MBA CEO Bob Broeksmit on federal housing policy updates

Change is constant and so is MGIC. For nearly 70 years, MGIC has been the original choice for mortgage insurance. With tools, resources and expertise to help you close more loans and manage risk. Market-tested, industry-trusted, authentically MGIC. Visit MGIC.com Welcome everyone. My guest today is Bob Brooks-Mitt, President and CEO of the Mortgage Bankers Association. To give an update on various housing policies being considered in DC and what we can expect to go through when it comes to credit reports, credit bureaus, White House executive orders and more. First, I want to thank our sponsor, Total Expert for making this episode possible. Bob, welcome back to the podcast. Thank you Sarah. Glad to be here. Glad to have you on the last time you were on was in January. So you know, that's like in dog years how how much time has passed. Yeah, I think I think that's six years Sarah. I think so too. It's felt that way. Well, thank you so much for coming on. I wanted to follow up with some of those legislative things we talked about. You know, as you and I have talked about several times in the last year, it's like we do have an administration focused on affordability and given that the MBA specifically, you have offered several policy recommendations that would directly reduce borrower costs, right? And so some of those are reduced restructure FHA. MIPs there, the MIPS there, the reduced GSE loan level price adjustments and the tri-merge credit port. So I would love to go through those and kind of be like, what where are we on those? Because we know that there is some will to do this. And I guess out here, it's like is it just too much other things going on? Because certainly there are a lot of other things going on. Yes, well, as you say Sarah, we have three concrete suggestions that would lower cost tomorrow for borrowers, whether on purchase loans or on refinances. As the rates jump around, it wasn't very long ago that they were below six and now they're closer to six and a half. But they'll come back again, we believe and give refinance opportunities. So we want as many homeowners as possible to take advantage of them. And they include reducing the low-level price adjustments for Fannie and Freddie. And for FHA to consider a reduction in the mortgage insurance premium given that their capital ratio is 11.47 percent against the 2 percent mandated level. And in conjunction with lowering the mortgage insurance premium, we think it makes sense to look at some layered risk scenarios. And perhaps tighten the guidelines at the most risky parts of the FHA book in order that the mutual mortgage insurance fund continue to have a significant surplus. But we do believe there's room to cut, which is, you know, is the same as reducing interest rates. If you cut at 25 basis points, it's the same as dropping the interest rate. A quarter percent, which adds up very quickly. And the third one is modernizing the credit report requirements to say borrowers versus the tri-merge that everyone is getting today. And where those stand is that there's broad support for them, but the administration has not moved on any of them. And as I sit here recording today, probably this will already be old news by the time our listeners are hearing this, but we're expected an announcement tomorrow from FHA. We hear joined by FHA, but time will tell that would open competition in the credit scoring space by finally having managed score become operational for Banny and Freddie and perhaps down the line for FHA. So that's the first step. The second step is competition between bureaus. Well, and you know, we've had, so we've had the White House executive orders, right? We just had those pretty recently. Did none of those correlate to these three priorities you just talked about? So the executive order on housing was very welcome, but I view it as a blueprint as opposed to the finished product. And what I mean by that is that the executive order said that various entities, the Fed, OCC, FDIC, FHFA, etc., CFPB, very importantly, shall consider the following. And then it was a long list of very welcome changes that would make it easier for lenders to produce compliant mortgages and also give some relief to some banks that have exited or diminished their mortgage presence, given the high cost to originate and comply with the myriad requirements of mortgage originators. So we are now busy talking to the regulators who are charged with turning the language of the executive order into actual changes that can benefit lenders and borrowers. And one important thing that we noted is that some of the suggestions in the executive order are targeted to community banks with the quite expansive definition of community bank, $30 billion in assets or lower, and also to quote smaller banks and quote where it's 100 billion in assets or less. And that covers an awful lot of banks in the country, but frankly not that much lending. We think that probably 80% of loans made today are not made by banks in those categories. And what we're urging is that if there are parts of tread or other mortgage rules that make it hard for banks of that size to comply, let's fix the rule for every lender, not just exempt certain types of lenders. And that way all consumers, whether they choose to work with an independent mortgage bank or credit union or community bank or regional bank or a super regional or a money center bank, can benefit from the streamlined process, the lower costs that implementing these executive orders would have. So we're very enthusiastic about them. We've had preliminarily at least good response from the agencies that will be rewriting the rules to comply with the executive order, that their goal is to improve the rules for everybody rather than just exempting certain types of lenders from overly burdensome rules that don't pencil out and add benefit to the consumer. Especially there, you talk about how IMBs account for so much of the single family mortgage market, but then even more, if you look at FHA, if you look at some of the underserved borrowers, some of the borrowers that really, frankly, let's just be honest, nobody else is really interested in serving. The IMBs have stepped up and done that. So it's like, why not incentivize them? Why