Some Affordability Finally Coming to Mortgage Lending but Is Fraud Protection Enough?

New Orleans    The new Consumer Financial Protection Bureau (CFPB) released its outline of new mortgage lending rules that will take effect in 2014.  The new rules are interesting, though in some ways not reassuring.

After years of arguing with big banks and subprime houses that “affordability” had to be the key test regardless of all of their fancy algorithms, the CFPB has rightly stepped up to worship at that altar.  Although their new standard finally makes affordability, or more simply the ability to repay, the central factor in judging a loan the numbers are very high at 43% of pre-tax gross income.  With taxes and insurance a family with this “affordable” loan would be paying more than 50% of their gross income for a mortgage, and since taxes for working families usually take 20% or more, a family could be left with an “affordable” mortgage and hardly one-third of their income to actually live on.  Is that affordable?  Maybe if that’s the way CFPB defines it, but there’s no question it’s a hard and difficult standard for a working, moderate income family to make if they hope to own a home.

All of which makes this standard of affordability more about the banks than about the consumers.  It almost seems like the CFPB wrote a standard simply to put an upper limit on how crazy banks could get in lending money, rather than how to protect consumers.  They are trying with this standard to protect banks and other mortgage lenders from themselves without worry about protecting consumers and borrowers from themselves.  If 43% of gross income defines affordability then we need to rethink advising low-and-moderate income families that home ownership should ever be part of their American dream.

Under these rules the bank is supposed to provide documents verifying income.  Undoubtedly this is designed to prevent so-called “liar’s loans,” but I can’t see anything that looks at the weakest link in this chain, which continues to be the power and unscrupulousness of brokers, the middle men in this operation.  During my years at ACORN we looked at scores of documents claiming that elderly couples with nothing but social security checks owing almost nothing on their mortgages wanted to refinance and had incomes many times their checks.  The brokers were filling in the blanks to make their quotas and the families were signing without fully understanding the numbers or the consequences, and the beat rolled on.  The new CFPB rules on first look seem to accept the popular ideology that the borrowers were lying, rather than the brokers, which was almost invariably our experience, and then to boot gives the bank legal protection for any liability after making the loan, which could once again “blame the victim.”

There’s no doubt that CFPB got some things right.  They have locked the door on “teaser” interest rates and preclude the introductory rates from affordability calculations which should hammer the adjustable rate mortgage (ARM) from regaining dominance.  They have virtually outlawed “interest only” loans that were designed for the rich, but too often sold, once again by mortgage brokers, to low-and-moderate income families as the bubble began to burst.  The most vulnerable mortgages are the super high end loans but that’s the rich man’s problem, and the banks seem to be saying that without a legal “shield,” they won’t make them anyway, but they will for favored clients I’m sure.

So, it’s a passing grade for the CFPB grading on the curve of some of the past problems, but a long way from leading the class until they take more seriously the “consumer financial protection” part of their mission and not the bank and mortgage markets security that seems to prevail here.

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