Today’s Residential Mortgage Industry: Have The Regulators Gone Too Far?

CongressBackground.  It wasn’t that long ago, circa 2010, housing advocates were lobbying for tougher new laws to rein in the abuses of the easy money years. Now, thanks to Dodd-Frank and its henchman, the CFPB, some folks are saying the regulators have gone too far.

Today’s Regulatory Atmosphere. In a recent Housingwire article (MBA’s Stevens: Today’s housing policies fail American homeowners), the President of the Mortgage Bankers Association (“MBA”) told of packed house of industry members, that the current regulatory culture was “broken.”

“…David Stevens, the president and chief executive officer of the Mortgage Bankers Association, spoke with passion as he told the attendees of the MBA’s National Secondary Market Conference that today’s housing policies are “failing the American homeowner.”


‘Today the American Dream is in the penalty box, and the Justice Department and other enforcement agencies appear to be in the driver’s seat when it comes to the nation’s housing policy. Everyone working in the mortgage business feels like there is a giant target on their back,’ Stevens told the crowd.”


“And the fact is consumers and the housing market would all be better served if the tone in D.C. changed,” Stevens continued. “The negative rhetoric and the enforcement environment are hurting everyone – homebuyers, lenders and the stewards of the nation’s economy. Housing policy is failing today.”

“One area where Stevens sees a negative environment being created by regulators and legislators is the mortgage rate comparison tool created by the Consumer Financial Protection Bureau.”


“Today’s environment is not encouraging credit expansion,” Stevens said. ‘It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.’”

According to the Housingwire article, Mr. Stevens had three steps for improvement [the follow comments have been condensed]:

  • First, Stevens said the dialogue must change. “We’re operating in the safest, soundest lending environment in decades. Consumers should feel confident in applying for loans and purchasing homes,” Stevens said.

“Policymakers should champion this environment and do a victory lap letting consumers know they are well protected and that they can trust the system,” Stevens said. “The dialogue of distrust must end. Regulators should understand the power that their message has over the mortgage market and just how their messages influence behavior.”

  • The second change that Stevens called for is adjustment to be made to the current lending rules.

Stevens also said that the Qualified Mortgage rule itself doesn’t work as written and needs to be changed.

“The only reason QM is working today is because of the ‘GSE patch,’[1] without which we would be in a world of trouble. The hardwired 43% debt-to-income ratio is too high for some borrowers, and too low for others,” Steven said.

“Non-QM/non-agency loans are primarily going to the wealthier buyers. There is strength at the top end of the market for well-heeled borrowers seeking jumbo loans, but credit remains tight for first-time borrowers who often get lower-balance loans,” Stevens said. “This directly translates into strength at the high end of the market, while the entry-level buyers in most communities still lag behind.

  • Third, Stevens said that the questions surrounding the secondary market need to be resolved.

Stevens said that last week’s update into the single mortgage-backed security that is to be issued by both Fannie Mae and Freddie Mac is a step in the right direction.

“The single security will lead to more liquidity,” Stevens said. “The single security will lead to more confidence, better and more transparent data. Upfront risk share will lead to a broader risk share model that encourages more competition and brings more private capital back to the market.”

Conclusion.  Mr. Stevens’ comments deserve consideration.  In effect, he is saying that if the financing system is to work for everyone, the rules must be realistic.  Touting QM as a great idea, but diluting it by a “patch” which makes it unrealistic and unfair, gives the CFPB bragging rights for coming up with the wrong solution.

However, Mr. Stevens ignores an issue he probably could not have addressed had he wanted to: The bureaucrats at the CFPB are not in the business of getting along. They need to sow fear and distrust in consumers – otherwise their regulatory raison d’etre disappears. So if they are to keep growing, and overreaching – if you will – they need a boogeyman, and the financial services industry fits that bill in spades.

If things are to change, and perhaps they will, it needs to come legislatively.  The CFPB needs to be reorganized, downsized, and declawed.  There are those in Congress who are beginning to do just that.  More about this in another post. ~PCQ


[1] Quoting the Urban Institute in another Housingwire article (Urban Institute: Qualified Mortgage impact overblown) the “patch” is a result of the a very large QM exception that: “…allows the GSEs and government agencies such as the Federal Housing Administration to operate under their own standards for seven years or, in the case of the GSEs, when they exit conservatorship, whichever is sooner.”  [Italics Mine.] Thus, the high lending bar imposed by QM for residential mortgages, is largely diluted. As Mr. Stevens notes, “The only reason QM is working today is because of the ‘GSE patch.”