A Pivotal Election: The NEXT Administration

With voters focused on a number of high-profile issues as they approach the fall elections, mortgage finance topics are being overshadowed. Still, there is a lot at stake. The next administration will preside over a critical restructuring of the mortgage finance system. Dodd-Frank Act rulemaking will continue to make waves, and the top job of the Consumer Financial Protection Bureau may be in new hands.

Mortgage Banking

September 2012

By Robert Stowe England

 

The choice between Republican challenger Mitt Romney and Democratic President Barack Obama in the 2012 election couldn’t be more striking. It’s a battle of core philosophies, underscored by Romney’s selection of conservative Rep. Paul Ryan of Wisconsin as his choice for vice president. The proper role of the private sector versus that of government has become a bright line separating the views of the two presidential candidates.

 

But will the election really matter when it comes to actual policy?

 

The voters’ ultimate choice this fall may produce stark differences in terms of some outcomes. Yet, for others, the obstacles to executing sweeping changes may mitigate those potential policy differences over the next four years.

 

Even if the election outcome does matter, voters, interestingly, may not know exactly where the two contenders stand on critical housing and mortgage issues, because it’s a topic they seem to be avoiding.

 

While Romney would be more likely to let the housing-sector recovery proceed on its own, without more intervention, and to support major reforms to revive the private-sector mortgage market, his campaign declined to provide a spokesperson to talk about Romney’s policies on real estate and mortgages.

 

Similarly, the Obama campaign declined to discuss what the president might do in a second term about ongoing stress in the housing sector and the future of mortgage finance. The Obama website is also lacking in such details about what policies a second administration might pursue.

 

Why the silence on housing and mortgage markets, which were at the center of the financial crisis of 2008 and remain a continuing drag on the economy?

 

The candidates are avoiding the housing issue because “there are no silver bullets,” says Bill Killmer, senior vice president for legislative and political affairs at the Mortgage Bankers Association (MBA).

 

“I think both sides aren’t talking a lot about housing because there isn’t the grand record of success the current administration can point to, and there are no easy and readily attainable solutions Romney can point to,” Killmer says.

 

A Romney administration

 

Some observers believe that even on a policy level, there may not be much political hay to be made on these issues because policy differences in key areas may not be all that striking.

 

“Part of me thinks it’s not a huge difference in what you are going to see across the two administrations, based on what they are proposing right now,” says Ted Gayer, senior fellow at the Brookings Institution, Washington, D.C., referring to a second Obama term versus a first Romney term.

 

“If housing is your No. 1 issue, I don’t see vastly different outlooks depending on who wins,” he adds.

 

Gayer tempers his view, however, by the fact that we are in the dark, to some extent, about the potential impact of a Romney victory in November because he has yet to flesh out a clear idea of where his housing and mortgage policies might go.

 

“It’s a little bit interesting, in a sense, from Romney’s side—he doesn’t talk housing policy too much. In his plan for economic growth on his website, there are no policies particular to housing,” Gayer adds.

 

One of Romney’s early forays into housing policy came last Oct. 17, when he opened his Nevada campaign headquarters in Las Vegas with the admonition that it would be better to allow the housing market to recover on its own without further government intervention.

 

On the Democratic National Committee’s (DNC’s) dedicated website titled “Mitt Romney’s Housing Plan,” Democrats claimed the statement showed Romney as someone who is “hopelessly out of touch when it comes to housing policy.”

 

The DNC posted a video of Romney’s remarks on housing on the website, located at www.romneyhousingplan.com. “There are things you can do to encourage housing,” Romney says in the video. “One is: Don’t try and stop the foreclosure process. Let it run its course and hit the bottom, allow investors to buy homes, put renters in them, fix the homes up, and let it turn around and come back up,” Romney adds.

 

The reason Romney does not want to talk about the woes of the housing market “is reflective of the conundrum that we’re in,” maintains Gayer. “When you talk about a large number of people underwater in their mortgages, as we’ve seen under the Obama administration, there’s just a limited amount the federal government can do,” he explains.

