Mortgages will remain hard to get until common sense returns

Commentary: Regulators' pullback from risk retention only prevents further tightening

Long-term rates stayed about the same this week, mortgages just above 4.5 percent for most products.

There are many things to write about this week, but the most important news for most Americans is the first retreat from Dodd-Frank toward common sense.

Tight credit image via Shutterstock.
Tight credit image via Shutterstock.

Economic data stayed in pattern — reasonable growth without acceleration. Overall orders for durable goods fell 7 percent in July, but excluding volatile orders for airplanes and such gained 0.6 percent.

Pending home sales fell 1.3 percent in July, but from an improved level. Second-quarter GDP was revised up from 1.7 percent to 2.5 percent annualized, but net of accounting gyrations still two-ish — way under the Fed’s forecast, as is inflation, barely 1 percent annualized.

Consumer spending and incomes in July rose 0.1 percent versus forecast gains of 0.2 percent and 0.3 percent, respectively.

The threat of action against Syria is still suppressing rates, but that won’t last long. A brief hail of Tomahawks won’t change anything, serious regional upset unlikely.

The Fed’s policy shift raising rates here is causing declines in emerging-nation currencies, but that is a perfectly normal self-corrective.

The containment of QM/QRM damage is not an easing of currently overly tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.

U.S. exports just set a new high, which says the dollar was somewhat undervalued, and emerging nations drunk on export demand from China will soon be helped by weaker currencies.

The wrecks (India, maybe Brazil) are wrecks, and the healthy (South Korea, Taiwan) will be fine.

New budget collisions ahead in Congress create anxiety, but even Republicans understand that the nation is flat bored with the hysterical behavior of the teapots. A fall fizzle is more likely than a run over the brink.

All the above is minor league today compared to excellent news for the country: Six regulators agreed that the central mortgage provisions of Dodd-Frank are bad ideas.

Dodd-Frank tried to define permissible mortgages, the qualified mortgage (QM) and qualified residential mortgage (QRM).

The QM standard would be a safe harbor for lenders, protection against claims of misbehavior.

The tighter QRM was the benchmark for the worst idea to come out of the post-bubble period, the alleged need for lenders to have “skin in the game.” Any non-QRM would have required the lender to retain part of the risk.

Here, six years after mortgage misbehavior stopped cold, we still do not have a national understanding of what happened, laboring in ignorance, score-settling, and the entirely successful effort by Wall Street investment bankers to dodge accountability.

1. Pre-bubble, every mortgage bank and broker was contractually obliged to repurchase any loan with deficient underwriting, whether it defaulted or not.

2. Commercial banks have always hated mortgage banks and brokers. Banks are ponderous and dim; brokers are light on their feet and live on their wits. Banks have huge balance sheets, brokers are small. Require brokers to grow balance sheets, and — voila! — a tough competitor is dead.

3. Loans against land predate Rome. U.S. mortgage underwriting after 1929 was low-default, clear, of record, and did not require reinvention. Loans with small down payments need greater rigor, and with large ones need less, especially if the borrower has assets sufficient to pay off the loan (the latter two types still locked out today).

4. The Wall Street banks did not just buy bad loans 2000-2007; they designed and vacuumed them. They knew exactly what they were doing, the finest credit analysts in the world, and each firm thought it would be able to leave the market just before it blew. None did. The individual decision-makers, perps in suits, still scot-free.

This first pullback from Dodd-Frank presages more “refinement” of that great legislative spasm, but don’t get your hopes too high. The containment of QM/QRM damage is not an easing of currently overly tight standards, just turning away from more tightening. In blackest comedy, the regulators cited as a principal reason to retreat that credit is already far too tight.

Restoration of common sense will gradually follow rates of default on new loans, by historic standards now almost undetectable.

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.


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