Last week I wrote about How the new mortgage rules will impact the housing market. Since then, even more regulations were announced. After thinking about the ramifications of these new regulations over the last week, I am surprisingly relieved by what I see. I think these new regulations really will prevent future housing bubbles.
With any regulation, there is fear that it will either be changed or enforcement will be lax. While it’s still possible future generations may forget the folly of the last decade, it’s unlikely our generation will. These new regulations are here to stay. A far larger concern is the lack of enforcement and oversight. And if the issue were left up to the agencies or the federal reserve, that would still be a big concern, but that’s not where enforcement will come from. Civil lawsuits from future loanowners decrying their inability to repay the loans is what will keep lenders in line.
What would inflate another bubble?
Housing bubbles inflate for one of a few reasons:
- Unstable loan products with rising payments allow borrowers to increase their loan balances beyond what their incomes can support. This usually happens in response to rising prices when borrowers want to raise their bids to obtain a better property but they can’t qualify using an amortizing loan. Interest-only and Option ARMs are Ponzi loans doomed to fail at some point in the future.
- Debt-to-income ratios get out of line. During the 1970s, lenders allowed very high debt-to-income ratios because both they and their borrowers assumed the borrower would obtain 10% or better raises every year due to inflation. A 60% debt-to-income ratio becomes affordable after three or four years of 10% yearly raises. In the 1990s, lenders allowed borrowers to stretch again, and they underwrote many interest-only loans which took the debt-to-income ratio to unsustainable heights.
- Another way housing bubbles can get inflated is to abandon underwriting standards altogether. Obviously, in the Great Housing Bubble lenders did everything they did wrong from the first two bubbles and added negative amortization, teaser rates, and liar loans to boot.
It all comes down to borrower leverage. If borrowers are not allowed to take on debts they cannot successfully service and repay, housing bubbles won’t happen. Wall Street might believe residential mortgages are the best investment available again, but without interest-only mortgages, Option ARMs, seconds, and HELOCs to pump money into those mortgages in an unstable way, housing bubbles won’t inflate.
How do we prevent another housing bubble?
Let’s review my recommendations for preventing future housing bubbles from The Great Housing Bubble:
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
- 1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
- 2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
- 3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
- 4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
The new regulations specifically ban interest-only and negative amortization loans, so #1 happened.
The debt-to-income ratio limits are not as low as I proposed, all loans, including jumbos, now have a maximum allowable debt-to-income ratio. The standard today set by the GSEs is 31% of gross income, and since all attempts at higher limits failed, it’s unlikely this will go up. So provisions two and three happened.
The combined loan-to-value has not been regulated yet, but regulations concerning minimum down payments are expected soon. There is the risk that second mortgages and HELOCs may rise back to 100% of value or higher, but given the magnitude of the losses on these loans from the bubble, it will be a while before lenders start making those stupid loans again. Plus, with rising future interest rates, demand for HELOCs and seconds will not be what it was during the bubble when lower rates allowed borrowers to refinance larger sums with the same payments.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
This last statement is the most critical. This is how the enforcement problem can be overcome. Regulators are pressured not to enforce laws when times are good, and decried for their lack of oversight when times are bad. If the oversight function becomes a potential civil matter policed by the borrowers themselves, the lenders know exactly what their risks and potential damages are. Any lender foolish enough to make a loan outside of the parameters would not need to fear the wrath of regulators, they would need to fear the civil lawsuits brought by borrowers eager to get out of their contractual obligations.
Given the legal environment favoring loanowners in response to the collapse of the bubble (loan modification entitlements, Loanoweners Bill of Rights, and so on), lenders will not be eager to stick their necks out and make loans outside the parameters of a qualified mortgage. Imagine what will happen if they do. Let’s say a lender makes a loan with a debt-to-income ratio that makes the loan unaffordable to the borrower. At the first sign of trouble, the borrower will petition for a loan modification. If they are denied, they will find an attorney to bring suit to force the lender to favorably modify the mortgage, and they will win because the loan is outside the “safe harbor” of a qualified mortgage. The threat of future lawsuits from borrowers — lawsuits the lenders know they will likely lose — will prevent them from loaning outside the parameters of a qualified mortgage. If lenders don’t loan outside those parameters, borrowers will be able to afford their mortgages, and a housing bubble and associated collapse will not occur.
