Debate over future of housing finance brews
Opportunity to comment on proposed mortgage rules ends Monday
Sameera Fazili of the U.S. Department of the Treasury explains the Administration's proposals to reform the housing finance system at a Woodstock Institute event.
As the number of foreclosure filings continue to outpace loan modifications and other foreclosure prevention strategies, more and more homes are becoming vacant in the Chicago region. More than 95 percent of completed foreclosures in the six-county region in 2010 became owned by their lenders and likely remain vacant, data from Woodstock Institute show. Moving families back into these homes would counteract the destabilizing influences of vacancy and set neighborhoods on the path to recovery. While new household formation is on the rise and should contribute to an increased demand for homeownership, access to mortgage credit has become sharply constricted.
Several proposals under consideration in Washington right now could dramatically impact the availability of mortgage credit. The U.S. Department of the Treasury released a white paper outlining a three plans for restructuring the housing finance system, all of which would involve winding down the current system dominated by the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac, and replacing them with a system more reliant on private investment.
Another policy proposal, the qualified residential mortgage, is intended to reduce excessive risk-taking behavior in mortgage lending. During the housing bubble, some lenders made excessively risky loans since any risk associated with the loan’s performance was passed off to investors. In order to mitigate the dangers of lenders’ risk-taking orientation, the Dodd-Frank financial reform bill included a measure that would require lenders to retain five percent of the risk of each loan. Some loans will be exempted from the risk-retention requirements if they are insured or guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), or the Veterans Administration (VA) or fall into the category of “qualified residential mortgages” (QRMs), which are loans that have characteristics shown to be associated with low default rates. Regulators have proposed a QRM definition that requires, among other aspects, a 20 percent down payment and very low debt-to-income ratios. Currently, the vast majority of mortgage loans are backed by the FHA, Fannie Mae or Freddie Mac and would therefore be exempt from the risk retention requirements. However, if the Obama Administration’s proposed wind down of Fannie Mae and Freddie Mac occurs, private-sector lenders subject to risk retention requirements will play an even larger role in mortgage finance for low- and moderate-income people. Few low- and moderate-income borrowers are likely to be able to meet a 20 percent down payment requirement.
Regional HOPI lead partner Woodstock Institute recently hosted a panel discussion with five housing experts from the U.S. Department of the Treasury, National Community Reinvestment Coalition, CitiMortgage, Community Investment Corporation, and Oak Park Regional Housing Center to analyze how these changes might impact access to mortgage credit and housing choices. Some panelists noted that GSEs have a mandate to affirmatively further affordable housing goals, and their elimination would result in a reduction in financing for small rental buildings and other affordable housing development. In the absence of access to affordable mortgage credit, many low-wealth individuals could lose an important means of building wealth. Other panelists raised concerns about how a QRM proposal with a high down payment requirement would impact access to credit in communities of color.
“At a time when wealth has been stripped out of many minority and low-income communities, the QRM will now exclude a majority of us from the best mortgage products available. This will compound the wealth gap in America,” said Rob Breymaier, Executive Director of the Oak Park Regional Housing Center. “The right answer to the foreclosure crisis is to make responsible lending the norm. No one wants to see a return to the days of widespread exotic loans with no documentation. Unfortunately, the QRM goes beyond reasonable lending to erect barriers that are too difficult for most of us to overcome.”
Woodstock Institute produced a white paper with a summary of key policy analyses and recommendations made by panelists. The panelists’ recommendations include: create a Public Mortgage Corporation to purchase mortgages and issue securities; expand the Community Reinvestment Act to the secondary market and require CRA to consider whether people of color are adequately served by financial institutions; and, create incentives and requirements to get lenders to be active in the small multifamily market.
Federal regulators are accepting comments on the proposed QRM rule until August 1, 2011. You can let regulators know your thoughts on QRM by emailing regs.comments@occ.treas.gov with the subject line “Re: OCC Docket Number OCC-2011-0002.”