“If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.
Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policymaking.
Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau — a bureaucracy created by the Dodd-Frank to be unaccountable almost by design — implemented the law’s “qualified mortgage” (QM) provisions.
The QM provisions are now so costly and complex that community banks and credit unions — as far away as one could get from the causes of financial crises — have sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representatives responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s (D-Nev.) desk.
Yet Thursday, in a much-hyped speech on housing in Phoenix, President Obama chose not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.
As described by press reports and this very vague press release from the Department of Housing and Urban Development, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.
Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received — according to a new Politico investigation — an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action. In the Politico expose of the FHA and other government credit programs, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”
Meanwhile, mortgages — even heavily subsidized ones — still will churn slowly until provisions of Dodd-Frank are repealed or at lease scaled back. Leaders of community banks and credit unions have testified that QM prevents mortgages even to borrowers with stellar credit because of its many mandates that have nothing to do with credit quality.
Jack Hartings, a community banker in Ohio testifying on behalf of the Independent Community Bankers of America, stated last year to the House Financial Services Committee, “There is no question that the new Qualified Mortgage (QM) rule will adversely impact my mortgage lending.”
Moreover, Jim Purcell, CEO of the State National Bank of Big Spring in rural west Texas that is co-plaintiff in CEI’s constitutional challenge to Dodd-Frank and the CFPB, has said that the CFPB’s mortgage regulations have already forced his bank to eliminate many types of stable mortgages.
Daniel Weickenand, CEO of Orion Federal Credit Union in Memphis, Tenn., testified last year on behalf of the National Association of Federal Credit Unions that due to Dodd-Frank’s QM rule, “a number of mortgage products sought by credit union members, and offered by credit unions, may disappear from the market.”
One of the biggest burdens Weickenand and other Main Street bank and credit union officials cite is QM’s hard-and-fast cap on “points and fees” to no more than 3 percent of the value of the loan. Included in the CFPB’s broad definition of “points and fees” are many things that would not strike borrowers or lenders as “extras,” but as essential items for a secure mortgage.
Escrows for property taxes and title insurance from bank affiliates, for instance, are subject to the cap. This has made it very difficult for some banks and credit unions to even cover overhead when making a mortgage.
Fortunately, in the last Congress, there already was legislation to scale back QM. The Mortgage Choice Act, introduced by Reps. Bill Huizenga (R-Mich.) and Gregory Meeks (D-N.Y.), stated that title insurance and affiliated escrows are not subject to the “points and fees” cap.
Amazingly, despite strong ideological differences among members of Congress, this bill passed the House in June by a unanimous voice vote. Even more amazingly, after this unanimous passage, the bill was never even brought to the floor in Harry Reid’s Senate.
If his goal is to help responsible homeowners — without saddling them or their children with even more crushing debt on the government level — then Obama needs to stop playing fast and loose with the FHA’s finances start speaking out for the Mortgage Choice Act and other bipartisan bills to undo the damage of Dodd-Frank.
John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.