Another million dollar bank loss
The losses the banks must endure on jumbo loans is truly staggering. Today’s featured property was likely a new build on a vacant lot. That’s why the initial purchase price is so low. On 10/7/2003 the owners borrowed $1,000,000 likely to cover the construction costs. On 11/16/2004 they refinanced with a $1,350,000 first mortgage and extracted $350,000 for furnishings (I don’t know, but what else did they spend it on?) On 8/16/2005 they got a $250,000 HELOC, and they followed that with another on on 3/10/2006. But in the final act of banker and borrower stupidity, they were given a $2,320,000 Option ARM on 9/28/2006. There’s no telling exactly how much these people borrowed and spent from this property, but it was likely well over a million dollars which is about what the bank will lose when this loan is closed out. In this instance, there is a clear winner and a clear loser.
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Proprietary OC Housing News home purchase analysis
12628 VISTA PANORAMA Santa Ana, CA 92705
$1,349,000 …….. Asking Price
$350,000 ………. Purchase Price
9/27/2001 ………. Purchase Date
$999,000 ………. Gross Gain (Loss)
($107,920) ………… Commissions and Costs at 8%
============================================
$891,080 ………. Net Gain (Loss)
============================================
285.4% ………. Gross Percent Change
254.6% ………. Net Percent Change
11.9% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$1,349,000 …….. Asking Price
$269,800 ………… 20% Down Conventional
3.97% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,079,200 …….. Mortgage
$257,032 ………. Income Requirement
$5,134 ………… Monthly Mortgage Payment
$1,169 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$337 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$6,640 ………. Monthly Cash Outlays
($1,254) ………. Tax Savings
($1,563) ………. Equity Hidden in Payment
$370 ………….. Lost Income to Down Payment
$357 ………….. Maintenance and Replacement Reserves
============================================
$4,551 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$14,990 ………… Furnishing and Move In at 1% + $1,500
$14,990 ………… Closing Costs at 1% + $1,500
$10,792 ………… Interest Points
$269,800 ………… Down Payment
============================================
$310,572 ………. Total Cash Costs
$69,700 ………. Emergency Cash Reserves
============================================
$380,272 ………. Total Savings Needed
The property above is available for sale on the MLS.
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45 Responses to “New mortgage regulations will prevent future housing bubbles”
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This is a little confusing to me. These regulations are for all mortgages not just Fannie and Freddie mortgages. So, if you have a private bank loan you need to fit within these regulations.
These regulations apply to all mortgages. If the mortgage also conforms to GSE standards it is automatically considered a qualified mortgage.
They announced regulations for jumbo mortgages banning interest-only and limiting debt-to-income ratios to 43%. Jumbo mortgages are by definition private mortgages.
You do not “have to fit within these regulations.” You are free to start your own mortgage shop and start pimping option-ARMs. However, because these loans won’t be “qualified mortgages” (and for a whole mess of other reasons), you’ll be taking on huge risk. Wall Street is unlikely to finance your effort, like they did before. So, you’ll be opening-up your own wallet. Could be profitable though…
Thanks for the explanation. Mortgages are becoming like taxes. I now need a mortgage broker, real estate, and a lawyer to explain the rules to me.
If I’m purchasing a multifamily rental I also need a property management company, CPA, and eviction lawyer.
Service economy.
While this does appear to be prudence, it will be interesting to see the ‘unseen’ or unintended consequences of this unnecessary meddling, er “regulation”.
There will be a loophole. there will be massive oversight. there always is.
The biggest potential loophole is the possibility of a proliferation of second mortgages and HELOCs. There is zero market appetite for these loans right now, but if that becomes a loophole that is widely exploited, it could create another unsustainable situation requiring a massive bailout.
