WASHINGTON—Richard Cordray, director of the Consumer Financial Protection Bureau, defended his agency’s qualified mortgage regulations against recent criticism during the Mortgage Bankers Association annual convention here Oct. 28. (See more coverage on page 3.)
Cordray took issue with the suggestion that current QM regulations may effectively decrease mortgage loan availability because so few loans funded now will comply when the rule goes into effect in January.
“Based on the other elements of the QM definition, we estimate that more than 95% of the mortgage loans being made in the current market will be qualified mortgages, as Mark Zandi of Moody’s Analytics recently confirmed,” Cordray told his general session audience. “Some, such as CoreLogic, have put out much lower figures, but by their own admission, those figures were not intended to take account of the expanded definition of QM that will actually take effect in January, but instead were offered as projections of a distant future when the temporary expansion expires.”
Cordray defined those other elements as the small issuer exemption, as well as the CFPB’s expanding the definition to include loans eligible for sale to Fannie Mae or Freddie Mac, or eligible for insurance from a government agency such as the Federal Housing Administration or Veterans Administration.
He also addressed fears that QM loans would not provide the promised legal safe harbor and he challenged law firms which, he said, were dreaming up scenarios.
“We purposely drew bright lines to define the contours of a qualified mortgage, such as a 43% debt-to-income ratio, or eligibility for purchase by the GSEs while they remain in conservatorship, or portfolio loans made by small creditors,” Cordray told the group. “A large number of industry commenters asked for those bright lines, and we agreed that approach made sense. If those lines were not drawn as sharply as they are, then much would have remained to be fought out in the courts for years and years before the definitions were clear. We crafted the rule to avoid that result, which is why critics are now forced to dream up hypothetical factual disputes about whether debts and income were correctly calculated in their efforts to criticize the rules or sow anxiety about them.”
Cordray also maintained the agency’s intention to implement QM regulations in January.
“We understand this poses a challenge for industry, just as the writing of such a substantial set of mortgage rules by last January posed a significant challenge for our new agency,” he said.
The following day during a breakout session at the event, Senator Elizabeth Warren (D-Mass.) speculated about whether the new regulations might need to be strengthened one day.
Speaking to a standing room only audience, Warren praised existing QM regulations for helping to introduce a level of accountability into the mortgage origination process. She pointed out history has shown accountability can be knocked off track by the moral hazard represented by incentives to issue mortgages without sufficient care.
But she suggested that when the U.S. housing market returns to a boom time—and it will, she said—originators will make non-QM loans and other firms will bundle them into securities that will be sold to investors.
“We may need to look how existing QM rules could be strengthened for the boom markets,” she said.
Warren put her comments about GSE reform into the context of the housing crisis and how it came about, a process she said independent researchers had blamed largely on private label securities originators and sellers, and not with the GSE’s and their affordable housing goals.
Warren said the affordable housing goals had been made scapegoats for the crisis by opponents who have wanted to get rid of them for years, adding, “It’s time to put down that red herring.”