Tag Archives: Qualified Mortgage

Dodd-Frank Repeal Unappealing for Homeowners

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Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Enlarging The Credit Box

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The Hill published my column, It’s Time to Expand The Credit Box for American Homebuyers. it reads,

The dark, dark days of the mortgage market are far behind us. The early 2000s were marked by a set of practices that can only be described as abusive. Consumers saw teaser interest rates that morphed into unaffordable rates soon thereafter, high fees that were foisted upon borrowers at the closing table and loans packed with unnecessary and costly products like credit insurance.

After the financial crisis hit, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The law included provisions intended to protect both borrowers and lenders from the craziness of the previous decade, when no one was sufficiently focused on whether loans would be repaid or not.

The Consumer Financial Protection Bureau (CFPB) promulgated the rules that Dodd-Frank had called for, like the ability-to-repay and qualified mortgages rules. These rules achieved their desired effect as predatory mortgage loans all but disappeared from the market.

But there were consequences, and they were not wholly unexpected. Mortgage credit became tighter than necessary. People who could reliably make their mortgage payments were not able to get a mortgage in the first place. Perhaps their income was unreliable, but they had a good cushion of savings. Perhaps they had more debts than the rules thought advisable, but were otherwise frugal enough to handle a mortgage.

These people banged into the reasonable limitations of Dodd-Frank and could not get one of the plain vanilla mortgages that it promoted. But many of those borrowers found out that they could not go elsewhere because lenders avoided making mortgages that were not favored by Dodd-Frank’s rules.

Commentators were of two minds when these rules were promulgated. Some believed that an alternative market for mortgages, so-called non-qualified mortgages, would sprout up beside the plain vanilla market, for good or for ill. Others believed that lenders would avoid that alternative market like the plague, again for good or for ill. Now it looks like the second view is mostly correct and it is mostly for ill.

The Urban Institute Housing Finance Policy Center’s latest credit availability index shows that mortgage availability remains weak. The center concludes that even if underwriting loosened and current default risk doubled, it would remain manageable given past experience.

The CFPB can take steps to increase the credit box from its current size. The “functional credit box” refers to the universe of loans that are available to borrowers. The credit box can be broadened from today’s functional credit box if mortgage market players choose to thoughtfully loosen underwriting standards, or if other structural changes are made within the industry.

The CFPB in particular can take steps to encourage greater non-qualified mortgage lending without needing to amend the ability-to-repay and qualified mortgages rules. CFPB Director Richard Cordray stated earlier this year that “not a single case has been brought against a mortgage lender for making a non-[qualified mortgage] loan.”

But lenders have entered the non-qualified mortgage market very tentatively and apparently need more guidance about how the Dodd-Frank rules will be enforced. Moreover, some commentators have noted that the rules also contain ambiguities that make it difficult for lenders to chart a path to a vibrant non-qualified mortgage line of business. Lenders are being very risk-averse here, but that is pretty reasonable given that some violations of these rules can result in criminal penalties, including jail time.

The mortgage market of the early 2000s provided mortgage credit to too many people who could not make their monthly payments on the terms offered. The pendulum has now swung. Today’s market offers very few unsustainable mortgages, but it fails to provide credit to some who could afford them. That means that the credit box is not at its socially optimal size.

The CFPB should make it a priority to review the regulatory regime for non-qualified mortgages in order to ensure that the functional credit box is expanded to more closely approximate the universe of borrowers who can pay their mortgage payments month in, month out. That would be good for those individual borrowers kept out of the housing market. It would also be good for society as a whole, as the financial activity of those borrowers has a multiplier effect throughout the economy.

