One year ago, the Community Mortgage Lenders Association merged with the Community Home Lenders of America, creating the Community Home Lenders of America.
What have we learned from the last year? First, there is a critical need for a national trade group that distinctly and vigorously advocates for the interests of small and mid-sized independent mortgage banks.
When Silicon Valley Bank imploded, certain parties in Washington re-doubled their efforts to engage in scaremongering Washington policy makers about the alleged significant taxpayer “risks” of IMBs. This allegation is unfounded – but these types of claims can have consequences, they can’t go unchallenged.
So, CHLA promptly released a report decisively rebutting the overhyped claims of IMB risk, documenting the “ubiquity” of both financial and consumer regulations on IMBs, and explaining how regulatory overreach could undermine the availability of affordable mortgages precisely at a time when homeownership challenges are rising because both mortgage rates and home prices are rising.
We have learned (or reaffirmed) that there is a critical need for an association that continues to educate Congress and federal agencies about the key role of IMBs in access to mortgage credit, leading the market in originating loans for minority, underserved, and first-time homebuyers.
Last October, CHLA continued the practice of releasing an annual “CHLA IMB Report.” This report explains what IMBs are, uses statistics to show the growing mortgage market dominance of IMBs (e.g., IMBs originate 90% of FHA and VA loans), and highlights the key issues for IMBs, along with practical policy recommendations.
We have learned that a larger organization means more resources, more member expertise, and a diversity of opinion that strengthens our advocacy efforts. CHLA and CMLA had represented slightly different arcs of the market for smaller lenders. The combined group gives us more breadth, ranging from the smallest IMBs to much larger mid-sized IMBs that securitize FHA, VA, and GSE loans
On behalf of small correspondent lenders, for example, CHLA has advocated for a Ginnie Mae cash window and a proposal to make aggregators more accountable to correspondent lenders in challenging GSE repurchase requests. Large mortgage lenders often have their own lobbyists in Washington or an outsize role in trade groups. So CHLA sees vigorous advocacy on behalf of smaller IMB lenders as an essential part of our mission.
We have learned that a larger organization translates into significantly greater policy successes. Key priorities that CHLA has been an acknowledged leader on came to fruition this last year – including an FHA premium cut, a number of much appreciated flexibility provisions related to Ginnie Mae pooling, and divestitures by ICE in response to CHLA criticism and FTC opposition to their purchase of Black Knight (although our push to fight abuses continues).
We learned (or reaffirmed) that having a bottom-up, member-centric trade group makes it easier to set priorities and take actions that reflect what matters most to community-based IMBs. Many initiatives CHLA pursued this last year were issues that Members suggested on our weekly calls. These resulted in CHLA proposals to reign in abusive trigger leads, to fight FICO’s 400% discriminatory fee hike and to develop proposals to recruit more minority and underserved loan originators (the best way to help IMBs do an even better job of serving those borrowers).
Finally, we have learned (or reaffirmed) that a trade group does not just have to reflexively advocate for special interest provisions for their members, but also has a vested interest in consumer protections.
Consumer confidence in the mortgage process is critical to the success of mortgage lenders and the right thing to focus on. So, CHLA recently released its “Consumer Bill of Mortgage Rights,” identifying seven critical gaps on mortgage consumer protections.
These include universal licensing of all loan originators, reigning in trigger leads, rolling back the FICO credit score hikes, consumer protections for dual compensation, and FHA ending their Life of Loan premium policy.
We can’t wait for the next year. And any IMB that likes what we are doing, give us a call, join our mission.
Federal Reserve Chair Jerome Powell said the central bank still has “a long way to go” in its effort to bring inflation down to its 2% target.
Speaking at the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Policy Symposium on Friday morning, Powell acknowledged the progress that has been made in cooling the economy since the Fed began raising interest rates in March 2022, but noted that further rate hikes could be in order.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said.
Powell made little mention of the banking sector in the much anticipated remarks, but noted that lending standards have tightened and loan growth has slowed sharply, contributing to the progress made in curbing inflation. This trend has been noted among both banks and nonbanks, with declining net issuance of high-risk products, such as leveraged loans and speculative-grade and unrated corporate bonds.
Interest rate-sensitive activities, such as home and auto lending, have proven responsive to the Fed’s hikes, Powell said, with demand for both types of borrowing waning over the past year. Similarly, rental prices growth has been trending down as well, he added, though the broader category of housing services has lagged behind other economic indicators.
Overall, headline inflation has tumbled from a peak of 7% in June 2022 to 3.3% last month. However, core PCE inflation — the Fed’s preferred measure of price growth, which factors out volatile commodities such as food and energy — has seen less movement, declining from a 5.4% high in February 2022 to 4.3%.
While the past two months have seen marked declines in price growth — a trend that has spurred optimism for a so-called soft landing, in which price stability is restored without tipping the economy into a recession — Powell said two months of clear progress are not enough to declare victory.
“The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said. “We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters. Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability.”
These comments feed mounting sentiment among financial market participants that higher interest rates could become a long-term fixture as the Fed looks to tamp down a resilient economy. This belief fueled a run-up in yields on 10-year Treasury bonds, which surged to their highest levels since November 2007. Rising yields on the 10-year typically indicate confidence in the U.S. economy, but in this case, that confidence also belies a belief that cooling the economy will be a protracted process.
Powell pointed to higher than expected gross domestic product and consumer spending as signs that the economy is not absorbing tighter monetary policy as expected. Similarly, he said the labor market has remained unusually strong, with the employment rate remaining steadily low despite fewer job openings.
