The regulators created one exemption for mortgages with down payments of 20 percent or more. Mortgages with very low down payments — and sometimes no down payments — were indeed part of the problem. They were also, as Morgenson and Rosner document, greatly encouraged by Fannie, Freddie, and the mandates of the Community Reinvestment Act. These loans were also encouraged by the Federal Housing Administration’s lowering of standards in the Clinton and Bush administrations for the mortgages it would insure.
But 20 percent is by many measures — to use a phrase popularized by a marginal political candidate — too damn high; it would rule out many mortgages and refinancings to responsible borrowers. And such a high threshold would be especially hard on families in states where the housing market has tanked and equity has eroded, if they need to move or refinance. A white paper for the Coalition for Sensible Housing Policy — an umbrella group of trade-association and policy groups, including the liberal Center for Responsible Lending — states
: “For those borrowers that have already put significant ‘skin in the game’ through down payments and years of timely mortgage payments, only to see their equity eroded by the housing collapse, the proposed definition tells them they are not ‘gold standard’ borrowers and will have to pay more.”
Not to worry, say the Obama administration and Dodd-Frank’s architects. If a loan is bought by Fannie or Freddie or insured by the FHA, none of this applies. Loan originators do not have to retain 5 percent credit risk, and borrowers do not have to meet the high down-payment requirement. Borrowers would only have to comply with these agencies’ minimal guidelines — and these guidelines may be lowered even further. The Wall Street Journal reported earlier this month that the administration is considering “having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors.”
The administration also closed the door on the option of creating any exemption for private mortgage insurers if they create models to reduce risk, as some have proposed. In the Obama administration’s view, the answer is government backing for mortgages, period.
The good news is that a strong bipartisan bloc of more than 320 members of Congress isn’t buying the administration’s line. The legislators have written to regulators demanding the new rules be scrapped. The bad news is that if Congress doesn’t move fast to repeal, delay, or modify the qualified-residential-mortgage provisions, the administration is likely to dig in its heels, and the GSE-expansion option will become more appealing, even to some Republicans. Witness the bill of Rep. John Campbell (R., Calif.), which would create a single GSE potentially more costly than Fannie and Freddie.
Anticipation of the rule is already adding to the precarious state of the housing market, and is helping to fulfill the contrived prophecy that the GSEs are needed because the private sector won’t provide mortgages on its own. Private-sector firms certainly won’t if they are handcuffed while their GSE competitors roam free. On this anniversary of “financial reform,” it is clearer than ever that the road to reforming Fannie and Freddie starts with the repeal of provisions from Dodd-Frank.
— John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute (CEI). Matthew Melchiorre is a research associate at CEI.