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The National Association of Home Builders (NAHB) told a Congressional committee on July 11 that proposed mortgage lending reforms under the Dodd-Frank Act must protect consumers’ access to credit to allow them to enter the housing market.
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 the "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. 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 urges the Consumer Financial Protection Bureau (CFPB) and policymakers to consider the long-term ramifications of these rules on the market, and not to place unnecessary restrictions on the housing market based solely on today's economic conditions," said Judson.
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 creditworthy loans and 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 penalties because they failed to satisfy the new ability-to-repay requirement.
The QM may also narrow the flow of credit because lenders face a high risk of legal challenges to their loan decisions. The NAHB supports a QM safe harbor definition that would provide more assurance to lenders that they will not be subject to increased litigation if they use sound underwriting criteria. The safe harbor should incorporate specific ability-to-repay standards, said Judson.
"We recommend that the regulators work with NAHB and other industry stakeholders to develop a workable safe harbor," said Judson. "The final rule should promote liquidity by providing consumers stronger protections than those proposed by the Federal Reserve Board and giving financial institutions definitive lending criteria that reduces excessive litigation exposure."
Noting that in a period of historically low interest rates, prospective home buyers are finding it more difficult to obtain mortgage credit, Judson called on policymakers to take great care to avoid further changes that could exacerbate the situation.