Are Regulations to Reason for Tight Mortgage Credit?

Posted on Oct 09, 2012

Why is it so difficult to get a mortgage?

It’s a question that received some notice in last Wednesday’s presidential debate when Republican nominee Mitt Romney, the former Massachusetts governor, put the blame for tight lending conditions on new regulations mandated by the Dodd-Frank financial-overhaul law. He referred to a specific provision that’s known as the “qualified mortgage,” where lenders face potentially stiff penalties if they make loans without enough evidence that the borrower can afford the loan.

Mr. Romney didn’t criticize the regulation directly, and instead took issue with the process—what constitutes a “qualified mortgage” hasn’t been defined, and neither have the potential penalties for noncompliance. “It’s been two years. We don’t know what a qualified mortgage is yet,” he said. “So banks are reluctant to make loans.”

There’s little direct evidence that uncertainty over the unfinished regulation is having an effect on the ability of borrowers to get a mortgage today, though it could hinder the emergence of new capital into the mortgage space. In other words, investors may be unwilling to deploy capital without knowing the rules of the road. (In addition to the “qualified mortgage,” a handful of other rules are being finalized by regulators, including the “qualified residential mortgage” and new bank capital rules that are part of Basel III.

There’s growing concern over what could happen to lending once the rules have been issued. Federal Reserve Governor Elizabeth Duke on Friday said she was “really, really worried” about the cumulative effect of having one mortgage lending regulation on top of another. “I’m worried that you’ll get to the point where the only loans that get made are the loans that fit in every single angle of the box, and that’s going to be a very small number of loans,” she said during a question-and-answer session at a conference at the New York Federal Reserve Bank.

Ms. Duke added that it would be important for policymakers to “find ways to make sure that you can still make the irregular loan, the one that doesn’t fit exactly in the box.”

A recent survey by the Federal Reserve of senior loan officers found that the biggest concern keeping lending standards tight right now has more to do with banks’ fear that they’ll have to buy back delinquent mortgages from Fannie Mae.

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