Pending mortgage regulations could lock today’s tight lending standards in place and result in nearly 20% fewer mortgages being issued in the coming years, restraining home sales and construction, according to a new study.
The report from the American Action Forum, a center-right think tank, provides an estimate of the potential impact of three important mortgage regulations set to take effect next year:
- Higher bank capital standards under the Basel III agreement
- The “qualified mortgage” rule regulating ability-to-repay standards, which is part of the Dodd-Frank financial-overhaul law
- The “qualified residential mortgage” rule setting standards governing loans that are issued as securities, also part of Dodd-Frank.
Together, the new rules “will raise the cost of borrowing for millions of home buyers and tighten access to credit beyond pre-boom standards, a period of much more responsible lending than in the lead-up to the housing crisis,” says the AAF paper.
Of course, regulators have yet to finalize the “qualified mortgage” and “qualified residential mortgage” rules. As a proxy for where those rules might land, the report roughly assumes that today’s tighter lending standards won’t return to those that prevailed before the housing boom as a result of the impending regulation.
“It would make permanent the current, tighter standards,” says Douglas Holtz-Eakin, the president of the AAF. While he says he won’t pretend that his estimate is “perfect,” he says it is a “sensible” forecast.
Mr. Holtz-Eakin and his co-authors attempt to quantify the potential impact of the regulations by comparing today’s mortgage lending standards with those that prevailed in 2001, which they use as a “baseline” for more normal lending standards.
Banks have tightened up their standards over the past three years—and kept them tight—largely to address the threat of mortgage “put-backs” from investors, from lawsuits, and from the higher costs associated with handling delinquent mortgages.
The paper concludes that if lending standards that are in place today don’t moderate to the 2001 baseline level, there would be roughly 14% to 20% fewer loans originated over the coming three years. That decline, they estimate, would reduce total home sales by 9% to 13%, depending on the ability of all-cash buyers to pick up any slack.
The decline in home sales, in turn, would reduce housing starts by 1.01 million through 2015 and GDP growth by 1.1 percentage points.
“The issue is, if we want to have tighter standards for mortgage origination—as a safety-and-soundness issue for banks, or as a matter of not having people get in trouble on their loans—you have to cut back on what you originate,” said Mr. Holtz-Eakin.
While no one is arguing for a return to the lax standards that prevailed during the housing bubble, Mr. Holtz-Eakin said he’s surprised that more policy makers haven’t focused on the potential impact on the housing market should regulation enshrine banks’ current defensive position when it comes to making mortgages.
Consumer advocates say they are cautiously optimistic that the Dodd-Frank rules can ensure stronger consumer protection without limiting new lending. “If Dodd-Frank is done right, we should see somewhat expanded lending from what we have right now,” said Julia Gordon, housing policy director at the Center for American Progress, a liberal think tank. “It’s important to raise these concerns, but it’s also important to be specific, and not just anti-regulation.”
SOURCE: Wall Street Journal