Called for under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and in response to the recent housing crisis, the Consumer Financial Protection Bureau issued a new rule implementing a requirement that creditors make a good faith effort to determine whether a consumer has the ability to repay before issuing a loan. I want to share with you a recent Wall Street Journal article which discusses this new qualified mortgage rule and provides different industry perspectives and opinions.  What are your thoughts on the rule? 

New Mortgage Rules: The Reviews Come In
By Alan Zibel

The day the lending industry has been nervously anticipating has finally come.

The federal Consumer Financial Protection Bureau has rolled out new rules that reshape the U.S. mortgage industry, and are designed to ensure that lenders don’t return to the lax standards that fueled the housing market’s boom and bust.

The rules implement what seems to be a logical proposition—that lenders consider borrowers’ ability to repay the loans they are given. But given the complexity of the issue, it took months of work for the consumer bureau to arrive at a definition of a “qualified mortgage” that would meet standards spelled out in the Dodd-Frank financial law of 2010.

The consumer bureau decided that lenders could satisfy this requirement in two ways: by making loans where the borrower is spending up to 43% of their income on debt payments –or by satisfying the lending standards of Fannie Mae, Freddie Mac and the Federal Housing Administration.

Some “jumbo” loans that can’t be sold to Fannie or Freddie might not be able to meet these requirements. That could dampen the availability of loans to jumbo borrowers with high debt levels, potentially putting a squeeze on sales in parts of the country where the housing market is still weak.

The rule contains key protection from consumer lawsuits sought by the lending industry. This “safe harbor” against litigation from foreclosed homeowners will only apply for loans that meet the qualified mortgage standards and are issued at interest rates that are no more than 1.5 percentage points above a national average.

Consumer advocates are unhappy with this move, as they had pushed for fewer protections from legal challenges.

Overall, the rule is a big change from last spring, when there were widespread fears in the real estate world that the rule would seriously impact the availability of loans. The rule “is far less onerous than what banks expected just six months ago,” wrote Jaret Seiberg, a senior policy analyst with Guggenheim Securities, in a note to clients.

Here’s a sampling from statements in response to the rule:

Julia Gordon, director of housing finance and policy at the Center for American Progress: “This new rule is a crucial step in protecting consumers against the predatory lending practices that crashed our housing market and stripped trillions of dollars from families. At the core of the rule lies a common-sense business principle: If a borrower can’t afford to pay back the loan in full, the lender has no business making that loan in the first place. Unfortunately, the Consumer Financial Protection Bureau shielded lenders from liability for a large subset of loans, making it more difficult for consumers to enforce this rule than was originally envisioned by lawmakers.”

Rep. Jeb Hensarling, chairman of House Financial Services Committee: “These types of ‘one size fits all’ solutions always—always—are fraught with unintended consequences. After all, government regulations and policies that strong-armed, incented and cajoled financial institutions into loaning money to people to buy homes they couldn’t afford are a major reason why we had the financial crisis to begin with. Ironically, now we have government regulations attempting to tell financial institutions not to do what the government was telling them to do before.”

Debra Still, chairman of the Mortgage Bankers Association: “This approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties…We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.”

Alys Cohen, staff attorney, National Consumer Law Center: “Congress’ mandate in Dodd-Frank is clear. Lenders must take reasonable steps to ensure that every mortgage loan is affordable when made, and homeowners whose lenders overreach have recourse. Unfortunately, and with potentially significant, negative consumer protection consequences, the Consumer Financial Protection Bureau’s new regulations fail to deliver those protections.”

Marc Savitt, president, National Association of Independent Housing Professionals: “Although the CFPB promised to create a level playing field and competition with their rules and regulations, once again we see a strong bias against licensed mortgage brokers when it comes to their ability to serve borrowers. We need a rule that treats all originators the same, instead of one that picks winners and losers.”

Gary Thomas, president, National Association of Realtors: “We are pleased that the rule encompasses the vast majority of the safe, high quality lending being done today. We will continue to work closely with the CFPB to ensure that the cap on fees doesn’t restrict consumers’ mortgage options, but believe (the) rule is a positive step to bringing certainty to the housing finance system.”

Last year, Fannie Mae and Freddie Mac spent over $28 billion in taxpayer money. Since then, Fannie Mae has reported a net loss of $6.5 billion and requested an additional $6.2 billion in taxpayer funds from the Treasury. To date, the failures of the two government-sponsored enterprises (GSEs) have directly cost taxpayers more than $150 billion. The Congressional Budget Office (CBO) estimates that total federal subsidy outlays to Fannie and Freddie could total nearly $400 billion through 2019.

The housing crisis of 2008 revealed how the two GSEs were irresponsibly lending billions of dollars to homebuyers who ultimately could not afford houses. This irresponsible lending led to one of the worst housing crises in American history, and hardworking American taxpayers paid the price, not Fannie and Freddie.

We must enact fundamental reform of these entities and of the entire housing finance system. I have cosponsored the Government Sponsored Enterprise (GSE) Bailout Elimination and Taxpayer Protection Act to end the taxpayer-funded bailouts of Fannie Mae and Freddie Mac and put the two GSEs on a path towards privatization. This bill begins implementing important reforms upon enactment, puts a hard two-year end date on conservatorship, and eliminates the government charters after five years.

To protect taxpayers, the bill immediately implements several fundamental reforms:

• Repeals the GSEs’ misguided affordable housing goals mandate and the Affordable Housing Trust Fund;
• Starts shrinking the size of the GSEs by capping their maximum portfolio size at $700 billion and gradually reducing that cap to $250 billion over five years;
• Reduces the GSEs’ market share by returning the conforming loan limit to its pre-housing crisis standard limit of $417,000;
• Increases guarantee fees to eliminate the GSEs’ competitive advantage and bring more private capital into the market; and
• Prohibits any reduction to the senior preferred stock dividends the GSEs contractually agreed to pay taxpayers under their conservatorship.

By privatizing Fannie and Freddie over a five-year transition period and gradually eliminating taxpayer subsidies in the secondary mortgage market, the bill requires the GSEs to eventually stand on their own two feet and compete with private sector competitors.