Reading the New York Times is a great intellectual exercise because you get to read news articles and say to yourself, “Hmm. That’s interesting. I wonder if it’s true?”
Today in the financial section, though, was an opinion piece that had me instead asking, “Do you even English, New York Times?”
Or rather to quote political commenter James Carville at a recent conference I attended: "Lack of knowledge on a subject never prevented me from delivering an authoritative opinion." The same could be said for when finance columnists at The Grey Lady try their hand at tackling the mortgage market.
The latest piece is headlined “More Renting, Less Risk for Wall St.”
Go ahead and visit their site and read it yourself. (They’re not a growing media company and they’re losing money on declining ad revenues investing in this whole Internet fad, so they probably appreciate the traffic.)
Here are the first couple of paragraphs.
Is it time to temper the American dream of homeownership?
If you want to curb the power of Wall Street and reduce the risk that the financial system will bring the rest of the economy tumbling down again, there may be no other choice.
Consider what happened last week, when regulators pretty much threw in the towel on new rules requiring mortgage bankers to keep on their books a minimum share of all but the safest loans.
The idea was perfectly reasonable — a way to keep bankers’ “skin in the game” to encourage prudence. In the end, however, officials decided that just about all mortgages were supersafe. No need for banks to keep a chunk.
“The loophole has eaten the rule,” Barney Frank, the former chairman of the House Financial Services Committee and co-author of the Dodd-Frank financial overhaul, told my fellow columnist Floyd Norris last week. “There is no residential mortgage risk retention.”
Something like this, laughable if it wasn’t sad, could only be written in the closed off, hot house, echo chamber that is the editorial office of the New York Times.
That or maybe the Onion. Only this wasn’t meant to be satire.
So let's look at QRM, adopted last week.
A client note circulated this morning from the Wall Street law firm Dechert, which is about as neutral on the issue as one could hope, explains what last week’s final rule is and means.
“Under the Dodd-Frank Act, securitizations composed solely of QRMs are exempt from the risk retention requirements. The Final Rules adopted the proposed definition in the Re-proposal by directly incorporating the CFPB’s definition of QM into the definition of a QRM. A QM is generally defined as a loan that meets the following requirements:
- regular periodic payments that are substantially equal;
- no negative amortization, interest only or balloon features;
- a maximum term of 30 years;
- total fees that do not exceed 3% of the total loan amount (or such other applicable amounts specified for small loans up to $100,000);
- payments underwritten using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment is due;
- consideration and verification of the borrower’s income, assets and debt obligations; and
- total debt-to-income ratio that does not exceed 43%.
To suggest loans that meet these requirements are risky is…I don’t even. This is throwing in the towel? As a fellow wag in our office said, a borrower meeting these standards would almost have to intend to default to default.
But it goes much farther than this.
“It’s remarkable to me how some of the comments come from an individual who played such a big role in promoting homeownership,” David Stevens, CEO of the Mortgage Bankers Association, told me Wednesday morning.
Stevens noted that Dodd-Frank, right off the bat and without even taking into account QM and QRM, eliminated 95% of all the variables that caused the mortgage crisis and subsequent financial crisis. It got rid of no doc, stated income, negative amortization, balloon, extended term, interest-only and short-term adjustable rate mortgages. Those were the programs that fueled the crisis, and which had the highest default rates, and a lot of what created the housing bubble in the first place.
“It eliminated forever the opportunity for lenders to prey on borrowers or borrowers to make poor decisions,” Stevens said. With QM and the ability-to-repay rule, mortgage lending “has the safest and soundest underwriting in history. So (this argument about risk) is absolutely ludicrous.”
It is true, Stevens points out, that QRM could have gone further and added a risk retention rule, but Dodd-Frank never called for that in the first place. Dodd-Frank also never called for a down payment requirement in mortgage lending. Both of these would end up further adding costs that would be passed on to borrowers.
It’s easy to see how down payment requirements would hit borrowers, but risk-retention isn’t something that would only sock it to lenders and Wall Street – risk-retention would likewise add costs in securitization that would hit borrowers in things like higher g-fees and higher premiums at the Federal Housing Finance Agency.
“Regulators spent more than three years working on the best way to craft QRM and look at the impact of QM,” Stevens said. “QM and Dodd-Frank already eliminated unsound lending practices and (through ATR which ensured borrowers were able to afford their mortgages), so anything else would have transferred additional costs to consumers, which Barney Frank spent his entire career to defend. So I bristle at this ‘tough on crime’ attitude.”
QRM is not letting mortgage bankers off light, and it’s not throwing oversight out the window. Six regulatory agencies went through more than three years of looking at this – each with its own agenda and focus – the Securities and Exchange Commission and Office of the Comptroller of the Currency with a mind to keeping financial institutions sound, HUD looking at ensuring affordable housing access and consumer protection, and so on. Not only is QRM and all it carries pretty well considered, it includes a mandatory look-back rule to ensure that regulators got it right, and that they are held accountable.
“If that isn’t prudent judgment, I don’t know what is, and to hear comments from those who aren’t educated like this is alarming to me,” Stevens told me.
For me, I always wonder at the motive behind the “renting is better” mentality. It just doesn’t make sense. Is it that these rootless progressives want to see everyone crowded in high-density housing sharing paper walls with neighbors so all of America can be as miserable as the island-dwelling Eloi in their closet-size Manhattan apartments?
Is it because homeownership builds in people a focus on their neighbors and their communities, rather than whatever nebulous abstract ideas the New York Times editorial board thinks we should be clutching our pearls about? Is it because homeownership tends to make every owner a bit more – and I emphasize the qualifying word here – fiscally conservative?
No, not everyone is or ever will be responsible enough for the investment of homeownership. And of course, there are markets where renting makes more sense.
Even Stevens concedes that it’s about striking a good balance, and that in the past too many administrations, congresses and policymakers pushed the notion of homeownership as a universal good too hard.
But the pendulum has swung too far.
Homeownership is still the best and most effective way of building generational wealth. Homeownership equity is more broadly distributed among the middle class than stock market equity.
There is enough risk protection in place. An additional level, the likes of which Barney Frank and the Times is going on about, would simply be one more barrier to first-time buyers, minorities and millennials, who are now straining the rental market.
There’s nothing wrong with a little risk or, and I know this is heresy in some quarters, a little profit.
Go clutch your own pearls, Mr. Porter and Mr. Frank.