No Review of Mortgage Lending Reforms?
The President yesterday signaled he is in inclined to slam the door shut on even sensible reforms of the Dodd-Frank mandated mortgage reforms. It looks like we will have to wait for the next President to make legislative adjustments to mortgage reforms. (https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr1210h_20151117.pdf)
HR 1210 (http://thomas.loc.gov/cgi-bin/bdquery/D?d114:1:./temp/~bdYfE2:@@@D&summ2=m&|/home/LegislativeData.php) introduced by Congressman Barr would extend Qualified Mortgage protections to any creditor who holds a mortgage in portfolio. Currently, QM protections are given to institutions with $2 billion or less in assets that originate 500 or fewer mortgages a year and hold the loans in portfolio for at least three years. The precise protections afforded QM loans will be determined by the courts but the basic idea is that if a creditor demonstrates that a loan is a QM loan, then it is protected against lawsuits.
In his statement threatening to veto the bill, President Obama asserts that the bill would “undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards.” True enough, institutions would, for example, be able to extend loans to borrowers without worrying about debt-to-income ratios. In other words, larger institutions would find it easier to make the type of loans that got us into this mess in the first place.
The problem is that the real cause of the reckless underwriting standards that caused the mortgage meltdown was a business model in which mortgages were originated to be sold and bought to be packaged into bonds. No one really cared about credit quality because no one thought they would be the ones holding these ticking time bombs when the ticking stopped. What I like about HR 1210, at least conceptually, is that it seeks to address this core problem by letting the free market determine what risks are appropriate. After all, credit unions and small banks are allowed greater underwriting flexibility because they have a direct stake in making sure loans get repaid. So long as larger institutions are willing to take on the same responsibility and are willing to accept the consequences that come when they make the wrong choices, why shouldn’t they have the same flexibility?
There are many important concepts imbedded in Dodd-Frank but its execution is very much a work in progress. Frankly, I don’t expect the President to chip away at legislation that has emerged for better or worse, mainly for worse, as one of his primary legacies. Hopefully, the next Administration will be more willing to reexamine what has been done in the name of a safer mortgage market. I just hope two years isn’t too long a wait.