Posted on 02 Jun 2011
Unusual alliances have sprung up in opposition to tighter lending standards, as as banking regulators are rewriting the rules for the mortgage market. Advocacy groups like the N.A.A.C.P. and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans.
The growing alliance between civil-rights organizations and banking lobbyists could extend beyond the current round of financial rule-making. If Congress turns its focus to restructuring Fannie Mae and Freddie Mac, for example, the same groups could voice similar concerns over anything that restricts the availability of credit for first-time home buyers.
“I think everybody agrees that the enthusiasm for promoting home ownership went way too far,” said David Stevens, chief executive of the Mortgage Bankers Association. “But now the risk is that we go too far the other way. We still need to be able to make affordable mortgages that don’t just go to the wealthy, who can afford the biggest down payments and who have the most positive credit ratings.”
For the uncommon alliance, the first point of attack is on a proposal that would require sellers of mortgage-backed securities to retain part of the risk should a package of loans go sour. The sellers would have to keep on their books at least 5 percent of the value of any baskets of loans they purchase from lenders and then resell to investors. One of the few exceptions to the requirement would be for mortgages on which the home buyer has made a down payment equal to 20 percent of the purchase price.
“Most people don’t have 20 percent to put down,” said Janis Bowdler, a project director in La Raza’s office of research, advocacy and legislation. “These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.”
The initial proposals on “risk retention” by sellers of mortgage-backed securities are likely to have limited effect, largely because Congress provided an exemption for loans that are sold to the Federal Housing Administration and Ginnie Mae, the Government National Mortgage Association. Regulators want to extend that exemption to Fannie Mae and Freddie Mac. Those and other government-sponsored housing finance enterprises currently purchase about 90 percent of new mortgage loans made today.
Republicans in Congress and the Obama administration have vowed to get the government out of the mortgage business, letting the private market take over Fannie and Freddie’s functions of supporting the market for home loans. But lenders and consumer advocates say any privatizations could disrupt lending, making matters worse and outweighing the protections they were designed to offer.
Any standards that apply to the private mortgage market will have to be reflected in government housing finance entities that help low-income and minority borrowers, said Barry Zigas, director of housing policy for the Consumer Federation of America. “Are you going to tell taxpayers that the
F.H.A. should have lower standards and take more risk than you expect private investors to take?,” he said.
Even the legislators who wrote the law on risk retention say that the proposal misses the mark. A bipartisan group of three United States senators — Mary L. Landrieu, a Louisiana Democrat, Kay R. Hagen, a Democrat from North Carolina, and Johnny Isakson, a Georgia Republican — wrote to regulators last month that a required 20 percent down payment “goes beyond the intent and language of the statute.”
The proposed regulations “would necessarily increase consumer costs and reduce access to affordable credit,” the senators wrote. “Sadly, in many cases, some creditworthy borrowers may not be able to get a mortgage at all.”
A similar letter this week from 156 members of the House of Representatives noted that in 2009, after mortgage underwriting standards had already tightened up, more than half of home purchases came with a down payment of less than 20 percent. Last year, according to the National Association of Realtors, 96 percent of first-time home buyers made down payments below 20 percent.
But as lawmakers and lobbyists of different stripes step up their attacks on the proposal, some regulators are scrambling to push back. They warn that a broader exemption could deter investors who buy mortgage loans from returning to the private mortgage market, or worse, re-inflate the bubble.
Because the rule-making process is under way, regulators are guarded in their comments. But in introducing the rule in March, Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, said that the down payment restriction “does not mean that under the rule, all home buyers would have to meet those high standards to qualify for a mortgage.” Rather, she said, those exempt loans “will be a small slice of the market.”
Some regulators say that the coalition of consumer and industry groups is jeopardizing rules that could, in the long run, protect borrowers from risky lending practices. In private meetings, some top agency lawyers now refer to the partnership as “the unholy alliance.”
But mortgage lenders, consumer and community groups, which are planning a joint news conference in Washington on Thursday to highlight their opposition to the risk-retention proposals, say they are just as certain that the regulations will not prevent risky loans from being made while hurting qualified borrowers.
“It is more likely that the credit restrictions that result will disproportionately fall on lower-income borrowers,” said Robert R. Davis, an executive vice president for the American Bankers Association. That, in turn, puts banks in a bind, because it gives the appearance of violating fair-lending practices.
The bonds between the former foes could unravel, in part because the wounds created by the implosion of the housing market remain fresh.
“I’m sure everything is not forgotten,” said Mr. Stevens, the mortgage banking lobbyist who headed the Federal Housing Administration for two years.
“A huge trust deficit was created as a result of the bad practices” that led to the housing bubble, he added. But the proposed regulations “will create new lines in the sand that separate the rich from the nonrich in ways that were never intended.”