Federal rules are scaring home lenders from making loans to anyone without excellent credit, a dynamic that top economic policymakers say is holding back the nation's economic recovery.
New surveys of lenders suggest that a mortgage rule implemented by the Consumer Financial Protection Bureau at the start of the year is restricting credit availability, American Bankers Association Executive Vice President Bob Davis told the Washington Examiner.
Similarly, 74 percent of lenders told the government-run mortgage buyer Fannie Mae that their operational costs increased because of the rule, and 36 percent said they tightened credit standards in response.
The rule, which specifies terms for mortgages that are protected from future lawsuits, requires that monthly payments not exceed 43 percent of borrowers' income, an effort to discourage the kinds of no-documentation and balloon loans that proliferated before the 2008 crisis.
But for now, the rule may be holding back the housing market. “It’s not stopping mortgage lending, but there are some people qualified for credit who aren’t qualifying for loans based on the decisions the banks are making,” Davis said.
Mortgage credit remains tight in the wake of the recession. And lending is slow: the total number of new mortgages originated in the second quarter, 267,000, was less than half of that during the pre-bubble, according to the Mortgage Bankers Association. The $286 billion of new mortgages in the most recent quarter was the lowest total since 2000, according to the Federal Reserve Bank of New York.
Fed Chairwoman Janet Yellen, in a July appearance before a House committee, placed much of the blame for 2014’s *weak housing activity on overly tight mortgage standards, calling the issue a “headwind.”
“It has now become the case that any borrower without a pretty crisp, pristine credit rating finds it awfully hard to get a mortgage,” Yellen warned.
The inability of some creditworthy borrowers to take advantage of the low mortgage rates engineered by the central bank has contributed to slow home sales, according to the Fed. The Census Bureau reported Monday that new-home sales declined in July to 412,000, far short of the million-plus totals normal before the housing bubble inflated. Existing home sales remain weak.
The mortgage industry and congressional Republicans have criticized the CFPB rule since before it went into effect in January, but the agency defends it. In response to an inquiry from the Examiner, the CFPB referred to June testimony in which director Richard Cordray said the rule’s impact had been negligible and maintained that “we tried hard to strike the balance in a way that was not going to undermine the mortgage market, and I think we have done so.”
Housing finance analysts at the Urban Institute, a Washington think tank, backed his assessment, writing in an analysis published last week that they found “surprisingly little impact” by the rule on lending.
Ron Haynie, the executive vice president of the Independent Community Bankers of America, said he thinks that the rule is crimping lending, but warned that it was still too early to judge its full effects.
An additional obstacle to easing credit, Haynie noted, is the fear among lenders that even properly underwritten home loans sold to government-sponsored enterprises Fannie Mae and Freddie Mac could come back to haunt them, either through government lawsuits or regulators forcing the lenders to buy back loans they identify as faulty, a process known as a "putback." Following the recession, the two government-sponsored enterprises forced lenders to buy back tens of billions of dollars worth of flawed loans. Government-sponsored enterprises account for about 80 percent of all mortgages originated.
“Lenders are basically scared, they’re shell-shocked,” from losses incurred on loans sold to Fannie and Freddie in the wake of the recession, Haynie said. “There’s a huge climate of fear out there,” and as a result lenders impose underwriting standards beyond the requirements, he said.
The regulator of Fannie Mae and Freddie Mac, Mel Watt, has indicated that his agency, the Federal Housing Finance Agency, will clarify the rules about the circumstances that would force banks to repurchase faulty loans and suffer losses on them. The FHFA did not respond to a request for comment.
Nevertheless, bankers remain hesitant to lend to people without very strong credit out of fear of putbacks or litigation.
Wells Fargo CEO John Stumpf told the Financial Times Tuesday that if regulators “want to stick with this program of ‘putting back’ any time, any way, whatever, that’s fine, we’re just not going to make those loans and there’s going to be a whole bunch of Americans that are underserved in the mortgage market.”