Federal Housing Policy Threatening To Permanently Undermine Housing Market Stability



Think the days of risky subprime loans are behind us?

Now that Dodd-Frank has been implemented, a lot of the talk has been about The “Qualified Mortgage Rule”. Supposedly this new rule known as “QRM” is going to protect consumers from lenders who are willing to make reckless, high cost loans to unsuspecting borrowers. Here is a brief summary of the rule, as stated on the ConsumerFinance.gov website:

The CFPB amended Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated.

© StepStock - Fotolia.com

© StepStock – Fotolia.com

 

But this new rule has already been rendered meaningless by the “Government Mortgage Complex” which has exempted itself from the QRM rule, according to a new FHA Watch report, from Edward J. Pinto, American Enterprise Institute Resident Fellow, and Co-Director of AEI’s International Center On Housing Risk.

His monthly report tracks the loan status and lending activity of Fannie Mae, Freddie Mac, FHA and a host of lesser known, government created lending institutions, designed specifically to facilitate mortgage loan financing. The February 2014 report exposes the shameless manner in which the new QRM rule has been touted as a final solution to the risky lending practices that helped create the housing bubble and bust. As Mr. Pinto points out in this report, nothing could be further from the truth. In fact, the GSE’s are helping to guarantee that the U.S. housing market will never regain it’s pre Clinton-era underwriting standards that had kept Taxpayer insured FHA loans at a historical default rate of as little as 3%. Today, well into our supposed “recovery”,  FHA Watch indicates that FHA’s delinquency rate for vintage 2007 loans is 30%, while the current rate for all FHA loans is 24.5%

FHA makes up more than 80% of the current market in entry level home buyers. A 24.5% default rate among 80% of all new home buyers is an unacceptable rate of default. No problem right? The new Qualified Mortgage Rule will put an end to such high default rates by improving underwriting standards – right? Not so fast…

Here’s another interesting tidbit from the AEI Report:

“This trend of increasing risk for the Government Sponsored Enterprises, (GSE’s), and for the FHA does not bode well for the future. The QM (qualified mortgage) credit box has been extolled as safe by the Consumer Financial Protection Agency – yet it contains no loan-to-value limits, no FICO score minimums, and it exempts Fannie, Freddie and the FHA from the 43 percent debt-to-income limit that was imposed by the Qualified Mortgage – Ability To Pay Rule”. The result is an explicit path to credit loosening based on increased leverage and impaired credit – a path that political pressures will assure gets taken.”

The other side of this story is the pressure that has been and is being exerted by real estate industry “special interests” like the National Association of Realtors, who lobbied long and hard, throwing millions of dollars into making sure that FHA would pick up the subprime mantle after the market bust.

So, bottom line is that the government now has laws under Dodd-Frank to hold privately owned lenders and banks accountable for following this rule while they exempt themselves so that they can continue to implement the same reckless political objectives that helped bring about the 2008 bust to begin with. This is especially ironic given that government-insured mortgages like FHA are loaded with fees and expenses that make them harder to pay off – include terms that result in ridiculously high LTV’s,  high interest expenses and tens of thousands of dollars for the cost of private mortgage insurance.  No need to worry about QRM putting a damper on the “housing recovery”.  It looks like unsuspecting borrowers will still have plenty of access to reckless, high cost loans, courtesy of Uncle Sam.
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Donna S. Robinson is a 18 year veteran of the real estate industry, with experience as a rehabber, wholesaler, investment analyst, rental property manager, owner, licensed agent and residential real estate market expert. She coaches real estate investors to improve cash flows while reducing risk. She has authored numerous books and courses on real estate market fundamentals and investing strategies. Follow her on twitter @donnaconsults  Watch her videos here, and read more articles or contact her about coaching services on her website.

 

Comments

  1. Interesting article, but I would think in the next 1-2 years HUD would announce more memo’s to address the QRM to fits its agenda. And with the conservatorship coming due in the next 4 years on FNMA I would hope by then the private market has watched and listened to what we learned from the QRM to decide if they are ready to reenter the market. Granted i do believe its odd that with no loan to value limits or rico score limits it seems like there could be some reckless opportunities in the future; however, I think most investors will come up with their own thresholds to these rules putting overlays in effect that will have other lenders to follow. Again I hope for the best but time will tell.