Economics, U.S. Economy

CFPB’s new ‘qualified mortgage’ rule: The devil is in the details

Image Credit: Shutterstock

Image Credit: Shutterstock

The Consumer Financial Protection Bureau (CFPB) promises its new “qualified mortgage” regulation will “protect consumers from irresponsible mortgage lending.” Twenty years ago, Congress passed the inaptly named 1992 “Federal Housing Enterprises Financial Safety and Soundness Act” and promised it would protect taxpayers from having to bail out Fannie Mae and Freddie Mac (the GSEs). Instead, it mandated the GSEs to lend to unqualified borrowers. As a result, taxpayers were handed the bill for the largest bailout in history.

How about the Federal Housing Administration (the FHA)? Its mission is to help credit-worthy low- and moderate-income and first time homebuyers. Yet it has a history of failure going back 60 years. Since the 1950s, it has been the leader in promoting borrower leverage, having increased leverage by a factor of 16. Over the same period, its foreclosure start rate ballooned by a factor of 19. My recently-released study documents how the FHA’s irresponsible underwriting practices hurt working class families and communities, the very ones it is supposed to help.

Where are the devils in the Qualified Mortgage Rule?

1.    Rather than banning the irresponsible underwriting practices of the FHA and the Department of Agriculture, they are grandfathered for up to seven years or until these agencies issue their own rules codifying their irresponsible lending practices.

2.    The GSEs and their automated underwriting systems are also grandfathered for up to seven years, notwithstanding that the GSEs and their systems were instrumental in the housing market collapse. Not surprisingly, we have one agency (the Federal Housing Finance Agency) working to reduce the GSEs’ share of the mortgage market by raising their guarantee fees and another (the CFPB) giving them a pass that will strengthen their grip on the mortgage market.

3.    The CFPB has codified HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk. This is convenient since the FHA does not price for risk and the Community Reinvestment Act (CRA) effectively causes the same result. The CFPB’s definition will force a lender to either subsidize risky loans to get the presumption of affordability or subject itself to a rebuttable presumption which will bring certain litigation from the tort bar at every attempt made to foreclose.

4.    The rule is made pursuant to the Dodd-Frank Act’s provision calling for minimum mortgage standards. It is being touted as making sure “prime” loans will be made responsibly. Yet true to the government’s long history of promoting excessive leverage, it sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. Under its tortured definition of “prime”, a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% as long as they are approved by a government-sanctioned underwriting system.

Booms are fueled by excessive leverage. This rule does little to limit borrower leverage and lays the foundation for the next bust.

11 thoughts on “CFPB’s new ‘qualified mortgage’ rule: The devil is in the details

  1. The second “Big Liar” steps up:

    “Twenty years ago, Congress passed the inaptly named 1992 “Federal Housing Enterprises Financial Safety and Soundness Act” and promised it would protect taxpayers from having to bail out Fannie Mae and Freddie Mac (the GSEs). Instead, it mandated the GSEs to lend to unqualified borrowers”

    Right- it took 15 years for the effect of the (cough) mandate to create the bubble.

    Carry on, fool. People are laughing at you.

    • Yes, it took 15 years because it was not until 1999 that Andrew Cuomo made the quotas for subprime mortgages mandatory. The quotas rose steadily from 30% of all mortgages in 1992 to 56% of all new mortgages in 2008. Those who cannot remember history…

      • “Yes, it took 15 years because it was not until 1999 that Andrew Cuomo made the quotas for subprime mortgages mandatory. The quotas rose steadily from 30% of all mortgages in 1992 to 56% of all new mortgages in 2008. Those who cannot remember history…”

        Your figures are wrong, and so is your narrative. The mandate only called for buying mortgages from an “underserved” population. The quota was set at 40% in 1996. It didn’t hit 55% until after the damage was done, as you correctly noted, in 2008, but by that time, I don’t think anyone was following any mandates.

        Absent of course from this narrative is the role of private label loans, and non-agency SubPrime and interest rate policy. And of course, the areas with the highest number of defaults and peak to trough prices were hardly “underserved.”

        No matter how you slice it, the Big Lie is an attempt to deflect blame from the private sector and dump in on the public sector. It won’t work.

        • As you probably already know, 64% of all less-than-prime mortgages were underwritten by government agencies. Your anti-business bias keeps you from admitting that government created 2/3 of the problem directly through its own agencies, and then also coerced banks into writing subprime mortgages. Who is telling the big lies now?

