Executive vice president of mortgage markets, financial management and public policy, American Bankers Association

Jennifer E. Garrett

As published in Scotsman Guide's Residential Edition, November 2011.

Legislation and regulation have been the keywords for the mortgage industry since the start of the housing crisis. From loan-originator compensation to new risk-retention rules, no corner of the industry has been untouched. Robert R. Davis, the executive vice president of mortgage markets, financial management and public policy for the American Bankers Association, tells us what is still to come in terms of regulation.

What legislation are you watching? This Congress is not in a mood to pass a lot of bills. We don’t see a likelihood of a lot of new legislation getting passed, probably all the way through the election next year. Our focus is on the implementation of laws passed in the past three years, particularly the Dodd-Frank Act.

What impact has Dodd-Frank had? We’ve only seen the tip of the iceberg in terms of the new regulations that are coming. As of Sept. 6, we have filed more than 80 comment letters on Dodd-Frank proposals. The Federal Reserve already issued a rule on loan-officer compensation, but the interpretation has been so broad. The Federal Reserve concluded that the mortgage loan originator cannot share in the profitability at any level of the institution they operate in. If there is a generalized, uniform profit-sharing arrangement for all employees, that would go to everyone but mortgage originators. The ultimate irony is a number of banks make their 401(k) payments based on the profitability of the bank. This law says mortgage originators can’t participate in that either, but a labor law says you can’t differentiate between classes when you have a 401(k) plan.  You can’t comply with one without violating the other. We’re trying to sort that out now.

What part of Dodd-Frank are you working on now? The big issues have to do with limitations on underwriting and penalties related to underwriting and risk-retention requirements that would require institutions to raise capital. [The risk-retention proposal and ability-to-repay standard] will likely significantly discourage some of the mortgage lending that’s being done today, [which] is pretty much plain-vanilla mortgages.

Have increased regulations affected mortgage markets? I think it’s likely that some of the regulations will end up having negative effects, and Congress will revisit and repeal parts of Dodd-Frank, but that process is going to take time. That means over a period of several years you’re going to have a ratcheting up of regulatory burden on mortgage lending, and I expect that to have a negative impact on credit choice and overall credit availability. And when you limit credit availability, it increases the price of the credit that is available.

What other issues are of concern? The mortgage market is going to need a stable and sustainable secondary mortgage market without the government having to hold all the risk. It’s understandable given the collapse of housing why the government is standing behind the operations of Fannie Mae and Freddie Mac. The government is never going to be completely out of the mortgage market, but we should look at ways to return secondary-market sales to a largely private-sector activity.

Jennifer E. Garrett is an associate editor at Scotsman Guide. Reach her at (800) 297-6061 or jenniferg@scotsmanguide.com.