If this above-trend economic growth continues, he said, the Fed would be more likely to consider further rate increases.
Powell reiterated that the Fed’s goal will remain 2%, though as he has stated before, the intention is not to maintain a restrictive monetary policy stance until that point is reached. Instead, the Fed will aim to lower rates as the economy nears the 2% target. But, Powell said, identifying when exactly to start that process is elusive and comes with its own set of risks.
Some economists have been warning for months that the Fed has already boosted rates too high and done so too quickly, arguing that the lagging effects of tighter monetary policy are bound to show up sooner or later, with potentially disastrous effects. Some have said the string of bank failures that occurred earlier this year were a direct result of the Fed’s rapid policy shift.
Powell addressed these concerns, saying the lagging effects of higher rates have not been fully realized. In the past, he has said the Fed would rather err on the side of tightening monetary policy too much, because the solution to that issue — cutting rates — is easier to implement than attempting to raise rates again after cutting too soon.
For now, Powell said, the focus is on balancing both sets of risks carefully.
“These uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” he said. “Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.”
WASHINGTON — After years of proposals, counterproposals, interagency disagreement and political intrigue, the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency appear poised to finish their modernization of the Community Reinvestment Act’s implementing rules.
FDIC Chairman Martin Gruenberg said last fall that he expected the three agencies would finalize a joint rule updating the CRA in early 2023. But the intricacies of the rule, a shake-up of leadership and a string of midsize bank failures this spring likely contributed to pushing back that timeline, according to Jesse Van Tol, CEO of the National Community Reinvestment Coalition.
“You had a mini banking crisis in the spring that certainly pulled people away from this. You had a leadership transition at the Fed as well with [former Vice Chair Lael] Brainard’s departure, [and] you’ve gotten new Fed governors who came on board.” he said. “The light at the end of the tunnel is here, and I think we will see the final rule in October.”
Congress passed the CRA in 1977 as a way to address de facto lending discrimination faced by communities of color. The act requires that banks be graded on how equitably they are lending to low- and moderate-income customers and neighborhoods in their service areas, typically determined by where they have branches and deposit-taking automated teller machines. Banks need to receive a satisfactory mark in order to merge with or acquire other banks.
Given the advent of mobile banking, both banks and community groups have long agreed on the need to update the CRA — the most recent comprehensive overhaul of the rules was conducted in the 1990s.
Former Comptroller of the Currency Joseph Otting previously attempted to reform CRA implementation during the Trump administration, but community organizations argued the proposal effectively allowed banks to ignore underinvested communities and they threatened to sue the OCC when the plan was finalized in 2020. Otting’s proposal also failed to gain the support of Fed officials. The Biden administration then took on the task of reform, starting from scratch under the leadership of former Brainard.
The banking agencies issued a notice of proposed rulemaking in May 2022, but banking trade organizations raised a variety of concerns about the proposal. Banks argued that it would be too difficult to attain satisfactory ratings under the change, particularly under the retail lending portion of CRA exams. Banks also argued that the 90-day comment period was too short for banks to meaningfully respond to the proposed changes under the Administrative Procedure Act and hinted at a legal challenge if the rule was finalized as written.
Banking groups on Tuesday asked regulators to delay issuing the final joint rule due to uncertainty created by a constitutional challenge to the Consumer Financial Protection Bureau’s funding structure and by the recent capital changes regulators have proposed as part of the Basel III accords.
But the regulators appear unfazed by that criticism. Ian Katz, a Washington analyst with Capital Alpha Partners, said that may be due in part to the closing window of opportunity that regulators have to finalize the rule and avoid a congressional repeal after the 2024 election. The Congressional Review Act allows Congress to nullify a regulation within 60 legislative days of its finalization with a majority vote in both chambers and approval of the president. Katz said that a real threat of an override exists if Republicans win the House, Senate and White House.
“If the administration wants to make sure that the rule can’t be nullified by a Republican administration and Congress, it probably needs to finalize it by roughly mid-2024 to avoid the other CRA, the Congressional Review Act,” Katz said. “I think they’ll put it out before then.”
But in addition to racing against the clock, experts say regulators also have to take their time to ensure that the final rule is not vulnerable to a legal challenge.
“CRA is complicated, and the proposal gives the banks a lot of different pieces they can attack. The banks are also asserting that the regulators are going beyond their statutory authority and that the proposal, if unchanged, would be vulnerable to a legal challenge,” Katz said. “I imagine the regulators have been taking a look at that and will try to make sure they put out something that won’t be easy to strike down in court.”
Van Tol said the agencies are highly sensitive to industry concerns and have spent a lot of time making certain the law complies with statutory authority. To craft a durable rule, the agencies — particularly the Fed, which is leading the rewrite — are likely to take all the time they have. Van Tol said this puts pressure on regulators to ensure the rule withstands the test of time.
“Because the banking trades have threatened to sue them, I think they are trying to make sure that they’ve dotted the i’s and crossed their t’s in such a way that the rules are best protected,” said Van Tol.
Ye the delay in finalization can’t all be attributed entirely to industry pressure, Van Tol said. CRA-related rules have historically been very difficult to get done, in part because the details are very complex and also because they require interagency collaboration.
“It’s an interagency ruling, it’s much more complicated to coordinate amongst three agencies — two of whom have boards — who have to vote on the proposal,” he said. “The Fed [officials] are perfectionists. If you give them time, they’ll take it. They’ll take as much time as they need to get to something they’re satisfied with.”
