WASHINGTON — The Consumer Financial Protection Bureau’s rules to improve mortgage underwriting took effect last year amid dire industry predictions that they would choke off the trickle of credit in an already crippled market.
But so far, at least, the Apocalypse hasn’t arrived.
Although the CFPB’s “qualified mortgage” and ability-to-repay rules remain one of the most contentious rulemakings since the Dodd-Frank Act was enacted five years ago, credit availability appears to be gradually widening since they were implemented, according to multiple different studies.
“We didn’t expect the ability-to-repay/Qualified Mortgage rule to have a large, immediate impact on the market. And nothing we’ve seen would suggest that there has been a large impact in terms of access to credit and people being able to do the kind of lending they were doing before,” said David Silberman, the CFPB’s associate director for research, markets and regulation, in an interview. “If anything, there’s been a gradual loosening of credit, but at very slow pace.”
That is not to say that both rules have worked perfectly — or that either is a done-deal as currently written. It’s also true that one of the biggest reasons why the rules have not visibly affected credit availability is because of a temporary “patch” that allows any loan purchased by the government-sponsored enterprises to automatically qualify as QM.
The rules were also implemented after lenders had already significantly tightened underwriting standards, which makes it difficult to track their exact impact.
“I’d argue the effect of QM has been very, very muted when first, the market has taken into account a lot of changes before the rule. And secondly, you’ve got the agency patch,” said Laurie Goodman, Center Director of the housing finance policy center for the Urban Institute.
The most recent housing report from the Urban Institute calls the projections for mortgage originations in 2015 “mixed” with the Mortgage Bankers Association projecting “a modest increase over 2014 of $81 billion to $1.2 trillion, Fannie sees a small increase of $14 billion, and Freddie expects no change.”
Economist are still struggling to figure out the “new normal” for the mortgage market, which is still seeing new regulations added in the midst of record low interest rates and shifting borrower demands.
“It was like a 100-year flood that we just went through and that colors some of the thinking. We are now in a period where the mortgage market is developing a new base of experience in order to set policy going forward,” said Paul Leonard, director of the California office for the Center for Responsible Lending. “As we go forward, we will see to what extent the patch is used … the world looks quite different than it did.”
At least theoretically, the patch’s days of helping GSE loans qualify as QM are numbered. The CFPB said the exemption would last for seven years, one of which has now passed, or until GSE reform is enacted. As GSE reform appears increasingly unlikely to happen anytime soon, however, many observers expect the CFPB will ultimately extend the patch.
The CFPB “can always make that patch permanent rather than having it revert back,” said Kevin Fears, senior economist at the National Association of Realtors. If nothing is done by Congress or the CFPB, “it would have significant effect on 14% to 18% of loan production if the timeline sunsets.”
Another difficulty in assessing the impact of the new rules is specifically how QM’s 3% cap on points and fees is affecting credit availability. Lenders continue to argue that the cap is too restrictive, and some lawmakers have proposed bills to broaden its calculation even while the CFPB makes tweaks to it.
While there are many reports on mortgages, such as the Home Mortgage Disclosure Act which the CFPB has proposed expanding — there is very little specifically tracking points and fees. That’s one of the reasons why the CFPB is working on building a national mortgage database with the Federal Housing Finance Agency, Silberman said.
“One of the things that is hardest to get, quite frankly, is data on points and fees, since it is not reported in HMDA. That’s an issue where it’s particularly difficult to get a sense of what’s going on,” Silberman said. “We’ve been talking to lenders about voluntary submission … to help us get a better sense of what’s happening and how the points and fees caps are affecting the market, if at all.”
Another area that the CFPB is closely watching is how the safe harbor protection on QM loans plays out for lenders. The industry continues to pressure the agency to broaden safe harbor protection to more of the non-QM market but that argument is difficult to make because mortgages written after the rule have not defaulted to the point of being tried in court.
“There’s still the speed bump on QM versus non-QM because we do not really know the difference in liability until we go through another significant cycle where we have an increase in delinquencies and defaults, and see what happens with potential claims,” said Bob Davis, executive vice president of mortgage markets at the American Bankers Association. “Right now it’s an unknown business cost.”
In the last year, the CFPB has made several amendments to its mortgage rule including trying to clarify what counts as points and fees cap; offering lenders a way to “cure” a loan mistakenly ended up not being a QM; and more recently, broadening the terms for small and rural banks.
Industry proponents said the amendments thus far have helped lenders and the mortgage market. They said they largely expected the stable mortgage numbers, but have been impressed with the CFPB’s repeated adjustments to the rule.
“Yes, it does surprise me,” Leonard said. “The CFPB has been very attuned and responsive in a data-driven sort of way, to make changes where they haven’t gotten the rules right in the first place.”
One area the CFPB is closely watching is small-dollar mortgages, typically under $100,000, that fall outside the QM space.