February 14, 2013
The Wall Street Journal reported (behind its paywall) uncritically on a recently released CoreLogic report about the supposed impact of the new Qualified Mortgage rules issued last month by the CFPB on the mortgage market. The report is very flawed.
The report states that “the issuance of final Dodd-Frank related regulations now underway represent a watershed moment that will impact the size of mortgage market [sic] and performance for many years to come.” (3) In particular, it argues that the new CFPB Qualified Mortgage and Qualified Residential Mortgage rules “remove 60 percent of loans.” (4)
The methodology here is superficially sophisticated, employing a
waterfall approach . . . where loans that do not qualify for QM were sequentially removed. The loan features that do not meet the QM requirements include loans with back-end [Debt To Income] above 43 percent, negative amortizations, interest only, balloons, low or no documentation, and loans with more than a 30 year term. (3)
The report thus implies that the QM regulations will reduce the number of mortgages originated by nearly two thirds. But the report ignores the obvious dynamics that one would find in a well-functioning market. Once certain products are banned (let’s say interest only mortgages), borrowers will have at least three options. First, they can take the path implied by CoreLogic and exit the mortgage market thereby becoming one of the supposedly 60 percent of loans that are “removed” from the market. Or, they can seek a mortgage product that complies with the new rules (perhaps an ARM) that will allow them to buy the home of their choice. Or, they can choose to buy a cheaper house with a mortgage that complies with the rules and is affordable to them. It is very likely that many borrowers will go with the second or third option, resulting in a different but not severely diminished mortgage market.
Yes, the new rules will change the types of mortgages that are available. Yes, loans will be more conservatively underwritten to ensure that they are sustainable. Yes, home prices will need to find a new equilibrium. But no, CoreLogic, the new rules will not destroy the mortgage market.