At a meeting attended by top economic and housing policymakers in the West Wing of the White House last Thursday, the Obama administration heard these grave warnings on housing:
- If you force overly stringent home loan standards and legal liabilities down the throats of the mortgage and real estate industries this summer, many lenders will squeeze underwriting requirements on loans even tighter than they are today, cut back on originations and tack on additional "overlay" fees. All that, in turn, will suck the air out of the housing recovery, with punitive impacts on jobs, new home building and resales of existing homes.
- The consumers who get hit the hardest if excessive standards are adopted by the administration will be homebuyers and refinancers who are on economic tightropes already, especially first-time homebuyers, and lower and moderate-income African Americans and Latinos. Why make things even tougher for them?
Though participants from the mortgage industry at the meeting say the issue never was framed in political terms, a White House team and president running for re-election in a weak economic environment and 8 percent-plus unemployment couldn’t miss that part of the message.
Among the administration attendees at the meeting, according to participants, were HUD Secretary Shaun Donovan, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray, White House Chief of Staff Jacob Lew, and National Economic Council Director Gene Sperling.
The issue triggering concern from the mortgage and real estate industries: the pending "QM," or "qualified mortgage," rules expected from the CFPB in the coming several months.
QM is different from the more widely publicized "QRM" or "qualified residential mortgage" rule, which was formulated by six federal agencies last year but has not yet been adopted in final form. Among that proposal’s controversial recommendations were 20 percent minimum down payments and restrictive debt-to-income-ratio requirements for loans eligible for the lowest interest rates and best terms.
Both QM and QRM are products of the Dodd-Frank financial reform legislation passed by Congress in 2010. As originally envisioned by its prime author, Rep. Barney Frank (D-Mass.), QM was meant to provide a set of broad standards for "safe" and affordable mortgages — achieved primarily through requirements for full documentation and verification of borrower income and assets, bans on the use of troublesome mortgage features such as negative amortization and balloon payments, plus mandatory evaluations by lenders that every applicant approved for a mortgage must have an "ability to repay" the loan.
QRM, by contrast, was a risk-retention concept, designed to ensure that lenders keep at least a modest portion — 5 percent — of the risk of future loss from defaults on mortgages they originate for securitization. For loans originated under the six agencies’ proposed underwriting standards, including down payments of at least 20 percent, lenders would be exempt from Dodd-Frank’s risk-retention requirements. Borrowers making nonqualifying down payments of less than 20 percent would likely pay higher rates — exactly how much higher is subject to debate.
QM was handed to the new consumer protection bureau as one of its first major tasks for 2012. Cordray has promised to get it out this summer. The key questions now facing him are: How inclusive should the rule be? Should the agency aim for the broadest possible criteria for loans to qualify, ensuring that the vast bulk of the mortgage marketplace is covered? Or should it aim more narrowly, much like the heavily criticized QRM proposal — specifying down payment, credit score, debt ratios and other criteria so hard to attain that only a small percentage of mortgages will make the grade?
For lenders, should the rule create essentially an umbrella of legal protections, giving them a safe harbor from lawsuits and regulatory challenges if they can show that they fully complied with the standards? Or should the upcoming rules instead leave them wide open to costly legal attacks, allowing borrowers to take lenders to court whenever a mortgage goes bad, even if it was the borrowers’ fault?
Mortgage and real estate industry trade groups argue strenuously that anything but a broad, clearly defined set of standards and a safe harbor that discourages frivolous litigation will drive lenders to the sidelines, raise interest rates and make financing a home more difficult than ever.
David Stevens, president and CEO of the Mortgage Bankers Association and a former Obama political appointee as FHA commissioner, said in an interview that "you can’t force lenders to lend" — certainly not at today’s affordable rates — if there is no bright-line set of rules offering them adequate protections from unwarranted litigation.
Glen Corso, managing director of the Community Mortgage Banking Project, a national group representing small and midsized lenders, says his members are "scared to death" that without a well-defined safe harbor they’ll spend inordinate amounts of time and money fighting lawsuits from borrowers who couldn’t keep up with their mortgage payments.
But Ira Rheingold, executive director and general counsel of the National Association of Consumer Advocates, says such fears and predictions of doom are way overblown — "they’re full of crap," he says about the lenders’ claims — and that consumer groups simply want the CFPB to give borrowers their day in court when lenders make irresponsible loans.
Where’s this all headed? It should be a revealing test for the CFPB: Will it listen to its core constituency and give consumer groups the legal rights they say the Dodd-Frank law guarantees mortgage borrowers? Or will they decide that any regulation that might roil the economy and upset real estate and lending groups would best be delayed until after the November elections, despite Cordray’s promise of a rule this summer?
Keep an eye on this one.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.
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