 

“And anything he’s going to do is going to likely incur some substantial costs and require some transfers, which would be politically risky,” Gayer says.

 

Romney’s solution to housing is to adopt policies that promote economic growth and job creation, according to Douglas Holtz-Eakin, an economist who was adviser to the 2008 presidential campaign of Sen. John McCain (R-Arizona) and founder and president of the American Action Forum, Washington, D.C., a center-right policy institute.

 

“Better overall economic growth is the mechanism that will transform what’s a clear demographic demand for increased housing into something that is an increased economic demand for housing,” Holtz-Eakin says.

 

By that, he means that today net new households are being created which is fueling underlying demand for housing that is currently being met primarily by rentals instead of expanded homeownership; but if the economy were to improve, those households could opt for homeownership, boosting overall demand.

 

“There’s no substitute for that. Let’s face it—until we get more buyers into, particularly the residential single-family homes market, you’re not going to get any substantial firming of prices. You’re not going to see housing starts go from the [539,000 in July] to the million-plus we need to show restored health. That’s the key.”

 

Romney, however, has not fleshed out how he expects his economic policies to affect housing. “If there are going to be particular ways to speed that process, they have yet to be rolled out in the [Romney] campaign,” Holtz-Eakin notes.

 

A second Obama term

 

What we can expect from a second Obama term may be easier to discern from his record as president.

 

“I think we know the most about President Obama because he’s been at it for the last four years,” says Holtz-Eakin.

 

“We’ve had HARPs [the Home Affordable Refinance Program] and HAMPs, [the Home Affordable Modification Program], and all sorts of initiatives, which I think have demonstrated that, one, [Obama’s] shown a pretty good appetite for getting in there and intervening in housing markets. And . . . two, it hasn’t been very successful.”

 

In a second term, the Obama administration may want to continue to pursue principal reductions for Fannie Mae and Freddie Mac mortgages to help underwater borrowers and improve the housing market, according to Gayer.

 

“That is something they are very vocal on, and there’s a lot of pressure being placed on the acting director of the Federal Housing Finance Agency [FHFA], Ed DeMarco, to allow principal reductions for mortgages that are owned by Fannie and Freddie,” Gayer says.

 

On July 31, after FHFA completed a review, DeMarco announced that the agency would not allow principal reductions, stating that such reductions “did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

 

“But let’s say Obama wins,” Gayer says. “It’s ultimately the purview of the regulator [DeMarco], and unless they could get a new regulator in there [at FHFA] that’s more amenable to the position, there won’t be much change.”

 

Furthermore, Gayer explains, “The only way they can get a new regulator more amenable to their position is if [the Democrats] take Congress and have enough votes in the Senate to confirm their choice.”

 

Romney would not likely push principal reductions, Gayer says. But, despite the difference in policy prescriptions, he does not think that Obama, if re-elected, would be able to succeed in getting principal reductions adopted as a policy by the FHFA.

 

 

The next Congress

 

The issue of policies such as principal reduction point to a larger point: The potential for either administration to advance an agenda in housing depends on the makeup of the new Congress, since major reforms are likely to require legislative approval. Further, major appointments to key positions will require Senate confirmation.

 

And it is not just a question of what party will have the majority, but the size of the majority that matters, according to MBA’s Killmer.

 

“Even if the change in electoral numbers in Congress are on the margins, they still speak to the kind of tone that the legislature takes in its oversight of existing programs that impact mortgage finance and impact the housing economy,” Killmer says. “And clearly that’s the case in [terms of] the presidential election with respect to the tone that’s set for the regulatory mindset.”

 

Killmer contends both campaigns, despite the lack of detailed housing plans and proposals, “have spent a fair amount of time establishing what their priorities might be.”

 

The Obama administration and the Democratic-controlled Congress in the president’s first term supported “a more robust role for the government,” according to Killmer. “And I think you have to give that mixed reviews, and I think that’s the consensus.”

