The Consumer Financial Protection Bureau was one of the most-hyped elements of the major financial regulation overhaul Congress enacted in 2010. Most of the regulation was too technical for the public to comprehend, but the CFPB had a media-savvy celebrity spokesperson in Elizabeth Warren, who turned it into a focal point for progressive activists. Yet since its creation, the CFPB has been relatively quiet.
But new rules on “qualified mortgages” issues last week, plus stricter regulation to protect against abuses by mortgage services announced today, change all that. Housing and housing finance are a major economic sector, and new proposals to crack down on abusive practices will have real benefits to consumers. At the same time, industry advocates are correct when they say the CFPB’s plans will make it harder for some people to get home loans. That’s a price worth paying if it produces a more honest, more stable mortgage market.
Last week’s action, known as the “ability to pay” rule, essentially requires lenders to make a reasonable, good-faith determination that a mortgage borrower will be able to repay a loan that’s offered. This is the kind of regulation that seems sensible to the point of being unnecessary—why lend money that can’t be paid back? But the house price boom of the early aughts revealed a ton of hopeless loans. Mortgage originators found they could make money off transaction fees regardless of the longer-term consequences. More broadly, financial institutions came to believe they had developed new methods of mortgage securitization that made the creditworthiness of any one homebuyer irrelevant. Individual loans might go bad but a judicious mix of diversification, separation of risk into separate tranches, and insurance against default risk could eliminate the downside.
The assumptions underlying this scheme turned out to be badly flawed, and produced disaster for the world.
The CFPB is countering with what amounts to a two-pronged strategy. The first is to create a safe harbor known as “qualified mortgages”—essentially mortgages that conform to Fannie Mae and Freddie Mac standards whether or not they’re actually purchased by Fannie and Freddie. These are your traditional mortgage products, with no funny resets or unusual term lengths. But there will also be unorthodox mortgages, so the second prong is imposing legal liability on vendors of unorthodox products who fail to make good-faith estimates of ability to pay. The idea is to drain the swamp of so-called NINJA (“no income, no job, no assets”) loans and of mortgage products built around deceptive teaser rates followed by balloon payments. Importantly, however, the rule doesn’t target specific products: It simply establishes that heightened scrutiny will be applied to all departures from qualified loans.
Today’s move takes aim at abusive practices by loan servicers against people who’ve already gotten in trouble making their payments. Starting in January 2014, the CFPB will require services to fully inform borrowers in writing about foreclosure alternatives as a first response when payments are missed. An account will need to be at least 120 days delinquent before foreclosure proceedings can begin, and “dual tracking,” whereby banks simultaneously initiate foreclosure and engage in loan modification (often extracting modification fees and then foreclosing anyway), will be banned.
Critics say both of these measures will restrict loan availability. And while advocates of stricter regulation don’t like to admit it, the fact is that the critics are correct. If it’s harder to come up with wild new mortgage products and if defaulters have more legal protections against getting screwed over, then some households will have a harder time getting loans.
But that’s fine. The great housing and credit boom didn’t come out of nowhere. As the nation’s homeownership rate and the volume of single-family house construction rose, building of mobile homes and multi-family rental properties slumped to historic lows. At the time, lenders and politicians alike touted this as a miraculous new wealth-building strategy. But in retrospect, the new lending products that facilitated it were disastrous and have left people with less wealth than ever. The right response to the news that sensible regulation will put traditional homeownership out of reach for some households is to remember that housing policy needs to meet the needs of everyone, not just the creditworthy.
As homebuilding recovered in 2012, multi-family dwellings have been a larger part of the mix than we saw in the aughts. But in absolute terms, starts of multi-family apartments remain well below where they were in the 1980s even as the population is larger. Manufactured home placements also remain in the doldrums. Some of this reflects general economic conditions and will improve as the broader economy recovers. But it’s also true that over the decades zoning codes have become unduly hostile to both mobile homes and apartment buildings (even in urbanist hotspots like Portland) in a way that makes it difficult to produce the housing we need. The technology to put questionably creditworthy families in owner-occupied single-family homes turned out to be a bust. But the technology to put such families in rental apartments and cheap manufactured structures is, if anything, better than ever. We just have rules that have made it harder to do so. The CFPB’s drive to ensure crazy lending doesn’t make a comeback is a great idea, but rules in other parts of the government—looser local zoning, for example—are going to have to adjust to make sure the supply of alternatives expands.