Dennis Kelleher, CEO of the public advocacy organization Better Markets, said part of the problem is that industry turmoil and agency turnover made an already tedious process more difficult.
“I think anyone thinking it was going to be finalized earlier this year was overly optimistic,” Kelleher said. “It would have been record-breaking for them to do all that and finalize by earlier this year. While we always prefer rules to be finalized sooner than later, we’re more interested in rules being finalized that are effective, workable, durable and achieve the intended goal. If that takes more time than less, better to get it right than be quick about it.”
When reached for comment, officials at the OCC indicated they are working on the rule and incorporating public feedback.
“The OCC has been working with the Federal Reserve and FDIC to modernize and strengthen the Community Reinvestment Act to expand financial inclusion and opportunity for all Americans, especially the underserved,” they noted in an email. “The agencies received hundreds of detailed and thoughtful comments on the notice of proposed rulemaking, and we are working together to consider the suggestions.”
The FDIC and the Fed did not comment for this story.
Van Tol said that for all the bluster about a possible legal challenge, he is skeptical that banks would actually follow through on their threat to sue their prudential regulators over the rule.
“I think the trades sending that letter [on Tuesday] is just an attempt to continue to delay, which is really just an attempt to kill it,” Van Tol said. “It will be interesting to see if they do. I think it’s one thing to sue the CFPB; I think it’s another thing entirely to sue your prudential regulator. I wouldn’t want to be in that position.”
He added that banks also must toe a fine line in opposing the CRA, given how such a stance could contradict banks’ previous stated commitments to racial justice.
“Some banks will think twice — many of them having made statements about their commitment to racial equity, their commitment to the community in the wake of George Floyd — about suing over a rule that fundamentally is about lifting up underserved communities,” he said. “I think obviously that’s the reason why they work through their trades, to shield themselves from criticism.”
WASHINGTON — The Bank Policy Institute and the American Bankers Association penned a joint letter Tuesday urging federal bank regulators to delay finalizing the most sweeping revisions to the Community Reinvestment Act — an anti-redlining bill — in decades.
The letter, sent by BPI and ABA to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency suggested regulators should delay any final CRA rule until the agencies’ joint Basel III capital rules are finalized. They posited regulators had not considered how the new capital requirements lower the incentive for banks to engage in CRA activities like low down payment mortgages to low-income families.
“The proposed capital rules would reduce incentives to engage in mortgage lending, which is central to the CRA programs of many banks,” they said. “Many banks offer low down payment mortgages as a means of meeting the credit needs of low- and moderate-income families.”
In addition to asking regulators to pause the CRA rule to accommodate the likely reduction in mortgage lending, the letter also said that a constitutional challenge to the Consumer Financial Protection Bureau’s funding structure should give regulators pause as they move ahead with a final rule. The banking industry has previously expressed opposition to the CRA revamp on the grounds it oversteps congressional authority.
A Texas district court judge last month temporarily barred the CFPB from enforcing its 1071 rule until after the Supreme Court rules on the constitutionality of the CFPB’s funding structure sometime next year.
“The banking agencies should delay finalization of the CRA rules until a final determination is made regarding the status of the rules promulgated under Section 1071, which will affect how the agencies administer certain aspects of the CRA rules,” the banking groups said.
While the necessity for a CRA update is widely acknowledged, the banking industry has expressed louder opposition as new Basel III endgame requirements and post-banking crisis reforms coincide with the new CRA standards.
In a comment letter in August, 2022 the Bank Policy Institute said the agencies’ joint proposed rule exceeded statutory mandate, added needless complexity and broad application and was overly punitive in its application toward banks. Another major trade group, the American Bankers Association, made similar claims in an August comment letter, saying the proposal missed the mark. ABA said they were concerned that significant numbers of banks would need to invest more in their retail lending departments to pass retail lending examinations under the new rule.
The Community Reinvestment Act was passed in 1977 to bar banks from accepting deposits from lower-income communities without making commensurate levels of loans to those communities — a problem for many communities of color in the first years since explicit racial discrimination in lending was outlawed. The law requires banks to make loans to low- and moderate- income borrowers in the institution’s “assessment area,” defined as areas where the bank has its headquarters, branches or deposit-taking ATMs.
Banks are assessed for compliance at least every five years by their primary regulator. Banks are graded in three areas: lending, investment and service, weighted as 50%, 25% and 25% of the examination respectively. Banks are then assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “noncompliant” based on their performance.
If a bank is deemed to have less than a “satisfactory” rating, then it may not merge with or acquire another banking institution or modify its charter until it achieves compliance. But critics have argued that most banks receive either an outstanding or satisfactory rating, meaning that virtually no banks face the regulatory burdens that the CRA can impose.
Former Comptroller of the Currency Joseph Otting sought to reform the implementation of the CRA during the Trump administration, but community advocates argued that his reforms were too favorable to banks and would yield little additional investment in the communities that need it the most. Bank regulators issued their revised proposal last year. — John Heltman contributed to this report
During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Contrasting conclusions
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, executive vice president of strategy and growth for the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
Many components of the capital rules that federal regulators proposed last month last month have elicited questions and concerns from in and around the banking sector, but none more than the treatment of single-family mortgages.
Trade groups representing banks and various parts of the mortgage industry have come out against the rules, as have housing affordability advocates. These groups say the impact of the proposed rule changes would be felt by the housing sector more so than the banks themselves.
“In the housing sector, which has just been in a sort of boxing ring getting punched, one after another, and getting exhausted from all that’s coming at them, this one is pretty incredible,” said David Stevens, a long-time mortgage executive who now heads Mountain Lake Consulting in Virginia. “We thought the current Basel rule made sense, but this one’s going to have downstream effects that are going to be very broad in the housing system.”