 

Killmer nevertheless believes the combined efforts of the government and industry have been able “to help with the overhang of inventory and move things through the pipeline.” This, in turn, has been “a positive thing” for borrowers and the market, he says.

 

The Republican approach, which gained traction after the GOP took control of the House in 2010, reflects “more of a philosophical tilt toward letting the market sort things out for itself, while preserving the government programs in place—FHA [Federal Housing Administration], [U.S. Department of Agriculture (USDA)] rural housing, VA [Department of Veterans Affairs]—as necessary supports,” Killmer says.

 

The mortgage industry and the housing industry at large “line up somewhere between those two [political] points of reference,” says Killmer.

 

That perspective, he explains, reflects an “understanding there is a role for the government in the mortgage space—not wanting to move toward anything that smacks of too much laissez-faire, but trying to find the right balance in terms of the government’s role,” he says.

 

“Where there has been effective work is when there has been meaningful public and private partnership and where regulators in the administration and, to a lesser degree, in Congress, have sought meaningful inputs from industry,” he adds. “So, that’s why you see some improvements in the HARP program and where you have seen some of the successes in the other programs the administration was the champion for,” Killmer says.

 

Jobs, jobs, jobs

 

In the presidential campaign, housing issues are taking a back seat to a broader focus on the lackluster economy.

 

“I think job one, in terms of the tone that is set for election outcomes, will be the different approaches to economic growth and job creation and making sure that credit’s not too tight and making sure the economy’s growing,” Killmer says.

 

“There is a recognition by the Romney campaign, and maybe the Obama campaign, that Obama made a bit of a mistake by putting all the eggs in the health-care basket” as his first priority early in his term, according to Mark Calabria, director of financial regulation studies at the Cato Institute, Washington, D.C.

 

“Romney is laser-beamed on this. If he is president, the entire first year will be about jobs,” Calabria says.

 

He adds, “They will have seen what it has cost Obama, if it does [cost him a second term],” referring to Obama’s failure to give top priority to promoting economic growth and job creation.

 

Putting the cart before the horse?

 

The Federal Reserve in recent years has pursued policies to lower longer-term interest rates based on the notion you can’t get the overall economy going strong until you get the housing recovery solidly under way. The Obama administration’s focus on mitigating the impact of foreclosures is also built on such a view.

 

Will Obama or Romney continue to believe the fate of the housing sector is key to reviving overall economic growth? Or have policy makers been putting the cart before the horse?

 

“That’s a really important question,” responds Holtz-Eakin.

 

“I, at least, have gone from someone who was in that [housing recovery must come first] camp in 2007 and 2008, especially during the McCain campaign, to one who now believes that instead of saying you’ve got to fix the housing market to get better growth, the emphasis should be get better growth to fix the housing market,” Holtz-Eakin explains.

 

“I don’t see that there’s any realistic large-scale, economically viable housing-market intervention that’s politically feasible,” says Holtz-Eakin.

 

“And, so, whatever one-whole-blackboard of ideas one might have, the electorate doesn’t support them. In particular, the $700 billion in negative equity out there is not going to get filled by some strategic government program,” he says.

 

But if economic growth is the key, what pace of expansion do we need to foster a full housing recovery?

 

“Well, I think we have to get top-line economic growth away from 2 [percent] and closer to 3.5 [percent GDP],” Holtz-Eakin says.

 

However, economic growth by itself will not be enough. “I think the bigger issue is that, if you look at real disposable income since the trough in June of 2009, the average quarterly growth in real disposable income is at an annual rate of 0.07 percent. It’s flat,” Holtz-Eakin notes. “We’re not generating enough income in the economy to generate the kinds of demand for housing and other things that are sort of hidden out there. We’ve got to do better.”

 

“I think you have a bunch of interrelated problems. At the core, you have to get home prices firmed up so people no longer sit on the sidelines waiting for more fire sales. They have an eagerness to get into the market. They have the capacity,” Holtz-Eakin says.

