Pending mortgage-related regulations threaten to become a "tsunami" of burdens that could unintentionally harm an already fragile mortgage industry, Acting Comptroller of the Currency John Walsh said Thursday.

Walsh said measures in the Dodd-Frank Act and regulatory orders against servicers, among other requirements, address needed improvements in the industry. But he warned that the cumulative effect at a time of continued turmoil in the housing and credit markets should give regulators pause.

"There are 15 to 20 new mortgage lending requirements in the regulatory pipeline, and their impact on the mortgage and servicing businesses will be more tsunami than simple wave," Walsh said in remarks to the Financial Services Roundtable's Housing Policy Council.

The speed of new regulations, he said, "is dramatic and continuing." The list includes registration and compensation requirements for originators and standards for the independence of appraisers. The recent cease-and-desist orders from the Office of the Comptroller of the Currency (OCC) and other federal regulators against large banks for servicing lapses come as state and federal law prosecutors negotiate further action against servicers.

Also on the horizon are the finalization of a rule mandating risk-retention for securitized loans, new servicing guidelines from Fannie Mae and Freddie Mac and proposals by the new Consumer Financial Protection Bureau.

Like a dangerous drug interaction, he said, the many rules could have dangerous side effects when combined, Walsh said, invoking a metaphor he has used previously.

"With respect to the mortgage industry, one regulation may strengthen the quality of capital; another might fix problems with the servicing process; and yet another may ensure that compensation policies don't encourage banks to take excessive risks. All of those goals are worthy, but it is hard to predict how they may all work together," Walsh said. "For example, we don't yet know how the new treatment of mortgage servicing rights will affect the price and availability of mortgage credit. The same holds true for the risk-retention rules and other changes. It's possible that the total effect may be more than the sum of the parts."

The flurry of rules hitting lenders, Walsh said, could ultimately prove to be a further obstacle to a housing recovery.

"It's too early to argue that lenders and servicers are leaving the business, or that activity is again migrating outside regulated institutions. But there is no arguing that burden is building for servicers, increasing their costs, while opportunities to make a profit are constrained," he said. "And all of these significant regulatory changes are coming at a time when housing and mortgage markets are struggling. The potential for unintended side effects is higher when the patient is weak."

The federal orders forcing changes at the 14 largest servicers were seen as just the first maneuver by officials to address "robo-signing" and other problems related to the foreclosure process. Many have criticized the order as too weak, hoping that the Justice Department and state attorneys general achieve tougher measures through settlement negotiations with big banks.

But Walsh said the enforcement actions have teeth. "We think that these orders will ensure that the banks responsible for servicing 68% of the nation's mortgages will be observing standards that ensure that every borrower, particularly those experiencing distress, are receiving every protection they are entitled to under law," he said.

He added that the "right outcome" is for servicing standards in the states to "complement ours."
"Our enforcement action sets up a framework, and requires the banks to fill in that framework in a way that is acceptable to us," Walsh said. "Much of what the states are seeking can fit within that framework — the details we are requiring banks to provide when they submit their action plans could and should be met by the detailed steps the states are seeking. If so, that would be very welcome."

While Walsh expressed support for interagency talks meant to develop nationwide servicing standards, he said "all of this rule writing raises a number of concerns, starting with timing."
"With the housing market still struggling, is this the right time to change the ground rules so fundamentally? Are we trying to do too much, too quickly? Are we, the regulators, working to ensure consistency?" he said. "Every law and every regulation, no matter how well defined, carries the potential for unintended consequences."

Regulators should be mindful not to expunge risk-taking from the banking system, Walsh added.

"Banking is a risk taking business; banks suffer credit losses; and we cannot eliminate all risk of future crises," he said. "To do so would be misguided; in fact, counterproductive."

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