In the last few
weeks months, the real estate industry has been staring at the deadline wherein qualified mortgages (QM) would begin to be the new normal.
Now look, some of the thought process that is behind the Dodd-Frank bill and QM make me recall a certain phrase that got huge play, recently. Just slip “mortgage” into the text and I think you hear what is rolling through my head.
Frivolity aside for the moment, Peter Wallison delivered a speech at Hillsdale College on November 5th, 2013, that has some key points that he believes led to the perceived need for Dodd-Frank. You can read his whole speech on Imprimus from Hillsdale.
From the opening of his speech:
The 2008 financial crisis was a major event, equivalent in its initial scope—if not its duration—to the Great Depression of the 1930s. At the time, many commentators said that we were witnessing a crisis of capitalism, proof that the free market system was inherently unstable. Government officials who participated in efforts to mitigate its effects claim that their actions prevented a complete meltdown of the world’s financial system, an idea that has found acceptance among academic and other observers, particularly the media. These views culminated in the enactment of the Dodd-Frank Act that is founded on the notion that the financial system is inherently unstable and must be controlled by government regulation.
His speech goes on to highlight that when the government intervened and enacted “affordable housing” goals for Fannie Mae and Freddie Mac, the government set us up for the bubble, collapse and current response. The government effectively gave Fannie and Freddie a nearly 50% share of the secondary mortgage market (where originated mortgages are sold to investors). Because the government intervened and backed these two entities, community activists were able to argue that Fannie and Freddie’s underwriting requirements were too restrictive and kept many low- and moderate-income families from purchasing homes.
You know the rest of the story: low-, no-down payment mortgages were issued, homeowners could not repay them, defaults rose, financial system collapsed, and congress felt the urge to regulate.
Amongst a host of other financial regulations laid on Wall Street and banks throughout the nation, Dodd-Frank has a few things to say about the qualification of mortgages. Or rather, what constitutes a qualified mortgage. This legislation has an “ability-to-repay” rule that seeks to limit a bank’s exposure to risk. This eye on limiting a bank’s exposure to risk will have the consequence of making it difficult for folks with negative equity to get refinanced and will create a higher hurdle for folks with debt to income ratios North of 40%.
There is potential for the market to experience higher rates on loans that fall significantly outside the QM standards. Like Findlay, he also sees an impact on moderate-income families.
When Up is Down and Down is Up
So, to recap, the same entity that loosened lending regulations that appears to have been a large factor in the housing bubble, is now attempting to, in essence, put the genie back in the bottle?
Yet, and here is the kicker as Peter Wallison puts it:
…Dodd-Frank was based on a faulty diagnosis of the financial crisis. Until that diagnosis is corrected—until it is made clear to the American people that the financial crisis was caused by the government rather than by deregulation or insufficient regulation—economic growth will be impeded.
Unfortunately, with a mid-term election year upon us, this topic will be made a political football (already is) and will likely not get the thorough, in-depth research, explanation and analysis it deserves.
In other words, “Squirrel!”