September 25, 2015
CFPB Mortgage Market Rules
Law360 quoted me in Questions Remain Over CFPB Mortgage Rules’ Market Effects (behind a paywall). The story highlights the fact that the jury is still out on exactly what a mature, post-Dodd-Frank mortgage market will look like. As I blogged yesterday, it seems like the new regulatory regime is working, but we need more time to determine whether it is providing the optimal amount of sustainable credit to households of all income-levels. The story opens,
Despite fears that a set of Consumer Financial Protection Bureau mortgage rules that went into effect last year would cut off many black, Hispanic and other borrowers from the mortgage market, a recent government report showed that has not been the case.
Indeed, the numbers from the Federal Financial Institutions Examinations Council’s annual Home Mortgage Disclosure Act annual report showed that the percentage of black and Hispanic borrowers within the overall mortgage market actually ticked up in 2014, even as the percentage of loans those two communities got from government sources went down.
However, it may be too early to say how the CFPB’s ability-to-repay and qualified-mortgage rules are influencing decisions by lenders and potential borrowers as the housing market continues to recover from the 2008 financial crisis, experts say.
“Clearly, there’s a story here, and clearly there’s a story from this 2014 data,” said David Reiss, a professor at Brooklyn Law School. “But I don’t know that it’s that QM and [ability to repay] work.”
The CFPB was tasked with writing rules to reshape the mortgage market and stop the subprime mortgage lending — including no-doc loans and other shoddy underwriting practices — that marked the period running up to the financial crisis.
Those rules included new ability-to-repay standards, governing the types of information lenders would have to collect to have a reasonable certainty that a borrower could repay, and the qualified mortgage standard, a class of mortgages with strict underwriting standards that would be considered the highest quality.
The rules took effect in 2014, after the CFPB made changes aimed at easing lenders’ worries over potential litigation by borrowers should their QMs falter.
Even with those changes, there were worries that black, Hispanic and low-income borrowers could be shut out of the market, as lenders focused only on making loans that met the QM standard or large loans, known as jumbo mortgages, issued primarily to the most affluent borrowers.
According to the HMDA report, that did not happen in the first year the rules were in effect.
Both black and Hispanic borrowers saw a small uptick in the percentage of overall mortgages issued in 2014.
Black borrowers made up 5.2 percent of the overall market in 2014 compared with 4.8 percent in 2013, when lenders were preparing to comply with the rule, and 5.1 percent in 2012, the report said. Latino borrowers made up 7.9 percent of the overall market in 2014 compared with 7.3 percent in 2013 and 7.7 percent in 2012, the federal statistics show.
And the percentage of the loans those borrowers got from government-backed sources like the Federal Housing Administration, a program run by the U.S. Department of Housing and Urban Development targeting first-time and low- to middle-income borrowers, the U.S. Department of Veterans Affairs and other agencies fell.
Overall, 68 percent of the loans issued to black borrowers came with that direct government support in 2014, down from 70.6 percent in 2013 and 77.2 percent in 2012, the HMDA report found. For Hispanic borrowers, 59.5 percent of the mortgages issued in 2014 had direct government support, down from 62.8 percent in 2013 and 70.7 percent in 2012.
For backers of the CFPB’s mortgage rules, those numbers came as a relief.
“We were definitely waiting with bated breath for this,” said Yana Miles, a policy counsel at the Center for Responsible Lending.
To supporters of the rules, the mortgage origination numbers reported by the federal government showed that black and Hispanic borrowers were not being shut out of the mortgage market.
“Not only did we not see lending from those groups go to zero, we’re seeing a very, very small baby step in the right direction,” Miles said. “We’re seeing opposite evidence as to what was predicted.”
And in some ways, the CFPB has written rules that met the goal of promoting safe lending following the poor practices of the housing bubble era while still giving space to lenders to get credit in the market.
“We have a functioning mortgage market,” Reiss said.