Key housing policies on the horizon are complex and it’s difficult to explain them in simple terms. This is why we haven’t heard much from the Presidential candidates on housing … until last night’s debate anyway.
Romney mentioned the proposed “Qualified Mortgage” rules that are part of Dodd Frank and overseen by the Consumer Financial Protection Bureau (CFPB). Here’s what he said:
"We have to have regulation on Wall Street. But I wouldn’t designate 5 banks as too big to fail and give them a blank check. That’s one of the unintended consequences of Dodd Frank, it wasn’t thought through properly. We need to get rid of that provision because it’s killing regional and small banks. They’re getting hurt.
Let me mention another regulation in Dodd Frank. You say we were giving mortgages to people who weren’t qualified. That’s exactly right. That’s one of the big reason for the great financial calamity we had.
And so Dodd Frank correctly says we need to have Qualified Mortgages and if you give a mortgage that’s not qualified, there are big penalties. Except they didn’t ever go on and define what a Qualified Mortgage was. It’s been two years. We don’t know what a Qualified Mortgage is yet.
So banks are reluctant to make loans … mortgages … try and get a mortgage these days. It’s hurt the housing market because Dodd Frank didn’t anticipate putting in place the kinds regulations you have to have. It’s not that Dodd Frank always was wrong with too much regulation. Sometimes they didn’t come out with a clear regulation. I will make sure we don’t hurt the functioning of our marketplace and our businesses cause I want to bring back housing and get good jobs."
This is the most clearly either candidate has articulated Qualified Mortgages, arguably the most important housing policy issue and the reason loans are so hard for consumers to get.
A lot of credit for that clarity goes to Mortgage Bankers Association head David H. Stevens, who said this last night on Twitter:
So what are the Qualified Mortgage/Ability To Repay rules?
Dodd Frank says mortgage lenders, when making loans, must make a reasonable assessment of a consumer borrower’s ability to repay the loan according to its terms.
Seriously, that’s the proposed law: that a lender has to formally approve a borrower.
If it’s determined that a lender didn’t properly assess ability to repay, the lender’s potential liability includes fines, civil liability, class action lawsuits, and more.
Protection from this liability comes if a lender makes a so-called Qualified Mortgage loan. Which is a loan made according to strict and as yet undefined approval parameters, and also the loan must exclude features like: negative amortization, interest-only, balloon payments, loan terms exceeding 30 years, total points over 3%.
So if the lender approves a loan in the most painstaking, highly-documented manner it possibly can (meaning a five-inch-thick file for a couple who have had their same W2 jobs for 10 years, perfect credit, and getting a loan to buy a brand new single family home in the best neighborhood in town) AND the loan excludes the features above, then the lender might have a fighting chance of defending itself from a claim that they didn’t properly assess borrowers’ ability to repay.
Sound grey? It is indeed, which was Romney’s point last night.
This is why loan approvals have been getting stricter, not easier, since Dodd Frank was enacted July 21, 2010. And it’s why even the most qualified consumers say getting a loan feels like death by a thousand paper cuts.
It’s also a huge roadblock to winding down taxpayer supported Fannie and Freddie who buy or guarantee 90% of the country’s mortgages. For a private market to emerge, lenders and investors need definition on what a Qualified Mortgage is.
And that definition will need to be pretty broad for private investors to buy pools of mortgages like Fannie/Freddie do now (which is a critical market function that helps keeps rates low).
Again, this is where people like David Stevens come in. Here’s what he said in a recent Mortgage Banking magazine interview when asked about success stories working with the CFPB on this topic:
"…in terms of proposed rule makings, we’ve been very actively engaged on the Qualified Mortgage proposed rule. And it is my belief that the rule will end up in a much better place as a result of our direct involvement."
On that note, I participated in a policy session last month with Romney and his team, and other industry execs in attendance are also working with the CFPB on this issue. Their take was the same as Stevens’: that the CFPB is listening and they seem to want to do the right thing for housing.
And for what it’s worth, I’m a Democrat. But I’m a retail mortgage banker first. I work with consumers all day everyday, and my career purpose is to help them. Yet these proposals have been hurting my clients, and overly narrow final rules will continue that trend and prevent housing and broader economic recovery.
So I sincerely hope the CFPB is in fact listening.
More to come as this topic is sorted out between now and the end of 2012.
Julian Hebron is San Francisco branch manager for RPM Mortgage, and also runs The Basis Point, a Stocktwits/CNNMoney housing blog.