The change is expected to have at least a moderate impact on banks’ willingness to originate. While banks have been steadily ceding market share to independent mortgage banks and other nonbank lenders since the subprime mortgage crisis, they still play a key role in the so-called jumbo mortgage market, which consists of loans too large to be securitized and sold to the government sponsored enterprises Fannie Mae and Freddie Mac.
“The big, traditional mortgage lending banks have largely exited the field and that’s been going on for some time. This is the next nail in the coffin,” said Edward Pinto, director of the AEI Housing Center at the American Enterprise Institute. “This nail will make it harder for banks to compete with Fannie and Freddie, generally, and then take the one market they’ve had left to themselves, the jumbo market, and make it harder to originate because of the capital requirements.”
Some policy experts say the bigger impacts could come from the second-order effects of the regulation. In particular, they point to the treatment of mortgage servicing assets — the salable right to collect fees for providing day-to-day services to mortgages — as a change that could crimp the flow of credit throughout the housing finance sector and lead to higher costs being passed along to individual households.
“With potential borrowers already facing record high interest rates, steep home prices, and supply-chain issues, increased fees and scarcity of bank lenders could be another brick in the wall stopping Americans from obtaining meaningful homeownership and wealth creation,” said Andy Duane, a lawyer with mortgage-focused law firm Polunsky Beitel Green.
The proposal, put forth by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller on the Currency, notes that the rule change could result in second-order effects on other banks, but it largely focuses on benefits that large banks could enjoy relative to smaller banks as a result of the new rules. It notes that such risks are offset by a requirement that banks adhere to both the new framework and the existing one, to ensure they do not see their regulatory capital levels dip below that of the standardized approach.
Still, the regulators are aware that the change could have unintended consequences on the mortgage industry and housing attainability. Because of this, their proposal includes several questions about the subject.
“We want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers,” Fed Vice Chair for Supervision Michael Barr said while introducing the proposal in an open meeting last month. He added that housing affordability was one of “several areas that I will pay close attention to and encourage thoughtful comments.”
However, the proposal dismissed the idea that the new risk weights on residential mortgages would have a material impact on bank lending in that space. Citing various policy papers, academic studies and regulatory reports, the agencies assert that the risk-weight changes would lead banks adjusting their portfolios “only by a few percentage points.”
Stevens — who served as an assistant secretary in the Department of Housing and Urban Development in the Obama administration, a commissioner for the Federal Housing Administration and president of the Mortgage Bankers Association — said he is not convinced regulators have done sufficient analysis to rule out the type of sweeping, negative implications that he and others fear. He noted that the 1,087-page proposal includes fewer than 20 pages of economic analysis.
“I just don’t think they’ve thought through the downstream effects and the lack of analysis, in terms of actual financial estimates of the implications, is really concerning,” He said. “This will be a really big change, and that’s why you see everybody up in arms and the trade groups aligned against this proposal.”
Like other components of the bank regulators’ Basel III endgame proposal, the components related to mortgages would create standardized capital rules for large banks and do away with the ability for large institutions to use internal models. It also extends these requirements to all banks with more than $100 billion of assets, rather than only the largest, global systemically important banks.
The key provision in the package of proposed rules is the use of loan-to-value, or LTV, ratios to determine risk-weights for residential mortgage exposure.
The change could allow banks to hold less capital against lower LTV mortgages, though there is some skepticism about much of a reduction in capital that change will ultimately entail, especially for GSIBs that previously relied on internal models, said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association.
“Those risk weights aren’t published, so we don’t know what they are, but they are probably lower than 50% for low-LTV products,” Mills said.
The Basel Committee’s latest regulatory accord, which was finalized in December 2017, envisions LTV ratios as a means of assigning risk weights. But Mills said many in the mortgage banking space were caught off guard by how much further U.S. regulators went beyond their global counterparts. The joint proposal from the Fed, FDIC and OCC calls for a 20 percentage point increase across all LTV bands, meaning while mortgages with LTVs below 50% are assigned a 20% risk-weight under the Basel rule, the U.S. proposal calls for a 40% risk-weight. Similarly, where the Basel framework maxes out at a 70% risk-weight for mortgages with LTVs of 100% or more, the U.S. version has a top weight of 90%.
Under the current rules, most mortgages in the U.S. are assigned a 50% risk weight, so loans with LTVs between 61% and 80% would see their capital treatment stay the same, and any mortgages with LTVs of 60% or lower would see a lower capital requirement. Loans with an LTV of 80% or higher, meanwhile, would likely see a higher capital requirement.
“For GSIBs, that’s probably an increase in capital throughout the LTV rank,” Mills said. “For the rest, it’s a higher risk weight for higher-LTV mortgages and maybe slightly lower in other bands, but, in aggregate, that’s not good for the mortgage market. It’s a higher risk weighting for most mortgages.”
Approximately 25% of first-lien mortgages held by large banks began with an LTV of 80% or higher, according to data compiled by the Federal Reserve Bank of Philadelphia. Roughly 10% have an LTV of 90% or higher, while half were 70% or lower.
Mark Calabria, former head of the Federal Housing Finance Agency, said he is not surprised by the proposed treatment of mortgages, calling it a “natural evolution” of where regulators have been moving. He added that some elements of the proposal resemble changes he oversaw at Fannie Mae and Freddie Mac in 2020.
