Analysis: Stricter mortgage standards criticized as too tight

Today, I want to share an interesting article I read in Florida Realtors® News:

During the housing boom, a borrower’s ability to exhale appeared to be the chief criterion for obtaining a mortgage. Six years of record foreclosures later, with millions of borrowers owing more than their properties are worth, the housing market continues to tread water.

To prevent this from happening again, the Dodd-Frank financial-reform act of 2010 required that changes be made. The chief targets: such mortgage instruments as “interest-only” and “negative-amortization” loans, both of which allowed marginal borrowers to buy more house than they could have ever possibly afforded.

Those were risky loans even in good financial times, but when the market collapsed, failure to meet even interest payments cost hundreds of thousands of borrowers their houses. To meet the reform law’s mandate, the Consumer Financial Protection Bureau, another Dodd-Frank creation, is designing what is known as a “qualified residential mortgage.”

With a summer deadline for this new “Ability to Repay” rule, there is concern in the housing industry that a highly restrictive regulation will cut more borrowers out of the market than the situation warrants.

What Dodd-Frank mandated was a rule requiring institutions that place securities in the asset-backed secondary market to have a financial stake in ensuring that mortgage products are quality products.

But opponents maintain that by requiring high downpayments intended to guarantee quality – thus creating what are called “gold-plated mortgages” – prospective borrowers who don’t qualify for them would be forced into a higher-priced home-loan market lacking the same guarantees and protections.

The Center for Responsible Lending, which typically stands on the opposite side of the fence from lenders, has cited research concluding that the government’s proposals might, indeed, end up being too restrictive.

That research, conducted by both the center and the Center for Community Capital, found that such rules could push 60 percent of creditworthy borrowers into high-cost loans or out of the market entirely. Their findings were based on an analysis of almost 20 million mortgages made between 2000 and 2008.

Government proposals have called for downpayments of up to 20 percent, but the research showed that “mandating large downpayments would be a mistake for business and consumers.”

Substandard underwriting, not low downpayments, contributed to the housing industry’s current woes, the centers maintain.

Predictably, the housing industry is unequivocally opposed to raising downpayments to 20 percent, or even 10 percent.

Last month, a letter signed by 33 groups representing real estate agents, builders, and lenders, among others, urged the Consumer Financial Protection Bureau to come up with a rule that would not “undermine prospects for a housing recovery and threaten the redevelopment of a sound mortgage market.”

“Congress intended that all creditworthy borrowers – especially low- and moderate-income borrowers and families of color – should be extended the important protections of a qualified mortgage,” the letter stated.

What the groups seek to help “ensure revival of the home-lending market” is “a broad qualified mortgage, which includes sound underwriting requirements, excludes risky loan features, and gives lenders reasonable protection against undue litigation risk.”

Builders, especially, have argued that tighter lending standards not only have kept buyers away but also have prevented construction jobs from being created in markets that did not take major economic hits and could do with more houses.

Copyright © 2012 The Philadelphia Inquirer. Distributed by MCT Information Services.

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Posted on May 14, 2012, in Finance. Bookmark the permalink. Leave a comment.

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