Affordable housing advocates and mortgage industry groups are often on opposite sides of the debate over the future of lending, but recent regulations have created a common adversary for the two groups: the QRM.
It's anticipated that the Dodd-Frank legislation's qualified residential mortgage proposal, which could create a 20% downpayment standard for risk retention exemption, will make it more difficult for both lenders and low-income borrowers alike, according to a panel speaking at a National Mortgage News regulatory conference in Washington.
The lending practices of the last decade did little to promote sustainable wealth building through homeownership, explained Janis Bowdler, director of the wealth-building policy project for the National Council of La Raza. While housing counselors advocate a gradual process to prepare low-income and minority families into homeownership, subprime lenders offered a “get-rich quick” alternative that did more harm than good, she said.
David Berenbaum, chief program officer at the National Community Reinvestment Coalition called the lack of oversight that perpetuated that environment a “regulatory failure.” He added that QRM proposals that include a 20% downpayment requirement “will send us back to the 1950s, and frankly, put fuel on the fire and keep us in the skids of the housing crisis,” he said.
Instead, Bowdler and Berenbaum call for more robust underwriting, accompanied by counseling for first-time homebuyers. “We all know that 5%, 10%, even 3.5% down with the right underwriting, works,” Berenbaum said.
Rodrigo Alba, vice president of mortgage finance and senior regulatory counsel for the American Bankers Association said lenders realize that mortgage finance is a pillar of community development and local lenders are a tremendous asset to homebuyers and small businesses alike. However, lenders don't want to get hit with penalties or negative public reactions if they run afoul of regulations, like new policies dictating lenders have reasonable assurance of a borrower's ability to repay.
“We're actually seeing a strange collusion of banks and consumer groups complaining about some of these new standards,” Alba said.
While they agree on some points, the two sides still have their disagreements -- in particular, how much consideration lenders should give to credit scores compared to other “nontraditional credit history” for borrowers with what Bowdler called “thin” credit histories.
Nontraditional credit history items include bill payment history, income reporting for jobs paid in cash, and accounting for rental income when an extended family intends to live in a house.
Mortgage lenders have lost their ingenuity when it comes to finding ways to take a holistic look at borrower credit, instead relying solely on metrics like credit score and income that can be verified with a W-2 tax documents. She said there's a balance between mortgages that require no income and asset verification and strict underwriting standards.
“When we think about credit worthiness, I feel very strongly that this is where the baby went out with the bath water,” Bowdler said. “A couple babies went out with the bath water.”
