Did Subprime Mortgages Just Get Started Again?

In a rare instance when you might have seen think tankers of The Cato Institute hand and hand with Occupy Wall Street protestors, many of whom were homeless people just looking for a cause, members of the powerful coalition of the NAR (National Association of Realtors), successfully lobbied the House of Representatives to pass a bill this Tuesday that makes it easier for lenders to lend money with less restrictions. On a positive note, at least Code Pink was there in their Susan Komen inspired T-shirts.

This does not bode well for the morally and conservative far right who believe less restrictive lending practices will lead to a repeat of the 2008 real estate crisis. If one where looking for comedic relief in this matter, the Greeks — who are still begging for government relief from the Germans, know that if America does the happy dance with subprime mortgages again, that in another 8 to 9 years when the next American real estate meltdown will occur (because this stuff does occur in cycles); they can expect that economic Tsunami to hit their Mediterranean shoreline once again.

However, according to real estate professionals at the highest level, many of whom are highly paid lobbyists for the NAR, this time it’s different. The sediment was expressed by its leader this past April 15.

The Mortgage Choice Act, which passed the U.S. House of Representatives last night with a bipartisan vote of 286-140, improves consumer access to mortgage credit with the full protection of the Ability-to-Repay and Qualified Mortgage rules that went into effect last year to safeguard borrowers from risky lending practices.
Chris Polychron, President of the NAR

In a nutshell, the NAR opposes only some of the new rules established by Congress as it pertains to what are commonly known as Qualified Mortgages; whom as a whole they view as counter-productive to a healthy home buying real estate market. More specifically, the NAR, in a press release uploaded to their website on April 16, read as follows:

“As they are currently written, the rules unfairly prevent consumers from obtaining QM loans through certain affiliated lenders whose joint venture services are collectively counted against the cap, while individual services from large retail financial institutions are each capped separately.

The discrimination in the calculation of fees and points is being felt by consumers, including lower-end buyers, who are seeing reduced choices and added obstacles in their transactions.”
NAR website, April 16, 2015

Polychron also pointed out, but suggested that “some modifications to existing regulations would help restore the homeownership rate to pre-bubble levels.” What this means in coded language, is that Congress should allow banks to have more flexibility in defining a Qualified Mortgage.

As it stands, QM loans are guaranteed by the government. Without this guarantee, banks will have a difficult time selling those loans, which the banks make a huge profit. For definitional purposes, a QM has a 43% debt to income ratio. The NAR would like to see that ratio kicked up, possible to the 50% plus range. The downside of that waiver, is that it results in a high rate of loan default. The subprime ratios in the mid-2000’s were regularly in the 50% to 60% plus range — for stated and nonstated loans. And that is making some US Senators and Congressmen nervous. Déjà vu all over again? Let’s hope not. Greece, don’t hold your breath.

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