Long-awaited government rules aimed at “tightening” home lending standards to head off another mortgage crisis are not as tough as the Obama administration is advertising.
The rules issued Thursday by the Consumer Financial Protection Bureau, the credit watchdog agency created by the Dodd-Frank “financial reform” law, require income verification and limits on household debt loads.
They also ban mortgages with risky features, such as interest-only payments, where the borrower doesn’t make payments on the loan principal, or negative amortization, where the principal rises over time.
But the devil is in the details of the 804-page regulation, titled the “Ability to Repay and Qualified Mortgage Standards.” What’s not required is any minimum down payment or credit score, which studies show are the two most important factors for predicting the ability of a borrower to pay back a home loan.
The regulation “does not require creditors to obtain or consider a consolidated credit score or prescribe a minimum credit score that creditors must apply,” page 741 states.
Contrary to some published reports, moreover, no job is required to qualify for a home loan, just “documented” income, which could include welfare payments, as well as alimony or child support payments.
“Income received from government assistance programs are acceptable,” the Obama administration decrees in its ruling.
It maintains that credit scores “may not be indicative of the consumer’s ability to repay.”
Also, lenders may “look to nontraditional credit references, such as rental payment history or utility payments.”
This underwriting practice has been widely blamed for waves of mortgage defaults in states with high Hispanic immigrant populations, such as California and Nevada.
The rule, further, does not require verification of debt obligations. And the 43% debt-to-income ratio requirement applies to a small slice of borrowers taking out jumbo home loans of more than $400,000 nationally, or $700,000 in high-cost markets like New York.
Some regulators sought a 20% down payment rule. But the final rule makes no down payment requirement and allows down payment assistance from community organizing groups.
This was a major victory for the affordable-housing lobby, which fought minimum down payments. The National Community Reinvestment Coalition, Washington’s chief lobbyist for the anti-redlining regulation that fed the subprime frenzy, the Community Reinvestment Act, argued that such a standard would restrict credit access in minority and other “underserved” communities.
Also missing from the new mortgage rules are any minimum down payment or credit score requirements for federally controlled Fannie Mae or Freddie Mac or the Federal Housing Administration, which together underwrite nine out of every 10 new mortgages in the country.
In fact, Fannie and Freddie are grandfathered from any of the rule changes for up to seven years. So is the FHA, which is now staring at insolvency, after taking up the affordable-lending slack from failed Fannie and Freddie.
“This rule does little to limit borrower leverage and lays the foundation for the next bust,” said Edward Pinto, former chief Fannie Mae credit officer and now an American Enterprise Institute fellow.