The State of Mortgage Lending

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The American Bankers Association has issued its 23rd Annual ABA Residential Real Estate Survey Report for 2016. There is a lot to unpack in its findings. The key ones are

  • About 86 percent of loans originated by banks were QM [Qualified Mortgage] compliant compared to 90 percent in 2014, likely because more banks are adjusting underwriting criteria to target selected non-QM loan opportunities
  • Despite increased non-QM lending, approximately 72 percent of respondents expect the current ATR [Ability to Repay]/QM regulations will continue to reduce credit availability – down from nearly 80 percent in 2014
  • Relatedly, the percentage of banks restricting lending to QM segments dropped from 33 percent to 26 percent, and those providing targeted non-QM lending rose to 54 percent from 48 percent
  • High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards
  • The percentage of single family mortgage loans made to first time home buyers continues to climb to a new all-time high as it represented 15 percent of loans underwritten in 2015 – up from 13 percent in 2013 and 14 percent in 2014
  • Approximately half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative (4)

The most important finding is that banks are becoming more and more comfortable with non-QM loans. I had thought that this would happen more quickly than it has, but it now seems that the industry has become comfortable with the ATR/QM regs.

There are good non-QM loans — for good borrowers with quirky circumstances. And there are bad non-QM loans — for bad borrowers generally. As a result, the finding that “High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards” could cut both ways. There are some non-QM borrowers with high debt-to-income [DTI] ratios who are good credit risks.  Think of the doctor about to finish a residency and enter private practice. And there are some non-QM borrowers with high DTI who are bad credit risks. Think of the borrower with lots of student loan, credit card and auto debt. Unfortunately this survey does not provide any insight into what types of non-QM loans are being originated. That is a big limitation of this survey.

The finding that about “half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative” is also ambiguous. Is a negative impact a reduction in the number of loan originations? But what if those loans were likely to be unsustainable because of the high DTI ratios of bad borrowers? Is it so bad for the ATR/QM regulations to have kept those loans from having been made in the first place? I don’t think so. It is hard to tell what is meant by this survey question as well. Perhaps the ABA could tighten up its questions for next year’s survey.

Did Dodd-Frank Make Getting a Mortgage Harder?

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Christopher Dodd

Christopher Dodd

Barney Frank

 

 

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The short answer is — No. The longer answer is — No, but . . .

Bing Bai, Laurie Goodman and Ellen Seidman of the Urban Institute’s Housing Finance Policy Center have posted Has the QM Rule Made it Harder to Get a Mortgage? The QM rule was originally authorized by Dodd-Frank and was implemented in January of 2014, more than two years ago. The paper opens,

the qualified mortgage (QM) rule was designed to prevent borrowers from acquiring loans they cannot afford and to protect lenders from potential borrower litigation. Many worry that the rule has contributed to the well-documented reduction in mortgage credit availability, which has hit low-income and minority borrowers the hardest. To explore this concern, we recently updated our August 2014 analysis of the impact of the QM rule. Our analysis of the rule at the two-year mark again finds it has had little impact on the availability of mortgage credit. Though the share of mortgages under $100,000 has decreased, this change can be largely attributed to the sharp rise in home prices. (1, footnotes omitted)

The paper looks at “four potential indicators of the QM rule’s impact:”

  1.  Fewer interest-only and prepayment penalty loans: The QM rule disqualifies loans that are interest-only (IO) or have a prepayment penalty (PP), so a reduction in these loans might show QM impact.
  2. Fewer loans with debt-to-income ratios above 43 percent: The QM rule disqualifies loans with a debt-to-income (DTI) ratio above 43 percent, so a reduction in loans with DTIs above 43 percent might show QM impact.
  3. Reduced adjustable-rate mortgage share: The QM rule requires that an adjustable-rate mortgage (ARM) be underwritten to the maximum interest rate that could be charged during the loan’s first five years. Generally, this restriction should deter lenders, so a reduction in the ARM share might show QM impact.
  4. Fewer small loans: The QM rule’s 3 percent limit on points and fees could discourage lenders from making smaller loans, so a reduction in smaller loans might show QM impact. (1-2)

The authors find no impact on on interest only loans or prepayment penalty loans; loans with debt-to-income ratios greater than 43 percent; or adjustable rate mortgages.

