Congress Is Considering Bills to Make Homeownership More Expensive and Less Safe
We need to be moving toward greater inclusivity in this space, not locking more people out.
President Trump declared June to be National Homeownership Month or a time committed to “ensuring that hard-working Americans enjoy a fair chance at becoming homeowners.” Despite this statement of intent, there are a number of threats to homeownership that are on the horizon, especially for prospective low- and moderate-income households that hope to someday climb the homeownership ladder.
In March of this year, the President proposed a budget that would completely defund many programs that make homeownership more affordable, undermining the very goals he set for Homeownership Month. In addition to this, bills were recently introduced that would make homeownership less affordable and compromise consumer safety and soundness if they passed. First, the Financial Choice Act, which sailed through the House of Representatives earlier this month, would gut consumer protections, including many for home buyers. How does it do that? Through the Mortgage Choice Act, which is just one of many housing proposals combined into this mega-bill. Second, the Community Lending Enhancement and Regulatory (CLEAR) Relief Act was introduced that calls for exempting smaller banks from complying with certain consumer protections.
The Mortgage Choice Act
While clocking in at only three pages, H.R. 1153, the Mortgage Choice Act, deals a significant blow to one of the consumer protections codified by Dodd-Frank. Specifically, it allows higher-cost loans to meet the Qualified Mortgage (QM) standard—and costs borrowers hundreds or potentially thousands of dollars in needless expenses.
The Qualified Mortgage standard, raised up by Dodd-Frank and shaped into a rule by the Consumer Financial Protection Bureau, requires lenders to make a good-faith effort to ensure that mortgage borrowers can repay their loan; if they comply with the requirements, “safe harbor” provisions give lenders legal protection against borrowers who claim that they were extended a predatory mortgage. This standard has benefits for both the borrowers and lenders: it ensures certain consumer protections for borrowers, plus it enables lenders to get their qualified mortgages off their books by selling to Fannie Mae and Freddie Mac.
The QM standard includes limiting debt-to-income ratios and avoiding abusive lending practices like interest-only periods and negative amortization loans that can trap borrowers in debt. It also limits the upfront points and fees that a mortgage lender can charge—this is the part that the Mortgage Choice Act would weaken. The bill would allow higher-cost loans to be classified as qualified mortgages by excluding the fees paid to title insurance companies affiliated with the mortgage originator.
Why does title insurance matter?
Borrowers can’t get a mortgage without it, but they “have little or no influence over the price,” according to a 2007 GAO report. In a letter opposing the 2015 version of the Mortgage Choice Act, Americans for Financial Reform and other consumer advocates noted that the “broken” title insurance market allows insurance providers to charge inflated prices, with as much as 70% of title insurance premiums going to commissions. Including affiliated title insurance fees in the points and fees limit for qualified mortgages creates some pressure to keep these costs under control.
The Community Lending Enhancement and Regulatory (CLEAR) Relief Act
The CLEAR Relief Act has the potential to also put consumers at risk by rolling back Dodd-Frank regulations on community banks. Specifically, the Senate version of the bill would give “qualified mortgage” status to any mortgage originated and held in portfolio for at least three years by a lender with less than $10 billion in assets, effectively exempting community bank portfolio loans from important qualified mortgage regulations that protect consumers. It would also exempt community banks from the Volcker rule, which prohibits banks from engaging in the types of speculative activities that partially led to the financial crisis. One of the arguments for such an exemption is that lenders would have “skin in the game,” thereby incentivized to make only good-quality loans. However, this argument fails to recognize that if a loan goes south, the homeowner’s equity is the what is typically lost first, followed by mortgage insurance or other forms of credit enhancement. The lender still likely walks away from a bad loan with origination points fees and servicing income, and family’s wealth is simply stripped away.
Although community banks have less market power than the “too big to fail” financial institutions that caused the most damage during the financial crisis, these banks can still play an outsized role in their local economies and rolling back regulations too far could encourage the risky practices that destabilized the mortgage market less than a decade ago. The House version would go even further to strip away required consumer protections, even removing the Consumer Financial Protection Bureau’s prohibition on “abusive” practices and amending the Fair Housing Act and Equal Credit Opportunity Act to require that violations have clear discriminatory intent, invalidating disparate impact claims.
These two bills are some of the most recent attempts to compromise household financial security and weaken consumer safety in the homeownership market. Homeownership is a critical wealth-building opportunity, and far too many households are already excluded from this market because they cannot afford the upfront fees required to become a homeowner. If these bills pass, they will make the price of homeownership even higher, making it harder for an increasing number of families in this country to own this valuable asset. We need to be moving toward greater inclusivity in this space, not locking more people out.