The mortgage industry is preparing their seconds market. With nearly every homeowner refinancing into ~4% 30-year mortgages, the next decade might not be big for the refi market. People are going to try to keep their low-rate firsts, and cash-out, if possible, using seconds.
I don’t think we will see a great deal of this because interest rates will rise. When interest rates were falling, they could cash out and keep the same payment. When interest rates go up, the cash out costs them money. There will be a big resistance to taking out a 6% second when they have a 4% first.
When free money isn’t free, people don’t take it.
Problem is, the biggest bubble of all-time is currently in the money.
The bond bubble caused by artificially low interest rates is the big problem right now. Affordability in housing is completely predicated on low interest rates. If the bond bubble bursts and mortgage interest rates suddenly move much higher, the real estate market will freeze up, then crash.
Bond Investors : Heed Warnings About Rising Rates…
http://m.startribune.com/?id=186380631
“… the huge amount of cash — more than $1 trillion — that bond mutual funds have attracted in the past five years.
Warnings about rising interest rates have become louder in 2013, partly due to a spike in rates during the first couple weeks of the year. Consider this one: The prospect of higher rates “is looming ever-closer” says Art Steinmetz, chief investment officer at OppenheimerFunds, who describes a rate increase as “a dust storm that we’re going to run into one of these days.”"
This will not end well. One of the surest signs of an asset bubble is a huge influx of cash from small investors and foreign nationals. Where did that trillion dollars come from?
The back to back RE and Bond bubbles will be two for the history books.
Unfortunately, the bond bubble is a sovereign debt bubble. What happens to a currency when a sovereign debt bubble bursts?
Reinstatement of Executive Order 6102
I had to look that up: Executive Order 6102.
“Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States”. The order criminalized the possession of monetary gold by any individual, partnership, association or corporation.”
Monetary gold? Doesn’t exist in this era.
Survey Finds Agents, Homebuyers Expect House Price Inflation in 2013
As home prices continue to climb, real estate agents and homebuyers are maintaining a positive outlook for home values in 2013, a recent survey found.
The survey, which was jointly released by Point2Homes and PropertyShark, reported 71 percent of survey respondents predicted home prices will go up or maintain their current level in 2013.
The survey included nearly 1,500 real estate professionals and homebuyers who were questioned in December 2012 on topics such as prices, sales volume, and inventory, as well as factors that will drive the market.
The view that prices will either stabilize or go up was shared by 59 percent of agents and 37 percent of homebuyers.
As for sales volumes, 41 percent of respondents overall said sales should increase, with 52 percent of agents sharing this view and 41 percent of homeowners stating sales will go up.
When it came to inventory, respondents said they don’t expect to see a change.
As for factors that will drive the market in 2013, 31 percent of respondents think that mortgage rates will have the biggest influence on the market. Access to loans placed second as an influential factor 2013 and foreclosures ranked third.
The survey also found Californians were more optimistic than New Yorkers when it comes to home prices.
Half, or 50 percent of California respondents, predicted prices will increase in 2013 compared to 44 percent of New York respondents.
On the topic of foreclosures, 21 percent of California respondents said foreclosures will influence the market in 2013, compared with only 9 percent of the respondents from New York. The survey noted the difference may be due to the higher foreclosure rate seen in California.
Owner-Occupant Homebuying Remains Weak
In a commentary from Capital Economics, economist Paul Diggle declared existing home sales are now at a “historically-normal level” relative to population after breaking past the five million mark.
The National Association of Realtors (NAR) reported existing-home sales in November rose to a seasonally adjusted annual rate of 5.04 million, the highest level since November 2009 when sales reached an annual pace of 5.44 million. In October, the annual rate for existing sales was 4.76 million.
Furthermore, Capital Economics thinks sales will probably rise even higher in December. Based on pending home sales in November, the firm’s calculation shows existing-home sales in December should increase to an annual rate of 5.15 million. NAR is scheduled to release data on existing-home sales on Tuesday, January 22.
