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Brian Chappelle tells about 400 mortgage brokers that they will face an incredible number of regulatory changes. (Photos by Patrick Hester)
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The mortgage and residential real estate industries will continue to come under scrutiny by federal regulators and legislators, as they attempt to protect consumers and prevent another national housing and economic meltdown, a nationally known speaker last week told about 400 local mortgage brokers and bankers.

“The upshot is they are going to look at everything,” said Brian Chappelle, principal of Washington, D.C.- based Potomac Partners, a consulting firm specializing in mortgage and real estate issues. His clients, among others, include the National Association of Realtors.

“We are going to see a steady cascade of regulatory changes,” Chappelle said during a more than two-hour presentation at the Infinity Center in Glendale. Universal Lending and Land Title Guarantee, sponsors of InsideRealEstateNews, put on the event.

Audience members represented people that make hundreds of millions of dollars in mortgage loans annually in the Denver area. Part of the talk by Chappelle, whose background on mortgage and real estate issues spans more than three decades, discussed how brokers will be compensated under new legislation, such as the Dodd-Frank Wall Street Reform and Protection Act.

But Chappelle also addressed big-picture issues, such the overall real estate mortgage market and what regulators hope to accomplish.

“Tough on crime”

Several times he said that policy makers and regulators want to be seen as “being tough on crime,” which means they will do whatever they can to try to protect consumers. “The goal is to create a level playing field,” Chappelle said.

For example, regulators want consumers to look at different mortgages that can easily be compared on an apple-to-apple basis. “Washington thinks the mortgage system is broken,” Chappelle said.

As part of the process, the government will be reviewing its role on every aspect of the real estate industry, he said.

Everything being evaluated

“Everything will be on the table,” Chappelle said. For example, in the very near future, Congress and the Obama Administration will decide if it is cost effective to allow homeowners to continue to deduct home mortgage interest payments at the current levels. Chappelle said he wouldn’t be surprised if they took some action, possibly eliminating the deduction for second homes or further limiting the amount of the deduction based the size of the loan or the income of the borrowers. There is talk that the government may require bigger down payments from borrowers, he said, possibly as high as 20 percent or even 30 percent. The government also will continue to grapple with what to do with Fannie Mae and Freddie Mac, he said.

“The government wants to make sure it is getting the biggest bang for its buck,” he said.

But it is not all bad news.

The Federal Housing Administration is in great shape, he said. It currently has $7 billion in reserves, he said.

“That is truly remarkable,” Chappelle said. In 2009, some skeptics were concerned that the FHA, which is self-sustaining, was in danger of needing a massive bailout. Now, that possibility appears extremely remote, he said.

Last year, about 1.5 million FHA-insured loans were made in the U.S. Of those, a mere 6,000 are in default. “That is 0.44 percent,” Chappelle said, far below historic default rates.

FICO scores high

Part of the reason is that some 46 percent of the borrowers last year who received FHA loans had FICO scores of 700 or above. Not even 10 percent of consumers receiving FHA loans last year had scores between 620 and 640, which used to be the bread-and-butter of FHA-insured loans, he noted. Lawrence Yun, the chief economist for the National Association of Realtors, in Denver recently made the case that banks have gone too far in reducing their risk by only lending to the most qualified borrowers who are unlikely to default.

As far as how mortgage brokers will be compensated in the future, it’s not all bad news, he said. For example, the government is not going to impose rules that would put a cap on income a mortgage broker could earn, he said.

Originators still will be allowed to be compensated based on a percentage of the total loan amount, under the Dodd-Frank Bill. One idea that had been floated was to pay brokers a flat fee. In other words, whether the loan amount was $50,000 or $500,000, the payment would have been the same.

However, the new rule will not allow an originator to be paid more for a loan because it carries a higher interest rate. In the past, originators could be paid more on the so-called “yield-spread premium.”

One reason is because an analysis of subprime and alt-a loans made during the go-go days when the crisis was building, found 50 percent of borrowers saddled with things such as option-ARMs with unfavorable terms, could have qualified for prime loans at lower rates and better terms, he said.

The new rules, he noted, generally prohibit originators from “steering” consumers to a loan that is not in their interest. Also, mortgage brokers cannot be paid by both the consumer and the lender.

More rules and fine-tuning of regulations are inevitable, he said. For example, the recent and highly publicized “robo-signing” of foreclosure documents by major banks could lead to more regulations, he said.

“You need to work through these sea changes,” Chappelle said. “There are going to be a lot of new rules. The environment is volatile.”

On the other hand, he said with all of the changes, brokers and lenders that “understand the rules and follow the rules,” will prosper.