CHRISTOPHER WHALEN
It’s a strange time in the housing market. Home prices have been increasing above the consumer inflation rate for more than five years, yet lending volumes are expected to fall again in 2018 for the third year in a row.
The housing industry continues to reel from the massive increase in the cost of regulation, which has cut productivity in the world of mortgage finance by two-thirds since 2012.
News reports suggest that thousands of jobs could be lost in mortgage finance this year due to rising interest rates and falling lending volumes.
Despite policies from the Federal Housing Administration and Federal Open Market Committee meant to boost house finance, regulation and extremely tight secondary market terms are hurting profitability and employment in the mortgage lending industry.
So most of the credit flowing from Washington is going to consumers buying larger homes rather than first time home buyers.
The bad old days of the Consumer Financial Protection Bureau extracting settlements from mortgage companies and banks are over.
Mortgage insider Rob Chrisman wrote recently of colleagues working “in a business where many are experiencing contracting voltunes and contracting margins. Bank of the Ozarks of Little Rock will stop originating home loans for resale on the secondary market, a line of business that had ‘operated at essentially break-even.’ ... Every company is taking a hard look at the continued high cost of originating loans.”
However, acting Consumer Financial Protection Bureau (CFPB) director Mick Mulvaney leaked a memo outlining how the agency will operate in future. The head of the Office of Management and Budget made clear that the bad old days of the CFPB extracting settlements from mortgage companies and banks are over. He wrote: “We are government employees. We don’t just work for the government, we work for the people. And that means everyone: those who use credit cards, and those who provide those cards; those who take loans, and those who make them; those who buy cars, and those who sell them. All of those people are part of what makes this country great. And all of them deserve to be treated fairly by their government. There is a reason that Lady Justice wears a blindfold and carries a balance, along with her sword.”
More significantly, Mulvaney confirmed that the CFPB will no longer regulate through enforcement actions and that fines and penalties will only be imposed when there is actual harm to consumers. This changes the inquisitorial approach of former director Richard Cordray, who extracted billions in wrongful settlements from private banks and mortgage companies during his reign of terror. Cordray is now seeking the Ohio governorship with a war chest filled to overflowing with contributions from the trial bar. Mulvaney stated in his memo:
“So, what does all of this mean, in terms of how we will operate at the Bureau? Simply put, we will be reviewing everything that we do, from investigations to lawsuits and everything in between. When it comes to enforcement, we will be focusing on quantifiable and unavoidable harm to the consumer. If we find that it exists, you can count on us to vigorously pursue the appropriate remedies. If it doesn’t, we won’t go looking for excuses to bring lawsuits.
“On regulation, it seems that the people we regulate should have the right to know what the rules are before being charged with breaking them. This means more formal rulemaking on which financial institutions can rely and less regulation by enforcement.”
200%
Rise in the cost of servicing a mortgage over the last five years
Under the tyranny of Richard Cordray at the CFPB, the cost of servicing a performing mortgage went up 200 percent in five years—one reason why many smaller independent mortgage banks have shut their doors. Larger firms are under pressure as well, which is why half of the top 10 independent mortgage banks are in bankruptcy or for sale. It is fair to say that there will be a significant number of business closures and acquisitions in the mortgage sector during 2018.
Even with the welcome regulatory changes in Washington, it will take years for the mortgage finance industry to recover to something like a reasonable cost structure. In the meantime, millions of Americans could lose their businesses and their jobs in 2018, not primarily due to rising interest rates but because of the abuse of power in Washington by ambitious progressives seeking higher office.
While the changes at the CFPB are welcome in the mortgage finance sector, the fact remains that 2018 is going to be a very tough year. The entire mortgage banking and REIT sector have been selling off since the end of December, reflecting investor concerns about rising interest rates and a flat yield curve. Regulatory changes in Washington are welcome and long overdue, but for the mortgage finance industry, it is still the depths of winter.
Christopher Whalen publishes The Institutional Risk Analyst and is the author of “Ford Men.” This article was first published on TheInstitutionalRiskAnalyst.com
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.