Calabria said mortgage risk is an issue in the financial system in need of regulatory reform, but he questions the methods being considered by bank regulators.
“I worry that they’re making the problem in the system worse by driving this risk off the balance sheets of depositories, which is probably actually where it should be in the first place,” he said. “I’m not opposed to them tinkering in this space they just need to be more holistic about it.”
The proposal also notes that the new treatment of residential mortgages is aimed at preventing large banks from having an unfair advantage over smaller competitors.
“Without the adjustment relative to Basel III risk weights in this proposal, marginal funding costs on residential real estate and retail credit exposures for many large banking organizations could have been substantially lower than for smaller organizations not subject to the proposal,” the document notes. “Though the larger organizations would have still been subject to higher overall capital requirements, the lower marginal funding costs could have created a competitive disadvantage for smaller firms.”
Yet, while regulators say the proposed rules promote a level playing field, some see it giving an unfair advantage to government-backed lenders.
Pinto sees the proposal as a continuation of a decades-long trend of federal regulators putting private lenders at a disadvantage to the governmental and quasi-governmental entities. He noted that if securities from Fannie and Freddie and loans backed by the FHA and Department of Veterans Affairs, which tend to have very high LTVs, are not given the same capital treatment as private-label mortgages, the net result will be the government playing an even larger role in the mortgage market that it already plays.
Pinto said despite these government programs targeting improved affordability, their provision of easy credit only drives up the cost of housing even further. He added that he hopes regulators reverse course on their treatment of mortgages in their final rule.
“They should just back off on this entirely. It’s inappropriate,” Pinto said. “They need to look at the overall impact they’re having on the mortgage market, and the housing and the finance market, and the role of the federal government, and the fact that the federal government is getting larger and larger in its role, which is inappropriate.”
The other concern is a lower cap on mortgage servicing assets that can be reflected in a bank’s regulatory capital. The proposal would see the cap changed from 25% of Common Equity Tier 1 capital to 10%.
Mills said the capital charge for mortgage servicing rights is already “punitive” at a risk weight of 250%. By lowering the cap, he said, banks will be forced to hold an additional dollar of capital for every dollar of exposure beyond that cap. He noted that regulators had raised the cap to 25% five years ago for banks with between $100 billion and $250 billion of assets to provide some relief to large regional banks interested in that market.
If the cap is lowered, Mills said banks will be inclined to shed assets and shy away from mortgage servicing assets. Such moves would force pricing on servicing rights broadly, a trend that would ultimately lead to higher costs for borrowers.
“MSRs are going to be sold into a less liquid, less deep market, and there are consumer impacts here because MSR premiums are embedded in every mortgage note interest rate,” Mills said. “If MSR values are impacted by this significantly, that rolls downhill through the system. An opportunistic buyer might be able to buy rights at a depressed value, but that depressed value flows through to the consumer in the form of a higher interest rate.”
The proposal will be open to public comment through the end of November, after which regulators will review the input and incorporate elements of it into a final rule. Between the questions raised in the proposal, the acknowledgement by Fed and FDIC officials that the changes could hurt housing affordability, and the strong negative response to the proposal, there is optimism that the ultimate treatment of residential mortgages will be less impactful.
“Nobody seems to be pushing for this, and nobody other than the Fed seems to like it,” Calabria said. “If I was a betting man, it’s hard for me to believe that this is finalized the way it is now in terms of mortgages.”
The Federal Home Loan Bank System’s profit surged again in the second quarter to the highest level since at least 2007, bolstered by elevated demand and rising yields on assets.
Net income at the 11 Home Loan banks about tripled to $1.84 billion from $607 million a year earlier, according to a press release from the system’s finance office. Profit in the first half of the year already exceeds 2022’s total.
Banks’ borrowings from the system soared during the banking crisis earlier this year, with total borrowing hitting a record $1 trillion at the end of March. That has since cooled, with loans outstanding at $882 billion at the end of June.
“Member demand moderated as market liquidity began to normalize,” the system’s finance office said.
A “unique business model” allows the system to expand and contract based on the needs of its bank members, Ryan Donovan, the president of the Council of Federal Home Loan Banks, said in a statement. “As we have demonstrated for more than 90 years, the funding we provide helps our members maintain lower cost access to credit for consumers and small businesses across the country.”
The Home Loan banks are government-chartered banks that lend to other financial institutions, which in turn own the Home Loan banks. They were created to boost home lending during the Great Depression but have morphed into a backstop for their members.
Supporters say this year’s banking stress has shown the important role the system plays in helping banks access liquidity. But the surge in its use has also brought scrutiny over how the system’s focus on housing finance has diminished. Of a Home Loan bank’s profit, 10% must support housing affordability.
The Home Loan banks are regulated by the Federal Housing Finance Agency, which has been reviewing the system’s mission since 2022. As a part of that review, the agency is considering limits on the ability of large lenders to use the Home Loan banks, Bloomberg News reported in June. The full report on the review is expected by the end of September.
Teresa Bryce Bazemore, who held a front-row seat during the bank liquidity crisis this year as president and CEO of the Federal Home Loan Bank of San Francisco, plans to retire when her term expires in 2024, citing personal reasons.
The San Francisco bank’s board chose not to renew Bazemore’s contract after she asked to retire in 2025, though her contract expires in 2024. The board instead initiated a search for a new CEO, said Simone Lagomarsino, the board’s chairman, who also is president and CEO at Luther Burbank Savings.
Bazemore “indicated that, due to personal and other considerations, she would like to retire in March 2025,” Lagomarsino said in a press release. “As a result, and in consultation with Teresa, the board has decided to move forward with a search to identify a new CEO who will deliver long-term continuity and engaged leadership.”
