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.