Balancing Consumer Protection and Access to Credit

S&P posted U.S. RMBS Roundtable: Originators, Aggregators, and Counsel Discuss New Qualified Mortgage Rules. In summarizing the roundtable, S&P notes that

The ability-to-repay rule, ostensibly to prevent defaults and another housing crisis, is still very much open to interpretation. To that end, Standard & Poor’s Ratings Services recently held a private roundtable with several market participants. The confidential discussion offered the attendees an opportunity to share their views and interpretations of these rules, offer opinions on how to operate efficiently within the scope of the rules, and highlight perceived conflicts the rules still present.

In our view, the discussion identified some common themes, notably:

    • Most originators will focus on QM-Safe Harbor loans to avoid liability and achieve the best execution.
    • Many originators will also find attractive opportunities to originate non-QM loans.
    • Non-agency originations of QM or non-QM loans will continue to focus on super-prime borrowers as lenders find that the best defense is to limit the potential for default.
    • The documentation standards used by originators will be the key to compliance with the rule. (2)

There are a lot of interesting tidbits in this document, including speculation about the role of technology in the brave new world of mortgage lending.  The summary ended on a guardedly optimistic note:

While the rule leaves significant room for interpretation, originators generally felt that the final rule to be implemented in January 2014 is better than expected. They expressed hope that regulators will be vigilant in pursuing violations that are reasonable. Originators still see challenges for originations of non-QM loans, but they don’t believe they are insurmountable, and many expect that non-QM loans will be represented in origination volume throughout 2014. The challenges that remain are the market’s pricing of QM safe harbor, rebuttable presumption, and non-QM loans; required credit enhancement levels; the effects of risk retention rules, which have yet to be finalized; and the ultimate costs associated with the assignee liability provisions in the rule. (7)

If these industry participants are right, it will look like regulators did a pretty good job of balancing consumer protection and access to credit. Let’s hope!

Reiss on Qualified Mortgages and Fair Housing

Law360 ran Banks Fear CFPB Rule Could Spur Fair Lending Fights (behind a paywall) which asked for my thoughts:

banks may be getting a bit ahead of themselves when it comes to worrying about how the fair lending law will work in the qualified mortgage context, said David Reiss, a professor at Brooklyn Law School.

Any mortgage that is purchased by Fannie Mae, Freddie Mac and — key for low-income borrowers — the Federal Housing Administration for seven years after the rules take effect in January will be deemed qualified mortgages. The FHA currently backs around $1.1 trillion worth of mortgages.

Unless the FHA drastically reduces its presence in the market that should cover many of the loans that have banks worried, he said.

The banks are not wrong to flag potential problems that may arise in the future, and the issue of fair lending law bumping up against decisions regarding extending only qualified mortgages is a legitimate potential problem, Reiss said.

It’s simply a bit premature with the federal government’s heavy role in the housing finance market.

“They are predicting a scenario, but there’s a lot that’s going to happen between now and that scenario ever being actualized,” Reiss said.