Weekly update from the National Housing Conference
July 28, 2019
President's Message I By David M. Dworkin
Dear Friend,

One of the most impactful elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act was its requirement that mortgage lenders make “a reasonable, good faith determination” of a borrower’s “ability to repay”. The Consumer Finance Protection Bureau (CFPB) has issued an Advanced Notice of Proposed Rulemaking that could have a chilling impact on mortgages for first time homebuyers and working families throughout America.

The Qualified Mortgage Rule (QM) was designed to address one of the most important factors contributing to the housing crash of 2008 and the subsequent Great Recession. Many of the toxic mortgages that turned the American Dream into a nightmare for millions of families ignored or minimized critical factors like income, debt and even employment. The worst of these loans, known officially as “Alt-A” or “Stated Asset, Stated Income” were better known behind the scenes as “Liars’ Loans.” As one colleague said to me after the crisis, “we couldn’t imagine that so many people getting Liars’ Loans were lying!” 

This regulation sought to create a special class of mortgages that would have the equivalent of a Good Housekeeping Seal of Approval. It would prevent borrowers from getting loans they couldn’t repay while protecting lenders from lawsuits the recipients of these QM loans failed to repay. Mortgages that met the QM requirements and had a reasonable mortgage rate defined by the rule would receive a safe harbor from lawsuits alleging violation of the regulation. Those that were more expensive but also met the QM standard qualified for a “rebuttable presumption,” a much lower standard that could still lead to expensive litigation, regardless of the outcome.

QM mortgages also had to meet strict product standards that excluded key features of the toxic mortgages that played such a large role in the housing crisis. These included terms like negative amortization, interest only payments and teaser rates that when reset virtually guaranteed foreclosure. In fact, when the Trump administration consulted with dozens of lenders in its effort to reduce Dodd- Frank regulations, the overwhelming majority argued in support of the product restrictions, as they protected them from having to compete with the industry’s lowest common denominator over market share. 

But the rule went too far in a critically important area. QM loans also had to satisfy one of three additional criteria, and here the rule went badly off track. To qualify for QM treatment, the debt to income ratio (DTI) could not exceed 43 percent or be eligible for purchase by small insured depositories (total assets under $10 billion) if the mortgage was held in portfolio. A third exception was also included. The mortgage had to be eligible for purchase by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Department of Agriculture Rural Development Agency (USDA-RDA). The exception for government-backed loans was permanent, but the Fannie Mae and Freddie Mac exception was set to expire by January 10, 2021, or their release from conservatorship, whichever came first. 

This unique treatment of Fannie and Freddie loans is called the QM Patch and the CFPB’s proposed rule has recommended eliminating it. What’s wrong with a DTI of 43 percent? It’s a reasonable question. As Karan Kaul and Laurie Goodman found in their research paper on this issue, evidence from historical default rates prove the DTI ratio is not the best predictor of default. Furthermore, they found that the share of QM loans with DTI ratios over 43 percent “has risen mainly because the widening gap between house price appreciation and wage growth has forced homebuyers to borrow more in comparison with incomes.” 

While serving as a senior policy advisor at the Treasury Department, I joined several of my colleagues in arguing against this part of the QM rule. Multiple factors are balanced into an overall mortgage score to predict actual loan performance in the modern housing finance system. Looking at DTI alone is about as modern as a cell phone that weighs two pounds and fits in a briefcase. But it is easier than addressing the reality of the modern mortgage market, so regulators, many with no experience originating loans, went with the easily understandable, but largely inaccurate indicator.

Eliminating the QM Patch would also have significant unintended consequences of reducing mortgage lending – and ultimately the homeownership rate – even further and driving the loans that are made into government programs, are fully backed by taxpayers and have a much worse record of loss mitigation (getting delinquent loans back into regular payment rather than foreclosure). Urban Institute estimates that “about one in five GSE-backed mortgages originated in 2017 had a DTI ratio over 43 percent, and approximately one in two FHA or VA mortgages had a DTI ratio over 43 percent.” That’s a lot of loans. 

NHC will write a strong comment letter against this irresponsible and poorly thought-out rule and will ask our 235 members to join us. We hope you will be one of them.
David M. Dworkin
NHC President and CEO
News from Washington I By Tristan Bréaux and
Quinn Mulholland
HUD suspends down payment assistance rule change

Last Tuesday, HUD announced that it would formally suspend its rule change affecting the FHA’s down payment assistance guidelines. The announcement came in after a federal judge in Utah granted a motion to delay the implementation of the rule change as part of a lawsuit filed against HUD by the Cedar Band of Paiutes, a federally-recognized American Indian Band. In a statement praising the ruling, Cedar Band Chairwoman Delice Tom said, “On behalf of the Cedar Band and indeed Native Americans everywhere, we are grateful that the Court barred a HUD policy that threatened to trample our sovereign rights and extinguish a crucial source of economic support for our people.”
House Financial Services Committee holds two housing-related hearings

Last week, the House Financial Services committee convened two hearings that addressed housing-related issues. On Wednesday, the full committee held a hearing on the proposed merger between SunTrust and BB&T. At the hearing, Chairwoman Maxine Waters remarked, “I am concerned that if this merger goes forward, it will create yet another megabank that is too big to manage and that poses a risk to our financial system.” On Thursday, the House Financial Services Task Force on Financial Technology held a hearing on expanding access to credit, which focused on two recently-proposed bills, the Credit Access and Inclusion Act and the FHA Additional Credit Pilot Program Reauthorization Act.
House approves budget agreement

