by Calculated Risk on 10/18/2006 05:31:00 PM

Comptroller of the Currency John C. Dugan, in a speech to the American Bankers Association on Monday, expressed concern about mortgage lending standards:

With respect to retail lending, the underwriting survey showed significant easing in residential mortgage lending standards, including home equity lending. We saw more of what we observed the previous year: longer interest-only periods, more “piggyback” loans to avoid mortgage insurance requirements, higher allowable debt-to-income and loan-to-value ratios, and greater volumes of loans with reduced documentation requirements.

This year has brought us at least one thing that’s new, however: a cooling of the red-hot housing market. In many local and regional markets, prices are leveling off, while in others, they have declined. We would normally expect that trend to change the calculus of many mortgage lending decisions, with lenders tightening their underwriting standards and requiring borrowers to provide more equity.

Yet that’s not what the underwriting survey and other recent evidence demonstrates. In fact, with fewer home buyers in the market, competition among lenders appears to be intensifying, and, with some exceptions, that competition has extended to weaker underwriting standards. Frankly, that concerns me. We don’t want to see the lending decisions bankers make today result in excessive foreclosures – and reduced affordable housing credit – tomorrow.

And on Tueday, Dugan spoke at the annual convention of America’s Community Bankers. Dugan urged the States to adopt the key principles of the Nontraditional Mortgage Guidance:

Our issuance of the nontraditional mortgage guidance, as important as it is, can only be viewed as unfinished business. During the comment period, banks and thrifts expressed strong concerns that the guidance would apply only to federally regulated institutions – insured depository institutions and their affiliates – but would not apply to those mortgage lenders and brokers regulated exclusively by the states, which constitute a large portion of nontraditional mortgage originators.

I agree with these concerns. There is an unlevel playing field that plainly distorts competition in the nontraditional mortgage business. And there is also a consumer protection gap with respect to the nontraditional mortgage lending practices of a broad segment of mortgage lenders.

... many ... originators will have no contact with a federally regulated institution at all – so the guidance will never even indirectly touch their operations. For example, institutions may sell the mortgages they originate directly to investment banks that package and securitize them. Indeed, the appetite for mortgages to securitize is so strong that we now see investment banks and other financial intermediaries acquiring mortgage originators in an effort to lock in volume for their securitization business. In some cases, these acquisitions transform a mortgage business that had been subject to federal standards to one that is not.
So when we see this gap, this unlevel playing field, what is the solution? ...

State regulation, effectively enforced, can do this. ...

I have been encouraged by the recent statements by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators. These two organizations are working on a version of the nontraditional mortgage guidance that will focus on mortgage underwriting and consumer protection issues. We understand that state agencies then will be urged to adopt and apply this guidance to the entities they regulate. In so doing, it is vital that key principles of our nontraditional mortgage guidance not be watered down. ...