Is QM What's Holding Back the Housing Market?

Mitt Romney made a surprising claim in last night's Presidential debate:  that the lack of a regulatory definition of Qualified Mortgage (QM) under the Dodd-Frank Act is what's causing banks to hold back from lending. This claim, while perhaps narrowly accurate in the sense that regualtory uncertainty is likely to have some chilling effect, takes a misleadingly selective view of what's going on in the housing finance market.

Dodd-Frank prohibits the making of residential mortgage loans "unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments." Failure to comply with the ability to repay requirement is an absolute defense against foreclosure or debt collection on the non-compliant loan. 

The statute, however, provides that ability to repay shall be presumed if the loan is a "Qualified Mortgage."  In other words, QM is a safeharbor.  The statute itself provides a fairly extensive definition of "Qualified Mortgage".  There's a question of just what income verification actually requires, but it's not as if the statutory definition leaves much in doubt.  The staute directs the CFPB to enact regulations, and permits the CFPB to amend the QM definition as it seems fit.

If Romney's point is merely that on the margin the lack of a QM regulation is chilling lending, I've got no quarrel with him. But I don't think Romney's point was just about the marginal mortgage loan. I think he's claiming that QM is really what's holding back the housing market, not the millions of underwater borrowers or borrwers with damaged credit and a tenuous employment market.  

Mitt also seems to have a selective memory.  First, recall that banks weren't lending pre-Dodd-Frank.  It's not clear that Dodd-Frank changed anything.  Banks with damaged balance sheets are going to be careful about their lending.  The banks got too close to the fire in 2008 and once burned, twice shy.  As it happens, though, it's not as if there is no lending going on.  But a quarter of the homeowner base is underwater, which basically removes them from the refinancing pool, and the pool of new homeowners isn't growing, so we're going to be looking at a smaller market in any event.  What QM is really about, however is not standard plain vanilla loans.  Instead, it is about riskier, more aggressive loans. Why aren't banks making those loans?  Because they don't want the risk. In 2004-2008, they could make those loans and securitize them.  Now, with the private-label securitization market dead, the only place to park those loans is on their own balance sheets, and the banks aren't foolish enough to do that.  

This brings up a second bit of forgetten history.  While the QM is a safe harbor, not a penalty, it can be seen as an extension of the HOEPA loan concept. We managed to have the loosest credit standards in living memory at a time when the Fed hadn't adopted a meaningful HOEPA rule (despite a direct statutory mandate to do so). So it's hard to believe that lack of a regulatory definition of a defined statutory term is really chilling the market.  

Finally, recall that the CFPB is the regulator responsible for adopting a QM rule. The CFPB could not adopt a QM rule without a Director, and GOP obstructionism significantly delayed the start of the CFPB's rulemaking process. For the GOP Presidential nominee to complain about delayed regulations when the GOP is responsible for that delay is a bit hypocritical.  And then as it stands, what will happen when the CFPB does adopt a QM rule? It will almost assuredly be criticized (again, especially on the right) as chilling mortgage lending. In short, the CFPB is damned if it does and damned if it doesn't.  But to blame the state of the mortgage market on the lack of a regulatory definition of QM is to misleadingly ignore the bigger picture.