Saturday, August 9, 2014

Dodd-Frank creates a drag on residential mortgage growth

Staying with the theme of credit expansion, one area where growth has been more constrained lately is residential mortgage lending. And one potential culprit seems to be the Consumer Financial Protection Bureau's Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (ATR/QM rule). These rules are part of the Dodd-Frank Act. In their zeal to avoid a repeat of the subprime crisis, politicians and regulators have made it tougher (and more complex) for banks to lend to anyone who either doesn't have a stellar credit or seeking a loan that is larger than the "conforming" limit (a "jumbo" loan). Banks, particularly smaller ones, are reporting that the ATR/QM rule has negatively impacted the likelihood of them approving such a loan.

Here are the results of the latest survey from the Fed:

1.  For loans that are of "conforming" size but with the borrower's FICO credit score below 680, almost 36% of all banks and half of small banks report "lower" or "somewhat lower" approval rate due to the rule.

2.  For jumbo mortgages the number is a whopping 52% (and 57% for smaller banks).

But what's particularly surprising is that even for conforming loans the number is 31% for all banks and 44% for smaller banks. That means that even agency-eligible loans are impacted by ATR/QM.

Source: Board of Governors of the Federal Reserve System

As a result, it seems that at least in part, these new regulations have materially reduced production of new loans, completely halting net new agency (Fannie, Freddie) MBS securities issuance.

Source: Deutsche Bank

Deutsche Bank: - Since January 10, banks have had to originate loans according to the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules. The Fed survey suggests that the rules have put a drag on all mortgage production. Since the rules went into effect shortly before net production tumbled, the possibility of a link is worth considering.
The ATR/QM rule has certainly not helped the housing market and may have created a drag on the US GDP. Welcome to the world of unintended consequences.

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