Washington, D.C.—The National Association of Home Builders (NAHB) recently told Congress that proposed mortgage lending reforms under the Dodd-Frank Act must be imposed in a manner that causes minimum disruption to the mortgage markets while ensuring consumer protections.
Testifying before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, NAHB First Vice Chairman Rick Judson, a home builder from Charlotte, N.C., said that “NAHB believes a housing finance system that provides adequate and reliable credit to home buyers at reasonable interest rates through all business conditions is critical to our nation’s economic health.”
At the heart of this issue is the definition of a new “qualified mortgage” (QM) as required under the Dodd-Frank legislation passed in 2010 that could have a profound effect on mortgage originations. The legislation includes an “ability to repay” provision that requires lenders to establish that home buyers have a reasonable chance of paying back the loan at the time the mortgage is written. This will set the foundation for the future of mortgage financing, as all mortgages will be subject to these requirements.
NAHB has joined with 32 other housing, banking, civil rights and consumer groups to urge the CFPB to issue broadly defined and clear QM standards that contain strong consumer protections, promote mortgage liquidity in the marketplace and provide lenders proper incentives to make home loans to creditworthy borrowers.
A narrowly defined QM would put many of today’s sound loans and creditworthy borrowers into the non-QM market, which would undermine prospects for a housing recovery. Loans that fail to qualify as QMs would be less available and far costlier because lenders and investors would face a much greater risk of violating the terms of the new ability-to-repay requirement.
In other words, under a narrow QM definition, lenders would further restrict home mortgage credit in what is already a tight lending environment because they would be fearful of the severe penalties that would be imposed if they failed to satisfy the ability-to-repay requirement under the more uncertain standards that would apply in the non-QM market.