Why the CFPB’s Qualified Mortgage Rule Misses the Mark
Ian Ayres & Joshua Mitts
Last Friday, the Consumer Financial Protection Bureau’s “qualified mortgage” rule went into effect. This rule is designed to put an end to the risky lending practices that led to the financial crisis. But a simpler rule could better assure borrowers’ ability to repay and simultaneously create greater repayment flexibility.
The purpose of the QM rule is to help assure that borrowers have sufficient monthly income to make their required mortgage payments, lessening the risk of large-scale defaults like those experienced after 2008. The rule creates a lender safe harbor for qualifying mortgages. Lenders can still make non-qualifying loans, but must instead meet more onerous multi-factored underwriting standards. Qualifying loans reduce the risk that lenders will be held liable under Dodd-Frank for failing to make a “reasonable, good faith determination of a consumer’s ability to repay.” Read More »
University of Arizona economist Price Fishback, who has been on this blog before, is one of the leading scholars of the economics of the New Deal. He has a great new set of insights to share on the U.S. mortgage mess. He’s also the co-author of the forthcoming book Well Worth Saving: How the New Deal Safeguarded Home Ownership, with Jonathan Rose and Kenneth Snowden.
The Folly of Eminent Domain Takings of Failing Mortgage Loans
By Price Fishback
Several cities around the country are considering using eminent domain to take control of troubled mortgages in their cities. An Associated Press example of how the proposal will work calls for the city to use eminent domain to force the lender to accept $150,000 for a $300,000 mortgage on a home that has a current market value of $200,000. The city would then refinance the loan while cutting the principal owed by the borrower to $190,000.
Eminent domain requires a public purpose for the taking of an asset. The public purpose claimed here is that property values and property tax revenues can be boosted by preventing a mass of foreclosure sales. Real estate studies do show that increasing numbers of foreclosure sales are associated with lower housing values in nearby neighborhoods. However, the spillover benefits of preventing foreclosures, tend to be focused on houses in nearby neighborhoods. Read More »
A new working paper (abstract; PDF) looks at how the recent housing bust affected minorities. Economists Patrick Bayer, Fernando Ferreira, and Stephen L. Ross looked at mortgage outcomes “for a large, representative sample of individual home purchases and refinances linked to credit scores in seven major US markets.” Here’s what they found:
Among those with similar credit scores, black and Hispanic homeowners had much higher rates of delinquency and default in the downturn. These differences are not readily explained by the likelihood of receiving a subprime loan or by differential exposure to local shocks in the housing and labor market and are especially pronounced for loans originated near the peak of the boom. Our findings suggest that those black and Hispanic homeowners drawn into the market near the peak were especially vulnerable to adverse economic shocks and raise serious concerns about homeownership as a mechanism for reducing racial disparities in wealth.
In our latest podcast, “What Do Hand-Washing and Financial Illiteracy Have in Common?” we talked about America’s financial literacy problem, a topic we’ve written about before. In the podcast, two Council of Economic Advisers chairmen discuss the role of financial illiteracy in the recession. And economist Annamaria Lusardi and legal scholar Lauren Willis offer their solutions to the problem.
We’ve had the good fortune over the last few years here at the blog to bring you occasional nuggets from University of Arizona economist Price Fishback, whose research on the Great Depression often offers powerful insights about our current economic situation.
Price’s latest contribution to the blog, this time joint with Ken Snowden from UNC-Greensboro, discusses the Home Owner’s Loan Corporation, which bought and refinanced 1 million severely delinquent loans between 1933 and 1936. Did things works out well or poorly? You’ll have to read on to find out. And if you like what they’ve written, keep an eye out for their soon to be released book (with Jonathan Rose as a third author).
Learning from the Last Great Mortgage Mess
By Price Fishback and Ken Snowden
For the past four years, the U.S. has faced a housing crisis that shows no signs of ending. The situation was similar in June 1933 when the Home Owners’ Loan Corporation was created to address the nation’s last severe mortgage crisis. Some have suggested that a new HOLC could help resolve the current crisis, but their characterizations of the HOLC have been incomplete. Our goal here is to summarize recent research that provides a fuller picture of the HOLC and its impact on housing markets in the 1930s. Read More »
I get it – people are angry. Very, very angry. I’m angry too. And Wall Street sure makes a great scapegoat, hence the Occupy Wall Street protest. Wall Street is a symbol of the “greed and corruption” that took over America and caused this whole mess.
But let’s take a minute to examine the facts and see if we can’t find some better scapegoats:
In 1997 Andrew Cuomo, the Secretary of Housing and Urban Development under Bill Clinton, allowed Fannie Mae to reduce the standards by which they would secure loans. This helped create the entire subprime category. Was this a bad thing? Of course not – it allowed more people to leave the ghetto, move to the suburbs, and achieve the American Dream of owning a home. Who knew that “Dream” would turn into a nightmare in a mere decade. Andrew Cuomo is not Nostradamus. We can blame him of course, but he had good intentions despite the negative results. Read More »
At the heart of the financial crisis was the market for mortgage-backed securities (MBS). These are the “toxic assets” that larded up bank balance sheets and all but froze the credit markets in the fall of 2008. Turns out a lot of those assets are still sitting there. Though they’ve mostly been downgraded to junk status, many of them began life as gold-plated investment products thanks to the AAA ratings they received from the rating agencies Moody’s, S&P, and Fitch. These firms that allowed so much junk to be passed off as gold were essentially the enablers of the financial crisis.
The relationship between the rating agencies and banks is a perfect case study of flawed incentives. With banks paying them to rate their investment products, and so much money pouring in at the height of the mortgage-boom (driving record profits for the highly competitive rating agencies), Moody’s, S&P, and Fitch had a strong incentive to play along.
A new study adds more fodder to the argument that these agencies were unduly influenced by the institutions whose products they were grading. It basically posits that the more MBS an institution issued, the better rating their stuff received. Read More »
It’s been a busy week for JPMorgan Chase. It’s only Wednesday, and already the bank has settled one civil fraud lawsuit, and been slapped with another one. Both shed light on Wall Street’s flawed system of incentives that helped bring on the financial crisis. They also raise questions as to the morals of bankers.
On Tuesday, JPMorgan agreed to pay $153 million to settle civil fraud charges brought by the SEC alleging that it “misled” investors when it sold them junky mortgage bonds. The deal in question was put together by Magnetar Capital. If you’re not familiar with Magnetar, it’s an Illinois-based hedge fund that made a killing shorting synthetic mortgage-backed securities that were essentially built to fail. Here’s how it worked: Magnetar would put down a few million bucks to start a collateralized-debt obligation (CDO), cram it full of the junkiest mortgage bonds it could find, then get a bank like JPMorgan to sell it off to investors as a triple-A, gold-plated piece of the booming housing market; when in reality it was a time bomb filled with toxic waste. Read More »