Will New Rules Be Enough to Protect Homeowners?

For those who watch affordable housing, it’s tough viewing these days: from stagnant wages and an uncertain regulatory environment to sequestration and a bolder push against any program for low- or moderate-income families, the challenges are everywhere. Despite all this, recent big-picture trends help explain why the concerns of so many Americans get easily overlooked.

The housing market is steaming ahead, with home prices up over 12 percent for the 12 months that ended July 2013. According to official numbers, the Great Recession ended in June 2009. If you were lucky enough to invest in an index fund back then, your money would have grown by over 75 percent.

Growing economies have always presented challenges to low- and moderate-income families, as wages at the low end of the spectrum often suffer relative to growth rates. Today’s wage stagnation is especially pernicious—while the American worker has become vastly more productive over the years, she or he has not been compensated for it, and income inequality has worsened.

These factors hurt many families’ chances to benefit from the housing recovery. Or, better said, buy a home where they can reasonably expect some price appreciation and asset protection. And the current political environments will likely offer a tepid response at best.
Though many in Congress have decided that the federal government should no longer help Americans facing unaffordable housing costs or that Washington should have little or no role in the mortgage market, many advocates and policy experts disagree. With such striking disagreements on the direction of affordable housing, is there any room for optimism?

In a recent speech on the importance of housing to the economy, President Obama noted that too many credit-worthy borrowers were getting shut out of mortgage lending. With context as the backdrop, there have been some meaningful developments coming out of Washington.

The big news in recent weeks has been the release by banking regulators of a revised proposed rule on what constitutes a Qualified Residential Mortgage (QRM). The revised rule defines the underwriting parameters for loans that get packaged into securities. The new QRM rule would, if finalized, align with the Qualified Mortgage (QM) rule, which aims to protect borrowers from unaffordable loans.

If the new rule takes hold, QM and QRM would each have a 43 percent debt-to-income ratio and no minimum downpayment requirements. Lenders once worried that if the two rules had differing definitions, compliance would be difficult and legal exposure would be higher. Consumer groups also raised concerns that the QRM’s original 20 percent downpayment requirement would keep many good customers out of the housing market. The alignment of the two rules could both free up credit for worthy borrowers and ensure that loans can be made and securitized responsibly. Though criticisms have been lodged, it seems that regulators have responded to the concerns of various stakeholders to address a need in the lending market. In this golden age of policy intransigence, any meaningful compromise is welcome.

The Federal Housing Administration also recently changed some rules to help borrowers who have been shut out by credit contraction. The FHA’s revised rule would reduce from three years to one year the time a borrower who went through a foreclosure, bankruptcy or similar crisis, and has since repaired his or her credit, must wait to be eligible for an FHA-backed mortgage.

The combination of the QM, QRM and new FHA rules, if implemented as now written, would expand access to credit for families and business opportunities for lenders, as well as better ensuring that families can afford their mortgage payments.

If these rules work as proposed—and such things are never absolute—what else can be done to help families find, afford and keep housing?

The obvious answer is to address the disconnect between home prices and household incomes. Regardless of how anyone feels about any particular policy path, there is little likelihood that Congress will address affordability in any meaningful way anytime soon though such things as a jobs bill, a minimum wage increase or a modification of the mortgage interest deduction into a targeted tax credit. And whatever shape GSE reform finally takes, it is unlikely to expand the affordable housing goals of Fannie Mae and Freddie Mac or whatever succeeds them in the coming years. The House proposal, cited above, has none; the primary Senate proposal retools the approach dramatically, likely resulting in a reduction of dollars available for affordable housing.

Moving forward, what can policymakers and advocates do to advance affordable homeownership? One approach that seems to be getting some traction is to link affordable housing development and lending to other policy initiatives.

A few weeks ago, Jeffrey Lubell discussed how the Federal Transit Administration is linking housing policy and transit development funding. While such a movement has implications beyond housing policy, it does recognize that true housing costs include commuting costs, since housing is not truly affordable if you can’t afford to get to your job.

Housing is also not affordable if you can’t afford the electricity, heating or water bills. It’s widely accepted that good quality housing is energy-efficient housing. For low- and moderate-income homeowners, this translates into more money at the end of the month, which can increase the likelihood of making the monthly mortgage payments. The University of North Carolina found that loans on Energy Star homes were 32 percent less likely to default than other mortgages. This trend is getting some notable support. Recently, the Administration requested for a review of the appraisal and underwriting processes of the FHA, which would allow buyers to more accurately measure the affordability of a home.

Our housing market and our economy are not out of the woods yet. There is general agreement that without income increases, housing demand and employment will stagnate. There is also recognition that we cannot return to the lending practice that helped steer the market into the ditch. Some things have been done, but there is much left to do.

Regulations, such as the new QRM and FHA proposals, are good and necessary for addressing the housing challenges ahead. Yet here needs to be a more honest recognition of the role housing of all types and costs play in our economy, communities and portfolios.

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