In a blow to the mortgage-lending community, last week saw the finalization of changes in the Alternative Mortgage Transaction Parity Act (AMTPA) by the Office of Thrift Supervision (OTS). The move is seen limiting the geographic diversity of loan pools for home equity and nonprime mortgage product as well as reducing liquidity in the ABS market, which in turn may be passed along to consumers.
The impact of the ruling will likely be reduced demand for portfolios in the red hot whole-loan market, due to a reduction in the available cash flows to structure net-interest margin (NIM) offerings. "The less that can be squeezed out of a NIM, the less of a premium someone would pay for a portfolio," a trader said. "But as for lenders, they would have to adapt."
After sifting through 298 comment letters, the OTS, including the two-cents of ABS issuers Option One Mortgage, New Century Financial, Conseco Finance; industry association Mortgage Bankers Association of America (MBAA) and Senate Banking, Housing and Urban Affairs committee chairman Paul Sarbanes (D-Md.), the regulatory arm of the U.S. Dept. of the Treasury, gave states the power to decide policy on prepayment and late-fee charges assessed by non-federally-chartered housing lenders - essentially un-evening the playing field for state-chartered lenders.
In its comment letter, New Century argued that "the Proposed Rule will have the unintended consequences of placing state housing creditors at a competitive disadvantage, increasing their compliance costs and dampening secondary market demand for their products."
Option One makes a similar case that late fees are necessary in attracting investors in ABS backed by riskier non-prime mortgages: "Inclusion of a pre-payment charge feature in loans provides secondary market investors with greater certainty about their return on investment, which makes loan portfolios containing the prepayment feature a more attractive investment."
Of course the MBAA defended its constituency, saying in essence that this rule was a Band-Aid being put on a bleeding hemorrhage. "The persistence of the predatory' lending problem is rooted in factors that need to be addressed through a fundamental reform of existing mortgage laws, a serious commitment to financial education, and very aggressive enforcement of existing laws."
In the end, however, the opinion of Senator Sarbanes swayed regulators the most in allowing states to oversee such charges. In his comment letter, dated July 26, Sarbanes described "lending characterized by very high interest rate loans, high up-front fees financed into the loan, and egregious prepayment penalties which prevent borrowers from refinancing into lower rate loans with other lenders."
Sarbanes noted that these laws were initially enacted during the mortgage crisis of the early 1980's. He added that the Parity Act is antiquated in that its intention was to spur ARM origination. But the evolution of alternative mortgage product, Sarbanes argues, led to the growth of non-federally chartered non-prime lenders, which have abused the Parity Act.
"These practices snip equity from homes and can often lead to foreclosure. There are virtually no limits on the charging of prepayment fees under Federal law. However, numerous states have enacted legislation restricting abusive and exorbitant prepayment penalties and late fees," he sums in his letter.