Last month the Senate voted unanimously to have the federal government become the nation's home loan officer. Senators Landrieu and Isakson spearheaded an amendment to have the federal financial regulators create a new mortgage product called a “qualified residential mortgage”, and Senator Crapo expanded this task by including commercial mortgages as well. If the amendment becomes law, most financial or housing regulatory agencies in the federal government will determine which consumers will qualify for a mortgage and those who will not.
What is so stunning about this is that it wasn’t but a few months ago when the very same groups that support this amendment were opposing Administration efforts to create the “plain vanilla” mortgage. Who else remembers the calls for more individual consumer control, opposition to government mandated consumer products and dare I say it, death panels? Oh sorry, wrong bill. But, same Senators, right?
Why do lenders want to pass the credit decision buck on mortgage lending? Lenders want avoid the risk retention requirements of the regulatory reform bill that force loan originators to maintain skin in the game.
If a lender is required to retain risk on its books it has to hold capital to offset that risk. And it gets worse for financial institutions since they can no longer create special purpose entities to move these risks off balance sheet. Consolidated balance sheet requirements mean the more you lend the bigger GAAP-induced capital headache you get. Lenders also don’t want to tie up funds that would otherwise be available to support and stimulate economic recovery and growth. Get used to seeing "qualified residential mortgages" and not much else.
This approach makes good sense on paper. But there are other benefits, too. A big one is that lenders will get to push adverse credit decisions back on the government. If a borrower on the margins can’t meet the government standard, it’ll be Congress’ fault. If a lender can’t find enough “qualified residential mortgages” to meet Community Reinvestment Act requirements, it’s Congress’ fault. If HMDA reports shows credit is not widely available, it’s Congress’ fault. Note to members of Congress, get ready for the phone calls because they’ll be coming. Trust me.
This all adds up to a big win for lenders, right? Maybe not.
The process of joint rulemaking by five or more agencies will be—well there is an expression for it that I won’t use. Getting two agencies to issue joint rules is hard enough (see Gramm-Leach-Bliley) but cluster together five agencies and getting the job done will be a sight to behold.
Unfortunately, just the number of agencies involved won’t be the only problem. If the current language becomes statute, it will be a broad, vaguely defined grant of authority to set underwriting criteria for residential and commercial loans. For a preview of what that looks like, check out what Fannie Mae, Freddie Mac and the Federal Housing Administration have done on underwriting requirements for condominium loans.
Between the three of them, Fannie, Freddie and FHA have near universal command of the mortgage market. What they dictate applies across the entire country. There was no justification for the condominium underwriting standards that were imposed nationwide. There was no meaningful opportunity for public comment. There is no appeal. And, no one is looking over their shoulders to see if they got it right.
If Congress wants the agencies to set underwriting standards for residential and commercial mortgages, it’s not enough to say, “The world is your oyster, now get to it!” If Congress adopts the Senate’s residential and commercial mortgage underwriting language, it must also require the regulators to consider that not all housing is the same.
For example, condominiums, cooperatives and manufactured housing are all different from single family housing and each may require specific underwriting standards. If Congress wants to ensure lenders will originate mortgages for low- and moderate-income borrowers, the agencies must be directed to create “qualified residential mortgage” standards for these borrowers. And, Congress must ensure the agencies rely on quantifiable, testable data made public for review and research. Unless the agencies are required to justify each underwriting criterion and are required to periodically review the standards they create Congress will be back to repeal or substantially revise this grant of authority and soon.
Or, Congress could save itself the trouble and tell lenders to manage their own business.