On Thursday, the House of Representatives voted to approve a budget deal to lift the debt ceiling and raise spending levels, sending it to the Senate for approval. The deal was announced by President Trump and Democratic congressional leaders on Monday after weeks of negotiation between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin. The deal increases the Pentagon’s budget by $22 billion to $738 billion and non-defense spending by $27 billion to $632 billion. It must now be approved by the Senate before going to President Trump’s desk for his signature.
Lawmakers introduce new housing-related bills

It was another busy week for housing-related legislation on Capitol Hill. On Monday, Senators Tammy Duckworth (D-Ill.) and Dick Durbin (D-Ill.) introduced the Fairness for Housing Communities Act, which would allow HUD to redirect fines from program fraud cases to communities that have been harmed. And on Thursday, Representatives Ayanna Pressley (D-Mass.), Yvette Clarke (D-N.Y.) and Rashida Tlaib (D-Mich.) introduced the No Biometric Barriers Housing Act of 2019, which would ban facial recognition technology in federally-subsidized housing. Also on Thursday, House Financial Services Committee Chairwoman Maxine Waters introduced the FHA Foreclosure Prevention Act, which would require HUD to increase its oversight of FHA mortgage lenders.
Carson speaks out on local regulatory barriers to affordable housing

In an interview with the Atlanta Journal-Constitution , HUD Secretary Ben Carson called for local governments to remove regulatory barriers that restrict housing construction. Carson, who was in Atlanta last week for an affordable housing conference, said the barriers increase the cost of development, lowering affordability. “Those are huge barriers,” Carson said. “When you look at some of the areas of the country where homelessness is the greatest, you see the greatest number of zoning restrictions.” Some communities have seen success in lowering barriers for denser housing developments in recent months, with Minneapolis and Oregon enacting policies to ban single-family zoning. More recently, the Washington suburb of Montgomery County decided to loosen regulations for auxiliary dwelling units, allowing for more density in many neighborhoods.
Klobuchar and Biden announce housing plans

Democratic presidential candidate and Minnesota Senator Amy Klobuchar unveiled her housing platform on Thursday in a post on Medium. As part of her plan, Klobuchar said she would fight discrimination by banning source of income discrimination and restoring the Affirmatively Furthering Fair Housing Rule; address the affordable housing crisis by strengthening rural rental assistance programs, expanding the Housing Choice Voucher program, and encouraging local governments to update zoning rules; and increase access to homeownership by creating a new tax credit to encourage investment in distressed neighborhoods, expanding down payment assistance programs, and strengthen the Community Reinvestment Act. Another Democratic presidential candidate, Joe Biden, also announced a housing-related plan last week with the launch of his criminal justice plan. As part of the plan, Biden wants to “set a national goal of ensuring 100% of formerly incarcerated individuals have housing upon reentry.” To do this, the plan would call on HUD to “only contract with entities that are open to housing individuals looking for a second chance.”
Sister Lillian Murphy, former president & CEO of Mercy Housing, passes away

Sister Lillian Murphy, RSM, who served as the president and CEO of Mercy Housing for almost 30 years, passed away on Thursday. Sister Lillian was a tireless advocate for safe and affordable housing for the disadvantaged, and under her leadership, Mercy Housing expanded to one of the largest affordable housing organizations in the country. As current President and CEO Jane Graf put it, “Her commitment and impact on affordable housing and to those in need will forever be felt.”

The entire team at NHC sends our heartfelt condolences to Sister Lillian’s family and the team at Mercy Housing.
What we're reading

The Daily Memphian examined the issue of housing affordability in Memphis in a recent article. Tennessee Housing Development Agency Executive Director and NHC board member Ralph Perrey is quoted in the article as saying, “Memphis has challenges. This was a place that saw an awful lot of subprime lending activity. … A lot of people lost homes.” Read the full article here .

In a report published Thursday, the Urban Institute took a deep dive into three cities’ plans to use the new Opportunity Zones program to revitalize neighborhoods. Though the cities—Fresno, Cleveland, and Washington, D.C.—each have taken a different approach, they all share a common strategy, according to the report. Read the full report here .

The Tampa Bay Times dissected a new plan announced by the city of St. Petersburg to address its affordable housing crisis. The plan, according to St. Petersburg Mayor Rick Kriseman, will build or preserve 7,000 affordable housing units and benefit 19,000 residents. Read the full article here .

NBC News reporter David Wasserman analyzed the possibility of President Trump losing the popular vote in 2020 as many as 5 million votes but still winning re-election. According to the article, this could happen because of demographic changes that favor Democrats in non-competitive states, but not in competitive ones. Read the full article here .

On the polling front, the latest Real Clear Politics polling average shows Joe Biden (28.6%) retaining his lead in the Democratic primary over Elizabeth Warren (18%), Bernie Sanders (15%), and Kamala Harris (12.2%); the only candidates to maintain double digit preferences.  Meanwhile, President Trump’s Gallup approval rating sits at 44 percent, roughly the same as Ronald Reagan and Barack Obama at the same point in their first term. Read the polling data here and here.
The week ahead
Sunday, July 28

Tuesday, July 30

Wednesday, July 31

The National Housing Conference has been defending the American Home since 1931. We believe everyone in America should have equal opportunity to live in a quality, affordable home in a thriving community. NHC convenes and collaborates with our diverse membership and the broader housing and community development sectors to advance our policy, research and communications initiatives to effect positive change at the federal, state and local levels. Politically diverse and nonpartisan, NHC is a 501(c)3 nonprofit organization.
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