I’ll have more about this later, but I participated in a presentation yesterday, which came to the conclusion that homeownership is the dividing line between the poor and the middle class. I questioned whether that was still true and desirable, given all we know about how banks have abused homeowners and broken the housing market, but this was the read of the data.
I think a lot of people on the Democratic side of the aisle believe in that ownership society of George W. Bush’s at least at some level, and believe that the government should encourage homeownership as a wealth-building strategy. I don’t really see it, at least not without putting the regulation at the forefront. But that’s part of what’s driving affordable housing organizations to join with banks in fighting new risk retention rules.
Now, as banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans.
For the uncommon alliance, the first point of attack is on a proposal that would require sellers of mortgage-backed securities to retain part of the risk should a package of loans go sour. The sellers would have to keep on their books at least 5 percent of the value of any baskets of loans they purchase from lenders and then resell to investors. One of the few exceptions to the requirement would be for mortgages on which the home buyer has made a down payment equal to 20 percent of the purchase price.
“Most people don’t have 20 percent to put down,” said Janis Bowdler, a project director in La Raza’s office of research, advocacy and legislation. “These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.”
Let’s be clear about this. Banks could still sell other loan products. And they could pass off 95% of those other loan products to investors. if they want to sell all 100% of the loan, they need to use a qualified residential mortgage (QRM) with a 20% down payment. Unless you believe that loan originators will not sell anything but a QRM, nobody will be locked out of the market. That’s further underlined by the fact that this rule does not apply to loans sold to the FHA or Ginnie Mae. There’s a good possibility that this will be extended to Fannie and Freddie as well. At that point, you’re pretty much talking about all new mortgage loans, since the securitization market outside of those public buyers is dead.
And let’s keep going on this. The terrible burden placed on these non-QRM home buyers is something on the order of twelve bucks a year:
The rhetoric of the Home Ownership Mob is entirely based on the unexamined premise that if banks can sell off 100% of their loans, rather than just 95%, then the loan rates will be cheaper.
But there’s no good reason to believe that to be the case. Will banks be able to sell that last 5% of the loan for more than they can book it for on their own balance sheet? I can’t see why they would — and if they can’t, then QRM loans wouldn’t be any cheaper than any other loans. More to the point, investors, burned during the financial crisis by the originate-to-distribute business model, are going to require a risk premium on any securitized paper where the underwriting bank doesn’t retain at least 5%. For that reason, too, it seems reasonable to believe that QRM loans would if anything be more expensive than other loans, rather than cheaper.
And most importantly, we’re talking about 5% of the loan here. Let’s say that the Home Ownership Mob is right, and that banks will require a premium of say 15bp to hold loans on their own balance sheet rather than selling them off in the market. If the market rate is 4.9%, the bank is going to require 5.05% to keep its own bit of the loan in-house.
Now say you’re buying a typical $250,000 home, with 10% down, and you’re getting a standard 30-year fixed-rate mortgage. If the whole thing was sold off into the market, then the monthly payments on a $225,000 mortgage at 4.9% are $1,194.14. On the other hand, suppose that just 95% of the mortgage was sold off into the market at 4.9%, and the other 5% was retained in-house at 5.05%. In that case, you end up paying a whopping 4.9075% instead, overall. And your monthly mortgage payments soar to $1,195.16 — a whole dollar more! That’s more than twelve dollars a year!
Dean Baker does similar math and finds the bankster’s claims that moderate-income borrowers will have no ability to afford a mortgage under these rules is just bunk.
Do affordable housing groups have a problem with risk retention? Do they think that banks shouldn’t have to hold any piece of the loans they originate, so they at least have a small stake in the downside, which might weigh on their ability to rip off customers? Would they rather the banks not care about the ripoff because they’ll feel no pain if the loan fails to perform?
What dupes these affordable-housing groups are being. I agree with Yves Smith – they’re acting as human shields for bad policy that will allow the banks to run the same kinds of dangerous originate-to-distribute shops and cut the same corners they did in the run-up to the bubble. Making sure that affordable housing gets into the hands of low and moderate-income people is not the same as making sure banks can rip off those same people. During the bubble days, originators like Ameriquest would essentially pay off groups like ACORN and others, getting them to buy in to the fact that these companies helped poor and minority borrowers achieve the dream of homeownership. It’s really just corruption, and we’re seeing it all over again.