In 2011, the Federal Reserve and other agencies, in response to Dodd-Frank legislation and the mortgage explosion in the sub-prime market, decided to tighten lending rules for Qualified Residential Mortgages (QRMs). These are mortgages where the buyer must put 20% down on the purchase, have viable assets, personally fund his own closing costs and not exceed 36% total debt to income, including all housing costs.
But on Wednesday, citing the dismal recovery in the housing market and rising rates, the Fed and other regulators announced that the rules on QRMs would be relaxed in order to stimulate the market and give many more people an opportunity to purchase a home. This would include a proposal to not require any down payment and a debt to income ratio of 43%. In exchange, banks who make these loans would hold a 5% stake in the loans sold off on the secondary market.
Isn’t this how banks, mortgage companies and private investors caused the financial meltdown in the last decade? Isn’t this why our economy has not yet rebounded? Isn’t this why foreclosures were at an all time high over the last four years? And, isnt this why so many people are still under water between the outstanding loans on the home and the real value the house is worth?
As a retired banker and as a former mortgage broker, I can assure you that I saw some crazy, questionable and unethical loans made to people who had no business buying a house. In addition, appraisals made for those homes were based on recent sales in a zip code, not from within a two- or three-block radius. 95% to 106% financing was not uncommon, and verification of income or the ability to pay the loan was virtually non-existent.
After the housing bust and the failure of the FSLIC in the late 80s, FDIC-insured institutions were required to make certain specific lending requirements were followed, including making loans with full income and full asset verification. As the market recovered during the 90s and the economy rebounded from the stock market crash from October, 1987, the Clinton administration relaxed the rules and allowed more people to purchase a home who previously were not qualified to do so. And the Bush Administration continued this reckless policy.
It’s time for the regulators to rethink their off-based ideas now and recant those floating presently in the market. Obviously, realtors welcome this so that they can start making the nice commissions they enjoyed up until five years ago. After all, once the deal closes, there is no penalty to them for any default by the buyer. And banks, even if they have to keep a 5% stake, have a minimal loss should the borrower fails to make the loan payment after they sell the loan.
No, the only person on the hook will once again be the taxpayer, as the government shores up the bad loans via bailout. And remember that nine banks control over 65% of all dollars in the banking industry, which the Federal Reserve deems “Too Big To Fail”.
I wrote about this on April 8 in Banking 101. I hope those who make the decision understand that those who fail to learn from the mistakes made in history are doomed to repeat them.
Or, next time, the pain of the lesson may be permanent.