What impact will the Qualified Mortgage and ability-to-repay rules have on mortgage lending? The short answer is it's too soon to tell.
To begin with, let's acknowledge that the Consumer Financial Protection Bureau (CFPB) is in a tough spot. [paragraph] The financial services industry, already feeling overregulated, didn't exactly jump for joy at the notion of a new fiber- regulator with seemingly limitless oversight authority. Most people in the industry believed, with some justification, that the risky behavior that had fueled the real estate boom--and had ultimately led to a catastrophic meltdown in the global financial markets--had been all but eliminated. [paragraph] Loan performance over the past three years has been pristine, and default rates on recent loan vintages are miniscule compared with historic averages. [paragraph] Consumers and consumer advocate groups, on the other hand, welcomed the idea of a regulator aimed at protecting people from predatory behavior by lenders and servicers. Yet these groups would have preferred a watchdog with sharper teeth and a more ravenous appetite for enforcement activities. Even so, they didn't really want anything that would make it harder for the average individual to get loans.
That conflict, oddly enough, is summed up in the CFPB's stated goal of making loans "safe and available."
This is a wonderful goal, but it's axiomatic that the safer loans are, the harder they're going to be to qualify for; and the more available they are, the more inherent risk will be involved.
"Safe and available," one could argue, aren't just mutually exclusive goals--they're effectively incompatible.
Which brings us, in an admittedly indirect way, to the Qualified Mortgage (QM) rules.
Subprime loans, Dodd-Frank and the genesis of QMs
Before we explore the impact QM rules are likely to have on mortgages, it might help to briefly revisit the events that led to their creation.
In the beginning, there were subprime loans. These performed reasonably well--not as well as prime loans, but not too poorly. These loans were bundled into securities and sold to Wall Street investors, who liked them very much--so much, in fact, that they developed a seemingly insatiable appetite for more.
And the industry responded by making loans to everyone who was even marginally qualified. Unfortunately, when lenders ran out of even the most marginally qualified borrowers, they continued making loans to people who weren't even remotely qualified.
And when the supply of not-even-remotely-qualified borrowers was exhausted, the industry got more creative, and started using exotic products such as negative amortization loans, "pick-a-pay" loans and 125 percent loan-to-value ratio (LTV) no-doc loans to make monthly payments on high-priced homes affordable (at least temporarily) to low-income, low-FICO[R]-score borrowers.
In hindsight, this turns out to have been a very bad idea.
We all know what happened next.
The housing market imploded--homes lost 35 percent of their value, virtually overnight. Foreclosures soared to record numbers. Investors, and seemingly invulnerable financial institutions--such as Bear Stearns, Lehman Brothers and AIG--suddenly realized that their vaunted empires were built on mountains of worthless paper.
In full emergency-response mode, the government took decisive action: It wrote gigantic checks to bail out the financial industry; wrote a gigantic, almost-incomprehensible piece of legislation to solve problems that the industry had already eliminated; and created a gigantic new bureaucracy to ensure that these already solved problems would never happen again.
So the subprime meltdown begat the "too big to fail" hysteria, which begat the Dodd-Frank Wall Street Reform and Consumer Protection Act, which begat the CFPB.