The decision followed “extensive deliberation and discussion” about the Home Loan bank’s long-term goals, including “the implementation and integration of strategic changes that may arise from the ‘FHLBank System at 100’ review currently being conducted by the Federal Housing Finance Agency,” Lagomarsino said in the release. “The board recognized the critical importance of a CEO who would be engaged for the next several years to lead the organization forward and implement a vision and strategy to align with the outcome of the FHFA’s review.”
The San Francisco Home Loan Bank played a central role in the bank liquidity crisis in March, when it served as lender of next-to-last-resort to Silicon Valley Bank, which was taken over by the Federal Deposit Insurance Corp. and ultimately sold to First Citizens BancShares in Raleigh, N.C. Other major borrowers of the San Francisco Home Loan bank this year included San Francisco-based First Republic Bank, which was sold to JPMorgan Chase in May, and Silvergate Bank of La Jolla, Calif., which self-liquidated in March.
Last year, Bazemore earned $2.4 million, which included a base salary of $910,000 and other incentive compensation. When she joined the San Francisco Home Loan bank in 2021, she received a $100,000 signing bonus. Her employment agreement provides for 12 months of severance pay, equal to her base salary, plus other awards, according to the Home Loan banks’ combined financial report for 2022.
Last year, the Federal Housing Finance Agency that oversees that Home Loan bank system, launched a holistic review of the government-sponsored enterprise, its first in 90 years. Critics have questioned the system’s hybrid public-private business model and whether the banks are engaged in the primary mission of supporting housing. FHFA Director Sandra Thompson is set to issue a report with policy and congressional recommendations sometime later this year.
Separately, Fitch Ratings on Thursday downgraded certain ratings of the Federal Home Loan banks of Atlanta and Des Moines citing the “high and growing general government debt burden,” of the U.S. government. The ratings actions followed the downgrade of the U.S. to ‘AA+,’ from ‘AAA.’
The Home Loan banks are bank cooperatives that provide low-cost funding to 6,500 members including banks, insurance companies and credit unions. Created in 1932 to bolster housing during the Depression, the system incentivizes banks to buy mortgage-backed securities and agency bonds that can be pledged as collateral in exchange for liquidity.
Mortgage and housing trade groups this week pushed back against a Financial Stability Oversight Council proposal aimed at reverting its review process to one in which it would be easier to designate nonbank servicers and others as systemically-important financial institutions.
Housing Policy Council President Ed DeMarco said in a letter that his group opposed the move away from the existing “activities-based approach,” in which other oversight agencies are the first line of defense before labeling an individual company a SIFI, because that has had demonstrable benefits.”
Since FSOC began raising concerns regarding nonbank mortgage lenders, various regulatory bodies and federal program agencies, including the Federal Housing Finance Agency, Ginnie Mae [and others] have taken steps to strengthen the capital rules, liquidity requirements, operational restrictions, mortgage servicing responsibilities, and consumer protection rules that apply to such companies,” said the former FHFA acting director.
In addition, when other oversight agencies potentially engage in counterproductive rulemaking from a risk management perspective, the existing approach is helpful, DeMarco said in his letter.”Another advantage of an activities-based approach is that it can address risks created or exacerbated by governmental policies,” the letter to FSOC said.
The HPC cites as an example the somewhat open-ended advancing risk in the large market for securitized government-guaranteed mortgages, which are backed by Ginnie Mae, an arm of the Department of Housing and Urban Development.
That risk, which is associated with servicers being able to cover payments delinquent borrowers aren’t making until the loan undergoes certain foreclosure procedures or engages in modification options, has been central in concerns about liquidity at nonbanks.
The HPC’s membership of mortgage companies, insurers and settlement service providers has long advocated for Ginnie to revise acknowledgement agreements that govern the rights of parties in financing agreements secured by servicing rights in ways that would encourage private corporate lenders to provide more liquidity. But efforts to do that to date have fallen short, it said.
“FSOC highlighted this issue in its 2022 annual report, but treated it as a liquidity concern with nonbank servicers, not as a consequence of Ginnie Mae policy. An activities-based approach could address this issue, to reduce or remove significant risk from the system,” DeMarco said in the letter. (Ginnie Mae has said it wants to have a permanent liquidity backstop for servicers.)
Members of another trade group made similar points in a letter to the Financial Stability Oversight Council, and noted in an emailed press statement that they “oppose a SIFI designation of any independent mortgage bank servicer.”
The scale of nonbank servicers should be kept in mind when it comes to SIFI designations, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in the letter.
“Even today’s largest nonbank servicer has balance sheet assets well below the original asset threshold Congress established for banks in 2010,” Broeksmit said in a footnote within the missive.
Those holdings also are “at least eight times smaller than the current asset threshold established by Congress in 2018, at least 20 times smaller than any of the nonbank entities FSOC has previously attempted to designate and at least 100 times smaller than the balance sheet assets of their largest counterparties,” he added.
A Financial Stability Oversight Council proposal aimed at reverting its review process to one in which it would be easier to designate nonbank servicers and others as systemically-important financial institutions.
Housing Policy Council President Ed DeMarco said in a letter that his group opposed the move away from the existing “activities-based approach,” in which other oversight agencies are the first line of defense before labeling an individual company a SIFI, because that has had demonstrable benefits.”