Despite the breakthrough, the firm noted, “sales remain dominated by cash buyers and investors, with mortgage-dependent buyers playing a relatively small role in the recovery.”
In order to have a long-term recovery that can be sustained, Capital Economics says that trend will need to change. The firm remains hopeful that it will.
Note the obvious optimism bias. There is no sign of owner-occupants coming back to the market. The only thing they have is hope. Hope and optimism isn’t data or news.
Bulk of Mortgage-Related Bailout Money Unused, Fortunately
When Treasury issued the Troubled Asset Relief Program (TARP) in October 2008, it designated $45.6 billion for mortgage-related programs.
However, a little more than four years later, when a few of the non-mortgage TARP programs have drawn to a close, more than $40 billion in mortgage relief remains unspent, according to a report from the Government Accountability Office (GOA).
The three major programs the $45.6 billion was allocated to fund include the Making Home Affordable program with its keystone Home Affordable Modification Program (HAMP); the Housing Finance Agency Innovation fund for the Hardest Hit Housing Markets, or more commonly, the Hardest Hit Fund (HHF); and HUD’s Federal Housing Administration Refinance of Borrowers in Negative Equity Positions, commonly called the FHA Short Refinance program.
With a stated goal of assisting 3 million to 4 million homeowners, HAMP has achieved about 1.1 million permanent modifications as of September 2012. The program will accept applicants until the end of this year.
As a whole, the Making Home Affordable program has spent about $4 billion of the $29.9 billion it was allocated. About $6.5 billion more “could be spent on incentives for HAMP modifications and other MHA interventions that were already in effect as of September 2012,” according to GOA.
That leaves about $19.4 billion untouched.
Treasury allocated $7.6 billion to HHR, of which about $1.5 billion has been dispersed.
Treasury allocated $8.1 billion to the FHA Short Refinance program. Thus far, it has allocated $7.2 million to Citibank in fees for the program.
http://www.usnews.com/opinion/blogs/economic-intelligence/2013/01/16/dodd-frank-qualified-mortgage-rules-will-create-a-new-bubble
This article makes an argument re: “borrower willingness to pay (as evidenced by credit score), and the size of the loan relative to the value of the property (loan-to-value ratio).” The author states that a bubble will still be inflated.
He also discusses those exempt from the regulations, such as small community banks (yikes!), FHA (small down!), Fannie/Freddie (isn’t that most loans?).
What am I missing here?
Here are the key facts the author glosses over:
“But Dodd-Frank’s suitability rules are enforced with a sledgehammer, with damages too high for most lenders to risk. Effectively, lenders subject to the regulations will be forced to make only loans under Qualified Mortgage’s safe harbor that protect them from liability …
Some requirements, such as bans on negative amortization, interest-only, and no-doc (no borrower income or asset verification) loans, will probably make borrowers less likely to take on risks they don’t understand. Limitations on excessive points (fees deducted from the loan amount) will make it more difficult for lenders to disguise high interest rates. …
The Qualified Mortgage regulations set the maximum debt-to-income ratio at 43 percent …”
The regulations on minimum down payments will come later.
Small community banks won’t issue enough loans to make a difference, and the GSEs and FHA will not loosen their standards to create bubble loans. The FHA did not loosen its standards during the housing bubble and opted to lose market share instead. That’s what a government agency should do, and it’s what they will do in the future.
The rest of his hysterical hyperbole about exceptions for HELOCs and seconds doesn’t reflect market reality. Given the huge losses lenders took on these loans, they won’t be eager to use them to inflate a housing bubble any time soon.
Thanks. I’ll still be waiting to see those down requirements. I’m sincerely hoping 20% at least.
Me too. Anything less makes the market unstable. Even a 10% down requirement leaves the borrower with little or no equity if they had to sell immediately (6% commission, 2% closing costs, plus a discount).
