New horrors of the Dodd-Frank bill seem to come to light every day. The latest I’ve learned of is the concept of the “qualified mortgage” the bill codifies into law.
What’s a qualified mortgage? Congress has decreed that it’s one that adheres to these eight rules:
1. The mortgage amortizes. No option ARMs need apply.
2. It can’t result in a balloon payment that’s twice as large as the average of earlier scheduled payments.
3. The borrower’s income and financial resources must be verified and documented.
4. Underwriting is based on the full term of the loan, and takes into account taxes, insurance, and other related payments.
5. If it’s an ARM, underwriting must be based on the max rate permitted over the first five years and full amortization (including taxes, insurance, and other related payments).
6. The borrower’s debt-to-income ratio meets standards set by the CFPB.
7. Related fees can’t exceed 3 points.
8. Maximum term is 30 years.
Got all that? The law basically insists that lenders write only mortgages that are qualified under federal standards. So, for instance, a lender that writes a mortgage that that’s not qualified will face an onerous risk-retention requirement if it securitizes it. In addition, the lender can be held accountable for up to three years of interest payments and damages, plus attorney’s fees. Borrowers will receive special foreclosure protection. One size had better fit all, or else.
Ugh. This is the worst sort of nanny-state over-regulation. There’s a reason, believe it or not, that the financial industry makes a habit of inventing lending products that have varying features: individuals’ financial needs and profiles vary. Products that take account of those differences can benefit both the borrower and the lender. Take, for instance, a type of mortgage that came to be widely vilified in the wake of the housing blowup, the Alt-A. Alt-A mortgages were originally invented for—and fill a critical need of—would-be borrowers who can’t provide the standard 1099/paystub types of documentation needed in the course of applying for a standard 30-year loan. These individuals might be high-earning self-employeds, such as physicians. Or individuals (actors, say) who don’t draw a regular salary but are paid sporadically instead on a per-project basis. They can be very strong credit risks, but basically have a paperwork problem. Alt-A mortgages provide a way for these folks to get access to credit.
But with the passage of Dodd-Frank, lenders’ ability to develop new loan products to serve the needs of people like this will be severely constrained. This is not a good thing. It’s not good for the lending industry, which will now have, at the margin, fewer profitable opportunities to lend. It’s not good for the economy. And it’s not good for borrowers, who’ll now be forced into plain vanilla lending products whether they’re appropriate or not.
You object, and point out that, in the end Alt-As did come to be abused; to prevent similar abuse in the next cycle, some sort of regulation of mortgage products is warranted. I’ll stipulate that. But Congress, in its wisdom, might have considered stopping short of writing into federal law what an acceptable mortgage looks like.
There’s already no shortage of provisions of Dodd-Frank—the CFPB, for instance, and the bill’s lack of preemption of state laws—that will have the effect of restricting credit and slowing the economy. Word of Congress’s insistence that mortgages adhere to highly restrictive, inflexible codified standards is the latest. I’m afraid it won’t be the last.
What do you think? Let me know!