While these findings seem to make sense, it is important to note that the report uses 2013 as its baseline for mortgage market conditions. The report does acknowledge that credit availability was tight in 2013, but it implies that 2013 is the appropriate baseline from which to evaluate the QM rule. I am not so sure that this right — I would love to see some modeling that shows the impact of the QM rule under various credit availability scenarios, not just the particularly tight credit box of 2013.

To be clear, I agree with the paper’s policy takeaway — the QM rule can help prevent “risky lending practices that could cause another downturn.” (8) But we should be making these policy decisions with the best possible information.

Exotic Mortgage Increase

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DepositAccounts.com quoted me in 10 Things You Might See From Your Bank in 2016. It reads, in part,

It’s that time of year when experts pull out the crystal ball and start talking about “what they see”. Banking pros are no exception. When it comes to 2016, they expect plenty; change is on the horizon. Here’s a look at some of them.

*     *     *

4. Exotic mortgages increase

David Reiss, a professor at Brooklyn Law School, specializing in real estate believes that banks are going to get more comfortable with originating more exotic mortgages as they have more experience with the mortgage lending rules that were prescribed in Dodd-Frank. These rules, such as the Qualified Mortgage Rule and Ability To Repay Rule, encourages lenders to make “plain vanilla” mortgages. But there are opportunities to expand non-Qualified Mortgages, so “2016 may be the year where it really takes off,” says Reiss. The bottom line? “This means consumers who have been rejected for plain vanilla mortgages, may be able to get a non-traditional mortgage. This is a two-edge[d] sword. Access to credit is great, but consumers will need to ensure that the credit they get is sustainable credit that they can manage year in, year out.”

CFPB Mortgage Market Rules

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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.

Mortgage Market, Hiding in Plain Sight

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David Jackmanson

I blogged about the Center for Responsible Lending’s take on the 2014 Home Mortgage Disclosure Act (HMDA) data yesterday.  The mere act of aggregating this data reveals so much about the state of the mortgage market. Today I am digging into it a bit on my own.

There is a lot of good stuff in the analysis of the HMDA data released by the Federal Financial Institutions Examination Council (FFIEC). I found the discussion of the effects of the Qualified Mortgage and Ability to Repay rules most interesting:

The HMDA data provide little indication that the new ATR and QM rules significantly curtailed mortgage credit availability in 2014 relative to 2013. For example, despite the QM rule that caps borrowers’ DTI ratio for many loans, the fraction of high-DTI loans does not appear to have declined in 2014 from 2013. However, as discussed in more detail later, there are significant challenges in determining the extent to which the new rules have influenced the mortgage market, and the results here do not necessarily rule out significant effects or the possibility that effects may arise in the future. (4)

This analysis is apparently reacting to those who have claimed that the new regulatory environment is restricting lending too much. The mortgage market is generally too complicated for simple assertions like “new regulations have restricted credit too heavily” or “not enough” There are so many relevant factors, such as changes in the interest rate environment, the unemployment rate and the change in the cost of housing, to be confident about the effect of the change in regulations, particularly over a short time span. But the FFIEC analysis seems to have it right that the new regs did not have such a great impact when they went into effect on January 1, 2014, given the similarities in the 2013 and 2014 data. This reflects well on the rule-writing process for the QM and ATR rules. Time will tell whether and how they will need to be tweaked.

While the discussion of the new rules was comforting, I found the discussion of FHA mortgages disturbing: “The higher-priced fraction of FHA home-purchase loans spiked from about 5 percent in early 2013 to about 40 percent after May 2013 and continued at monthly rates between 35 and 52 percent through 2014, for an annual average incidence of about 44 percent in 2014.” (15) Higher-priced first-lien loans are those with an APR that is at least one and a half percentage points higher than the average prime offer rate for loans of a similar type.

The FHA often provides the only route to homeownership for first-time, minority and lower-income homebuyers, but it must be monitored to make sure that it is insuring mortgages that homeowners can pay month in and month out. If FHA mortgages are not sustainable for the long run, they are likely to do homebuyers more harm than good.