Since Congress enacted the Dodd-Frank financial reform legislation, financial institutions have been trying to soften some of its sharper edges.
The “skin-in-the-game” provision, requiring mortgage lenders to retain at least 5 percent of the risk in the loans they originate, has been a particular concern.
Industry lobbyists have been urging regulators, who are drafting the implementing rules, to broadly define the “qualified residential mortgages (QRMs) that will be exempt from the risk-retention requirement. But it appears they may be losing that battle.
New York Times columnist Floyd Norris reported recently that regulators appear to be resisting industry arguments that a narrow exclusion will limit the availability of credit and increase its cost, closing home purchase doors to all but the most affluent borrowers. They also appear unlikely to adopt the flexible standards lenders have suggested, applying risk retention rules only to loans with negative amortization or balloon payment features.
“It now appears regulators will not go nearly that far,” Norris reported, citing Congressional sources who predict that the rules will set a minimum 20 percent down payment for qualified mortgages, including some adjustable rate loans under the QRM umbrella, but with strict limits on the adjustments allowed.
Industry efforts to secure a more flexible carve-out were set back considerably when John Gibbons, executive vice president at Wells Fargo Home Mortgages, publicly endorsed the risk-retention requirement as sensible and necessary. “You gain confidence when you go to a restaurant and see an owner is eating his own food,” he said during one Congressional hearing.
Some state lawmakers are proposing to go even further than federal regulators in the effort to prevent the underwriting lapses that contributed to the mortgage meltdown. The Oregon Legislature is considering a proposed bill that would require lenders to hold on to the loans they originate and the servicing rights related to them for at least five years.
The Oregon Association of Mortgage Professionals is opposing the measure, arguing that it would be devastating for borrowers and lenders.
“This is another bill intended to inaccurately attack non-depository lending institutions in hopes of improving quality to the consumer, which, if passed, would drastically create the exact opposite result,”
Industry executives say they don’t think the legislation stands much chance of winning approval, simply because, as one mortgage broker told reporters, “it is so outlandish, it can’t pass.”
CREDIT CARD PRAISE
Credit card issuers got praise from an unexpected source recently – Elizabeth Warren, the special assistant to the President responsible for structuring the new Consumer Financial Protection bureau, reported that the new regulations designed to improve consumer disclosures and curb abusive credit card practices have been more effective than anticiapted.
“Much of the industry has gone further than the law requires,” Warren said at a recent conference, noting that many have eliminated over-limit fees entirely, even though the rules allow those fees, subject to some restrictions and advance notice requirements.
Warren cited the results of a CFPB study, which found that consumers have noticed the improved disclosures and are benefiting from them, by making larger payments or reducing credit card spending. “Lenders in the industry deserve credit for moving in the right direction,” she added.
A study by the Center for Responsible Lending also concluded that the new credit card rules have benefited consumers without limiting their access to the credit or increasing its costs, as industry executives had warned. Among the major findings:
- The rules have reduced the difference between stated and actual card rates, “resulting in more transparent pricing.
- Adjusting for the effects of the downturn, the cost of credit card debt has remained level.
- Direct mail offers have been extended ‘at a volume and pace consistent with economic conditions.”
“People mistake higher rates on mail solicitations and other offers in the last year as a price hike,” Josh Frank, senior researcher for CRL land the author of the study, said. “But the facts show that offers now just more closely match actual costs. Prices have been level, and borrowers have a much better picture of what those prices are,” he added.
Banking industry executives contend that the studies by CRL and the CFPB understate the negative impact of the new rules, by failing to consider, among other factors, the increase in annual fees and higher rates many cards now carry – charges that may offset other savings.
The rules have “ushered in a new era of empowerment” for consumers, by increasing transparency and improving protections, the association acknowledged in a press statement. “[But] it is also clear that these benefits have not come without trade-offs, including a reduction in available credit for many consumers and increased prices. Recent data indicates that the cost of credit and its availability have been negatively impacted by the Act,” the association noted, “particularly for working class Americans, many of whom have been edged out of the marketplace or are facing higher upfront rates and tougher credit terms.”
DISPARATE IMPACT
Few have escaped the impact of the economic downturn, but some have been hit harder than others, and minorities, at least in real estate terms, appear to have been hit hardest of all.
“Although the recession hurt all Americans its toll was especially severe among African-Americans and Hispanics,” according to a recent article in the Washington Post, that minorities “were more likely to lose jobs, face foreclosures and lose health insurance coverage.” The article noted the results of a recent poll, which found that minorities are less likely than whites to have retirement savings of any kind; only one in four blacks and one in six Hispanics responding to the poll said they owned stocks, bonds, or mutual funds.
