Home lenders are set to mark a major victory in watering down a major mortgage regulation, but industry officials don’t expect it to ease super-tight credit conditions or to significantly boost the housing market.
Although the industry prevailed on the mortgage rule, lenders remain worried about having to buy back faulty loans from government mortgage buyers Fannie Mae and Freddie Mac, and, even more importantly, the threat of future litigation over loans they make.
Three agencies voted Tuesday to finalize a hotly contested and long-delayed rule that requires lenders to maintain a 5 percent stake in any loans that are bundled into securities and sold to investors, a provision meant to ensure that banks and other mortgage lenders retain “skin in the game.” The rule, mandated by the 2010 Dodd-Frank financial reform law, includes an exception for home loans that meet certain specifications standards, known as qualified residential mortgages.
When the rule was proposed in 2011, the definition of a qualified residential mortgage included several strict terms, including a 20 percent down payment. But after home lenders protested, the six regulatory agencies tasked with writing the rule last year proposed simply setting it equal to the requirements for a safe mortgage written in a separate rule by the Consumer Financial Protection Bureau, which does not include a mandatory down payment.
The final rule approved Tuesday by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Housing Finance Agency was “as good as we could get within the confines of the law,” said the American Bankers Association’s Joseph Pigg, a senior vice president in mortgage finance. The Federal Reserve and Securities and Exchange Commission are expected to approve the rule in meetings Wednesday, leaving only the Department of Housing and Urban Development left to vote.
By not requiring a down payment or any other standards beyond what is already required by the CFPB’s rule, Pigg said, the qualified residential mortgage rule finalization is a “positive development” that will allow for more certainty among lenders. “Everyone was waiting to see what was going to happen with this rule, and that uncertainty … was an inhibiting factor” in lending, he said.
“I don’t see that it’s going to do anything to greatly spur the market,” Pigg said, but at least it “removes one big doubt.”
The controversy over the rule stemmed from regulators’ ongoing struggle to balance the need for credit to flow to would-be home buyers against the desire to prevent a return to the prevalence of subprime and poorly documented loans that led to the financial crisis and bailouts.
Among the remaining sources of uncertainty, say lenders, are the policies of housing regulators toward faulty loans sold to the government-sponsored enterprises Fannie Mae and Freddie Mac. Since the housing crash and the subsequent bailout of the two companies, the regulator in charge of Fannie and Freddie has required lenders to repurchase failing loans sold to them on the grounds that the loans’ paperwork was faulty. Fear of losses from such “putbacks” has led many banks to require additional credit standards from borrowers.
Mel Watt, the former Democratic congressman from North Carolina who has run the Federal Housing Finance Agency since January, announced Monday that his agency would provide additional clarity regarding the terms that would be required for loans that wouldn’t be subject to putbacks.
Watt’s assurances “will go a long way” in convincing lenders they have scope to make loans, said Ron Haynie, the executive vice president for mortgage services at Independent Community Bankers of America, but there’s a larger fear still holding lenders back: the fear of litigation.
Many banks have had to settle claims — some stretching into tens of billions of dollars — that they sold Fannie and Freddie fraudulent mortgages in the run-up to the housing crash, leading to concerns on the part of some lenders that they will ultimately be sued for loans that they consider only slightly deficient in terms of documentation or terms.
“If you have a climate of, ‘we know you did something wrong and we’re going to find it and make you pay for it, over and over,’ they add up, it’s an overriding impact,” Haynie said. “It’s what makes lenders very cautious,” he said, comparing the impact to that of the news of the Ebola outbreak. “People are cautious about getting on airplanes or going into crowds,” he said, adding that “you read about it and think, ‘God, what if we made a mistake?’”
Mortgage lending has slowed dramatically in the past year, with loans down by more than 50 percent from 2013 through the first eight months of 2014, according to the Urban Institute.
Part of that reflects weak demand amid the slow economic recovery. But it appears that tight credit conditions also play a role. The median FICO score on new loans is 749, according to the Urban Institute, up from just above 700 before the housing bubble began to inflate.
Home sales also remain weak. The National Association of Realtors reported Tuesday that sales of existing homes rose to 5.2 million in September, down slightly from a year ago and well off pre-crisis levels, although part of the decline represented a decrease in sales of foreclosures. At roughly 500,000 in the latest reading, new home sales also remain at roughly half their pre-bubble level.
The share of Americans who own a home, at 65 percent in the second quarter, is the lowest since 1995, according to the Census Bureau. The homeownership rate peaked above 69 percent during the housing bubble in 2004.
Despite the complex system of programs, regulations and tax code provisions intended to boost homeownership in the U.S., the country ranks only in the middle of the pack among developed nations for homeownership, according to research by Harvard economist John Campbell. While some countries, such as Spain and Hungary, have homeownership rates as high as 90 percent, in others, including Germany and the Czech Republic, only half of households own their homes.
