By Peter Ricci
The mortgage markets have been bracing themselves for new regulations ever since the passing of the Dodd-Frank regulatory bill in 2010, and a new study from the American Action Forum on the qualified mortgage rule, Basel III and other regulations has come to some stark conclusions on how they would impact the mortgage markets.
According to the study, which the Wall Street Journal recently covered, the regulations being discussed by regulators could result in nearly 20 percent fewer mortgages, a shortage that would almost certainly impact the gradually recovering real estate markets.
American Action Forum on Tighter Lending Regulations
Between the higher capital requirements for banks in the Basel III agreement, the standards for the qualified mortgage rule (which places emphasis on the borrowers ability to repay the mortgage) and the qualified residential mortgage rule for securitized loans, the American Action Forum is projecting some big impacts on the housing market:
- Using 2001 as a baseline for mortgage standards, the Forum’s paper asserts that if the qualified mortgage rule and other regulations take effect, they’ll stop the lending markets from loosening as the housing market recovers, and “make permanent” the tighter lending standards of the last three years.
- With that baseline in mind, the number of mortgage originations in the next three years would decline 14 to 20 percent because of the regulations.
- That decline would contribute to a nine to 13 percent reduction in total home sales, depending on all-cash transactions compensating for the fall.
- New home construction would also be affected, and American Action Forum predicts that housing starts would decline by 1.01 million through 2015.
Mortgage Regulations – Floating in the Air
The one dirty secret to all those estimations, though, is that nobody has a clear idea on how the qualified mortgage rule and other mortgage regulations will actually function when they are finally implemented. The governments regulatory agencies (particularly the Consumer Financial Protection Bureau, or CFPB) have been debating the particulars of the measure for some time now, and it remains uncertain when the standards will be implemented.
Spencer Cowan, a vice president at the Woodstock Institute, said one of the big remaining questions is how the CFPB will define a qualified residential mortgage, and whether it will be more of a consumer measure, which would allow borrowers to challenge irresponsible loans by banks; or, more of a safe harbor for banks, which would restrict credit access to borrowers who can’t afford higher down payments – one of the possible requirements of that particular regulation.