Monday, April 11, 2011

Does The New Government Mortgage Fix (QRM) Undermine Disparate Impact?

The recent “Mortgage Meltdown” was rooted in decades of “Fair Lending” lawsuits that forced banks via both litigation and legislation to make more loans available to “low-income Americans,” often referred to as “subprime borrowers.” Virtually ALL of those lawsuits were predicated upon the legal concept of “disparate impact,” given that traditional lending criteria (requiring expensive PMI or private mortgage insurance on purchases with less than 20% down, higher credit scores to procure the lowest interest rates, three years of tax returns, a lending cap of no more than 2½X your annual income, etc.) had and HAVE a “negative and disparate impact” on low-income Americans/subprime borrowers.

But NOW, all that has changed! Those old lending criteria, along with their “negative and disparate impacts” on low income Americans” appear to be back...and back with a vengeance!

Beyond the 20% down-payment requirement there are additional parameters in what’s being called the QRM or the “Qualified Residential Mortgage.” These include;

• Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rates, you’d need to spend no more than 28 percent of your gross monthly income on housing-related expenses, and you couldn’t have total monthly household debt that exceeds 36 percent of your income.

• To refinance your existing mortgage and replace it with one carrying the best available interest rate, you’d need no less than a 25 percent equity stake in your house to qualify. If you sought to take any additional cash out through a refi, you’d need 30 percent equity. Today’s typical requirements for a conventional refi are nowhere near as strict.

• Pristine credit standards. For example, if you were 60 days late on any credit account during the previous 24 months, you’d be ineligible for a mortgage at the best available terms.

According to Kenneth Harney, the executive director of the National Real Estate Development Center, These are all core features of what may be the most sweeping and controversial set of changes in decades for the housing and mortgage markets. The so-called “qualified residential mortgage” (QRM) proposals were released at the end of March by banking, securities and housing regulators, along with the Department of Housing and Urban Development.”

If banks were to blame and government’s intervention in the mortgage market via “fair-lending” lawsuits was positive, wouldn’t the proper solution be even MORE government involvement, even further micromanaging of the mortgage market?

You’d certainly think that it would be.

BUT, as one Treasury Department spokesman said on Friday, the U.S. government has had “too big a footprint” in the mortgage market and the Obama administration intends to make it smaller.

That puts the Obama administration right in line with the likes of Rep. Scott Garrett (R-N.J.), who recently took over a House committee overseeing housing finance, who recently endorsed the idea of lowering loan limits in a keynote address to the conference back in February (2011). It would seem that politics certainly DOES make for some strange bedfellows.

Garrett said he wants the government to exit the mortgage market entirely, though he acknowledged it was a long-term proposition. “I realize that this will not be an easy or immediate goal, but it is one I feel strongly about,” he said.

Even Federal Deposit Insurance Corp Chairman Sheila Bair wants to require 20 percent down payments to thwart the excesses that fueled the financial crisis. If the banks had supported “loose money” or “more loans to more low-income Americans,” you’d expect them to oppose such a stance, but industry heavyweight, Wells Fargo, has proposed an even tougher standard – a 30 percent down-payment requirement.

Moreover, none of this looks like a temporary stop-gap measure, with an eye toward eventually loosening such criteria to allow more low-income Americans back into the mortgage market.

As Reuters recently reported, “We may be entering a permanent age of 20 percent down payments. High down payments may not just be a temporary post-crisis response limited to the high-end of the market. One of the long-term reform proposals being bandied about Washington would require that any loan a lender wants to sell outright into the secondary market be secured by at least a 20 percent down payment. Anything below that amount and the lender would be required to hold onto at least 5 percent of the loan value in its own investment portfolio. That’s how you keep lenders from doling out high-risk loans. A good move for the financial system, to be sure. But one that could ultimately make home buying a more expensive proposition in the future, raising the allure of renting rather than buying for many, no doubt.”

All of this begs the questions; IF “disparate impact” has been abandoned in one area where it’s been proven a disaster (home mortgage lending), than how can its use be justified in any other context?

There’s no doubt that the deeply flawed legal concept of “disparate impact” created the “subprime mortgage crisis,” where subprime borrowers received what then HUD Secretary Andrew Cuomo called “Affirmative Action in lending.” (SEE Andrew Cuomo's April, 1996 Pres Conference lauding "affirmative action in lending";

Can anyone actually conceive that its use would be any less disastrous in any other venue, and if so, WHY...and HOW?!

But it’s not like “disparate impact” and loose lending parameters/lowered standards don’t have their supporters. Recently, Michael Calhoun, president of the Center for Responsible Lending, argues that if adopted in its current form, these QRM proposals will make it much tougher for lower-income consumers to afford a first home, while Jerry Howard, CEO of the National Association of Home Builders, claims that government agencies and the administration have strayed far beyond Congress’ intent, and their proposals threaten to undermine any recovery in housing and force millions of Americans to rent rather than to own.

Still, facts are stubborn things. It was government’s meddling in the mortgage market to undermine those traditional lending criteria, in the name of resolving that “disparate impact” on lower-income Americans that caused the mortgage meltdown of 2008 and the subsequent and ongoing housing collapse.

Those standards obviously served a very useful purpose and undermining them had catastrophic results!

There’s little question that the lowering of ANY standards has the potential to be equally disastrous, if not worse.

Standards are more than mere barriers to those who can’t meet them. They are, all too often, the minimum criteria needed to be able to bear the burdens they’re used to measure.

Disparate impact may have been well-intentioned, but as they say, “The road to hell is paved with such good intentions.”


John Washburn said...

Good intentions, like social engineering, ie the govt's attempt to get home ownership for low-income Americans (also know as those who can't afford home ownership).

Banks aren't afraid of this kind of stuff anymore because Uncle Sam has made it clear that they'll get bailed out of whatever bad mortgage decisions they make.

Makes me wonder why I bother paying my mortgage.

WomanHonorThyself said...

hiya JMK...ah yes:
Still, facts are stubborn things. It was government’s meddling in the mortgage market to undermine those traditional lending criteria, in the name of resolving that “disparate impact” on lower-income Americans that caused the mortgage meltdown of 2008 and the subsequent and ongoing housing collapse...and the LIBS still deny responsibility for this horror!..they simply hate the Private sector...........

JMK said...

Absolutely right John!

Out of "good intentions," the government has institutionalized "bad business," or "business as a social service."

The truly frightening thing is that none of the fundamentals that brought about the mortgage meltdown have been eradicated, so ultimately we could be in for a "Part Deux" of this nightmare.

JMK said...

Hi Angel!

And the weirdest thing of all was that it was largely a bi-partisan affair. Despite a few brave Conservatives opposing that "loose lending," or what Ron paul called "Credit Socialism," BOTH major Parties embraced it.

Dodd and Frank were the faces of Democrat abuse, but the Jack Kemp "ownership society" folks went along with much of this disaster.


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