“The rest of his hysterical hyperbole about exceptions for HELOCs and seconds doesn’t reflect market reality. Given the huge losses lenders took on these loans, they won’t be eager to use them to inflate a housing bubble any time soon.”
Minus the federal backstop, this would be correct. Yes, the market does indeed self regulate. Unsustainable loans fail. Sustainable loans sustain. What a concept.
The unintended consequence of this regulatory nonsense is squandering the wealth of the productive on bumbling buffoons like Barney Frank to inefficiently do what the market would naturally do on its own. This is the unseen. He and his ilk are the economic drain.
I remember most second liens use to be seller financing or private parties, but at much higher rates.
Example, my Dad sold a home in the 80′s and it seller financing at 15%. It was 8 years before the buyer could refi that second mortgage into a first.
I’m going to post down below. The new CFRB rules is going knock out a lot of smaller servicers that make a business niche out of these loans.
What the professor also glosses over is one of the fundamental forces of physics… in that, you can only suspend gravity for so long, thus, everything eventually falls.
I think I’m just missing your criteria #4, which hasn’t happened yet…
Also, I’m asking/confirming who is exempt from these regulations.
None of the significant players are exempt. Small community banks will not become big players because if they did, they would no longer be small community banks able to exploit the exemption. The GSEs and the FHA will not loosen their standards either. Other than that, the law applies to all loan originators including the shadow banking system players and buyers of ABS pools.
Basically, with any borrower able to sue an originator if they are given an unaffordable mortgage, no originator will do it. This will effectively end the era of the toxic loan.
What stops a fly by night operator to originate loans…. lots of them and when the time comes for the borrower to sue them, they are long gone…
As in Ameriquest for example
Under these rules…. that cannot happen ?
It could happen, but the buyer of those bad loans will end up eating the losses. Such an eventuality will make potential buyers of such ABS pools unlikely to buy them.
Just a heads up about PBS’s Frontline Documentary tonight about “The Untouchables” an investigation into why Wall Street leaders have escaped prosecution for fraud related to the sale of bad mortgages : The Untouchables
Neat. Hopefully they avoid the leftist ‘victimized homeowner’ crap, but i doubt it.
The true answer is: arbitrary tyranny. If you are connected to the regime, the rule of law does not apply to you, nor do the laws of economics. Corzine? Mark to fantasy accounting? Subsidies forced on the taxpayer?
Definition of LIBERTY
1 : the quality or state of being free:
c: freedom from arbitrary or despotic control
In this digital age, collectivism is no longer administered by physical force but at the hand of the virtual printing press. It’s much cleaner.
CFPB rule leaves fate of smaller servicers up in the air
Posted by Kerri Ann Panchuk on January 22, 2013 12:50 PM
The Consumer Financial Protection Bureau adjusted its final servicing rule to exempt servicers with 5,000 loans or less, but at least one analyst worries it’s not enough to ensure the survival of smaller servicing shops.
“If you have 5,500 or 6,000 loans (that a firm is servicing), those are still very small servicers, and they are going to be under the same rules,” said Diane Pendley, managing director at Fitch Ratings.
Pendley says larger servicing shops, which were previously under the national consent order with regulators and the Attorneys General servicer agreement, are already prepared to deal with the CFPB’s national servicing standards. But smaller servicing shops, especially those previously excluded from servicing rules, could face some sticker shock when trying to comply.
“Servicers that had not been under the rules (AG settlement/consent order) will have to change and end dual-tracking,” she said. “I have two fears. One is there has been a lot of consolidation in the market over the last few years. Most of these servicing changes take time and money, and you need a significant amount of loans to offset (costs from) major changes.”
Pendley says it costs smaller servicers, with as little as 6,000 loans, a significant sum of money to add technology and staff to deal with new rules.
She notes, “So many of these changes go right to the pocketbook. I would not be surprised if we don’t see an additional group of servicers, or their parent firms, making the decision that the liabilities, the oversight and the costs make it prohibitive for them to stay in the business.”