A separate study found that minorities have also been affected disproportionately by the tighter credit standards adopted in the wake of the housing market collapse. Mortgage lending to blacks and Hispanics has plunged by 62 percent compared with a 17 percent decline for whites, according to a recent study by ComplianceTech, an Arlington, VA-based company that provides fair lending consulting services to financial institutions.
The study blames the disparate impact largely on the high concentration of subprime mortgages approved for minorities during the boom, creating a “dual mortgage market” in which minorities have less access to prime credit today.
“The higher cost for mortgage credit translates into less money for basic necessities,” Maurice Jourdain-Earl, founder of ComplianceTech and the study’s author, notes. “The higher cost for mortgage credit also translates into African-Americans and Latinos having lower home-ownership rates and lower opportunities to build wealth, lower educational achievement and higher unemployment.”
Mortgage industry executives haven’t commented directly on the study, except to suggest that it did not adequately control for a variety of non-discriminatory factors that could account for differences in approval and denial rates for minority borrowers. Consumer advocates agree that tighter credit has affected minorities disproportionately, although, they acknowledge, the reasons aren’t entirely clear. What is clear, U.S. Rep. Maxine Waters (D-CA), says, is the need to address the issue.
“Analyzing the question of access to mortgage credit is significant because of the central role home ownership plays in building personal wealth,” Waters said in a press statement. She cited a recent study by economists at Brandeis University, which found that “the wealth gap between African-Americans and whites …has quadrupled over the last 23 years.”
RECOUNT?
The National Association of Realtors documented the housing market’s dizzying decline, as home sales and prices have plunged during the downturn. It turns out that the association’s dismally figures may actually have understated conditions.
CoreLogic estimates that home sales declined by close to 12 percent in 2010 – more than twice the NAR’s estimate of a 5 percent reduction. Based on those figures, CoreLogic puts the current inventory of unsold homes at 16 months – a much bleaker picture than the NAR’s estimate of a 9.5-month overhang.
The problem, according to CoreLogic, is that the NAR has been using an out-dated calculation to adjust for the Multiple Listing Services that don’t report their sales figures. The calculation doesn’t reflect the consolidation of MLS organizations over the past several years and the increase in sales that occur outside the system. As a result, CoreLogic analysts contend, the NAR adds more sales to its totals than it should.
If CoreLogic is correct, the housing downturn has been deeper and recovery is likely to take considerably longer than the NAR’s figures indicate.
The real problem is the failure to account for fundamental changes in the housing market, Sam Khater, senior economist for CoreLogic, told Inman News. “Any time you’ve got fundamental changes in the market, it’s going to cause market data to go haywire,” he said. “It’s important to have data from a wide range of sources, to see e the truth lies in between them.”
NAR officials told Inman that they will be making planned benchmark revisions in their data this year, but they expect any “data drift” issues to be “relatively minor.”
UPWARD TREND
Even without the conservative underwriting standards regulators are considering for their definition of “qualified” mortgages under the new risk-retention rule, down payments for home loans have been increasing steadily over the last two to three years.
The median down payment in nine major U.S. cities increased to 22 percent (for conventional loans), according to a study by Zillow.com, conducted for the Wall Street Journal. That trend represents a sharp departure from the low- and no-down payment mortgages that became common during the housing boom and, most agree, contributed significantly to the bust that followed it. The median down payment fell steadily from around 20 percent in the’90s to a low of 4 percent in the fourth quarter of 2006, the Zillow study found.
Higher down payments – meaning more “skin-in-the-game” for borrowers ¾ combined with tighter underwriting standards will improve credit quality and reduce default risks, but those measures will also reduce access to credit, industry executives agree.
“There is no question that the tightening of criteria prices households out of the market,” Stan Humphries, an economist for Zillow, told the WSJ. “The middle ground buyer is the one having to fight to get a conventional mortgage,” he added.
Some industry executives and regulators – FDIC Chairman Sheila Bair among them, are pushing for higher down payment requirements; others fear the negative impact on the housing market as the pool of eligible mortgage borrowers shrinks.
“Lower leverage means less risk for banks,” David Berson, chief economist of the PMI Group told WSJ. But it also means “less activity. A balance between the two is best,” he suggested.
A Federal Reserve economist has suggested that the federal government consider offering down payment assistance to buyers as a means of reducing lending risks and encouraging “sustainable” home ownership, without undercutting home buying activity.
“Historically, [home buying] assistance has taken the form of either interest rate or down payment subsidies,” O. Emre Ergungor, notes in a recent study published by the Federal Reserve Bank of Cleveland. “But recent research suggests that down-payment subsidies are much more effectively. They create successfully homeowners – homeowners who keep their homes – at a lower cost,” he concluded.
