Debra Still with the Mortgage Bankers Association #350

On Friday, October 18, The Norris Group proudly presents its 6th annual black tie event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: PropertyRadar and Sean O’Toole, HousingWire, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Angel Bronsgeest, and Sarah Buonora, InvestClub for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, Wilson Investment Properties, RODA Construction, and White House Catering. For event information and tickets, visit

Bruce Norris is joined this week by Debra Still. Debra is President and Chief Executive Officer of Pulte Mortgage, a nationwide lender that is headquartered in Inglewood, Colorado. The company employs 750 individuals throughout the United States. They have been in business since 1972 and have seen over 400,000 homebuyers finance their new home purchases. She became chairman of the Mortgage Bankers Association in October 2012, and she recently served as chair of MBA’s residential board of governors. She is also a member of the association’s board of directors.

Debra wears a lot of hats. She is in charge of a very large company nationwide; so Bruce wondered how much of her time is spent with that business when she is involved so much in the Mortgage Bankers Association. Debra said it is a full plate, and it has been for the past year. Thankfully she has a really strong leadership team at Pulte Mortgage, and they have all worked for the company for quite some time. They have shared this burden as a team. With so many issues they have dealt with over the past year, it has helped her ability as chairman to run a company and understand the business realities of it all. In addition, as MBA chairman she has been able to bring back very proactively a lot of the issues and debates and integrate them in strategically how they run the organization both now and in the future.

Debra’s input is from real life, and her decisions made in this little box really has an effect in the field. This includes who gets to own a field and who gets to make a living as a mortgage broker. Bruce asked if she has felt that people have been attentive to her information. She said she believes they have; and in particular the CFPB has been a very good listener as they deal with the complexity of implementing 3,500 pages of Dodd-Frank rules. The notion of broad access for credit to consumers is one area around which we can all align. Having a business reality and being able to share the unintended consequences has allowed the CFPB to make interpretations and adjustments. They have been very flexible in how they have listened and made changes within their authority.

The CFPB (Consumer Financial Protection Bureau) is fairly new, so Bruce asked Debra if she thinks they are here to stay. Debra thinks they will stay. They are a little over two years old and have around 1,000 employees at this point. They are overseeing about 8 areas of consumer protection and financial services. Their initial focus has been very much on the mortgage environment. They were chartered by Congress in the Dodd-Frank Act, and they have written 3500 pages of rules that lenders will be obligated to implement by January 10, 2014. We are a little over 90 days away from implementing six very important rules. The one that will most impact consumers is the ability to repay rule. Bruce said this is an important issue, but he wonders if people will be saying no to loans that are perfectly safe for the lender. If somebody who is 75-80 has a free and clear house and no other funds, will they be able to get a loan? Debra said every lender must determine that the borrower has the ability to repay the mortgage. Looking at income and assets is going to be very important as well as a handful of other criteria. The CFPB has done a good job of making that definition broad. They put a temporary patch in place and said that any loan that is eligible to be sold to either Fannie, Freddie, or other government agencies will automatically be considered needing the ability to repay rules and the definition of a qualified mortgage. They have done a good job of making that broad.

Debra said for her what is going to be most challenging, particularly within the first six months after January, is that the rules are very complex. There is a lot of detail, and the ability to repay rule was over 800 pages long. The question is even though we have the rules, will all of this complexity make lenders even more conservative than they are today. Bruce asked if it is better to know the rules finally than it is to still wonder what the rules are. Debra said they had talked over the past couple years about how much uncertainty there has been in real estate finance. They now do have a bit more certainty and have the rules. They are still waiting to hear from the CFPB the definitions and interpretations of some of the aspects of the rules. Congress allowed FHA to write their own QM rules, so they just FHA’s ability to repay the QM definition on Friday. There are still a lot of interpretations they are waiting for, such as the Mortgage Bankers Association which has an 86-page Q and A into the CFPB over the servicing standards rule. Still waiting on definitions leaves them with a little bit of uncertainty. With seven rules all going into effect at once and with some of the interpretive issues, the complexity is pretty meaningful.

