WORD ON THE STREET: In our view, the proposed rule on risk retention would squander an opportunity to ensure that well-structured, responsibly underwritten and appropriately serviced mortgage loans become widely available to all creditworthy families. If the private-label securities market makes a substantial comeback, it would relegate many creditworthy families to second-tier, less sustainable mortgage loans. Access to responsibly structured, properly serviced loans is particularly important for families who lack the wealth to sustain payment shock or hedge against interest-rate risk.
For this reason, we agree with the agencies that the Qualified Residential Mortgage (QRM) exception to the risk-retention rules should apply only to loans whose terms are responsible and sustainable, and that are underwritten to ensure the borrower's ability to repay based on documented income. Where we differ with the agencies is in our strong belief that such loans should be broadly available to creditworthy families.
Ideally, these should be the loans of choice for most borrowers. Loans that do not meet these standards should remain available, but should be the exception, not the dominant product, and should be subject to strict regulatory oversight to address abuses. We believe that was the intent of Congress.
The proposed rule would do exactly the opposite of what we suggest. It would create a category of responsible mortgages, but make them available to only a small proportion of creditworthy families. This is the result of down-payment, debt-to-income and credit-history requirements so extreme they would exclude much of the middle class, along with large numbers of creditworthy families of color and low- and moderate-income borrowers, from access to QRMs.
Respectfully, we believe that the proposed approach is both a bad idea and a missed opportunity and should be revised.
It is a bad idea for two reasons. First, a 5% risk-retention requirement for loans outside the QRM definition will come at a cost that will be passed on to borrowers. Most borrowers should be able to avoid this added cost – and receive the benefits of a soundly underwritten and fair mortgage – by opting in to a QRM. The added cost of non-QRM loans should be the exception rather than the norm.
Second, we are concerned that non-QRM loans will be stigmatized by lenders, considered unsafe by bank examiners and made more costly or less available as a result. The rule should be reworked to ensure that most borrowers are able to get a sustainable loan through the QRM.
It is a missed opportunity because the regulators now have the opportunity to drive the market into one dominated by sound, sustainable loans.
Our concerns and suggestions are detailed below.
Almost four years ago, our organization released a report warning that the reckless and abusive lending practices of the previous two decades would lead to approximately 2 million subprime foreclosures. At the time, our report was denounced by the mortgage industry as absurdly pessimistic. Sadly, our projections turned out to be extremely conservative. The damage has been far worse, spreading from the subprime to the prime sectors, catalyzing a housing-led recession and triggering historic levels of unemployment.
Since we issued that 2006 report, there have already been as many as 3 million homes lost, and Wall Street analysts recently predicted there could be as many as 11 million more foreclosures filed. The foreclosure crisis has had catastrophic consequences for families and communities. The first wave of homeowners ended up in dire straits owing to abusive mortgage originations, incompetent and predatory mortgage practices, ineffective government oversight and a complex securitization system that lacks accountability.
Now, millions more are in danger because of the toxic combination of underwater loans and unemployment that festers in so many areas. Even families that never missed a mortgage payment prior to this recession now struggle under financial strains not of their making.
The mortgage lending marketplace has become so problematic that today, private lending is almost non-existent. Government lending is practically the whole market – a circumstance that is not viable over the long term. In order to create a strong housing market moving forward, the private market must come back without repeating the mistakes of the 1990s and early 2000s. The best way to do this is through clear "rules of the road" set forth in the QRM definition that encapsulate the terms of sustainable mortgage lending for most borrowers.
Unfortunately instead, the proposal suggests a narrow "gold standard" that will reach a small portion of mortgage borrowers and sets the stage for a two-tiered market to evolve as the private market returns – with good loans for the top tier and substandard loans for the bottom tier.
Some argue that low- and moderate-income borrowers should either take their chances on non-QRM loans or be denied credit altogether. However, denying such families access to the American dream of homeownership – and the ability to build wealth in the long term – makes no sense. It would be unfair to deny borrowers who can demonstrate an ability to repay a mortgage the ability to build wealth and ties to the community simply because they could not afford to put 20% down in cash.
This would also have negative repercussions for the economy and the ability for middle-class families needing to sell their houses, as a healthy market needs a continuous influx of new customers. The failure to consider the needs of first-time home buyers and customers from low-wealth backgrounds when we create any new system would be catastrophic for future growth.
Ellen Harnick is senior policy counsel at the Center for Responsible Lending. This article was adapted from testimony Harnick delivered April 14 before the House Subcommittee on Capital Markets and Government Sponsored Enterprises. The entire testimony can be found here.
