In the first presidential debate, the mortgage meltdown and the moribund housing market were barely mentioned. Presidential candidate Mitt Romney did bring it up in a passage that only mortgage wonks would understand.
Romney has said that he wants to repeal the financial-reform law known as Dodd-Frank. The law established the Consumer Financial Protection Bureau, which regulates mortgages. The law requires the CFPB to define something called a "qualified residential mortgage," a plain-vanilla home loan that can be sold easily on the secondary market.
Romney began his foray on mortgages this way: "Let me mention another regulation in Dodd-Frank. You say we were giving mortgages to people who weren't qualified. That's exactly right. It's one of the reasons for the great financial calamity we had."
So far, so good.
"And so Dodd-Frank correctly says we need to have qualified mortgages, and if you give a mortgage that's not qualified, there are big penalties, except they didn't ever go on and define what a qualified mortgage was," Romney said.
A bank won't exactly pay "big penalties" for underwriting a loan that doesn't fall within the guidelines of a qualified residential mortgage. Instead, the bank will have to retain 5 percent of the risk. It's kind of like if a dealer sells a sports car to a teenager, and has to pay 5 percent of the retail value to the insurance company if the car is totaled in a crash within a few years.
The Consumer Financial Protection Bureau indeed is taking a long time to define "qualified residential mortgage." More than a year-and-a-half ago, the bureau (with help from five other agencies) suggested that a qualified residential mortgage would require a 20 percent down payment for a purchase or 25 percent equity for a refinance, and the borrower or borrowers could have no 60-day late payments on any debts in the last two years. Consumer advocates said those requirements were too stringent. Some banks, especially Wells Fargo, welcomed the strict definition. The National Association of Realtors strongly opposed it on the grounds that it would result in fewer home sales and thus fewer commissions for its members.
With powerful players in strong disagreement, the CFPB has asked for more public comment and has delayed implementing the rule.
"It's been two years. We don't know what a qualified mortgage is yet. So banks are reluctant to make loans, mortgages," Romney said during the debate. "Try and get a mortgage these days. It's hurt the housing market because Dodd-Frank didn't anticipate putting in place the kinds of regulations you have to have. It's not that Dodd-Frank always was wrong with too much regulation. Sometimes they didn't come out with a clear regulation."
Today's tight lending standards have nothing to do with the delay in the definition of a qualified residential mortgage. Instead, banks have tight lending standards because they worry that borrowers will stop paying their home loans, and then Fannie Mae and Freddie Mac will force them to buy back the scratched-and-dented loans at full price. That's more punitive than requiring banks to hang on to 5 percent of the credit risk.
The rule won't go into effect until a year after it's adopted. At this point, we're talking early 2014 at the earliest.