Mortgage resets, disclosure debate to make for 'interesting' 2007.

Expect a "fairly tough correction" for the mortgage market in 2007--but it could be an even tougher year for lenders if the industry doesn't reach a consensus on better consumer disclosure for complex loan products, concluded a panel of lending executives at the Mortgage Bankers Association's (MBA's) 93rd Annual Convention & Expo in Chicago in October.

As mortgages begin to reset and the market adapts from what had been the best housing market in the last 10 to 15 years, the resulting change will be good in the long run, but it will not come without some growing pains, noted Freddie Mac Chairman and Chief Executive Officer Richard Syron.

"The long and the short of what is driving this is that in the mortgage banking industry and in financial services as a whole, there's too much capital chasing too little product," said Syron. "We're all going to get squeezed out on the risk curve; [many] already have. That's what we get paid to do."

Daniel Mudd, president and chief executive officer of Fannie Mae, noted that even more important than the threat of declining house prices might be the resetting in 2007 of $1 trillion out of $9 trillion in adjustable mortgage products.

"These resets are going to have some very interesting and very difficult-to-predict impacts on consumers and others. Some of the maximum resets take people, who bought in the first place based on the monthly payment, from a monthly payment in the hundreds of dollars to a monthly payment in the thousands of dollars," said Mudd. "I think we're in for a very interesting year."

Some of that is due to the innovation in the mortgage market, and while he supports innovation, Mudd said, "It's not entirely clear to me that everyone knew exactly what they were getting into."

The key to nontraditional mortgage products is having and implementing "good business practices," said Michael Perry, CMB, chairman and chief executive officer of Indymac Bank, Pasadena, California.

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The final guidance on nontraditional products issued by federal regulatory agencies this past fall "won't have a major effect" on top lenders, because they are already doing much of what the guidance calls for, added Perry.

"If these products are offered responsibly by lenders and the consumers truly understand what they're getting, they have been good business for our industry and good business for homeowners," said Perry.

In his acceptance speech as 2007 MBA chairman, John Robbins, CMB, proposed a standard loan disclosure for all mortgages nationwide, "with a simple, easy-to-understand tool that spells out both the strengths and weaknesses of the loan the borrower is getting."

The panelists backed the concept of fuller disclosure standards for mortgage borrowers in general, and specifically the reform proposed by Robbins.

"We can't ignore the reality. There's going to be a lot of heat about this, and we're going to be at the edge of the flame-thrower," said Syron. "I think we all better get on our horse and work with John [Robbins] and the MBA and get this done pretty quickly, because if we don't get this done pretty quickly, we're going to get something else."