The U.S. Congress should consider strengthening mortgage-servicing standards to ensure banks don’t return to higher-risk lending in a future housing boom, Senator Elizabeth Warren said in a speech today.
The qualified mortgage rule, which requires lenders to verify a borrower’s ability to repay by confirming income and assets, needs to be bolstered because the version taking effect Jan. 10 has insufficient penalties for noncompliance, Warren said at a Mortgage Bankers Association conference in Washington.
“The potential liability associated with writing non-QM loans is relatively small, and in good times, lenders can compensate for those possible losses with higher rates or fees,” said Warren, a Massachusetts Democrat who was elected last year. “We need to consider strengthening or supplementing the QM rule so that it provides an adequate check on overly risky lending even during housing booms.”
Congress directed the Consumer Financial Protection Bureau, formed as part of the Dodd-Frank Act, to create the qualified mortgage rule after banks were faulted for helping spark the 2008 credit crisis by making loans to people who couldn’t afford them. The rule approved by the agency this year gives some legal protection to lenders who meet its standards.
Warren, who shaped the consumer bureau before running for office, used the speech to lay out her housing-finance priorities. The Senate is writing legislation to replace Fannie Mae and Freddie Mac, the U.S.-owned mortgage-finance companies that were sustained by $187.5 billion in taxpayer aid before they returned to profitability this year.
Senator Tim Johnson, the South Dakota Democrat who leads the banking committee, and Senator Mike Crapo of Idaho, the panel’s top Republican, are drafting a bill that Johnson is looking to introduce by the end of the year. The measure is likely to include elements of a proposal submitted by Senator Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, that would wind down the government-sponsored enterprises in five years.
“I don’t think it’s a perfect bill, but I applaud them and their co-sponsors for the work they’ve put into this,” Warren said of the Corker-Warner bill.
Any housing-finance legislation should include an explicit government guarantee and solve servicer and trustee problems for modifying mortgages, Warren said. The new system shouldn’t increase advantages for large banks, which would exacerbate the problem of lenders being deemed too big to fail, and the U.S. guarantee must serve the entire primary market, she said.