NCPA - National Center for Policy Analysis

Toward Another Mortgage Meltdown?

March 6, 2013

The Consumer Financial Protection Bureau (CFPB) was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers involved with financial products and services. A recently finalized rule abrogates the CFPB's responsibility to protect consumers from irresponsible mortgage lenders and instead keeps mortgage underwriting standards artificially low, say Peter Wallison, a senior fellow, and Edward Pinto, a resident fellow, at the American Enterprise Institute.

  • Federal policies were partly responsible for the mortgage meltdown of 2007 and 2008 that sent the U.S. economy spiraling into a recession.
  • In 1992, the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac began purchasing a growing number of subprime mortgages in the U.S. market to expand homeownership to borrowers at or below the median income of their communities.
  • When the Department of Housing and Urban Development raised the quota of mortgages the GSEs were required to purchase in 2000, underwriting standards had to be relaxed.

During the subsequent period, the GSEs began acquiring mortgages with 3 percent down payment at first, followed by no down payment and relaxed credit score requirements. The result of these practices yielded 28 million loans by 2008 that were considered subprime or weak. Seventy-six percent of those loans were on the government's balance sheet. When the housing bubble burst, it created a domino effect of foreclosures and plummeting housing prices that weakened financial institutions and helped cause the financial crisis.

  • The CFPB's new Qualified Mortgage rule makes the lender liable for various penalties if it is determined the borrower could not afford the mortgage.
  • Loans by lenders who observe the set of specific rules outlined by the government will be considered prime.
  • All loans will receive a designation by either a GSE or the Federal Housing Administration (FHA) on whether the loans should be considered a prime loan.

The problem is that the Government Mortgage Complex, made up of community activists, realtors, homebuilders and other member, has been successful at pressuring Congress and the CFPB to encourage lending to borrowers whose credit positions are questionable.

The system now in place is eerily reminiscent of the pre-housing bubble before 2007. It encourages loan originators to sell their loans to the GSEs and FHA rather than through private channels because the lower cost structures allow them to take more risk. This means taxpayers will once again be on the hook for these risky mortgages.

Source: Peter Wallison and Edward Pinto, "Wallison and Pinto: New Qualified Mortgage Rule Setting Us up for Another Meltdown," Washington Times, March 3, 2013.


Browse more articles on Economic Issues