It really could happen. It’s possible that thousands of pages of financial rules just issued by the Consumer Financial Protection Bureau (CFPB) could be tossed out, leaving a mortgage marketplace with far-higher loan rates, lower home values and far-ranging uncertainty.
In a mortgage marketplace which remains fragile everything done to date by the CFPB — including its just-issued mortgage guidelines — could be thrown in the dumper. The strange twist is that despite lobbying and public statements to the contrary, much of the lending industry might well prefer to see the CFPB survive.
The CFPB is an outgrowth of Wall Street reform, the Dodd-Frank legislation produced as a reaction to the foreclosure crisis and the need to reduce marketplace risk. But while Wall Street reform passed Congress, 44 Republican senators opposed to the legislation were able to block the confirmation of a CFPB director. Without a director, the Bureau could not officially move forward, meaning that many of the tasks required under Dodd-Frank could not begin — including the publication of specific guidelines relating to mortgages and foreclosures.
The problem seemed to end with President Barrack Obama’s recess appointment of Richard Cordray in July 2011. With Cordray in place, the CFPB entered the regulatory process and in the past few weeks has just issued guidelines concerning such things as loan servicing, allowable lender compensation plans, high-cost mortgage disclosure rules and ability-to-repay requirements.
If you’re a lender, you want these rules. The reason is that Wall Street reform protects lenders from virtually-all borrower lawsuits when low-risk loans are originated. Basically, the okay loans include FHA, VA and conventional financing with points and fees equal to 3 percent or less of the loan amount and with a loan application which is fully documented.
But now, under a case called Noel Canning v. NLRB, a court has thrown out recess appointments made by President Obama to the National Labor Relations Board because the requirements for a “recess” appointment were not met. Since the circumstances of the NLRB situation are the same as the appointment of Cordray there’s little doubt that his appointment will be challenged.
If Cordray’s appointment is ruled invalid, then three results are likely:
First, Dodd-Frank remains in force but with the guidelines missing many investors may see more risk in the marketplace, meaning it will be tougher to get a mortgage. That will pressure mortgage rates higher — and home prices lower.
Second, among the potential losers would be Fannie Mae, Freddie Mac, the FHA, and private-sector lenders, who hold title to more than a million properties they would like to unload. With more short sales, REOs and foreclosures coming in 2013, a decline in the housing sector would damage lender portfolios, shareholder values and a large part of the economy.
Third, there are widespread second thoughts regarding Wall Street reform — and the reason is money. The Mortgage Bankers Association reports profits per loan reached $2,465 in the third quarter of 2012. This compares with $917 two years earlier. Existing home prices went up 11.5 percent in 2012, evidence of significant improvement.
If it happens that the Cordray appointment is struck down then it could take years to build new guidelines. That’s a lot of uncertainty — and there’s no guarantee, from a lender’s perspective, that the revised guidelines won’t be worse or that new liabilities and lawsuits won’t pop up.