not give them the same level playing field that you're looking to give smaller banks? Right. I think that there are institutions that are serving that borrowers demographic while avoiding the government mortgage products because of past overzealous false claims act enforcement or because just the high cost of compliance. But I'm proud to say that somewhere between 80 and 90 percent of the government market is served by IMBs and you're absolutely right. Those are some of the borrowers that could benefit most by this streamlining and ringing some of the cost out of origination. I mean, I'm sorry to tell you that it still costs $11,100 to produce a mortgage in this country, which is crazy. And we think that the executive order has some really good ideas to improve that and all we're saying is improve it in a way that all borrowers benefit. You know, I started it at Housing Wire in 2013, and after Trid came out, what was that 2015? Is that 2015 that Trid came into force? Sounds right. Yeah. And we would write these. We would read your report every month about what it cost to originate alone. And we ran out of superlatives. Literally, it was like, it's an incredible amount. You know, it was like such an expensive way. Now it's like even more expensive. It was like more expensive than ever. It's like, and that was how many years ago. We can't even, we don't even go there anymore. We just say here's the cost because like we can't even put a label on it. It's just ridiculous. Right. And anyone who doesn't think that that filters through to the consumer doesn't understand the economics of the mortgage business. Absolutely. Hi, I'm Clayton Collins, the CEO at Housing Wire, and I'm joining you today to talk about the gathering. So the gathering is where the industry's most impactful leaders show up when it matters. It's where the leaders from Rocket, Mr. Cooper and Redfin first shared the stage post acquisition or the CEO of Keller Williams first talked openly after stepping into his new role as CEO and where this year leaders of Penny Mac and Cross Country are talking openly about what's next, including M&A and organic growth levers. This is the most powerful room in housing and you are invited. So if you're able to join us in on April 27th through 30th, go to HousingWire at the Gathering.com and use the code podcast for 20% off. Let's talk about the single file credit report, right, which has been something that you guys have proposed. And I am, we are still waiting on sort of some advanced copies of the press release of the, the announcement tomorrow about that potential credit change. So I don't really know what that looks like. Maybe you can talk about where the single file credit reporting proposal is right now. Yeah, my guess is that the tomorrow's announcement will be more about the scores and doing something to put into operation the decision that director Pulti made last summer to permit managed score for Fannie and Freddie loans. And as I mentioned before, it sounds like FHA may be moving in the same direction and that's very welcome and competition in the score arena is dearly needed. And our view is that it's also needed in the bureau space as well. And that's where our proposal to permit a single in file rather than a trimerge for Fannie and Freddie loans where the credit score is 700 or above makes so much sense somewhere north of 80% of Fannie and Freddie purchases are 720 and higher and the average credit score is in the 750s, about 757. So we don't claim that this would be a solution for 100% of borrowers because if your first score is 701 maybe you'd roll the dice and get a trimerge in hopes that 7201 is the lowest and you get a little better price if you fall into a better LLPA bucket and our proposal would reserve that right to originators to of course pull three as long as they submit them. You can't pull three in there only submit the best and they'll be enforcement mechanisms for that but we think that it would short-circuit the process for the vast majority of Fannie and Freddie borrowers who the first score is going to be well into the 700s and prevent people from overpaying for a service that doesn't improve the risk efficiency of the process and it's been more than three years going on three and a half years ago that Sandra Thompson when she was director of FHFA which I'll remind everyone is not just a regulator it's a conservator charged with conserving the assets of Fannie Mae and Freddie Mac and she said almost three and a half years ago that you don't need a trimerge on any loan sold to Fannie and Freddie and at that point it was to switch to a buy merge so anybody who today is seriously saying the trimerge is essential and we're going to go back to a 2008 financial crisis if we move away from it is ignoring the facts. What do you say to people who are like because what I've heard about the trimerge is like well geographically right some are better than others but wouldn't you know that if you're a lender within that region I mean wouldn't you be like okay I know that this is a better score is a more accurate score in this geography. Well Sarah I'm 61 years old and I guarantee that whoever told you that is my age or older because it used to be true that there were broad geographical differences between bureaus and heck I remember matrices that said if you live in the following states you must use transunion or expiring or Equifax because their models did differ geographically the vast bulk of those differences has been wrong out of the system so that is a historically maybe accurate concern but I don't think it's true today. So you wrote a letter to the editor right last week about this very topic to the Wall Street Journal what kind of reaction did you get? It's a very frustrating process where the journal writes a in my view patently absurd editorial saying here comes 2008 again we're going to bail out Fanny and Freddie. When again over three years ago their conservator said we don't need three credit reports there's no it's just sensational and then when I do my part and write a letter to the editor trying to set the record straight I mean thank you for reading it not many people did right I mean it's almost like running a correction everybody sees the bad original piece and the correction so I don't know it's frustrating