New mortgage rules that go into effect in January won't be enough to prevent risky lending during another housing boom, Sen. Elizabeth Warren said today.
The qualified mortgage rule -- which requires lenders to verify a borrower's ability to repay the loan in exchange for protection against lawsuits -- is a good "incentive" for lenders to write safer loans, Warren said. But, she added, the rule needs to be strengthened or supplemented.
Warren, D-Mass., came up with the idea of the Consumer Financial Protection Bureau while she was a Harvard professor. She spoke today at the Mortgage Bankers Association annual convention, in Washington, D.C. Using jargon familiar with her audience of mortgage bankers, she spoke of "QM loans" that fall within the restrictions of the qualified mortgage rule, as well as "non-QM loans," which don't.
Preparing for the next housing boom
"The potential liability associated with writing non-QM loans is relatively small, and in good times, lenders can compensate for those possible losses with higher rates or fees," Warren said. "And so, in my view, we need to consider strengthening or supplementing the QM rule so that it provides an adequate check on overly risky lending even during housing booms."
Lenders say that the rules imposed on the mortgage industry since the housing crisis are already too restrictive. They say the rules will constrain loan availability next year as many banks will fear lending outside of the qualified mortgage standards created by the Consumer Financial Protection Bureau.
Remember 'liar loans'?
During her speech, Warren reminded the room full of bankers of why these rules were created and why reform of the housing finance system is needed.
"According to the Financial Crisis Inquiry Commission, the crisis was triggered by the rapid growth in the origination and securitization of subprime loans in the private-label market," she said. "There were other contributing factors, of course, but fundamentally, the crisis started one lousy mortgage at a time."
Scapegoating affordability goals
As lawmakers work on legislation to replace Fannie and Freddie, and the debate over housing finance reform continues, affordable housing needs to be at the center of the discussion, Warren said. Affordable housing goals imposed on Fannie Mae and Freddie Mac were not to blame, "not even a little bit," for the subprime crisis, she said.
"Affordable housing goals have been scapegoated by those who have been itching to get rid of the goals for a long time, but I think it's time to drop that red herring," she added.
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