Since FSOC began raising concerns regarding nonbank mortgage lenders, various regulatory bodies and federal program agencies, including the Federal Housing Finance Agency, Ginnie Mae [and others] have taken steps to strengthen the capital rules, liquidity requirements, operational restrictions, mortgage servicing responsibilities, and consumer protection rules that apply to such companies,” said the former FHFA acting director.
In addition, when other oversight agencies potentially engage in counterproductive rulemaking from a risk management perspective, the existing approach is helpful, DeMarco said in his letter.”
Another advantage of an activities-based approach is that it can address risks created or exacerbated by governmental policies,” the letter to FSOC said.
The HPC cites as an example the somewhat open-ended advancing risk in the large market for securitized government-guaranteed mortgages, which are backed by Ginnie Mae, an arm of the Department of Housing and Urban Development.
That risk, which is associated with servicers being able to cover payments delinquent borrowers aren’t making until the loan undergoes certain foreclosure procedures or engages in modification options, has been central in concerns about liquidity at nonbanks.
The HPC’s membership of mortgage companies, insurers and settlement service providers has long advocated for Ginnie to revise acknowledgement agreements that govern the rights of parties in financing agreements secured by servicing rights in ways that would encourage private corporate lenders to provide more liquidity. But efforts to do that to date have fallen short, it said.
“FSOC highlighted this issue in its 2022 annual report, but treated it as a liquidity concern with nonbank servicers, not as a consequence of Ginnie Mae policy. An activities-based approach could address this issue, to reduce or remove significant risk from the system,” DeMarco said in the letter. (Ginnie Mae has said it wants to have a permanent liquidity backstop for servicers.)
Members of another trade group made similar points in a letter to the Financial Stability Oversight Council, and noted in an emailed press statement that they “oppose a SIFI designation of any independent mortgage bank servicer.”
The scale of nonbank servicers should be kept in mind when it comes to SIFI designations, Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in the letter.
“Even today’s largest nonbank servicer has balance sheet assets well below the original asset threshold Congress established for banks in 2010,” Broeksmit said in a footnote within the missive.
Those holdings also are “at least eight times smaller than the current asset threshold established by Congress in 2018, at least 20 times smaller than any of the nonbank entities FSOC has previously attempted to designate and at least 100 times smaller than the balance sheet assets of their largest counterparties,” he added.
A multiple listing service settled a lawsuit challenging Realtor commission rules for $3 million, a possible harbinger for several ongoing actions by home sellers alleging listing requirements are anticompetitive.
The case, Nosalek v. MLS Property Information Network, had class action status and was filed in the U.S. District Court for Massachusetts. Only the MLS agreed to a settlement, according to a June 30 legal filing. Other defendants in the case, both franchisors and brokerages, were not part of the agreement.
Sellers, along with the Department of Justice, are pushing for a major change to the real estate industry’s compensation structure that both its proponents and opponents agree will affect every party involved in home buying.
“Life after all of this is gonna be quite different,” Dennis Norman, a real estate broker and owner of More, Realtors, said. “And I don’t know if NAR survives because we’re talking about massive, massive amounts of money.”
Rules by the National Association of Realtors and associated multiple listing services, which are databases real estate brokers use to list and search for properties, are at the crux of all three major lawsuits — Nosalek v. MLS PIN, Sitzer v. NAR and Moehrl v. NAR. All three cases cite the Sherman Antitrust Act.
The Nosalek plaintiffs didn’t sue NAR, although they did go after realty companies like Century 21, HomeServices of America and Keller Williams. Their initial complaint, filed in December 2020, cites MLS PIN rules on Realtor commissions that say listing brokers must include a fee for the buyer’s representation on each property.
This is because of a coupled compensation structure: most home sellers pay for both the buy-side and sell-side broker fees.
Sellers who don’t offer a fee on the MLS PIN can’t list their home on the service. The lawsuit says this complicates the selling process because buyer agents use the MLS to search for their clients and popular websites like Zillow also use it for their home listings.
Another complaint in the lawsuit says if sellers offer a lower-than-normal fee, buyer agents can see this on the MLS and will likely steer their clients away from the listing.
As part of the settlement, MLS PIN agreed to change its rules on the topic, eliminating the compensation listing requirement. They will also require brokers to inform buyers that they can negotiate the buyer-broker fee and inform sellers that they can elect not to pay it.
HomeServices of America and its affiliates recently filed for summary judgment on the case, arguing there’s no evidence the company conspired with the MLS PIN to inflate commissions.
Both the Sitzer and Moehrl cases contain similar complaints, but are focusing on the NAR as well because of its strong influence on listing service rules: 97% of regional MLSs are affiliated with the NAR and follow its code of ethics, according to by T3 Sixty, a real estate consultant firm.
If the Sitzer and Moehrl lawsuits compel NAR to uncouple with MLSs as some industry voices like Norman are expecting, on top of large damages, the organization and its local chapters would lose their major draw: member-only access.
“I think that’s almost the last bullet for the associations,” Norman said. “MLSs are gonna have their challenges too… but they still have what everybody wants and they’re good for the consumer.”
How Realtors get paid Coupled commissions have been around for a long time. With this system, home sellers pay their listing broker 5% to 6% of the final sale price after closing. That commission is then divvied up evenly between sell-side and buy-side agents, who interact with the customers, and their broker agencies. The majority of each half goes to the agent.
For example, after selling a $300,000 house, a seller pays $15,000 in Realtor fees. Agents receive $6,000 each and their brokers $1,500 each for the sale. The buyer doesn’t pay any fees.
“The whole compensation system doesn’t make a lot of sense,” Steve Brobeck, a senior fellow at the Consumer Federation of America and a self-described public interest advocate, said.
