What Do the Changing Mortgage Rules Mean for Lenders?

The real estate market in the US has started recovering from the subprime lending crisis. Now mortgage executives are preparing to deal with a new mortgage business model that places special emphasis on protecting the interests of borrowers. In order to deal with the change in the lending landscape, lenders have to modify their business models. This requires making adequate changes in the underwriting process and employing highly advanced information technology. The goal is to improve the borrower's buying experience. The lender also needs to standardize processes and procedures.

New mortgage rules require the lender to comply with stricter regulatory guidelines. That means the lender now has to adhere to the spirit as well as the letter of the law. This requires developing a customer-centric lending model that complies with GSE underwriting guidelines, consumer protection and banking institution safety. This will not be possible if the technological and organizational infrastructure do not evolve, innovate, or compete.

The federal government now expects lending institutions to consider consumer experience when they deliver financial services. Failure to do so may result in hefty fines and penalties.

How to comply

Lenders now need a team of well-qualified risk analysts, legal consultants, process engineers and consumer advocates to ensure that they comply with the guidelines. In order to keep all employees informed, lending institutions may need to conduct comprehensive training programs. This also requires significant investment in IT infrastructures.

Changing underwriting norms

Before making the loan, the lender has to assess the borrower's current and future capacity to repay the loan. In addition, the lender is not allowed to make a loan to a borrower who cannot afford it. It is not hard to see that in its bid to protect consumer interests, the government is effectively denying financing to a section of borrowers who do not have a reliable source of income to qualify for the mortgage.

Refinancing loses demand

Another development is the reduced demand for refinancing. This is forcing lending institutions to change the mix of products they offer. While refinancing products were quite popular in 2012 and 2013, they have fewer takers now.

Refinance volume is likely to drop to around 388 billion USD in 2014. In 2013, the amount was 967 billion USD. To deal with the decreasing demand for refinancing, lenders are shifting their focus to jumbo lending, reverse mortgage lending and money loans.

Lenders now watch consumers and catalog the products they make to ensure that they are prepared to compete in areas where borrowers are seeking financing.

The lender has to change their mix of mortgage products to match the changing market. The market is shifting from refinance business to purchase money transactions. In addition, many purchase money borrowers now seek jumbo financing. The slowly improving economy and Federal government policy changes are driving the demand for jumbo loans. Consumers, too, are seeking larger homes.

Reverse mortgages

The aging population is fuelling the demand for reverse mortgages. These products have matured over the years and consequently older adults are increasingly looking at this option to fund their retirement years. Lenders who do not have a trained staff to originate these new products many either recruit more staff or outsource the origination work.

Conclusion

The biggest changes that lenders face today are the focus on the consumer and the need to offer a new mix of mortgage products driven by a number of economic factors.

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