2011 How Regulation and Underwriting Will Affect Mortgage Lending

1. 2011How Regulation and UnderwritingWill Affect MortgageLending Marianne Collins, SVP Insight Bank

2. Challenges • Regulation • Interest Rates • Underwriting • Unemployment • Falling Homeownership Rates

3. 2010 Regulation • HVCC Appraiser independence • MDIA Extended processing time • REG Z HPML U/W & Escrow changes • SAFE Act Loan officer licensing • RESPA New GFE & HUD1

4. 2011 Regulation • Loan Officer Compensation • Truth in Lending Changes and Proposals • HMDA • FCRA • Dodd-Frank Financial Reform • Consumer Finance Protection Bureau

5. Loan Officer Compensation • Federal government has taken on the role of telling private companies how they can pay their employees • Lenders will no longer be able to pay loan officers less for products with thin margins • Lenders will have to make the choice of discontinuing some loan products or raising rates to keep them How is this benefitting the consumer?

6. Truth-in-Lending Changes • New Truth in Lending disclosure as of 1/30/11 New ARM disclosures Must show maximum possible rate in 1st 5 years Must give advice on refinancing to avoid payment increases, with no guarantee of a refinance • Proposal to include all closing costs in APR, with a 2nd APR calculation taking some closing costs out of the calculation for determining if the loan is an HPML • Proposal to add another 3 days to the process by allowing the borrower the right to a refund of all fees for 3 days after signing the initial Truth-in Lending disclosure

7. HMDA(Home Mortgage Disclosure Act) Currently, lenders must report the following for all applications: • Application date • Loan Type • Property type • Loan purpose • Occupancy status • Loan amount • Action taken and date of action • MSA, state, County census tract • Borrower’s ethnicity, race and sex • Income • Type of institution that purchased the loan • Rate spread if HPML or high cost loan

8. HMDA Lenders will have to start reporting the following additional data: • Borrower’s age • Credit score • Total points and fees • The difference between the APR and a benchmark rate (benchmark TBD) • Appraised value • The presence of contractual terms that would allow payments that are not fully amortizing • The number of months after which an introductory rate may change

9. FCRA As of 1/1/11 borrowers must now receive a credit score disclosure form that informs them of the following: • Their credit score • What their score means • How the score is used • Range of scores • Factors that adversely effect their score • The right to dispute • Their credit score could effect their cost of credit • How they rank with scores of other consumers

10. Dodd-Frank Financial Reform • 500 new laws, 115 apply to mortgage lending (will amount to tens of thousands of pages of rules) • Credit-risk retention rule for non-qualified mortgages, in addition to several underwriting requirements, including a maximum debt-to-income ratio (yet to be determined by the Federal Reserve Board) • Creates the Consumer Financial Protection Bureau • “Dodd-Frank will make the largest financial institutions bigger than ever. It will destroy small and regional banks”, Congressman Spencer Bachus-Chairman, House Financial Services Committee

11. Consumer Financial Protection Bureau • A far reaching independent bureau within the Federal Reserve, created under Dodd-Frank • Funded by a certain percentage of the Federal Reserve’s budget. Additional funding may be available through Congressional appropriations (taxpayer money) • Responsible for Fair Lending Enforcement and rule making for all consumer related regulations (except merchants and auto dealers) • Supervisory authority over depositories with more than 10 billion in assets • Can require reports and examinations of smaller depositories • Exclusive enforcement authority over non-banks that provide mortgage-related services • Tasked with changing the GFE (again) to combine it with the Truth-in-Lending disclosure

12. Underwriting • Higher Credit Score Requirements • Tighter Appraisal Requirements • Condominium requirements • Increased documentation • Increased waiting periods after short-sales, bankruptcies and foreclosures

13. Interest Rates • Cost of Regulation and compliance • Agency repurchases • Government borrowing • Lack of purchasers of Mortgage Revenue Bonds • Agency add-ons (Fannie/Freddie based on credit score, LTV, CLTV and condos)

14. Unemployment • Last week’s unemployment numbers: Initial claims 454,000 (up 51,000 from the prior week) Continuing claims 3.99 million • Bankruptcies up 9% in 2010 ($1,530,078 consumers), and are expected to keep climbing in 2011. • “2010, The Year of the Short Sale” Short Sales have tripled since 2008 • Foreclosures - Many more to come

15. Falling Homeownership Rates • 2010 4th quarter = 66.5% • Down from 67.2% 1 year ago • Lowest level since the end of 1998 • Black households from 46% to 44.8% • Hispanic households from 48.4% to 46.8% • White households from 74.5 to 74.2%

16. Lenders Tough Times for Mortgage Brokers • Many lenders getting out of wholesale • Lenders will be reducing and limiting compensation to brokers, due to the lenders cost of lending regulation, compliance, and compensation rules Tough Times for Mortgage Bankers • The cost of regulation and compliance • Burden of repurchases • FHA’s increased net worth requirements Tough Times for Small Depository Institutions • The cost of regulation and compliance • Decision to exit the market

17. Changing the Buyer’s Mindset(Convincing buyers that owning a home is still a great investment) • In 2011 HUD expects it’s foreclosure inventory to increase by 50% • Shadow inventory (90-day+ delinquencies, foreclosures and REO not listed for sale) estimated at 2-4 million units • Housing inventory expected to remain elevated for some time “These are not problems, they are opportunities”

18. The Good News • Mortgage interest & real estate taxes are still tax deductible • MI companies are back in the business of approving loans • MI premiums have gone down for strong borrowers • Tax deductibility of mortgage insurance has been extended for another year • Rates are still low

19. Just remember that old saying…“Now is the time to buy!”