Mortgage bankers and Realtors are warning that it could become even harder for borrowers to qualify for a home loan early next year as the industry faces what some are calling a “perfect storm” of new rules.
Regulators are preparing to release the language of two rules taking effect in January to set standards for non-abusive lending and require banks to hold a slice of risky mortgages on their books. In addition, U.S. banking overseers must also complete new capital standards mandated in the international Basel III accords next year.
The industry’s main worry is that the rules, coming almost simultaneously, may overlap or conflict, creating what National Association of Realtors President Maurice “Moe” Veissi called a perfect storm of regulation.
“There’s this intersection of policies that are absolutely not being considered by this massive array of institutions, all involved in deciding the future of homeownership and rental opportunity,” said David Stevens, president of the Mortgage Bankers Association, at the recent annual conference of the association in Chicago.
Mortgage credit is already tight. U.S. regulators including Federal Reserve Chairman Ben S. Bernanke and Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, have expressed concern that banks are preventing qualified borrowers from taking advantage of interest rates driven to record lows by the Fed’s monetary policy called “quantitative easing.”
James Parrott, a member of President Barack Obama’s National Economic Council who advises on housing issues, told mortgage bankers that the administration is still concerned.
“How do you correct for what happened in 2005, but not do so in such a way that we’re stuck where we are today, where there’s not nearly enough liquidity?” Parrott said at the MBA conference. “We clearly haven’t threaded the needle yet.”
Borrowers whose loans closed in September had an average credit score of 750, which would place them in the top 40 percent of Americans, according to Ellie Mae, a Pleasanton, Calif., company that provides automation solutions for the mortgage industry. Those buyers made down payments averaging 22 percent.
The housing market has been gaining steam in recent months, with online real-estate listing firm Zillow Inc. reporting that home prices jumped 1.3 percent in the third quarter, the largest gain since 2006. At the same time, about 28 percent of existing-home sales are all-cash transactions as investors snap up distressed inventory.
Consumer advocates, who question whether high credit standards are really just a response to regulation, say the industry’s fears are overblown.
“All of these rules are reactions to the failure to regulate at all over the last decade,” said Alys Cohen, a staff attorney at the National Consumer Law Center. “The rules don’t need to be in lockstep in order to provide reasonable oversight.”
The next few months will usher in a new implementation phase of the government response to the financial crisis of 2008 as regulators begin to unveil exactly how they will set limits intended to prevent another housing bubble.
The Consumer Financial Protection Bureau is briefing other regulators about its plans for the qualified mortgage rule, which will require lenders to determine borrowers’ ability to repay loans. If banks meet the standards for a non-abusive mortgage set in the rule, they’ll be offered a degree of legal protection.
Lenders say they’ll probably make only the safest mortgages as defined by the rule, commonly known as the QM regulation, after it is issued.
“QM will, in my mind, largely define the market,” said Michael J. Heid, president of Wells Fargo Home Mortgage, at the MBA conference.
The CFPB, which faces a Jan. 21 deadline, told regulators it is considering issuing a rule that would offer the strongest legal protections for loans to borrowers spending less than 43 percent of their income to repay debt. That would include about 80 percent of government-backed loans, according to data from the Federal Housing Finance Agency.
Once the QM rule is set, regulators including the Fed, Federal Deposit Insurance Corp. and Securities and Exchange Commission will write a second measure with a similar name: the qualified residential mortgage rule. The QRM rule will require lenders to retain stakes in risky mortgages when they package them into securities.
At the same time, regulators have proposed a set of standards under the Basel III agreement that would require banks to hold more capital against risky mortgages. The agencies are going to complete the language and phase in the rule beginning next year.
The MBA recently wrote a letter urging regulators to abandon their Basel III proposal on the grounds that it would hurt lending.
Consumer advocates say they agree that the rules are complex and must be carefully calibrated.
However, they say, the mortgage industry needs to be more judicious with its complaints.
“Unfortunately, the mortgage lobby is the boy who cried wolf,” Julia Gordon, director of housing finance and policy at the Center for American Progress, said in an email. “They fight any and every regulation and routinely insist that the fill in the blank rule will increase the cost of credit or reduce access to credit, which makes it difficult for the regulators to figure out when that’s actually true.”
Federal Financial Analytics, a Washington-based consulting firm, has released a study analyzing possible unintended consequences of overlapping mortgage rules.
Karen Shaw Petrou, author of the study commissioned by the Securities Industry and Financial Markets Association, said the rules will shut out less-than-perfect borrowers.
Parrott, the Obama administration official, said the rules could always be changed if they don’t work.
“Given where the market is today, I’m actually optimistic that we can land these regulations in a pretty good place,” Parrott said. “I think the objective everybody shares is a more stable, healthy system going forward that maintains broad access to credit.”