Bruce asked if all national rules they are waiting on are national in scope and if they trump any state rules. Debra said these are federal rules, so they will apply to all lending institutions regardless of the business channel. Some of the large depositories are federally regulated, and the independent mortgage bankers and brokers are state regulated. For the independent mortgage bankers and brokers who must comply not only with the federal rules but also with the state rules, it is going to be the most conservative of the two. In the case of Pulte Mortgage, they operate in 30 states and have to know all of the state rules. Anywhere a state is more conservative than the CFPB, they have to follow the more conservative version. Where we are really bumping up into some disparities that the CFPB is working with the states on is in the servicing standards.

CFPB just made an announcement last week that helps them with some of the notifications in the servicing rule. However, that is another level of complexity that lenders have to deal with if they are state-regulated. Bruce asked how you would read 800 pages of who to loan if you are just a small shop. Debra said one of the biggest concerns is this notion of “too small to comply” and if a lending environment will have the bandwidth to be able to incorporate all of this. They have to write new policies, new procedures, and they have to reprogram their technology systems. In addition, they have to update all their document retention schedules, monitor for future changes, and train employees. For the small community banks and lenders, that is a big concern and the timing is a bit challenging.

If you look at the increase in overhead as it relates to quality control and legal compliance technology, we are investing in infrastructure during a time when for most lenders volume is declining. Rates are ticking up, and recent finances are down about 70%. This means you have lower productivity, declining volume, and rising interest rates all at a time when overheads are increasing. It is very challenging for any lending institution, but particularly the smaller ones. You are going to have fewer players that are capable of obeying the rules or even understanding them.

Bruce wonders about the lenders who decide it is all worth doing and if they will be forced to offer fewer loan products. Debra said yes and that the ability to repay rule prohibits some of what they may have called the exotic loan products of the past. Some of those should have gone away, like the pay option ARMs and others. However, there are interest-only loans for highly qualified individuals. They are starting to see credit constricting a little as it relates to the IOs disappearing from the marketplace in anticipation of the new rules. In addition, the GSEs just announced that they will not buy a loan anymore that does not meet the definition of a qualified mortgage. The liquidity in a non-qm loan is going to be diminished. That is where they hope the private capital in the private marketplace will play a role. Right now what they are seeing is that while private capital seems to be coming back in the jumbo space, it is only for the wealthiest borrowers. They have not seen any indication of private capital being interested in supporting middle class America.

Bruce asked about the current interest rates and if it would be unappealing to tie up private money at 4% for thirty years. Debra said for sure and that private capital may certainly focus on some of the shorter maturities and some of the ARM programs. There is definitely going to be an incremental cost for anyone who is choosing to lend in the non-QM space. This is driven by some of the fact that there are not some of the legal protections that a lender would get if they lend in the QM space.

Bruce asked about the final definition of a qualified mortgage. Debra said the qualified mortgage goes with the ability to repay rule. There are no down payment requirements associated with it either. What Bruce is referring to is the QRM, which was a definition introduced in the risk retention rule. If you think about the ability to repay rule, it focused on safe and sound sustainable loan programs for consumers. The QRM rule, which was the risk-retention rule, focused on the same thing but targeted more at investors. Late last month, the regulators who worked on the QRM rule re-proposed the QRM rule to equal the QM rule. The original QRM rule would have required a 20% down payment, 28-36% hardwired DTI requirements, and some credit markers. What they have done is re-proposed their preferred alternative, which is that QRM should equal QM. This would remove the hard wired down payment, the DTI, and the credit markers. This provides broad access to credit for consumers. The statistics would suggest that with a 20% down payment, it would eliminate about 61% of all borrowers that otherwise would have met the QM definition.

Debra is very pleased that the regulators have taken a look at the value of requiring a down payment versus the social responsibility of access to credit. The also proposed a QM plus, which is an alternative proposal that is not preferred but on which they want to receive comments. The QM plus would make it equal to QM plus put back a 30% down payment as well as some credit markers. There is no doubt all these changes are going to make for a very safe pile of loans, albeit a small pile of loans. We have a housing industry that still has a ways to go. Builders are still not building with confidence, especially in California.