people tend to return to their corners and try out the same old tired lines but I defy anybody to defend the status quo when the incumbents are increasing the prices year after year 400 percent increase over the past three years or so for no improvement in outcomes as it relates to credit and I'll remind you that Fanny and Freddie don't even use the credit scores all they look at is the underlying data so it's a system that only exists because of the government granted oligopoly and all we're asking is the government to rescind the oligopoly and let market forces prevail and I'll guarantee you the product will get better and the price will come down. We are 18 years away from 2008 and yet this this long shadow we talk about it all the time because Logan you know Arlead analysts battles this all the time where he's like the data does not support any of these kind of like you know doomsday scenarios as far as like a housing crash on all these different things and he you know you can point to Dodd-Frank and say the other parts of Dodd-Frank you know you don't need this like triple credit report they're protecting things and have created a system where that really can never happen again and I just I don't understand people's inability to grasp that it seems very obvious to me yeah I think that sometimes when legislative responses to bad events are effective people are skeptical right because it's like well gee how often does Congress get it right and I'm sure at the time MBA had some concerns about the ability to repay the requirements that were part of Dodd-Frank but boy they've been very effective I remember in the old days I'd get to a city for a convention and I'd get in the Uber and the Uber driver found out that I was in the mortgage business and would proudly talk about all the properties he owned and I guarantee you that the mortgages on said properties would not be made today because they would not pass the ability to repay and we run all that excess out of the system and the only way to reintroduce it is to undo legislative steps which as you know in a closely divided Congress it's hard to legislate anything let alone something that has stood as in good stead for so long and if you look at Fannie Mae and Freddie Maxe delinquency rates they are bouncing around the bottom they're extremely low and the weighted average LTV on a loan in the GSEs portfolios is I don't know 60 something now you could say that's because we had huge appreciation during the pandemic and that's true but what I'm saying is simply that the credit profile of GSE loans is pretty close to pristine and going away from a regimen that requires consumers and lenders to pay through the nose for no predictive kick-up makes no sense. Do the rising delinquencies on the FHA side does that concern you at all? Sure I think FHA can be the first sensitivity I don't want to say canary in a coal mine because I don't think we have a pending disaster but clearly those borrowers have less cushion by design right it's a program where America tries to give a hand up to people typically for their first time home who may not be able to get financing absent a program like FHA which certainly goes farther on the risk spectrum than conventional loans do. There have been changes in how FHA reports loans that have ticked up the 90 plus day delinquency rate in a way that's a change in measurement versus a change in performance and it has to do with trial payments on some of the loss mitigation features and those loans now being considered delinquent until you make all three trial payments so there's a little bit of noise in the numbers but certainly the FHA numbers are rising from a very low historic period but they also have an 11.47% capital surplus against a 2% statutory one so they're very well positioned to whether the storm and there is to some degree an inflation in that number when you compare it to earlier measurements of it. So it just feels like the common theme throughout your comments are like the risk doesn't match the you know on the other side what what's being asked and the cost of managing that risk when the risks have gone down so much across the board. Yeah I think that's fair I think that we tend to add requirements to protect from very serious downturns and then after we've had the benefit of some time and some performance history we don't tend to go back and say well is that area ripe to reconsider which is pile more on top of it and that's how we get this this system where we pay checkers to check the checkers to avoid a footfall at all costs less one of these regulations mean that a borrower has a defense from foreclosure for what would be considered a footfall and an inconsequential mistake. Well let's talk about the 21st century Road to Housing Act right so that's something it got all the way through the Senate we've got some momentum going there but you do have some concerns we'd love to hear what you think about that. Sure well this is a really fascinating case study in the legislative process because there were separate housing bills in the house and senate percolating and most of them they were both compilations of many smaller bills that bubbled up through the relevant committees in the house in the Senate and then they got a real shot of adrenaline when the president came out for some sort of limit on institutional investors buying single family residences and found as politics make strange bedfellows and Elizabeth Warren in the Senate and president Trump actually agreed on something which is the populous notion that Wall Street fat cats are buying houses for cash and preventing first time home buyers from buying the facts are a little murkier in terms of the very low percentage of homes in this country they're owned by institutional investors and the fact that they are net sellers and have been for the last couple of years for regular economic reasons like it doesn't pencil out to buy a house and rent it out when rates are 6% the same way it did when they were 3% but all that aside it's become a political hot potato and the moving vehicle in the house in the Senate were these housing bills, and so this was added, and then passed quickly one could say hastily by the Senate without what we view as proper regard for the effect that it would have on housing