 

Strong prices, plenty of choices, including new construction—“all of those are characteristics of housing markets when things are actually growing. And they’re just not there,” says Holtz-Eakin.

 

“But there are people out there [to serve as potential buyers]. There have been a million new households formed in the last three years. They’ve all gone into rental housing. That’s not usually the case. We don’t usually see all of new household increases showing up as rentals,” he adds.

 

Low mortgage rates alone have not proven to be a magic elixir.

 

“The ingredients to [boost] home buying are: demography—get people in the right age groups to buy homes; prices—both borrowing costs and with current interest rates that’s entirely beneficial; incomes and expectations of incomes to service mortgages—that’s missing completely; and the hope of price appreciation—and we haven’t seen much of that,” Holtz-Eakin explains.

 

Mortgage finance

 

The biggest real estate policy issue likely to confront the next president is the future of mortgage finance.

 

More specifically, it is the future of Fannie Mae and Freddie Mac, which have been in conservatorship since 2008. The matter at its core centers on getting to a diminished role for the government-sponsored enterprises (GSEs) and embarking on a path to a revival of the private sector in mortgage finance.

 

In the period of conservatorship while these issues have awaited resolution, the two GSEs have incurred bailouts from the Treasury in excess of $187.5 billion so far.

 

Neither the Democratically controlled Congress of 2009–2010 nor the divided Congress of 2011–2012 has dealt with the uncertain future for the GSEs. Republicans, who control the House, and their allies in the Democratically controlled Senate have supported a range of bills to put limits on the GSEs and help jump-start the rebirth of a private securitization market. But these bills have languished in the House in the run-up to the fall elections.

 

Gayer sees little difference between Obama and Romney on the central issue of the future of mortgage finance: Both sides want to see a revival of the private sector in mortgage finance, he contends. They differ only in the degree to which they want the government to play a role in the future.

 

During the second quarter of 2012, the government stood behind 91 percent of all mortgage originations, according to Inside Mortgage Finance—nearly five years after the collapse of the private-label mortgage-backed securities (MBS) market in 2007.

 

Gayer points to the Obama administration’s February 2011 white paper Reforming America’s Housing Finance Market—A Report to Congress for hints of where Obama would go in a second administration.

 

That 31-page paper, issued by Treasury and backed by the Department of Housing and Urban Development  (HUD), outlined a future for mortgage finance that included a range of three options that all relied on a robust private sector issuing private label mortgage-backed securities and a wind down of Fannie and Freddie, as well as reforms for the Federal Home Loan Bank (FHLB) system.

 

Given the starting point of the Treasury’s white paper, “I don’t see huge differences” between a second Obama administration and a first Romney administration, Gayer says. “I see Romney moving for more privatization, but I don’t see the full privatization of Fannie and Freddie.”

 

Gayer thinks Obama would likely have a government agency or regulated private entity involved in a new mortgage system.

 

The big difference between the two administrations would center around the role for affordable-housing goals, which some Republicans and a number of academics see as having been the primary reason Fannie and Freddie failed.

 

While few expected a new policy move affecting the GSEs only months before the Presidential election, the Treasury Department on Aug. 17 announced a significant revamp of their support of Fannie and Freddie.

 

Under the original agreement from September 2008, the two GSEs have been required to pay 10 percent dividends to Treasury for funds advanced to keep the two solvent. Under the new agreement, the GSEs will not have to pay a dividend when they do not make a profit; however, when they do make a profit, all profits are returned to Treasury as a dividend payment.

 

The revised agreement accelerates the pace at which the portfolios of the GSEs will be wound down. Currently each of the two can have portfolios no larger than $650 billion by year end 2012. Beginning next year, however, instead of reducing the portfolios by 10 percent a year, they must reduce them by 15 percent a year, reaching a final cap of $250 billion each by 2018.

 

Mortgage Bankers Association president David H. Stevens praised the move by Treasury. “The announcement is a clear and appropriate effort to limit taxpayer exposure resulting from the federal government’s investment in Fannie Mae and Freddie Mac.”

