A new study suggests new mortgage regulations that have emerged in the wake of the financial crisis could eliminate as much as a fifth of residential loan originations over the next three years — cutting into home sales, reducing jobs and hurting the nation’s gross domestic product. Six key features have been identified that will have greatest impact.
The study, Regulatory Reform and Housing Finance: Putting the “Cost” Back in Benefit-Cost, was released Friday by the American Action Forum.
The Washington, D.C.-based group says it is a nonpartisan organization that isn’t affiliated with or controlled by any political group and has center-right values. Among its board members are former Bush administration Treasury Secretary Robert K. Steel, former Bush administration Labor Secretary Elaine L. Chao and former Florida Gov. Jeb Bush.
While the regulatory reform that followed the housing bubble is “both understandable and appropriate,” a “virtual tsunami” of changes to the mortgage industry has made credit more difficult to obtain — dragging down the housing market and economy.
The implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as Basel III, could likely reduce U.S. residential originations by between 14 and 20 percent over the next three years based on “conservative economic assumptions.”
The lower production translates into 600,000 fewer home sales, 1,010,000 fewer housing starts and 3.9 million fewer jobs, according to the study. That works out to 1.1 percentage points in lost gross domestic product as a result of reduced expenditures on goods and services related to home purchases.
The report says that the qualified mortgage rule, which defines origination standards, and the qualified residential mortgage rule, which determines when originators don’t need to maintain a 5 percent interest in securitized loans, are “among the most important aspects” of Dodd-Frank that will impact the mortgage industry.
The final QM, QRM and Basel III regulations are expected to be released in January 2013.
Six features were identified that will deter lending to qualified borrowers:
- QM’s 43 percent back-end debt-to-income ratio limitation;
- QM’s rebuttable presumption;
- QM’s and QRM’s full documentation requirement, limit on exotic features, and adjustable-rate mortgage resets requirements;
- QRM’s 20 percent downpayment requirement;
- QRM’s 690 FICO requirement; and
- Basel III’s capital requirements for mortgage portfolio holdings.
On loans with more than 80 percent loan-to-value ratios, Basel III will significantly impact loans that don’t meet underwriting and ability-to-repay standards and second liens. In addition, mortgage insurance can no longer be used to offset the risk on higher LTV loans.
Between QM, QRM and Basel III — tight lending standards that have voluntarily been implemented by lenders to mitigate litigation and repurchase risk will essentially be made permanent.
