My goal is to help mid-level staff at regulatory agencies on the Hill understand some important characteristics of mortgage risk and the mortgage business.
As Ed Pinto points out, there is still room for improvement in mortgage regulation.
Last month it was the Consumer Financial Protection Bureau (CFPB) promulgating its Dodd-Frank Act mandated Qualified Mortgage rule (QM). Dodd-Frank imposed QM to set minimum mortgage standards. Yet it is now being touted as making sure “prime” loans will be made responsibly. True to the government’s long history of promoting excessive leverage, QM sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. The rule provides an eight-year pass for loans approved by a government-sanctioned underwriting system.
The WSJ reports on a study by Brandeis University researchers:
Home ownership is the biggest contributor to net worth. But white families, the researchers say, buy homes and start acquiring equity on average eight years earlier than black families, largely because white families can lean on their own families for help with down payments. Because of less access to credit, lower incomes and government policies, they say, the homeownership rate for white families is 28.4% higher than for black families.
Brandeis is all about the oppressor-oppressed narrative. One of the complaints I have about housing policy is that the assumption is that home ownership drives wealth accumulation rather than the other way around. I will address the issue of housing and wealth creation in the course.
The initial steps of reform will involve creating the government capability to sell secondary insurance on MBS, setting up the common securitization platform to allow new firms to compete with Fannie and Freddie, and gradually increasing the private capital required for MBS to qualify for the guarantee.
This is an example of the sort of uninformed policy wonk suggestion that my course is designed to warn against. It assumes (a) that securitization of mortgages is something that the government must support and (b) that there is zero institutional knowledge needed to run the business safely.
I do not intend in my course to get into the specifics of regulatory proposals. However, I will clearly lay out the factors that generate risk in mortgage lending. Policy makers can then pay attention to this information, or they can ignore it. I have little hope that a Philip Swagel, a Joseph Stiglitz, or a Martin Feldstein will take the course, or that they will stop pontificating about mortgage markets from a state of ignorance. Instead, my dream is that mid-level staffers will absorb some wisdom and use it to ward off some of the worst ideas coming from the academic types.