Mitt Romney’s comments attributing the difficulty of getting a mortgage to Dodd-Frank QRM rules was really way off base. The rule is on track to be completed by the Consumer Financial Protection Bureau on the timeline set out in Dodd-Frank, by 2013. As it’s not in place now, it places no penalty on lenders to hand out loans below the Qualified Residential Mortgage standards. And there isn’t a look-back function in the rules. If anything, you’d think lending would go FASTER to get negative amortization or adjustable-rate loans in under the wire. To the extent that there’s any delay, it’s because banks and mortgage lenders are trying to expand the rule to get themselves legal immunity on the loans they write.
There are lots of reasons for the current difficulty among consumers in obtaining a mortgage loan. New capital requirements on loans, for one; the artificially low supply of housing, meaning that lenders can be choosy over who they select to bestow with a mortgage, for two. Nick Timiraos at the Wall Street Journal finds another. Fannie Mae and Freddie Mac, the mortgage giants which buy up virtually all mortgages on the secondary market, have actually gotten stringent in analyzing the underwriting of loans before they purchase them. And lenders are having a sad about that.
Thousands of would-be homeowners are being locked out of the market because lenders, facing a hard-line stance from Fannie Mae and Freddie Mac, have grown wary of making new loans.
The two mortgage giants have been forcing banks to take back an increasing number of loans that the banks made during the boom years and sold to Fannie and Freddie. To protect themselves from such demands in the future, banks are ratcheting up credit and documentation standards for new mortgages [...]
This play-it-safe stance by banks threatens to undercut the Federal Reserve’s latest effort to push down mortgage rates by buying up mortgage-backed securities. Even if rates keep falling, many people will find it much harder to take advantage.
So far, Fannie and Freddie have asked banks to repurchase $66 billion in mortgages made between 2006 and 2008, according to an analysis of federal filings by Inside Mortgage Finance, an industry newsletter. The balance of outstanding demands from both companies at the end of July was up 37% from a year earlier. Most of these loans have defaulted, so banks face losses when they take them back.
Basically, banks are angry that Fannie and Freddie are daring to check their work, instead of blindly accepting the loans like they did during the housing bubble. Given bank performance during the bubble years, and the rampant fraud in the system, I’d say that work needs to be checked. Someone with a poor credit history shouldn’t just be handed a big mortgage loan, for their own good, I might add. Those crying about Fannie and Freddie’s due diligence want to reinflate the housing bubble as far as I can tell.
And it’s not like banks are losing money on this enterprise. In fact, they’re making more off of mortgage lending than ever on a per capita basis.
There’s an easy answer to avoid this put-back risk; stop making dodgy loans. Or, fix the private securitization markets, so Fannie and Freddie don’t have to buy 9 out of every 10 loans and therefore have to scrutinize what they buy in ways that cause bottlenecks. In fact, banks make plenty of money just off the interest rate on the loans they sell to consumers, maybe they could just hang onto the loan like the old days, instead of using it to gather capital so they can go gambling. You don’t HAVE to sell the loan into the marketplace, after all. If a bank thinks there’s no default risk, they shouldn’t whine about all the scrutiny from the GSEs, they should hang onto what they believe will be a performing loan!
In other words, fix your underwriting systems and then get back to me about how mean Fannie and Freddie are being.