A new proposal floating around Capitol Hill would make it very simple and easy to get a mortgage – and for lenders to originate them. Is there a catch? You bet.
The Portfolio Lending and Mortgage Access Act (H.R. 1210), passed the House with a 255-174 vote. If passed by the Senate and signed by the President, the legislation would allow lenders to ignore many Dodd-Frank provisions when they originate “portfolio” loans, mortgages they keep on their balance sheets until the loans are paid off. The Qualified Mortgages (QM) and ability-to-repay requirements would continue to apply for loans sold in the secondary market.
“Loans held in portfolio are well underwritten and conservative by their very nature — banks hold only the safest loans in portfolio,” said James Ballentine, executive vice president of congressional relations and political affairs with the American Bankers Association. “There is no need to create additional barriers for creditworthy borrowers for loans held in a bank’s portfolio.”
As with all things involving housing and mortgages, nothing is ever simple. The White House, for example, says if the legislation passes in the Senate it will face a presidential veto
According to the White House, “the Administration strongly opposes this bill because it would undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards — including very basic standards like verifying a consumer’s income.”
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“Under the bill, depository institutions that hold a loan in portfolio would receive a legal safe harbor even if the loan contains terms and features that are abusive and harmful to consumers. The bill would limit the right of borrowers to file claims against holders of such loans and against mortgage originators who directed them to the loans.”
Banks and Self-Interest
One strong argument in favor H.R. 1210 is simple self-interest. If a portfolio loan is delinquent or foreclosed the bank will take a hit. Why would any lender make loans that could undermine its balance sheet? Is not self-interest the greatest protection against banking excess available to government regulators?
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” said Alan Greenspan, testifying on Capitol Hill in 2008 directly after the foreclosure meltdown. The former Chairman of the Federal Reserve was the principle architect of the Fed’s hands-off regulatory policies – the policies which said only minimal regulation was necessary because the banks could rationally be expected to act in their own self-interest.
Fighting The Nonbanks
In one quick motion H.R. 1210 would solve a lot of problems for big bank lenders. The Ability-To-Repay rules which require lenders to verify the ability of a borrower to pay back a mortgage would be gone – and with them the risk of fines and lawsuits for underwriting errors. The Qualifying Mortgage interest rate restrictions would disappear, lenders could charge more and still not face the remedies available to borrowers under Dodd-Frank. Balloon notes would be okay and so would no-doc loans. Big banks would gain substantial competitive advantages at the very time they are losing market share to nontraditional competitors.
Banks are fleeing the mortgage marketplace, complaining in many cases about excess federal regulation and especially about FHA policies which can force lenders to buy back loans even for minor paperwork glitches. If H.R. 1210 passes it would divide the lending system in two with one set of mortgages made under the current Dodd-Frank standards and a second set of rules for portfolio loans made largely outside Dodd-Frank requirements.
According to the Consumer Financial Protection Bureau, between 2010 and 2014, “the market share of large banks and their affiliated mortgage companies declined from 53.8 percent to 38.3 percent.” Since then things have not gone much better: for example the Los Angeles Times says nonbanks “now control 64 percent of the market for FHA and similar Veterans Affairs loans, compared with 18 percent in 2010.”
A dual-track regulatory system would create a huge advantage for big banks because they have the ability keep loans in portfolio. A lot of the rules which now make mortgage underwriting expensive and risky would be gone for portfolio lenders – but not for their competitors. In comparison, smaller banks, credit unions and nonbanks typically sell their mortgages to raise capital that can be used to create a new round of loans or – in the case of nonbanks – to repay borrowed capital. Since those loans are by definition non-portfolio products they would have to be originated under the Dodd-Frank standards now in place, the rules disliked by many in the financial services industry.
Will H.R. 1210 become law?
"After the incredibly volatile boom and bust cycle we saw from 2003-2008, legislators are, understandably, still skeptical about trusting banks to make safe mortgage loans outside of the CFPB’s QM rules ” said Rick Sharga, executive vice president at Ten-X, an online real estate marketplace. "But the lending environment today bears little resemblance to those bad old days. We now have several years of data on jumbo loans that banks have originated and kept on their portfolios with virtually a zero rate of default. And much of the excessively risky behavior that led to bad lending practices was driven by an insatiable appetite from Wall Street to buy sub-prime loans as as investment vehicles. If Washington believes that the banks have truly learned their lessons, there’s at least a chance that this bill will pass."