The Dodd-Frank Act includes a provision known as the "qualified mortgage", and it imposes stiff penalties on lenders who make loans without enough evidence that the borrower can afford the loan. In principle, the concept of a "qualified mortgage" can easily be defended. The problem is that, so far, what constitutes a "qualified mortgage" has not yet been defined.
The job of making that definition has been delegated to the Consumer Financial Protection Bureau, one of a number of new regulatory agencies created by the Dodd-Frank Act. The CFPB has missed the deadline imposed by the legislation for completing this assignment, but not to worry – they have also missed deadlines for other important assignments, like new rules for loan officer compensation and new bank capital rules. In their wisdom, the eminent crafters of the Dodd Frank legislation have made provisions for all kinds of penalties for mortgage professionals who violate the law (whatever the law turns out to be, as defined by the unelected bureaucrats serving on the CFPB and its sister agencies) – but there will be no penalties of any kind imposed on the various boards and bureaus for missing their deadlines. Because, after all, those folks are all public servants.
It's hard to measure the impact that this particular obstacle has had on the willingness of lenders to lend, because there are also a number of other constraints on that willingness.
Multiple Layers of Regulation
The Wall Street Journal reports that on Friday, Federal Reserve Governor Elizabeth Duke said she was "really, really worried" about the cumulative effect of having one mortgage lending regulation on top of another: "I'm worried that you'll get to the point where the only loans that get made are the loans that fit in every single angle of the box, and that's going to be a very small number of loans." She added that policymakers should "find ways to make sure that you can still make the irregular loan, the one that doesn't fit exactly in the box."
Want to know an interesting fact about Federal Reserve Governor Elizabeth Duke? She is the only member of the Federal Reserve Board of Governors who has actually worked in private sector banking. There are 7 members of the Board; three of them are academics (economists) who have also worked in government, and the other three are lawyers.
The Wall Street Journal also reported in the same article (Tuesday, October 9) that, in a survey conducted by the Federal Reserve, senior loan officers said "the biggest concern keeping lending standards tight right now has more to do with banks' fear that they'll have to buy back delinquent mortgages from Fannie, Freddie, and other investors." 25% of respondents cited "put-back" risk as the most important factor in keeping lending standards tight. An additional 33% said it was a "very important" factor.
At a Senate hearing in July, Treasury Secretary Timothy Geithner admitted, "Mortgage credit is tighter than it should be, and the main reason for that is because banks… feel much more vulnerable now to what people call 'put-back'."
According to Inside Mortgage Finance, Fannie and Freddie have already asked banks to repurchase $66 billion in mortgages made between 2006 and 2008, and the balance of outstanding demands from both of the former GSE's at the end of July was up 37% from a year earlier.
It used to be a loan officer's job to determine that a borrower could reasonably repay a loan. Today, our job is to protect ourselves and our employers from put-backs, and we do this by requiring borrowers to produce reams of documentation so that we can deliver loans that cannot be questioned by regulators who, it could be argued, don't know enough about mortgage lending to qualify for a job as a loan officer.
Remember this the next time you get frustrated with your underwriter or your company. Prepare your clients and Realtors for the experience -- don't sugar-coat it. Let them know you will have their backs all the way, and that you will fight for their loan. And try to help them understand who the real culprits are in all of this.