While many in the industry laud the recent changes the Consumer Financial Protection Bureau made to the proposed Qualified Residential Mortgage (QRM) rule, one economist says the new proposed rule sets the stage for another housing crisis.
Robert C. Pozen, a senior fellow in economic studies at theBrookings Institution suggested shared his dire outlook in a recent article in the Wall Street Journal, expressing his concern that without the assurance of a substantial down payment or risk retention from lenders, risky lending will prevail.
“Under the proposed rules for home mortgages, most borrowers would make minimal down payments and most lenders would have no risk of loss,” Pozen said. “This is a good way to create another mortgage crisis.”
Original proposals for the QRM included a 20 percent minimum down payment requirement and a maximum loan-to-value ratio of 36 percent.
The CFPB’s new proposal, released August 28, includes no minimum down payment requirement and increases the maximum loan-to-value ratio to 43 percent.
While the Mortgage Bankers Association said the original rule “would have unduly constrained the availability of mortgage credit for many borrowers,” Pozen disagrees, drawing on the Canadian housing market for comparison.
Lenders in Canada generally require a down payment of at least 20 percent, and the nation’s homeownership rate is even higher than the U.S.‘s – 67 percent compared to our 65 percent, according to Pozen.
Loans that do not meet QRM standards require 5 percent risk retention by lenders, unless they are backed by the Federal Housing Administration or the GSEs.
“The combination of low down payments and government backing is lethal,” Pozen said, pointing out the FHA’s low 3.5 percent down payment requirement. He also noted that the GSEs require a down payment of “only” 10 percent.
While the future of the GSEs is unknown, any losses they bear in their current state are absorbed by taxpayers.
The same is true for the FHA, which currently does not meet its statutory minimum loss reserves due to significant losses in recent years.
“In short, if the U.S. wants to promote homeownership, it should learn from past mistakes,” Pozen said.