Yet another unintended consequence of further regulation – the burden of cost to comply disproportionately affects smaller competitors. It is anti-competition. The big guys love it.
The reality of those in favor of further regulation: “We hate the concentration of capital and monopolies. However, if it is a byproduct of our additional regulation and “protections”, we can ignorantly & blissfully pass the buck and blame capitalism”
Jumbo mortgages may become jumbo hassles
January 18, 2013|AnnaMaria Andriotis
Private jumbo mortgages could soon become harder—and pricier—to get.
New rules announced last week by the Consumer Financial Protection Bureau will tighten lending standards in the private-mortgage market. The changes, which start in 2014, will ban lenders from issuing loans if they don’t verify a borrower’s income or assets.
The CFPB rules are meant to ensure that home buyers have the ability to repay their mortgages. They also affect many affluent buyers seeking private jumbo mortgages, those that start after $417,000 in most parts of the country or at $625,501 in high-cost metro areas.
Low-documentation mortgages account for about 12% of the private mortgages borrowers signed up for from January through October 2012, according to the latest data from CoreLogic, a real-estate analytics firm. Unlike full-documentation loans in which borrowers present detailed financial paperwork, such as tax returns, pay stubs and bank statements, low-documentation loans are sometimes given to wealthy borrowers who provide limited information.
While these borrowers can more than afford the mortgage payments, their financial statements don’t always prove that. Starting next year, if home buyers can’t provide enough paperwork to verify that they have the income or the assets to afford the mortgage, they’ll be ineligible for a mortgage—even in the private market, according to the CFPB.
Another change that could have a big impact on private jumbos: Interest-only loans, in which borrowers don’t pay principal toward the home for a certain period, will be restricted. As a result, some lenders are questioning whether they’ll continue providing private loans that don’t meet the CFPB’s “qualified mortgage” criteria.
“All lenders are going to have to think very hard before we expose ourselves to liability,” says Tom Wind, executive vice president of residential lending at EverBank, a national lender.
Lenders who continue to provide interest-only mortgages next year could face greater liability in lawsuits filed by borrowers in foreclosure. If they default on their loan, borrowers of these non-qualified mortgages could argue that the lender didn’t do a thorough job confirming that they could afford it.
Interest-only mortgages account for roughly 14% of the private mortgages originated during the first 10 months of 2012, according to CoreLogic. Well-off borrowers often choose these lower monthly payments in order to invest the savings elsewhere.
EverBank will continue originating interest-only private mortgages for now but will re-evaluate its strategy toward the end of the year, Wind says. And Jim Cutillo, chief executive of lender Stonegate Mortgage Corp., based in Indianapolis, says his firm will have to change how it approves borrowers for adjustable-rate mortgages, given the new rules.
“Starting next year, if home buyers can’t provide enough paperwork to verify that they have the income or the assets to afford the mortgage, they’ll be ineligible for a mortgage—even in the private market, according to the CFPB.”
Is this really a problem? Shouldn’t ALL borrowers provide proof they can make the payments?
Will these jumbo loans have the 5% risk retention rules?
If they don’t meet the standards they will. As long as they conform to the other standards, I don’t believe lenders have to retain any of them. However, ordinarily lenders do keep these on their books because they provide better returns from the higher interest rates.
U.S. Senator Corker urges regulators to simplify mortgage rule
WASHINGTON | Tue Jan 22, 2013 1:57pm EST
Jan 22 (Reuters) – An influential Republican U.S. senator on Monday urged regulators to carefully craft a mortgage rule so that it does not keep the mortgage market dependent on government support.
Senate Bob Corker, a member of the Senate Banking Committee who has been an outspoken voice on housing reform, called for changes to the new mortgage standards that are being drafted by six regulatory agencies.
One such rule defines Qualified Residential Mortgages, or QRMs. These seemingly safer loans would be exempt from a “skin in the game” requirement that calls for mortgage originators to keep a portion of securitized loans on their books.
