Blaming Regulation, Again, for Restricting Mortgage Lending

New York TimesBy PETER EAVIS | New York Times 10/12/12

 

It’s the government’s fault — or so the bankers say.

Despite the multiyear federal stimulus that is still being thrown at the mortgage market, some banking executives are saying that Washington is acting in ways that is holding back a housing recovery.

The latest person to pile on was Jamie Dimon, chief executive of JPMorgan Chase, who said Friday: “I would hope for America’s sake we start to fix the things that make the mortgage underwriting too tight.” The inference was that new regulation is getting in the way, especially the lack of clarity on proposed rules that aim to make mortgages fair and affordable for borrowers.

Regulatory uncertainty does of course weigh on banks’ ability and desire to make loans. But here are some counterweights to such complaints.

First, government support to the housing market far outweighs any negative impact for banks. The mortgage market is benefiting from three huge sources of stimulus and subsidy. The Federal Reserve has purchased hundreds of billions of dollars of mortgage-backed bonds since the crisis, which lowers interest rates and ignites demand for new loans among borrowers. Government-owned entities like Fannie Mae currently guarantee repayment on nearly all mortgages. And the Treasury Department’s homeowner relief programs have generated refinancing income for banks.

All this aid has made it possible for banks like JPMorgan to carry out one of the most profitable, low-risk “trades” that has ever existed in modern capital markets. They simply make mortgages and flip them to bond investors, after attaching the federal guarantee. In the third quarter, JPMorgan booked $1.78 billion in revenue from that type of transaction, a 36 percent increase from the year-earlier period.

Second, bankers may be overstating the amount of regulatory uncertainty that hangs over the mortgage market.

Mr. Dimon said that mortgage underwriting was “too tight.” It is true that nearly all mortgages made these days have to be underwritten very safely – lots of money down, and much verifying information, for example – to qualify for the federal guarantee.

Still, banks are absolutely free to make mortgages with looser standards and then hold them on their balance sheet instead of selling them in the bond market. Banks, however, say they are reluctant to do that, in part because of regulatory uncertainty. For one, they say new capital rules could make it more expensive to hold certain types of mortgages, though the details here are getting much clearer.

Then there is the crucial question of what will constitute a “qualified mortgage,” a classification created by the Dodd-Frank financial overhaul. Under Dodd-Frank, banks have to retain a set amount of exposure to mortgages if they’re in the business of selling them to bond investors. But that rule won’t apply to the “qualified mortgages,” giving banks the freedom to hold as many as they want.

The argument goes: Until the banks know what a qualified mortgage is, they will stick to making loans that can be affixed with a government guarantee. The problem with this criticism is that most loans written since the crisis are likely to fit the characteristics of a “qualified mortgage,” going by the information available. That was the finding of a Government Accountability Office study last year.

But debating the effect of all these various mortgage rules misses an important point: Banks like JPMorgan are currently willing to hold all sorts of assets that face regulatory uncertainty, some of them arguably riskier and harder to quickly sell than residential mortgages. One such asset is credit default swaps, which led to large trading losses earlier this year at JPMorgan. The bank is still a huge player in that market, despite a range of new rules that are still being drawn up.

So perhaps the protests over regulation mask other concerns. For banks, one obvious deterrent to holding mortgages is low interest rates — rates that are so low that banks cannot make enough money on the interest to make up for the risks of holding them.

It’s sensible for banks to think twice before holding onto long-term assets with low, fixed interest rates — like the mortgages people are getting these days. But if that’s the major reason they’re not holding on to mortgages, banks should just come out and say that.