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Is QM What's Holding Back the Housing Market?

posted by Adam Levitin

Mitt Romney made a surprising claim in last night's Presidential debate:  that the lack of a regulatory definition of Qualified Mortgage (QM) under the Dodd-Frank Act is what's causing banks to hold back from lending. This claim, while perhaps narrowly accurate in the sense that regualtory uncertainty is likely to have some chilling effect, takes a misleadingly selective view of what's going on in the housing finance market.

Dodd-Frank prohibits the making of residential mortgage loans "unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments." Failure to comply with the ability to repay requirement is an absolute defense against foreclosure or debt collection on the non-compliant loan. 

The statute, however, provides that ability to repay shall be presumed if the loan is a "Qualified Mortgage."  In other words, QM is a safeharbor.  The statute itself provides a fairly extensive definition of "Qualified Mortgage".  There's a question of just what income verification actually requires, but it's not as if the statutory definition leaves much in doubt.  The staute directs the CFPB to enact regulations, and permits the CFPB to amend the QM definition as it seems fit.

If Romney's point is merely that on the margin the lack of a QM regulation is chilling lending, I've got no quarrel with him. But I don't think Romney's point was just about the marginal mortgage loan. I think he's claiming that QM is really what's holding back the housing market, not the millions of underwater borrowers or borrwers with damaged credit and a tenuous employment market.  

Mitt also seems to have a selective memory.  First, recall that banks weren't lending pre-Dodd-Frank.  It's not clear that Dodd-Frank changed anything.  Banks with damaged balance sheets are going to be careful about their lending.  The banks got too close to the fire in 2008 and once burned, twice shy.  As it happens, though, it's not as if there is no lending going on.  But a quarter of the homeowner base is underwater, which basically removes them from the refinancing pool, and the pool of new homeowners isn't growing, so we're going to be looking at a smaller market in any event.  What QM is really about, however is not standard plain vanilla loans.  Instead, it is about riskier, more aggressive loans. Why aren't banks making those loans?  Because they don't want the risk. In 2004-2008, they could make those loans and securitize them.  Now, with the private-label securitization market dead, the only place to park those loans is on their own balance sheets, and the banks aren't foolish enough to do that.  

This brings up a second bit of forgetten history.  While the QM is a safe harbor, not a penalty, it can be seen as an extension of the HOEPA loan concept. We managed to have the loosest credit standards in living memory at a time when the Fed hadn't adopted a meaningful HOEPA rule (despite a direct statutory mandate to do so). So it's hard to believe that lack of a regulatory definition of a defined statutory term is really chilling the market.  

Finally, recall that the CFPB is the regulator responsible for adopting a QM rule. The CFPB could not adopt a QM rule without a Director, and GOP obstructionism significantly delayed the start of the CFPB's rulemaking process. For the GOP Presidential nominee to complain about delayed regulations when the GOP is responsible for that delay is a bit hypocritical.  And then as it stands, what will happen when the CFPB does adopt a QM rule? It will almost assuredly be criticized (again, especially on the right) as chilling mortgage lending. In short, the CFPB is damned if it does and damned if it doesn't.  But to blame the state of the mortgage market on the lack of a regulatory definition of QM is to misleadingly ignore the bigger picture.


Banks aren't lending for a variety of reasons. One of the biggest issues is that rates are so low, no one really wants to do any lending outside of Fannie/Freddie. Then you have the uncertainty around new regulations on top of dealing with the overzealous enforcement of existing ones.

The single biggest issue with the housing market though is negative equity. Until that is addressed without necessarily getting into moral hazard issues of just wholesale writing down principle balances, housing will continue to plod along going nowhere.

Maybe Romney should ask the clear thinking MA jurist Keith Long of Ibanez/Bevelaqua fame. He was a Romney appointee and who clearly has an understanding of the problems.

The "elephant in the room" is the fact that the "GSE Business Model" is FATALLY flawed. Everybody knows it and until we are willing to bury them there will be the ever increasing consequences, including the underwater people.

There are no silver bullet remedies however; attempting to breathe life into something that is dead is ludicrous.

It would seem that a "QM" is satisfied by bad debt insurance, which every mortgage originator must have in order to qualify for a AAA rating, required by SEC regs and securities investors. That is the first stage of stating that all pre-requisites have been met regarding prudent in house due diligence of the borrower's financials. When the originator deceives the insurer, the rating is assigned, which is relied on by the buyer of that security. In the end, if it cannot be proved the originator met his "in house" burden in order to secure the insurance, then the insurer is "Off the Hook", and if that is shown, then there never was a "QM" status due to fraud in obtaining the AAA rating. If that comes to light, the originator must re-imburse the buyer of the uninsured securitized mortgage. The originator was paid cash and must return same to the securities buyer. That is the real "elephant in the room" as it involves breach of contract with the insurers, and fraud on the part of the originator as to his obligation to have vetted each insured account prior to submission for the bad debt insurance in an attempt to gain coverage to meet the requirements of the SEC regarding the matter. The banks would have to come up with huge amounts of funds to return to the securities purchasers, and in fact some of them are already suing the banks now for this very reason.
The "mother's milk" during the mortgage boom, was availability of Freddie and Fannie money to buy the bogus mortgages, which was obtained from the public sale MBS. When that stopped, mortgage origination stopped by local banks. Now that the FED has stated they will back Freddie and Fannie by buying morgages, it looks like it is "game on" again, only this time it is not the investment funds that will take the risk, rather the Taxpayer, because money paid to banks for these mortgages is untimately backed by government funds, which are borrowed into existence in the fisrt place.

Forget QM, the problem is lack of QB (Qualified Borrowers) and QC (Qualified Collateral). Face it, we no longer have anything close to the population we had that can make a 15-30 year loan commitment. The income stability just isn't there. It doesn't help either that much of the national real estate market now follows the "gold camp" model, with perennial booms and busts.

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