The five issues keeping US lenders awake

It’s a new year, one full of anxiety for US mortgage lenders. Then again, this year’s worry list may not look so dire. Residential home values appear to have stabilised, although certain hard-hit markets like Las Vegas and Florida still have a way to go before a true floor is declared. Below, I list five key issues on US lending executives’ minds.

The robosigning settlement

The US’ 15 largest home loan servicers, which together control 65% of the receivables market, have yet to strike a deal with state attorney generals to settle allegations that they cut legal corners when foreclosing on many thousands of troubled home owners.

However, this is a headache mostly for the megabanks such as Bank of America, Wells Fargo and JPMorgan Chase.

The big question is how much will they have to pay to make the states happy? Estimates range from $20bn to $30bn. Talks between the states and the 15 have been ongoing for a year, with some jurisdictions – New York and California – taking the position that whatever the payment might be, it’s not enough.

The banks have lawyered up, believing that although they cut legal corners they’ve since mended their ways. After all, they were mostly foreclosing on dead-beat borrowers, not innocents.

In November, several media outlets reported that a deal would be struck by the year-end, but it’s now January 2012 and no settlement has been announced.

And it’s not just money the big boys are worried about – it’s new servicing standards that might accompany a legal settlement. Servicing standards is code for new rules and regulations.

Loan volumes

When it comes to mortgage banking, it’s always a case of what’s ahead, not what’s behind. Although 2011 just ended, the final origination tally for the year will likely come in at $1.32trillion, the industry’s worst showing since the late 1990s. Even the financial implosion year of 2008 was better at $1.6trillion. But the US’ recovery is still wobbly. And yes, a 30-year fixed rate mortgage can be had at 4%, but most housing and mortgage economists believe that at best, 2012 will yield $1.2trillion in new business with 60% of it coming from refinancings of existing loans. In 2011 refinancings accounted for 70% of all loans written.

Consumers on this side of the pond are starting to buy more homes, but no-one believes that the new year will yield enough of a boom in home purchases to offset the decline in refinancing. The only good news is that mortgage rates will probably remain low, thanks in part to the European debt crisis.

The bank of america question

An expected down year for loan production is never something to look forward to, but if there’s one potential silver lining, it’s Bank of America. The US’ second largest bank is still bleeding red ink from its 2008 purchase of Countrywide Financial Corp, once considered the premier lending institution in the nation.

But CFC turned out to be a Trojan horse of bad sub-prime loans, causing billions of dollars in losses at the bank. In response, Bank of America has slashed its presence in the lending and servicing sectors, creating a huge opportunity for other firms. The irony is that the bank is cutting back on mortgages at a time when all the new loans being written today are considered to be of pristine quality. In short, Bank of America’s near-exit from home finance is good news for its competitors.

Increased regulatory costs

It’s no secret that in response to the financial crisis, states and the federal government have tightened the rules of the game. Unlicensed loan brokers are no more. Instead, loan brokers must be licensed, fingerprinted and are required to take annual tests.

The red tape has increased the cost of doing business, putting brokers at a competitive disadvantage to depositories, who don’t have to face some of the same rules. Also, the robosigning scandal has forced servicers to add more staff to make sure they are in compliance with both existing and new rules that become active this year.

Fannie mae and freddie mac

It’s hard to believe, but Fannie and Freddie have been wards of the US government, via the Treasury Department, for more than three years.

Uncle Sam has spent $160bn to keep the two in the black for one simple reason – no-one would buy their bonds if they were technically insolvent.

Of course, it helps to have the full faith and credit of the US government standing behind the two.

And yes, Fannie and Freddie continue to lose money on an operating basis, but it’s likely that by Q4 2012 they might actually turn a profit and stop being a burden to taxpayers.

But the biggest concern regarding Fannie and Freddie is their future. Because of their purchasing power in the secondary market, the two account for 70% of all new loans – thanks to their government guarantees.

All sorts of proposals have been floated regarding their ultimate resolution, ranging from out-and-out liquidation to their recreation as one government-managed utility.

But there has been no consensus in Congress on what to do with them. With Republicans and Democrats polarised on just about every issue, no-one in the mortgage industry sees a resolution to the Fannie/Freddie question until after a new US president is sworn in a year from now. In the meantime, as long as the two keep buying mortgages, lenders will be happy.