Tag Archives: regulation

Republicans Issue Report Critical of CFPB’s Regulation of Mortgage Markets

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The staff of the House’s Committee on Oversight and Government Reform issued a report that argues that the CFPB is “predisposed to limit access to credit;”  “will increase regulatory burdens and reduce credit availability;” and has inadequate mechanisms to “detect access to credit impediments.”  As to mortgage markets in particular, it argues that

Lenders are reportedly requiring the highest credit scores in a decade to approve home mortgages, with an average credit score of 737 for borrowers approved for a home loan in 2011.22. The international capital guidelines outlined in the Basel III capital accords have also made mortgage loans less worthwhile for banks. An April 2012 Federal Reserve survey found that 83 percent of banks were less likely to originate a GSE-eligible 30-year fixed-rate mortgage for a borrower with a credit score of 620 and a 10 percent down payment than they were in 2006. Roughly 70 percent of those banks surveyed blamed regulatory and legislative changes for restricting lending. (3-4, footnotes omitted)

It continues,

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the CFPB is currently considering a mortgage rule that would require a lender to verify a borrower’s ability to repay a mortgage unless the loan satisfies the definition of a “qualified mortgage.” According to Frank Keating, CEO of the American Bankers Association, the rule could “make borrowing more expensive and credit less available. Some lenders may leave the market altogether.” The rule could also increase the cost of mortgage lending, reduce consumer choice, and make it harder for consumers to compare mortgage options. If the CFPB is not careful, these rules could make it more difficult – if not impossible – for millions of Americans to purchase homes. (11, footnotes omitted)

The analysis in this staff report strikes me as fundamentally unsophisticated as it does not draw a distinction between sustainable credit and unsustainable credit.  The last bubble was driven by credit that was extended to people who could not repay it.  There is no reason we would want to see a return to those practices.

The question should be — what regulations allow for a healthy mortgage market where careful lenders make loans to creditworthy borrowers?

Levitin and Wachter’s New History of American Housing Finance

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Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance.  The paper provides a history of the development of the housing finance infrastructure in the United States.  It concludes that

[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)

Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper:  “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.”  (30)  As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing.  Personally, I believe it can handle a lot more than we give it credit for.