The United States should be enjoying a major resurgence in home building and buying, which would boost the nation’s sluggish economy. However, the nation’s bankers believe new mortgage rules promulgated by the Consumer Financial Protection Bureau will be a damper on the housing market.
In a typical good economy, some 1.7 million new housing units are constructed each year. After the 2008 economic crash, that number dropped precipitously. Last year, housing construction had rebounded to 950,000 new units, still 750,000 below the average.
But significant pent-up demand exists for housing. Over the last five years, amid poor economic conditions, consumers have been cautious about building or buying homes or forming new households to rent apartments. An estimated 1 million young people who otherwise would form households of their own and buy or rent are living with parents. In addition, many high-income households have delayed buying vacation homes.
Today, with an improved economy and historically low mortgage interest rates, consumers are more inclined to buy homes or get their own apartments. Some economists believe a return to normalcy in housing could add a full percentage point to economic growth and significantly increase employment.
However, a threat to a housing rebound is new mortgage rules established by the Consumer Financial Protection Bureau, a new regulatory agency authorized by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The qualified mortgage rules make verification of income harder and reduce the debt-to-income limits, among other things.
More than 80 percent of bankers expect that the new rules will constrict mortgage credit, according to the results of the American Bankers Association’s latest Real Estate Lending Survey. Two-thirds of survey respondents said they would restrict their mortgage lending in response to the rules, making it harder for first-time buyers and consumers with average incomes to get mortgage loans.
“The new mortgage rules are a speed bump for mortgage lending,” ABA Executive Vice President Bob Davis said. Banks are heavily regulated and mortgage lending practices are closely monitored, so banks are forced to become more conservative in granting residential mortgages to avoid violating the rules.
Immigrants could also become victims of the qualified mortgage rules. Some potential borrowers don’t have traditional credit profiles or work histories and could find it difficult to secure a mortgage — even if they can pay as much as 60 percent of the home price as a down payment, according to a recent American Banker article.
This drag on mortgage lending is occurring at a time when people are being more responsible about debt and more are paying their mortgage loans on time. The ABA survey found the foreclosure rate dropped from 0.98 percent in 2012 to 0.73 percent in 2013, while the single-family home delinquency rate fell from 2.4 percent to 1.87 percent.
Obviously, banks are not interested in providing mortgages to people who won’t be able to pay them. Everyone loses when a mortgage goes delinquent. It is important to prevent abuses while not hindering good mortgages. Today, the rules are so restrictive that some qualified families will have difficulty obtaining mortgage loans.
We know regulatory burdens can damage economic growth. In my opinion, the new rules are an example of what Utah Gov. Gary Herbert stated at his recent economic summit. "Too many regulations are simply a drag on the economy," he said. "They’re like weeds in a ditch bank; they impede the flow of commerce."
Nearly 4 in 10 bankers in the survey said the Dodd-Frank regulations have caused them to reconsider their commitment to mortgage lending. That is a surprisingly high number.
A. Scott Anderson is CEO and president of Zions Bank.