Why are Realtors compensated this way? It evolved from the original system used in 1908 when the first iteration of NAR, the National Association of Real Estate Exchanges, was founded, according to a report by T3 Sixty.
Back then, the industry relied on an exclusive representation system: sellers hired a single listing broker for a fee. Buying brokers were sub-agents of listing brokers, and both sides had a fiduciary duty to sellers. When property sold, listing agents gave their sub-agents a portion of the commission fee.
Eventually, the industry moved away from the subagency model to properly align fiduciary duties, but it didn’t move away from coupled compensations.
“It’s a weird system,” Ann Schnare, a former Freddie Mac executive who ran a study on the compensation structure, said. “Admittedly, it wouldn’t be the first to come to mind, but the fact is that’s what exists… changing it, I think, would be unnecessarily disruptive.”
The NAR has a similar outlook: it resists the lawsuits’ efforts to outlaw shared commissions because they say it’s optional and the rate is negotiable.
Critics of the system like Brobeck point to uniform commission rates despite this negotiability. Brobeck found that in 24 cities across the country, 88% or more of home sales had buy-side commission rates between 2.5% and 3% in a CFA report.
“This rate uniformity is striking evidence of the lack of price competition in the residential real estate industry,” Brobeck said in the report.
Other antitrust lawsuits Legal action over commission fees began in 2018, when a 10-year settlement between the DOJ and the NAR expired. Before crafting a new agreement, the DOJ and Federal Trade Commission held a joint workshop about competition in the real estate industry.
In 2020, the DOJ filed a new lawsuit against the NAR under the Sherman Antitrust Act and simultaneously settled with the association. The settlement required several changes to NAR’s code of ethics to provide “greater transparency to consumers about broker fees.”
The settlement banned buyer brokers from advertising their services as free unless they receive zero compensation from any source. It also prohibited these brokers from searching MLSs by filtering out properties with low commission fees and pushed for greater transparency on those sites.
Because of the settlement, many MLSs began to publicly post commission fees for each property. Redfin and Zillow followed suit. For the first time, homebuyers saw how much their agent would earn from each listing.
But then, the DOJ pulled out of the settlement in 2021 because it prevented them from investigating the association’s rules further.
The Moehrl and Sitzer lawsuits popped up around the same time as the DOJ’s initial workshop.
On March 6, 2019, Christopher Moehrl sued Realtor companies “for conspiring to require home sellers to pay the broker representing the buyer of their homes, and to pay at an inflated amount, in violation of federal antitrust law.”
Then, in April 2019, Joshua Sitzer and Amy Winger, Scott and Rhonda Burnett and Ryan Hendrickson filed a similar lawsuit in Missouri.
Both plaintiffs sued the NAR along with large national broker franchisors: Realogy (now Anywhere Real Estate), HomeServices of America, RE/MAX Holdings, and Keller Williams Realty, as well as HomeServices affiliates BHH Affiliates, HSF Affiliates and The Long & Foster Companies.
Real Estate Exchange, a real estate brokerage, also filed an antitrust lawsuit in 2021 against the NAR, Zillow and Trulia. The lawsuit alleges that Zillow’s search features prevent “transparent access to home inventory.”
Will cash-constrained homebuyers suffer? NAR argues in press releases about the lawsuits that the coupled compensation system fosters market competition because it frees up cash for buyers, allowing them to make a larger down payment.
A study funded by HomeServices of America, a defendant in all three suits, supports the claim. It declares that unless lending changes come in tandem with revisions to this commission structure, it would hurt “minorities, lower income households, and first-time home buyers” the most.
Consumer advocates argue that agent fees won’t hurt buyers because their cost is currently built into home prices. If sellers no longer pay both agent commissions, home prices will fall, and buyers will have the same net cost.
Schnare, one of the study’s authors, said because most finance their home with a mortgage, that’s not true.
“If everything was cash, it wouldn’t make a difference,” Schnare said. “What seems like a small adjustment can make a big adjustment on what they can afford to pay and, you know, potentially hurt the lower end of the market, but with ripple effects upwards.”
Brobeck says this concern is exaggerated, and that lenders will adapt accordingly: “the only reason that argument has any force at all is because the industry supports buyers not being able to finance their commission on the mortgage.”
But Schnare’s study found it’s not that simple.
In order to avoid hurting cash-constrained buyers, lenders would need to change underwriting standards, specifically the loan to value ratio, which represents the borrower’s equity position in the property. This is the most powerful measure of default, the study says, and including an “extraneous factor” like buyer agent fees in the ratio could decrease its predictive accuracy. Schnare says government-sponsored enterprises, the Federal Housing Administration and the Department of Veterans Affairs are unlikely to approve of this change.
Even if they did, it would “require regulatory approval and coordination across multiple parties along the mortgage supply chain,” so Schnare expects it to be a lengthy, expensive process. In the meantime, first time homebuyers would struggle to pay broker fees out of pocket.
“We have what we have, we’re not starting from scratch,” she said. “That’s a big ask for something where the benefits are not entirely certain.”
But the CFA and REX both dismissed the study, citing its funding and accusing it of a faulty premise.
Either way, the industry might be forced to change — both the Sitzer and Moehrl lawsuits are going to trial and many expect the plaintiffs to win. The Sitzer trial is scheduled for Oct. 16, and the Moehrl trial will likely begin early 2024.
“I would not be surprised if there was a settlement before them in both cases,” Brobeck said. “And then the question is, will this settlement really lead to effective price competition?”