September 2, 2013

‘Skin-In-The-Game’ Proved To Be A Good Slogan

A reader suggested a topic on housing loans. “Are U.S. mortgage lending standards already headed back towards subprime, so soon after the subprime-caused Fall 2008 financial collapse?”

From MarketWatch. “The real-estate rebound has boosted the value of luxury homes. As a result, many borrowers are taking out home-equity lines of credit to seek the thrills they missed during the housing bust. ‘The jumbo borrower is more likely to pull out money for a recreational purchase—a boat, a third car, a sports car, improvements on a second home,’ said David Hall, president of Troy, Mich.-based Shore Mortgage.”

The Washington Informer. “In the aftermath of more than 2.5 million foreclosures, the Federal Housing Administration (FHA) is now offering a homeownership program that will put previously troubled borrowers on a fast-tracked return to the home ownership market. The new program known as ‘Back to Work – Extenuating Circumstance’ cuts the standard three-year waiting period to only 12 months. The Back to Work program is now available nationwide through FHA-approved lenders. Once participating lenders determine that mortgage applicants meet all eligibility and policy criteria, the same 3.5 percent minimum FHA down payment requirement will apply.”

“‘We understand that families occasionally experience financial difficulties that are simply beyond their control,’ said Charles Coulter, HUD’s Deputy Assistant Secretary for Single Family Housing. ‘As part of FHA’s ongoing mission, we want to make sure that qualified borrowers are not being unnecessarily shut out of the market.”

American Banker. “In 2011, financial regulators issued a proposed rule on ‘qualified residential mortgages’ — as required by the Dodd-Frank Act — but the plan generated enough criticism to send them back to the drawing board. At issue were what parameters the government should set for defining mortgages that require risk retention by the mortgage securitizer and mortgages that don’t. With a recently issued revised proposal, federal regulators have effectively admitted defeat and, in adopting ‘qualified mortgage’ parameters, ceded the job to the Consumer Financial Protection Bureau.”

“The intent of risk retention, or ’skin-in-the-game’ as it was called ad nauseam during Dodd-Frank’s drafting, is to ensure that securitizers of residential mortgages (and other asset classes) don’t package junky loans into securities and sell them to unsuspecting buyers. To prevent this, securitizers would be required to hold 5% of the credit risk of the loans backing the securities they sell. The 5% figure was an arbitrary number plucked out of the air in congressional hearing rooms. ‘Skin-in-the-game’ proved to be a good slogan for those hyping Dodd-Frank.”

“Defining the QRM was ill-fated from the get-go. Asking the government — which is always torn between its desire to facilitate homeownership and its fear that banks will fail — to set underwriting standards is a bad idea. For government officials, boosting homeownership invariably trumps all.”

“Making matters worse, QRM design is a multi-regulator effort involving the banking agencies, the Federal Housing Finance Agency, the Department of Housing and Urban Development, and the Securities and Exchange Commission, some of which have undermined underwriting standards in the past. On this recent attempt, regulators tried something different. They deferred to the CFPB, an agency that Congress, presumably by design, left off of the QRM rule-writing team, and adopted its qualified mortgage definition as the definition for QRM. What could be easier than simply pulling a ready-made definition off another regulator’s shelf?”

“Unfortunately, the CFPB did not design the Qualified Mortgage with safety and soundness in mind. Instead, its definition enshrines a ‘one-size-fits-all’ mortgage that ignores the nuanced needs of American consumers and avoids terms, such as balloon payments, that the bureau finds distasteful. Qualified Mortgage standards don’t include down-payment requirements and set a debt-to-income cap of 43%. The QM definition does not serve the same purpose as QRM was supposed to and thus is inapt.”

“Nevertheless, QRM regulators have embraced that definition and any future amendments to it. As a result, in the words of SEC Commissioner Daniel Gallagher in his dissenting statement, ‘The QM designation, so to speak, is the new NRSRO [credit rating agency] triple-A rating.’”

Bits Bucket for September 2, 2013

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