Real Estate Market

Are lenders truly making mortgages based on borrowers' ability to repay the debt?

(6/8/2012) With homeowners in droves still losing their homes to foreclosure at the rate of nearly 200,000 per month, the Consumer Financial Protection Bureau (CFPB) wants to be sure lenders aren't still making those predatory mortgages borrowers can't afford to repay.

CFPB recently expanded a public comment period on federal regulations that mandate lenders fully assess consumers ability to repay home loans before approving the application.

Lender Processing Services' (LPS) April Mortgage Monitor report found overall foreclosure starts dropped by 2.6 percent in April, but Federal Housing Administration (FHA) foreclosure starts spiked significantly, jumping 73 percent during the month, a claim FHA vehemently disputes.

A foreclosure start, by LPS' definition, is any active loan that was not in foreclosure in the prior month, but moves into foreclosure inventory in the current month.

LPS says the dramatic rise in FHA foreclosures stems from defaults in 2008 and 2009 vintage loans, loans written at a time the FHA was ramping up, effectively replacing the toxic subprime market.

FHA mortgages aside, LPS reported 181,584 foreclosure starts in April, down from 186,446 starts in March 2012 and down from 187,423 a year ago, but not by much.

The CFPB wants to be sure lenders are accountable for making bad loans.

"Through our ability-to-repay rule, we want to ensure that consumers are not set up to fail with mortgages they cannot afford and we want to protect access to affordable credit," said CFPB Director Richard Cordray.

The housing boom's fuse was set with toxic, low-down, no-down, undocumented income mortgages many borrowers couldn't afford to pay back.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stepped in to prevent a future economic collapse in the scope of the Great Recession.

It included a mandate that lenders make a more reasonable assessment of a borrowers true ability to repay the mortgage. The mandate includes the "qualified residential mortgage" provision that says underwriting standards should create mortgages that help foster borrowers' ability to repay.

Dodd-Frank initially set forth ability-to-repay requirements under the auspices of the Federal Reserve, which on May 11, 2001 proposed to amend Regulation Z (the implementing regulation of the Truth in Lending Act or TILA) to make it so. The original comment period ended in July 22, 2011 last year, but the Dodd-Frank creation of the CFPB transferred rulemaking authority on the issue to the CFPB.

With mortgage industry oversight, CFPB reopened the comment period until July 9, 2012 to seek comment specifically on certain new data and information submitted during or obtained after the close of the original comment period.

New data includes Federal Housing Finance Agency (FHFA) data that tracks the performance of Fannie Mae and Freddie Mac loans purchased or guaranteed from 1997 to 2011.

The CFPB has also obtained data on other securitized mortgage loans and is ferreting out data on FHA loans, loans from the Department of Veterans Affairs (VA loans), the Department of Agriculture's Rural Housing Service (RHS) loans and "loans held in portfolio or securitized outside of the Enterprises or a federal agency," to get the best handle on how loans are behaving and how they should comply with the proposed ability-to-repay rules.

The CFPB expects to issue the final rule before the end of 2012.

"We are committed to gathering solid data to inform this important rule. This notice gives the public an opportunity to comment on the information we have received so far, as well as an opportunity to submit additional data," Cordray added.

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