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InsiderOnline Blog: March 2013

Meet the New Mortgage Boss, Same as the Old

The same bad lending that produced the 2008 mortgage crisis is likely to happen again, write Peter Wallison and Edward Pinto: “The new Qualified Mortgage rule finalized in January by the Consumer Financial Protection Bureau turns out to be simply another and more direct way for the government to keep mortgage underwriting standards low.” On their own, lenders would require substantial down payments and good credit histories; but those requirements are absent from the new rule, explain Wallison and Pinto:

Substantial downpayments and good credit histories are unpopular with community “activists,” realtors, homebuilders and other members of what we call the Government Mortgage Complex. They want continued lending to as many potential home buyers as possible, even if these borrowers don’t have the incomes, assets and credit histories to meet common sense underwriting requirements. This coalition has been effective in moving Congress in the past—and the Consumer Financial Protection Bureau in its recent rule—to encourage lending to borrowers whose credit positions are shaky. 

So the rule, in effect, takes the underwriting standards out of the hands of the lender and gives them to the government. If the automated underwriting systems of the GSEs or the FHA give the loan their stamp of approval—even if it is not ultimately guaranteed by these agencies—the loan is considered a prime loan, no matter what its quality. […]

Because of their government backing, FHA and the GSEs have lower cost structures, which make it much easier for them to stay below the 1.5 percent cap on risky loans. Thus, originators will have competitive incentives to sell their loans to the GSEs and FHA rather than through private channels. Once again, this threatens the taxpayers with potential losses when these weak loans default. [Washington Times, March 3]

In other words, the Consumer Financial Protection Bureau hasn’t changed anything.

Posted on 03/06/13 05:50 PM by Alex Adrianson

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