Ensuring access to credit markets for low- and medium-income families has been a decades-long objective of housing policy. Designing a more efficient approach to such policy should be an integral component of GSE reform. However, the National Community Reinvestment Coalition's proposal to require securitizers in a post-GSE world to pick up responsibility for affordable housing objectives where the GSEs left off is not an optimal approach and may ultimately reduce credit availability for the groups it seeks to help.
Ironically, minimum underwriting standards imposed by the Consumer Financial Protection Bureau create an environment where some otherwise creditworthy borrowers may not be able to secure a loan simply because they do not meet federal standards demonstrating an ability to repay the obligation. Consequently, reassigning GSE affordable housing goals to private securitizers or "taxing" such entities ignores important changes in the direction of underwriting standards. It also ignores the extent of likely guarantees that in part historically made affordable housing targets a quid pro quo for the benefits enjoyed by the GSEs by way of their unique charter.
We already have a federally supported program for low-income and first-time homebuyers; namely the Federal Housing Administration. Redoubling FHA's focus on affordable housing provides a more efficient mechanism to broaden mortgage market access for low- and medium-income borrowers than to apply a retread of GSE affordable housing policy to private securitizers in a post-GSE world.
The Qualified Mortgage rule implemented by the CFPB and the Qualified Residential Mortgage rules under development dramatically reshape the mortgage underwriting landscape by dictating minimum loan quality standards for eligible borrowers. For example, the QM rule, with maximum debt-to-income ratios of 43%, will preclude a number of otherwise creditworthy borrowers that fall into the low- and moderate-income category from obtaining a mortgage. This may be felt even more in high-cost areas where property values typically translate into higher loan amounts. A low- to moderate-income borrower attempting to obtain a mortgage that has a 750 FICO score, has saved a 10% down payment, but has a 44% DTI would not be QM-eligible under the new rules.
In part, QM is designed to avoid making loans to borrowers that cannot afford to repay the obligation. Certain product features such as option adjustable-rate mortgages and low documentation loans never intended to be mass-marketed to borrowers became vehicles for abuse both by lenders and borrowers during the mortgage boom. Getting back to sensible underwriting is critical to having a stable mortgage market. However, there is no question that QM and QRM will likely choke off some loans that would have otherwise been made to borrowers meeting the low- to moderate-income definition.
There is no upside to the borrower, the lender or the servicer in putting someone in a home that they cannot afford to stay in. We saw this during the mortgage boom, where standards for borrower creditworthiness as credit score requirements were relaxed, so that when home prices popped, many borrowers that were already highly leveraged by putting little or no down payments on the home defaulted. In this case, the NCRC ought to focus on promoting a QM scorecard that holistically evaluates the borrower rather than relies on a DTI limit to establish loan quality standards. Such a scorecard would make risk tradeoffs across a number of borrower attributes, thus permitting more creditworthy borrowers to obtain a QM-eligible loan. Going back to the earlier example, if lending standards required a minimum FICO of 700, then the additional 50 points in score would more than offset the 1% higher DTI.
Reassigning the GSEs' affordable housing standards to new securitization entities or imposing a variable cost on them also ignores important changes in the nature and extent of federal mortgage guarantees in the conventional conforming market. Increasingly it appears that federal guarantees for these loans will be limited. With investors asked to shoulder the vast majority of credit losses, the much greater risk exposure borne by the private sector completely changes the dynamics of affordable housing policy.
The "implicit" guarantee of the GSEs that turned into an explicit guarantee served as a catalyst for imposing affordable housing targets on the agencies under the premise that the benefits accruing to the companies via the guarantee should require greater focus on serving the needs of low- to moderate-income borrowers. With that benefit largely eliminated, a major foundation for affordable housing targets vanishes.
Changes in federal guarantees and underwriting standards do not mean that efforts to promote affordable housing should be scaled back. On the contrary, a modernized FHA provided the resources needed to effectively manage the federal guarantee could easily take up the mantle of affordable housing from the GSEs. Rather than imposing affordable housing goals or costs on private securitizers, a direct subsidy via FHA may be the more efficient policy.
The NCRC is right to call attention to the need to include affordable housing in housing reform. However, it must take into consideration the risks borne by the private sector in a post-GSE world.
Clifford Rossi is the Professor-of-the-Practice at the Robert H. Smith School of Business at the University of Maryland.