 

Policy priorities and narrow majorities

 

The post-election environment will be more conducive to a proper debate about the future of GSE reform and mortgage finance, according to MBA’s Killmer.

 

“But it’s going to take whichever administration’s in place, leaning into that [issue], spending some capital to get it done. I think it’s easier for the Obama administration to do that, because they’ve had more time and attention and one term to lay their thoughts forward. So, they could get off to a running start sooner,” he says.

 

“I think it probably would be further down the list [of issues to tackle] if it’s a Romney administration—behind some of the other things that he’s making a centerpiece of his campaign, which is more of a focus on debt and deficit reduction and how he would change the role of government,” Killmer adds. “I think it’s probably somewhere closer to the bottom five of his [top-10] list, and I think it’s closer to the middle of the pack of the top 10 for the Obama administration.”

 

Killmer thinks that whichever party controls Congress next year there will be narrow majorities and that will complicate any effort at reform.

 

“I think Republicans will likely still control the House, but with a smaller majority,” says Killmer.

 

“It’s possible Democrats could retake the House, but if they did, with a very small majority,” he adds. If they did, Maxine Waters (D-California) would be in line to head the House Financial Services Committee.

 

If Republicans retain the House, Spencer Bachus (R-Alabama) has indicated he will not seek another term as chairman of the House Financial Services Committee. Possible replacements include Jeb Hensarling (R-Texas), Scott Garrett (R-New Jersey) and Ed Royce (R-California).

 

“The Republicans have a shot to take the majority in the Senate,” Killmer contends. “But, if they do, they are going to have a very small majority,” with Sen. Richard Shelby (R-Alabama) at the helm of the Senate Banking Committee.

 

“And if the Democrats hold, they are going to have a smaller majority. So, it’s going to be very tough to get legislation out of the key committees of jurisdiction in Congress,” Killmer concludes.

 

Will Congress take the lead on GSE reform?

 

Calabria believes the momentum for GSE reform, instead of coming from the White House, could come from Congress instead.

 

A key concern will be designing a transition period. “Nobody’s going to pull the chair from under Fannie and Freddie overnight. It’s simply not going to happen,” says Calabria. He expects a phase-out to be stretched out five to 10 years.

 

“The question is what do you do to make that credible” that the phase-out is actually going to proceed on schedule, says Calabria.

 

“What do you do to make sure the private sector takes over a bigger share of the market, and to make sure it’s not the too-big-to-fail banks that are taking over?,” Calabria asks.

 

A question mark in any possible reform hangs over the future of the Federal Home Loan Banks. “For them it’s a wild card,” says Calabria. The FHLBs are likely “to keep their heads down and walk out of this basically with the same format, structure they now have,” Calabria contends. “Again, it’s really hard for them to really talk about how we get through this without getting tarred and feathered.”

 

The Brookings Institution’s Gayer, however, thinks any effort at GSE reform could be considerably altered as it tries to wend its way through Congress.

 

Gayer sees a Romney administration leading an effort toward privatization, “but perhaps not a complete privatization of Fannie and Freddie.” An Obama administration, he contends, would favor less privatization and might prefer that the government role be played by a public agency and not a regulated utility.

 

“But still, getting a bill through Congress . . . with [all] the political interests involved, it’s hard to see what any outcome under either administration would look like at the end of the day,” says Gayer.

 

“You will increasingly, as time passes, be more likely to just see stasis,” Gayer says. “The longer you take to paint the picture [of a new mortgage finance system], the more likely you’re going to amble on a lot like now and we just kind of evolve without any new policies under either administration,” Gayer says.

 

Tight credit

 

Either Obama or Romney could face another challenge: a mortgage market where credit continues to tighten as a result of regulatory proposals coming out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, especially definitions around a Qualified Mortgage (QM) and a Qualified Residential Mortgage (QRM).

 

While regulatory definitions are typically done at the staff level, Killmer believes that whoever heads the agencies in the next administration will be able to influence them.

