Thursday, December 8, 2016

Housing: Part 192 - Regulatory limits to mortgage access

Here is a good article from the Wall Street Journal on the regulatory limits to mortgage access. (HT: Nick Timiraos).  The article begins:
Sean Dobson wanted to start a mortgage bank four years ago to serve borrowers with middling credit or irregular income. He eventually decided that growing regulatory hurdles and other costs would erase his returns.
Instead, he purchased thousands of homes in states from Texas to Indiana and now rents them to people who might have been his borrowers.
Pretty much the story of the decade.  The comments on that article reflect the general attitude of the electorate on this matter, which is why we will continue to impose these problems on ourselves.

On a related note, here is an interesting post from Richard Green at USC regarding the CFPBs DTI limits (HT: Mark Thoma).
The Consumer Financial Protection Board has deemed mortgages with DTIs above 43 percent to not be "qualified." This means lenders making these loans do not have a safe-harbor for proving that the loans meet an ability to repay standard. Fannie and Freddie are for now exempt from this rule, but they have generally not been willing to originate loans with DTIs in excess of 45 percent. This basically means that no matter the loan-applicant's score arising from a regression model predicting default, if her DTI is above 45 percent, she will not get a loan.

This is not only analytically incoherent, it means that high quality borrowers are failing to get loans, and that the mix of loans being originated is worse in quality than it otherwise would be. That's because a well-specified regression will do a better job sorting borrowers more likely to default than a heuristic such as a DTI limit.

9 comments:

  1. This is not specific to the mortgage market at all - starting any business involves an insane number or regulatory issues.

    The way out of this mess is to bring a manufacturing-type productivity boom to the "protected" sectors of Housing, Education, and Healthcare. I'm not optimistic.

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    1. Wait, I thought the recession happened because we live in a Friedmanesque Darwinian hellscape. What's this "regulation" you speak of?

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  2. "Friedmanesque Darwinian hellscape."

    Not bad. You can coin a phrase when you try.

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  3. I have mixed feelings about this. When I grew up 28 percent was the cap and the nation did just fine. 43 percent of your income to mortgage? That sounds insane to me. JMO.

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    1. Does 43% of income going to rent sound crazy?

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    2. Unfortunately, Kevin, yes it does. Where will it end, with people on the street? I don't live over there and I don't understand it.

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    3. Actually my recolletion is, at least in the 1980's, it was 28% PITI to income and 33% to 36% total debt service to income.

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  4. Alone among America's economic bloggers, Kevin Erdmann has pointed out that effective US policy is to zone property, but then limit access to credit to buy property to the upper classes.

    BTW, I am a pro-business, lower-taxes-and-regulations kind of guy. I believe L.A. needs a couple million luxury units. Yes, luxury units.

    But Erdmann is following the facts, the money trail, and it is not pretty.

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  5. Bayview sent the homeowners legally deficient notices, transmitted faulty written communications about their mortgage loan default and impending foreclosure, mortgage broker toronto

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