Affordable-Housing Zealots Hijack Mortgage Reform

It's Official: Affordable-Housing Zealots Hijack Mortgage Reform

Posted 08/30/2013 06:28 PM ET

Housing: Under pressure from civil-rights activists, federal bank regulators have killed tougher mortgage rules requiring minimum down payments and credit scores for loans bundled into securities. Here we go again.

The Fed, FDIC, SEC and three other agencies regulating Wall Street have adopted the same weak underwriting standards the Consumer Financial Protection Bureau set earlier this year for loans.

The Dodd-Frank Act was supposed to require banks and other issuers of mortgage-backed securities to retain 5% of the credit risk of the bonds on their books to avoid the moral hazard that led to the financial crisis, when lenders quickly resold subprime loans to Fannie Mae, Freddie Mac and Wall Street to offload risk. Only high-quality mortgages were supposed to be exempt.

But a week after the president met with regulators at the White House, when he reportedly expressed fears lenders might not want to lend to low-income borrowers, they proposed a broad exemption to the rule covering 98% of all mortgages.
Proponents of tighter underwriting had sought a 20% down payment rule. Now, there is no requirement.

Regulators also punted on proposed credit score metrics — even though the agencies' own studies show credit history and down payments "are significant factors in determining the probability of mortgage default."

Instead, lenders can look to "nontraditional" credit references — rental payment history or utility payments — a practice widely blamed for waves of mortgage defaults in states with lots of immigrants.

Qualifying mortgages, moreover, can count income received from child support and even "government assistance programs" against household debt to meet the new 43% debt-to-income threshold.

The ratio is the only hard metric in the mortgage rules. Yet it was loosened from an original 36% ratio, and it's still not as useful as credit scores in predicting defaults. Under the new criteria, federal data predict a whopping 23% loan default rate.

Regulators admit that such a high default rate is "not an acceptable level of risk," but justify it by arguing:

"The agencies are concerned about the prospect of imposing further constraints on mortgage credit ... (that) might disproportionately affect groups that have historically been disadvantaged in the mortgage market, such as lower-income, minority, or first-time homebuyers."

This is a major victory for the affordable-housing lobby, which before the crisis successfully pushed for similar easing. The NAACP, National Community Reinvestment Coalition, Center for Responsible Lending and Urban League, among others, all fought minimum down payments and credit scores, arguing they "block" housing market access for minorities with weak credit.

In fact, low-income minority borrowers have not been locked out of the mortgage market. In 2012 alone, Fannie and Freddie underwrote close to $300 billion in low-income loans to meet goals set by the government.

And the Federal Housing Administration has backed so many subprime loans that delinquencies have threatened the agency's solvency.

Last year, moreover, the administration re-adopted a Clinton-era rule that compels lenders to bend mortgage standards for minorities with weak credit.

The Justice Department, as part of a crusade against lending discrimination, has sued banks that maintained strong standards. And the Consumer Financial Protection Bureau has marched an army of investigators into banks to make sure their underwriting policies don't have a "disparate impact" on blacks and Latinos.

Now, by giving risky mortgages and securities an official stamp of approval (and legal protection), the administration has institutionalized the same lax underwriting practices that sparked the mortgage meltdown.

While the administration has paid lip service to tightening lending standards and preventing another crisis, behind the scenes it actually has done the opposite.

In fact, it's pushing the same reckless Clinton-era policies of lowering standards to boost minority homeownership that sparked the mortgage meltdown.

Only now, in an obscenely cynical betrayal of the public trust, the government is doing it in the name of "financial reform" and "crisis prevention."