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Lenders Worry Mortgage Rules will Overlap

dispatch.comNov 15, 2012

By Clea Benson

WASHINGTON — Mortgage bankers and Realtors warn that it could become even harder for borrowers to qualify for a home loan early next year as the industry faces a collision of new rules.

Regulators are preparing to release the language of rules taking effect in January that set standards for non-abusive lending and require banks to hold a slice of risky mortgages on their books.

U.S. banking overseers also had expected the requirement to complete new capital standards mandated in the international Basel III accords next year, but late last week, the Basel III accords were delayed, with no new start date identified.

The industry’s main worry has been that the rules, coming almost simultaneously, might 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,” David Stevens, president of the Mortgage Bankers Association, said in a speech recently at the association’s annual conference in Chicago.

Mortgage credit is already tight, some industry observers say. Regulators including Federal Reserve Chairman Ben Bernanke and Shaun Donovan, secretary of the 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 “quantitative easing” strategy.

James Parrott, a member of President Barack Obama’s National Economic Council who advises on housing issues, told mortgage bankers that the administration is 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 bankers 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 interest rate on a 30-year fixed-rate mortgage averaged 3.37 percent in the week that ended on Oct. 18, according to Freddie Mac.

The housing market has been gaining steam in recent months, with the online real-estate listing firm Zillow Inc. reporting last week that home prices jumped 1.3 percent in the third quarter, the largest gain since 2006. At the same time, 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 lock step 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 is the big one,” said Marianne Collins, executive director of the Ohio Mortgage Bankers Association.

The industry is anxiously awaiting the Consumer Financial Protection Bureau’s decision on whether to adopt a provision called “rebuttable presumption,” which would grant more leverage to borrowers who default on a loan to claim that the lender erroneously made the loan.

“If the CFPB goes that way, you’ll see a lot of lenders exit the market,” Collins said. “And the fewer lenders there are, the less competition there will be and the higher the costs to the consumers.”

The CFPB, which faces a Jan. 21 deadline, told regulators recently 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. A deadline for public feedback on the proposal passed, and on Friday, federal regulators delayed the implementation of the rules.

Coleman Clougherty, CEO and president of Farmers Citizens Bank based in Bucyrus, Ohio, said the capital requirements would make it more difficult to make loans that aren’t traditional 30-year, 20-percent-down loans.

“A lot of people are opting for shorter balloon loans now, especially first-time homebuyers who think they’re only going to be in the house three or five or seven years. They’re opting for the balloon loans, and those have significantly more capital requirements.”

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 (any 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, released a study recently 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.

“Regulators in every cubicle at all of the agencies are tightening each of their rules so drastically that the combination of all of them will stifle a return of private capital to securitization, blocking constructive change at the GSEs to end their conservatorship and limiting credit availability for all but the most gold-plated borrower,” Petrou said in an e-mail.

Parrott, the Obama administration official, said the rules could 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.”

Dispatch reporter Jim Weiker contributed to this story.

Back to November 2012 Archive

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