 

And even though Republicans are campaigning on a pledge to get rid of Dodd-Frank, “It’s tougher to do that with tighter margins,” Killmer notes.

 

“What you’re going to see in Congress if the GOP prevails, is that they will, in the Senate, do the oversight of Dodd-Frank that you haven’t seen in the current Congress,” Killmer says. He expects Congress, instead of overturning Dodd-Frank, will instead move to enact technical corrections.

 

Calabria expects that if Obama is re-elected, the current narrow definition of the QM and QRM will remain in place, even in spite of a likely major pushback to change them from a number of Democrats in Congress. If Romney is elected president and there is a GOP Congress, even that “does not guarantee” Congress can overturn Dodd-Frank and the current definitions of QM and QRM, he says.

 

One path to a more credit-friendly federal regulatory climate may ironically lie with the ability of Romney, if elected, to appoint a new head of the Consumer Financial Protection Bureau (CFPB), according to Calabria.

 

The current director, Richard Cordray, was a recess appointment by Obama (and the appointment was made even though the Senate had not declared a recess). As such, it is only temporary and Cordray cannot serve out a five-year term as director without being renominated and confirmed by the Senate.

 

Once Romney gets a new director confirmed, he or she “may be more open to seeing changes to QM,” Calabria says. “Cordray’s trying to get QM done before the end of the year. It will be harder to reopen rules once they are finalized,” he contends. (See “Q&A with Richard Cordray” elsewhere in this issue of Mortgage Banking,  where he states that the CFPB will get QM done by the January 2013 deadline set in the statute.)

 

The next administration and Congress will also face the likelihood that FHA will need a bailout, according to Calabria. In return for taxpayer funding, he suggests, Congress may impose more restrictions on FHA lending. “Premiums will have to go up,” he adds.

 

Mortgage credit availability may increase once interest rates start to rise, according to Calabria, because “in the current environment, the combination of QM, HOEPA [Home Ownership and Equity Protection Act] rules (from the Housing Opportunity Program Extension Act of 1996) and low interest rates make it impossible [for lenders] to cover credit risks on anything but prime credit,” Calabria says.

 

With higher market rates, lenders will get a chance to become more comfortable with pricing higher credit risk and be able to offer credit to more borrowers than is currently available, Calabria suggests.

 

“We are going through a transition,” he says. “I tend to think some of the broker channel will come back.” Joining others who have already taken this position, San Francisco–based Wells Fargo & Co. in July announced it would no longer operate a wholesale lending channel for loans from mortgage brokers.

 

Disparate impact and an aggressive enforcement stance

 

Stepped-up enforcement actions against mortgage lenders could also be in play based on the electoral outcome.

 

The Obama administration for the last year increasingly has focused on using disparate impact as a means to bring enforcement actions claiming discrimination against minorities. Disparate impact, as the legal doctrine is being used, does not require intent to discriminate or even any proof of a single case of discrimination.

 

On July 12, the Department of Justice (DOJ) announced a settlement of $155 million with Wells Fargo, the second-largest fair lending settlement. DOJ had alleged a pattern of discrimination against African Americans and Hispanics in the bank’s lending practices between 2004 and 2009, and many of the loans referenced came from broker channels.

 

In a statement, Wells Fargo did not admit wrongdoing and said it settled with the government “solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continuing to provide fair credit services and choices to eligible consumers, and important and meaningful assistance to borrowers in distressed U.S. real estate markets.”

 

Following the settlement with DOJ, Wells Fargo announced it would end its wholesale lending arm that relied directly on brokers to originate loans, but the company said its decision had nothing to do with the settlement.

 

HUD has also expressed support for holding banks accountable for discrimination when there is statistical evidence of disparate impact.

 

DOJ and HUD were joined by the CFPB on April 10, when the agency put lenders on notice that it “will use all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against customers.” Such enforcement would come under authority of the Equal Credit Opportunity Act, according to the CFPB statement.

