The much heralded Consumer Financial Protection Bureau (CFPB), of which Elizabeth Warren (D-MA) was the architect, is largely ineffective. Why?
1. Elizabeth Warren and Richard Cordray misunderstood the problem facing mortgage borrowers and lenders.
Essentially, the world that Warren and Cordray wish that existed (1999) when real median household income was at its max and mortgage foreclosures were just above 1% doesn’t exist anymore. The tidal wave of mortgage foreclosures wiped out AT LEAST 5% of mortgage borrowers from the pool of eligible borrowers (or nearly 10% for serious delinquencies). But the decline in real median household income means that millions of borrowers cannot meet the income test for borrowing.
If we add other confounding economic variables that have deteriorated after 1999 (such as M2 Velocity and Employment-to-population ratio) to the mix, one can see why it is so difficult to jumpstart mortgage purchase applications REGARDLESS OF CFPB RULES. And despite the zero interest rate policies (ZIRP) by The Fed.
In fact, the remaining borrower pool is fewer in numbers and weak compared to 1999 that lenders struggle to find borrowers even if they expand their credit box (loosen underwriting standards). And CFPB will be forced to relax or undo their promised ironclad rules for safety.
2. The alleged iron-clad QM rules have more leaks than The Titanic.
The Consumer Financial Protection Bureau recently issued the Qualified Mortgage (QM) rules. Originally, QM status required the meeting of strict underwriting standards, including a 20 percent down payment and a 28 percent housing-cost-to-income ratio. Those provisions are no longer in place. A loan can obtain QM status without that down payment, and the debt-to-income ratio was raised to 43 percent. In addition, the QM rules allow for so many exemptions from the standards that the standards are virtually worthless.
So, the Consumer Financial Protection Bureau is almost irrelevant thanks to their misunderstanding of mortgage risk and where the economy sits today. Not to mention that their ironclad rules are as porous as The Titanic.
In other words, Adam Smith’s invisible foot has taken over and made the CFPB irrelevant.
But remember, we got into this mess in the first place thanks, in part, to the Clinton Administration’s “National Homeownership Strategy: Blueprint for the American Dream.” Read it and weep. nhsdream2