Bruce just spoke with John Burns on the radio show last week, and he spoke on sub-divisions in California being down 95%. Builders must be looking at their future and saying they are not confident yet. The uncertainty of who will be able to get a mortgage is really having a trickle-down effect of how many projects will be built and how many jobs will be created. If you look at the long-term and at housing demand for the long-term, the date will show you that about 60% of household formation is going to be driven by two components. One is the echo boomers, which are children of the baby boomers and a lot of first-time homebuyers. They will also probably be saddled with more student debt than what their parents originally had. You also have about 30% of household growth over the next ten years driven by immigrant borrowers. You take these two groups together, and you look at the fact that household growth will be driven by the first-time homebuyer, and you see that we are not going to have a sustainable housing recovery without the first-time buyer. You then have to look and say that you will credit the available.

If you look at today’s data, it is really the higher end of the market that is growing. There has been a lot of pent-up demand from wealthy home buyers, but when that subsides or equalizes the question is if we will really have a sustainable housing recovery without providing access to the first-time homebuyer. This goes to the FHA program. Bruce said he knows the history of the FHA loan program, and when you look at the loan amount that was usually available compared to Fannie Mae it was always a lot less. Now it is not less. This is a real important factor in a state like California. Bruce asked Debra if she sees this staying here, or does she see it being repealed and brought down to a former ratio of 50% Fannie Mae loan limit. Debra said that is the debate right now, and FHFA has signaled that they would like to bring down the Fannie/Freddie conforming loan limits. There is a wide contingency in real estate finance and real estate that it is way too early to bring those loan limits down. It would also create an even bigger gap with FHA.

Debra said thank goodness for FHA and that they have moved in to provide continuity during this housing crisis. With the stimulus loan limits, Debra does not think there is too much appetite to extend them. Therefore, we will see the FHA come down a little bit at the end of this year. Most would be very pleased if FHA just left it at that for the time being. Unfortunately, our housing recovery has showed in the last 60 days that it is a little more fragile than what we were all hoping for in the first 6 months of this year. In terms of the builder communities, one of the other things that shows is the builders are clearly mindful of the credit availability on the low end of the market. However, she thinks you also had 3-5 years where no land was developed or entitled, so we may have a bit of a gap just in terms of availability from an inventory standpoint up until early 2015. In California, there is no doubt this will definitely be the case, possibly may take even longer.

FHA just reduced the timeframe for somebody who had a bankruptcy, short sale, or foreclosure to be able to access a loan. Usually you end up with an overlay from the lender saying it is all well and good but they are not going to fund it. The time when things seem to not get done is when lenders have an overlay, so Bruce asked Debra why overlays make sense. Debra said where you find most of the overlays is with the folks who are aggregating loans where they might lend to the full extent of the FHA credit box for their own direct lending. However, if they are going to buy loans from another lender, they might put some overlays on top of that. This in turn creates a lack of ability for anyone that is not issuing their own Ginnie Mae securities or selling directly to the GSEs. It is really an access and liquidity standpoint; and the notion is that if one is going to take a risk at the most marginal end of the business they are going to be a bit more conservative.

Debra said she would make sure that from a broad access to credit standpoint that her retail business is extended to the fullest. It is really an access issue; so FHA is very concerned and would like all of their lenders to loan to the fullest extent. They are working on their compare ratios as well because if you are above the average, you might signal concern in terms of compliance with the compare ratio. It is almost like it is a race to the top right now of who can make the best loans. FHA is working diligently to put a floor or a ceiling on that so we can all feel comfortable that we are all doing our due diligence for credit risk.

Debra Still will be featured this year on the panel at I Survived Real Estate 2013. The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate 2013: Adrenaline Athletics, California Property Solvers, Coldwell Banker Town and Country, Claudia Buys Houses, Elite Auctions, FIBI (For Investors By Investors), In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Inc, Keystone CPA, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Orange County Real Estate Investors Association, Orange County Investment Club FIBI, Personal Real Estate Magazine, Pilot Limo, Primary Residential Mortgage, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Tony Alvarez, and Westin South Coast Plaza.

See for more on the event and all of our sponsors.

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