The most dangerous political coalition in the financial system—the Home Ownership Mob—is working to undermine one of the key provisions of Dodd-Frank.
The Mortgage Bankers Association is teaming up with groups including the National Community Reinvestment Coalition, the Consumer Federation of America, the Center for Responsible Lending and the National Housing Conference to say that regulators took a narrow approach when they outlined in March which loans would be exempt from the new requirements. They plan to hold a joint press conference Thursday and are expected to meet with regulators and lawmakers.
By way of background, Dodd-Frank requires banks to retain five percent of the risk of mortgages they securitize. The idea behind this was to force banks to have “skin in the game” so that they would better police the quality of the mortgages they package into securities.
The law also contemplated a very limited exception to the risk retention requirement for “qualified residential mortgages.” These were to be the highest quality mortgages on which the risks were considered to be almost non-existent.
Very clearly, the idea here was to make a baseline rule of risk retention that would apply to most mortgages made by banks, with a limited class of exceptional mortgages. We’d have a two-tiered system, in other words: risk retention for most mortgages, no risk retention requirements for the safest mortgages.
The law, however, left it to regulators to define what could count as a “qualified residential mortgage.” And this is where the mischief comes in.
Regulators put forth a rule that would exempt only mortgages with 20 percent downpayments and imposed maximum debt-to-income ratios for qualified residential mortgages. They also exempted any mortgage backed by Fannie Mae and Freddie Mac.
Now the Home Ownership Mob is screaming that this amounts to class war and racial discrimination.
"What has been proposed essentially creates a separate and unequal system of finance for people of color and for blue-collar, working-class people where regardless of your creditworthiness, of whether you're someone who has a great credit score and pays your bills on time and plays by all the rules, if you're not well-heeled enough to come up with 20% or if you're household debt to income ratios are high … you're going to go into a separate and unequal category of financing where you're going to have to pay more,” John Taylor of the National Community Reinvestment Coalition is quoted as saying in American Banker.
"DTI and LTV have very significant societal impacts. They draw boundaries along income and ethnicity that I'm very concerned about if the final rule goes forward as is," Mortgage Bankers Association Chief Executive David Stevens said in an interview with American Banker.
That’s right. Housing is becoming a civil rights issue again.
But here’s the thing. Regulators set forth down-payments and debt-to-income ratios for qualified residential mortgages because those measures have proven far more reliable predictors of default in times of economic stress than relative measures such as credit scores.
To put it differently, the law set out to make “separate and unequal” categories of mortgages because not all mortgages are created equal.
It’s important to remember that the fight here is not over whether riskier mortgages will be created or securitized. It’s over risk retention: which mortgages will be exempt from the general rule that banks should retain risk on mortgages they securitize.
What the Home Ownership Mob is attempting to do is convert the exemption into the rule. And they’re doing this not on the grounds of sound economics but race-and class-based politics.
Unfortunately, the Home Ownership Mob is winning.
From the American Banker:
Last week, nearly 40 senators from both parties told the regulators in a letter that the 20% down-payment requirement went too far. That followed a letter in April from House members, including one of the law's authors, Rep. Barney Frank, D-Mass. "There is evidence that a 20% requirement does not result in sufficiently lower risk to justify the significantly enhanced hurdle to buying a home that this represents," the House members wrote in the April 15 letter.
It would be far better to just do away with the exemption altogether than to allow it to be expanded so far that it undermines the risk retention rule altogether.
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