss FHFA Director Calabria. Calabria is unlikely to fight that decision as the Seila Law logic is constitutionally sound for a libertarian.
[10] I may anger a few other readers by assuming that Georgia will send at least one Republican Senator to Washington, but again, please trust the process folks. We built the best democracy on the planet. It’s not perfect, and we still have a lot of work to do, but it’s still better than all other alternatives.
[11]Unlike forbearance, which was offered without a requirement of proof, I expect COVID-19 related underwriting relief to require detailed explanations and evidence of hardship.
[12]Foreclosure relief is going to prove politically divisive unless renters are offered similar federal relief. Despite likely overrepresentation of minorities in forbearance users (vs. overall borrowers), as a result of the vast racial disparities in homeownership rates generally, any relief for homeowners without similar relief for renters and/or mom & pop landlords will almost certainly be viewed as racially unfair and/or unjust. FHA, in particular will need to grapple with these issues due to the high levels of forbearance use by FHA borrowers.
[13] The MBA has redoubled its commitment and priorities to diversity and fair lending in 2021.