Widespread Increases in Mortgage Rates Could Result From Regulatory Changes
New regulatory rules brought about by the Dodd-Frank Act could have the side effect of increasing mortgage rates and causing home values to decline.
In an effort to discourage the type of risky lending practices that helped to inflate the housing bubble, lenders will be required to retain capital reserves equal to five percent of the value of all but the safest loans. The only loans that would be exempt from the risk retention are the safest mortgage loans, called “qualified residential mortgages” (QRMs). The rule was enacted to discourage lenders from originating risky loans, securitizing them, and selling them to investors without retaining any of the risk.
One problem with the regulations is that what constitutes a QRM has yet to be defined. According to a Reuters article by Corbett Daly, the decision is made by the FDIC, HUD, the Federal Reserve, and other regulators. Sheila Bair, the head of the FDIC wants to require a twenty percent down payment. Wells-Fargo advocated for a thirty percent down payment. No matter what happens, a substantial percentage of mortgages would not be deemed QRMs, and would be subject to risk retention rules. The decision on QRM definitions will likely be handed down in the coming months.
This added risk retention will likely have three effects. First, it will cause rates on non-QRMs, which could constitute a large chunk of the market, to rise due to the added risk. Second, it could cause the number of lenders issuing non-QRMs mortgages to shrink due to the risk-retention rules. Third, by making mortgages more expensive or harder to get, it will reduce the pool of potential buyers for some properties.
There is already a low demand for homes in the United States, which combined with a large excess supply of houses is causing property values to fall in most markets. Further reducing demand could exacerbate this effect which could be disastrous for an already anemic housing market.
Added risk retention is probably a good idea that I think would be better implemented when the housing market is a little healthier. We will see what happens.
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