          • “As you probably already know, 64% of all less-than-prime mortgages were underwritten by government agencies. Your anti-business bias keeps you from admitting that government created 2/3 of the problem directly through its own agencies, and then also coerced banks into writing subprime mortgages. Who is telling the big lies now?”

            Not me- and you have to know something about mortgage underwriting and securitization before you speak. Your numbers are wrong. I don’t think you know what a “SubPrime” mortgage is.

            And I don’t have an “anti-business” bias, I’ve been a businessman all of my life. Only you people could think that preventing people from being used and abused constitutes an “anti-business” mindset. Stupid conceit.

  2. “Not surprisingly, we have one agency (the Federal Housing Finance Agency) working to reduce the GSEs’ share of the mortgage market by raising their guarantee fees and another (the CFPB) giving them a pass that will strengthen their grip on the mortgage market.”

    Here, Fast Eddie laments that since Low Doc and No Doc loans have been banned, more mortgages will fall under conforming (i.e. GSE) lending standards.

    Which do you prefer Eddie? The GSE underwriting whose floreclosure rate was one fifth of the non-conforming loans, or do you want to bring back the Wild West again, with recently discharged Chapter 13′s eligible for a mortgage?

    Scum…

    • Before you call someone a scum, you should stop with the Hobbsian choice of your way or the nothing of a straw man argument. His point is that two agencies are working at cross purposes, yet you pull out other arguments he didn’t make and try to skewer him for it. This is also a false dilemma in that there are other choices besides yours OR the “wild west” lie. You really should toss Alinsky in the wastebasket. He’ll be found on the rubbish pile of history along with Stalin and Marx. Haven’t you seen the pattern? Even after you subjugate us, we kick your butts again. And again. And again. Freedom always wins out in the end. As long as you start in the right place on the circle, that is.

  3. “Before you call someone a scum, you should stop with the Hobbsian choice of your way or the nothing of a straw man argument. His point is that two agencies are working at cross purposes, yet you pull out other arguments he didn’t make and try to skewer him for it. This is also a false dilemma in that there are other choices besides yours OR the “wild west” lie. You really should toss Alinsky in the wastebasket. He’ll be found on the rubbish pile of history along with Stalin and Marx. Haven’t you seen the pattern? Even after you subjugate us, we kick your butts again. And again. And again. Freedom always wins out in the end. As long as you start in the right place on the circle, that is.”

    Your rant is as incoherent as Pinto’s screed is as full of crap, and if Pinto wants to refute me, Im sure he has the ability to do so. His first lie was:

    “Instead, it mandated the GSEs to lend to unqualified borrowers. As a result, taxpayers were handed the bill for the largest bailout in history.”

    Again: we call it the “Big Lie” because it is no different in scale or morality than Hitler’s Big Lie techniques.

    Secondly, we have this comment about “cross purposes:”

    “Not surprisingly, we have one agency (the Federal Housing Finance Agency) working to reduce the GSEs’ share of the mortgage market by raising their guarantee fees and another (the CFPB) giving them a pass that will strengthen their grip on the mortgage market.”

    Typically, Pinto assigns a sinister motive to imposing underwriting limits (which, in my view view, may be TOO strict) which conform to the model that Pinto is claiming that Fannie and Freddie ABANDONED, when he made his first claim. So Fast Eddie is complaining about the adoption of underwriting standards he wrongfully condemns the GSEs for throwing out. You have to be a complete idiot to swallow this line of thought, because HE’s the one whose advocacy is at “cross purposes.”

    Got it?

    So the entire piece is pure Pinto, which is to say, pure horsesh*t. Pinto has been roundly skewered for his idiotic FHA piece about “60 years of failure.” That description more aptly fits Pinto’s career.

    Lastly, take that Alinsky crap and shove it. I never even HEARD of him until the wingnut websites couldn’t stop repeating his name like pre-programmed zombies.

    As far as your last triumphalist sentiment, look around: you belong to a dying religion.

  4. I’ve worked in banking the last 30 years. The bubble extends from the practice of all banks taking excessive risks with other peoples money. When bank’s discovered back in the 90′s that they could make high risk loans, collect huge fees and sell them off to Fannie, they jumped in with both feet, and then they followed up with churning their mortgage portfolio’s.

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