 

The Department of Justice also demonstrated its commitment to disparate impact enforcement when it weighed in on a case, Magner v. Gallagher. The city of St. Paul, Minnesota, had appealed a case it lost in lower courts to the U.S. Supreme Court. DOJ prevailed on St. Paul to ask the Supreme Court to dismiss St. Paul’s appeal because, if the Supreme Court agreed with St. Paul, it would disallow the use of statistical data as proof of discrimination. St. Paul then asked for dismissal and the Supreme Court granted it on Feb. 12.

 

The city of St. Paul, in justifying its plea for dismissal of its appeal, stated that a victory “could eliminate disparate-impact civil rights enforcement.”

 

In the original case, rental property owners in St. Paul argued that under the Fair Housing Act, the city’s “aggressive enforcement” of its housing code constituted disparate impact race discrimination. The 8th Circuit Court of Appeals upheld an initial court victory by the rental property owners and gave legal backing to the use of data that demonstrate disparate impact to rule against the city of St. Paul.

 

On June 11, a New Jersey municipality asked the Supreme Court to determine if disparate-impact enforcement can be used under the Fair Housing Act in the case of the Township of Mt. Holly v. Mt. Holly Gardens Citizens in Action Inc. The Supreme Court has granted a hearing on the request to take up the case.

 

“This whole push for equal outcomes under disparate impact” needs to be stopped in its tracks, argues Ed Pinto, a senior fellow at the American Enterprise Institute (AEI), Washington, D.C. Otherwise, those efforts will lead to a government-enforced resurgence in risky lending based on the inability of lenders to rely on FICO® scores, he contends. The elections in November could determine to what extent that might be possible.

 

Pinto thinks the Obama administration disparate-impact enforcement efforts and the plans of the CFPB stray from what courts have sanctioned on the matter. Under court interpretations of the legal doctrine, businesses cannot face enforcement for disparate impact for practices or policies that are “essential or indispensable to an employer’s business,” Pinto says.

 

“When you look at lending, what could be more indispensable to lending than credit standards?,” he asks. “Yet, under the whole disparate-impact push, notwithstanding the fact FICO scores are color-blind, if minorities have lower FICOs in general than whites, then you end up with a disparate impact and that should not be allowed to stand,” Pinto says.

“That’s a fundamental problem. It’s no longer lending. How can you have lending if you can’t take into account an individual’s credit history and you have to make a loan to them if they have a 590 FICO score because [if you don’t] it would have a disparate impact?,” he asks.

 

“It’s really the continuation of the entire affordable-housing movement that created the financial disaster,” Pinto says. “It’s now become reincarnated as disparate impact. It’s the same issue.”

 

Pinto has analyzed the factors affecting default in the FHA program and has found that FICO scores are the single most-significant factor in determining whether a loan will go to foreclosure.

 

Pinto thinks the FHA may prohibit lenders from having credit-overlay criteria to loan programs provided by the agency. Thus, if the FHA allows 580 credit scores in a given program, banks cannot deny applications for FHA-backed loans because they require a higher credit score for the loan, he contends.

 

So, Pinto argues, nominations to head HUD and CFPB will be critical, as well as any permanent director at FHFA. It could be the difference between building a new, healthy mortgage market and repeating on a smaller scale the mistakes made during the 1990s and 2000s.

 

A high stakes election

 

So, it would appear that the stakes are high in the election in terms of the overall direction housing and mortgage finance reform will take. Voters may be largely in the dark as they make their choice, but their vote can redirect public policy.

 

After the election, however, the ability of either Obama or Romney to make real progress toward achieving their goals would appear to be somewhat more dicey. The actual outcomes achieved by the next administration might be less striking than one might expect from the contrasting views on policy.

There is one plus, no matter which candidate prevails. “Whoever is president next year, there’s a sense you can put the housing crisis behind you,” says Calabria. “The next administration will preside over a recovery in the housing market.”  MB

 

Robert Stowe England is a freelance writer based in Arlington, Virginia, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Copyright © 2012 by Mortgage Banking Magazine. Reprinted with permission.

 

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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