The problem with the current proposal, Corker said, is that the QRM rule would also exempt loans backed by government-controlled Fannie Mae and Freddie Mac. That would likely mean lenders would only make loans that could be sold to Fannie, Freddie or the Federal Housing Administration, and would push private capital out of the U.S. mortgage market, he said.
Combined, those three government entities currently own or guarantee about 90 percent of new U.S. home loans.
Corker also said the QRM proposal is problematic because it may not match up with another important mortgage underwriting rule known as the Qualified Mortgage rule.
“Forcing lenders to comply with two separate sets of rules isn’t good policy, and in this case, it would set back the timetable on doing what we absolutely must do – begin to move away from a complete dependence on the government for mortgage credit in our country,” Corker said in a statement that was released with his letter to multiple government agencies, including the Treasury Department and banking regulators.
Banks have also expressed concern that the new lending rules would mean a larger government role in mortgage securitization and the industry has said private issuers are currently sitting on cash as they wait to see what standard is adopted.
To provide a steady stream of funds, Fannie Mae and Freddie Mac buy loans and either hold them or repackage them as securities, which they sell to investors with a guarantee.
When millions of mortgages soured during the financial crisis, Fannie and Freddie were driven to the bring of collapse and had to be taken over by the government.
If new standards are not designed carefully, regulators could “permanently enshrine” Fannie Mae, Freddie Mac and other government housing entities “as the only large-scale source of mortgage credit in our country,” Corker said in his letter.
The QRM rule is being developed by the Federal Deposit Insurance Corp, Department of Housing and Urban Development, Office of the Comptroller of the Currency, Securities and Exchange Commission, Federal Reserve and Federal Housing Finance Agency.
“The problem with the current proposal, Corker said, is that the QRM rule would also exempt loans backed by government-controlled Fannie Mae and Freddie Mac. That would likely mean lenders would only make loans that could be sold to Fannie, Freddie or the Federal Housing Administration, and would push private capital out of the U.S. mortgage market, he said.”
This is a red herring. The GSEs are winding down their own portfolios. The money going to ABS pools backed by the GSE guarantees is private money.
Didn’t anyone see “Jurassic Park” – and recall Dr. Ian Malcom’s great line: “Life finds a way…” These rules are already being looked at by an army of lawyers who will discover loopholes large enough for any lender to weasle through. Compensation rules were changed in 2010, but there are many companies out there willing to overpay their LO’s because they found away through what were supposed to be ironclad rules. Some Hedgies are considering private money lending with “A” paper terms for “B” quality buyers (accepting high ratios primarily at this point). They are chasing yield at this point in time more than anything else and are bound and determined to originate paper that has a better return than FN/FR/FHA loans even with the existing thin prohibitions against alternative financing schemes.
We’ve yet to hear the Greek chorus of realtors, wailing and gnashing their teeth against any change in the loose underwriting standards of today. Yes, it takes an amazon forest worth of paper to get a loan, but when FHA allows 600 FICO’s and 51% debt to income ratios, and Agency loans are running up to 50% DTI with the right factors and an AUS approval, underwriting standards are still very slippery today despite what has been said out there. Don’t expect one of the largest lobby groups out there to stand by as these rules are implemented.
Think of this exercise as a game of “Whack-A-Mole”. The regulators might hit something on the head over here, but right away someone comes up with another way around it over there. There may be a lull in financial innovation from these upcoming rules, but nothing in the changes that will still the monsters beating heart for good.
Thanks for your insights. I like your “Whack-A-Mole” analogy. The search for loopholes will go on and on. I think that’s what I like the most about the threat of consumer lawsuits as the incentive to keep lenders in line. Borrowers will kiss their loan agents and thank them at the closing table for a toxic mortgage, but the moment they get in trouble, they were victims of predatory lending with an army of lawyers behind them. The solid and credible threat of borrower litigation will not go away either, and with armies of lawyers on both sides, there probably will be someone to whack that mole back. There will certainly be a lawyer willing to take a fee to try.
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