supply. And housing supply includes rental housing. And believe me, if builders had a better economic prospect in building a subdivision to sell to individual owner occupants, they would do that. There are times in the cycle when it makes more sense to have institutional money back a subdivision of single-family homes that can be rented. And might the renters eventually become owners? Sure, might they be renting because they prefer to rent, and they move frequently? Sure. And this bill says if you own more than 350 homes, if you were to do a build-to-rent community, you could only do it if you sold each residence within seven years to an owner occupant. Who in the world is going to devote capital to build like that with an artificial constraint saying you must exit your investment within seven years regardless of the economic conditions pervailing at the time, and that you were responsible for finding an individual owner occupant free to the homes. Even the discussion of this has frozen investment in this sector, and the last thing we need facing the supply crisis is to further constrain supply. So that's our top concern. The second one is a drafting error that actually reduces the FHA multi-family statutory loan limit when the impetus had been to increase it. So we're urging that that drafting error be corrected, and then there are a couple of other things that do things like take funds from the mutual mortgage insurance fund of FHA and pay for counseling for delinquent borrowers, not just for FHA loans, but for VA and USDA loans. We think it's a bad idea to use funds set aside for credit losses on FHA loans for anything other than credit losses on FHA loans. And there's another one about what we believe to be duplicative and unnecessary further disclosures about VA loan eligibility. So the main one that's garnered the headlines is the first one, the institutional investor ban, and frankly, I don't know where it's going to end. There's talk of either a formal or informal conference between the House and Senate to iron out these differences. This could be just stalled indefinitely, and the one wild card we all know is if President Trump goes on truth social tonight and says, I demand this be passed by the House in its current form by the end of the week, that could be well what happened. So it's a little hard to predict where it's going to end up. You know, you and I have done, I've heard you speak at several conferences, at several conferences, this year I've been able to moderate it, you know, talk to you about it, and we always in the green room, it's always like, we really don't know. I mean, anything could happen at any time. So it's a quick change on the build to rent community. I think it's especially, it's just to say you have to sell all of those. So you build them all at the same time, which means you would have to sell them all at the same time. I mean, that makes no sense at all. I mean, you're just you're flooding the market in a particular, you're driving down the House, the price of all those houses. It's just so impractical, you know, you think sometimes who thought of this one? Yeah, I mean, I get the impulse that you want people who are renting to have an incentive to one day own a house, but it's also can be a little paternalistic, right? I mean, like I said, if you're renting for your own set of personal or financial reasons, you may not want to be a home buyer, but you may be a perfect tenant and you may have your kids in the right school districts and like your neighbors and all that sort of thing. And to say that those communities won't continue to be built because of an unreasonable requirement on how and when they exit their investment and, you know, politicians can say whatever politicians want to say, but the market will vote with its feet. And if the people providing their capital stop, which they already have in response to this uncertainty, then all we know is the supply deficit worsens. Right, that unintended consequence. Well, we're almost out of time, but I did want to give you a minute to talk about the Basel 3, right? The reproposal, that's coming up. I think we're in that comment period until June, right? Maybe give us the NBA view on that reproposal. Sure, very briefly, and I'm going to testify on this on April 28th in front of the House Financial Services Committee. We welcome the vastly improved product over the one that the Biden administration put out. And in the mortgage space in particular, it fixes a big problem that the previous proposal had, which would have penalized banks for holding mortgages on their balance sheets, it uncaps the amount of mortgage servicing that banks can invest in. We think it's really important that if a bank is good at servicing and like servicing that it be allowed to do it versus some members we have have to sell servicing every quarter to maintain a position under the caps that the current rules require. It invites comment on what the risk rate should be on mortgage servicing, which at 250% is way too high and will be commenting on that. It asks what the proper role for private mortgage insurance should be in setting bank capital standards for loans on balance sheet. And we think bringing more risk absorbing loss absorbing capital into the system is a good thing and should be recognized that we'll be commenting on that. And finally, we are hoping that some reassessment of the risk rate for warehouse lending, which is essential for banks to continue to support IMBs and the central role they play in the industry will be considered as part of Basel 3 as well. So very positive about the initial submission. We of course have helpful suggestions for how to make it even better and we'll be commenting about that and I'll be testifying on that later this month. Well, we look forward to seeing what that transcript is hearing your testimony there. I really appreciate you taking the time to sit with me and update our audience on all these really important things. And I know we're going to be talking again soon because that's the way things go here. Absolutely. Thank you Sarah. Thanks Fab. Thanks for listening. The Housing Wire Daily. If you haven't already, we'd love for you to take a minute to rate the show or leave a comment. We'll see you back here on Monday for more news and insight.