Mortgage Rules and Mortgage Risk

To much fanfare (it was the lead story in last Thursday’s Washington Post), the Consumer Financial Protection Bureau promulgated rules intended to reduce risky mortgage lending. My thoughts:

1. Horse. Barn Door.

2. Ed Pinto offers valid criticism.

3. Nothing has changed in Washington. Pinto notes that Freddie and Fannie are effectively granted exemptions from following the rules. To me, this leaves no doubt that the housing lobby is still setting mortgage policy. The CFPB may be a brand new agency, but it is caving into the same old rent-seekers.

4. The rules do not strike me as evidence-based. As I point out in a new essay, mortgage defaults are driven largely by the borrower’s loss of equity. Thus, the most important risk factor at the time the loan is made is the size of the down payment. The rules ignore that. Instead, the focus in the borrower’s debt/income ratio, which is far and away the least predictive of the major factors used in predicting default (the down payment is most useful, followed by credit score and then by loan purpose, although the effects of these variables interact with one another so that it is not so easy to rank-order their importance).

5. Later this month, I am going to be launching a course on the American housing finance system at Marginal Revolution University. Details to follow. But the course will be aimed at the sort of agency staff who work on housing policy issues. My goal is to share what I know about mortgage analytics and business processes within the mortgage industry. I am confident that my target audience is capable of absorbing this information. I am less confident that they will be able to have as much influence with policy makers as the industry lobbyists. But one can only hope.

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