The Consumer Financial Protection Bureau, or CFPB, created by the banking reform legislation is setting rules for implementing qualified mortgage and ability-to-pay regulations. The measures are designed to protect lenders and borrowers alike from making home loans that are unlikely to be repaid. Habitat’s fear is that the rules may be so far-reaching they paralyze the organization’s ability to serve its primary clientele: low-income borrowers who do not qualify for conventional home mortgages.
The anxiety extends beyond Habitat and its affiliates. Groups such as the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders say they fear the tightening of loan standards could kill hopes for a recovery of the nation’s residential real estate market.
For Habitat, the scenario that comes to mind is that a borrower in default could use the new rules to sue the housing provider on a claim it should have known ahead of time the home loan could not be repaid. The fear is that the new qualified mortgage and ability-to-pay regulations could open the door to this, said Trey Jones, executive director & COO of the Mississippi Association of Habitat for Humanity.
“Honestly, we’re a little scared right now about the implication of Dodd-Frank’s ability-to-pay- component,” he said in a late May interview.
Not knowing the standard makes management of the risk “difficult for us,” he said.
Habitat should not be in the picture to begin with, considering that its loans are self-financed, Jones said.
“Mortgages we write do not affect the credit market. No one is going to bundle our mortgages and send them off,” he added, referring to the bundling of so-called “toxic-mortgages” that investment banks sold in the equities market and brought a near collapse of the nation’s financial system in the fall of 2008.
Habitat wants the rule writers to make “a safe place for what Habitat does,” he said.
“We have done nothing to create the problem,” Jones added. “On the QM standards we need to know our mortgages won’t be subject to litigation under the ability-to-pay rule.”
Elizabeth K. Blake, Habitat’s general counsel, outlined the low-income housing organization’s concerns in a May letter to Richard Cordray, the newly confirmed director of the Consumer Financial Protection Bureau.
Habitat wants a broadly defined qualified mortgage standard that is flexible enough “to incorporate uniquely effective lending opportunities such as those presented by Habitat affiliates,” Blake wrote.
A qualified mortgage standard “that is too narrowly defined will preclude Habitat affiliates from being able to serve their communities and limit our ability to partner effectively with banks and state housing agencies by pushing our loans into the non-QM market,” she said.
Because a single adverse judgment could devastate or even bankrupt an affiliate, the scope of potential litigation must be limited and predicable, Blake added, and urged that mortgages that meet qualified mortgage standards not be subject to litigation under the ability-to-pay rule.
The Mississippi Home Corporation, an agency created by the state in 1989 to address the housing needs of Mississippians, shares Habitat’s concerns and is keeping tabs on the rule making process, said spokesman Scott Spivey.
The agency has urged the state’s congressional delegation to push for broadly written rules, Spivey said. “We don’t want it to be defined too narrowly. That would prohibit a lot of the affordable products out there right now. We want to have a definition that excludes predatory mortgages but allows innovative, creative solutions.”
The Home Corporation has always done 30-year fixed mortgages under mortgage writing standards of such long-established organizations as the Federal Housing Administration, he said.
“We just don’t want to be squeezed out of the market by the pendulum swinging too far in the other direction.”
He acknowledged the rule writers have a tough task ahead in balancing the need to maintain market flexibility and ensuring that the nation does not see a repeat of 2008’s housing collapse brought on in large part by predatory mortgage lenders.
The state housing agency tries to lessen default risks by working closely with borrowers to ensure they understand their obligations. Spivey said. Prospective borrowers whom the Home Corporation deems as especially high risk are often asked to undergo a year of credit counseling and homebuyer education, he said.
The Mississippi Home Corporation’s national organization, the National Council of Housing Agencies, has joined with such groups as the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders in seeking flexibility in the new rules expected to be issued sometime this summer. “A narrowly defined QM would undermine prospects for a housing recovery and a sound mortgage market,” the groups said in a recent joint letter to the CFPB’s Cordray.