Of the many financial reforms in Dodd-Frank, a requirement that lenders retain a share of the risk in mortgages they sell to investors seemed like a no-brainer. If lenders were on the hook, too, the thinking went, they would tighten standards and avoid the kind of defaults that contributed to the collapse of the housing marketand the financial crisis.
But now that a rule to implement this provision has been written, critics say the requirement will make it so hard to get a mortgage that it will further depress the housing market and undercut a struggling economy. “I’ve been in this business 32 years and I have never seen guidelines as tight as they are now,” said Scott Eggen, senior vice president for capital markets with PrimeLending, a mortgage lending subsidiary of Dallas-based Plains Capital Corp.
This is bad?
“The proposal as introduced will literally erase a decade of accomplishment in defining what is a responsible loan,” said David Berenbaum, chief program officer with the Coalition, an advocacy group for community organizations that support affordable housing and equal access to credit. “It is going to narrow the range of loans that lenders are willing to originate to the point that only consumers with the best credit scores—meaning white and affluent consumers—are going to get loans.”
Accomplishment? What are you smoking?
Look folks, here’s the record on this “accomplishment” — median household income went from $29,943 to $49,445, an increase of 65% from 1990 to 2010.
Household mortgage debt went from $2.34 trillion to $9.97 trillion during the same time, or an increase of 326%.Source: Fed Z1
Accomplishment? What accomplishment?
There has been no accomplishment. There has only been a false hope sold to the putative homeowner and massive price inflation in homes which is supported not by fundamental values or improvements in the common man’s earnings power but rather by financialization of a consumer durable good into a speculative mania.
Regulators defined qualifying residential mortgages very conservatively, requiring a 20 percent down payment, caps on a borrower’s debt-to-income ratio, restrictions on loan terms, and other limits designed to restrict the number of loans that would qualify for the exemption.
Good. The definition of a “sound mortgage” for fifty years was 20% down, 28% front end ratio (or “PITI” to income) and 36% back end ratio (or all debt service to income.)
Of course everyone wants to claim that they can “hedge off” the risk and be “safe” writing loans that violate these strictures in one form or another. The problem with such claims is that whether they’re true or not is immaterial to the underlying reality: The purpose of these rules is not solely to prevent mortgage-related meltdowns – it is to put a stop to predicating financial pyramid schemes on houses!
These rules are not only appropriate they should have always been present.