Let’s not revive the predatory mortgages Barney Frank eliminated

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With the recent passing of former Rep. Barney Frank (D-Mass.), let’s remember and recommit to a central component of his legacy: stopping the predatory lending that had caused millions to lose their homes.

President Trump recently signed an executive order, “Promoting Access to Mortgage Credit,” directing federal regulators to review protections established by the landmark law authored by and bearing the names of Frank and Sen. Christopher Dodd (D-Conn.): the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law was passed after one of the most devastating economic catastrophes in American history, the 2008 financial crisis. Before changing these safeguards, it is worth remembering exactly what they are guarding against, and who gets hurt when they fail.

It is indisputable that homeownership is further out of reach for most families than ever, due among other things to a lack of housing supply. And no one can deny that for would-be homeowners to realize their dream of owning a home, access to credit is essential. But it is equally clear that consumers need access to affordable and sustainable credit — that is, credit whose monthly payments are within the prospective homeowners’ ability to pay. Extending credit that is unaffordable and therefore not sustainable does not serve the interest of borrowers or of lenders.

During the years preceding the crash, mortgage lenders and investors lost sight of this fundamental truth. Lenders engaged in a wide range of irresponsible practices, from making loans without verifying the borrowers’ income to underwriting based on monthly payment amounts that were artificially reduced for a period of time using artifices such as short-term teaser rates.

For example, lenders misled stretched borrowers by offering non-amortizing loans whose monthly payments shot up after a few years. They imposed penalties for homeowners who needed to refinance their loans when the original low teaser rates reset to much higher rates. They paid loan originators more for mortgages that carried higher interest rates. At their worst, many lenders were making what became known as NINJA loans — loans to borrowers with no income, no jobs and no assets.

While policymakers believed that lenders would in effect police themselves because “of course they would want mortgages to be affordable,” that assumption turned out to be incorrect. Lenders could be so reckless because they didn’t hold onto the loans; they sold them within weeks to Wall Street, which packaged them into bonds and sold them to investors.

In 2004, my organization testified before Congress that abusive mortgage lending practices were “ticking time bombs,” especially as federal regulators blocked state-level anti-predatory lending laws we supported. In 2006, we projected that over 2 million borrowers would lose their homes. The warnings went unheeded.

A tsunami of delinquencies and foreclosures ensued. The damage was worse than we feared: a global financial crisis and recession, mass unemployment not seen in the U.S. since the Great Depression, and as many as 10 million Americans losing their homes.

Even those not directly hit were harmed. My organization calculated that four out of every five households lost home equity because of neighbors’ foreclosures.

That is why Congress passed Dodd-Frank in 2010 and, through this law, created the Consumer Financial Protection Bureau to enforce the guardrails established for mortgage lenders. Dodd-Frank directed lenders to only make mortgages to homebuyers “on terms that reasonably reflect their ability to repay,” and laid out the requirement that lenders make a “reasonable and good faith determination, based on verified and documented information,” that a borrower can afford to pay back a loan before making it.

The law specifically targeted the designed-to-fail loans that had brought on the crisis, eliminating a range of incentives for lenders to make riskier loans. To make compliance easier for lenders, Dodd-Frank created a category of “qualified mortgages” that allows lenders to prove they followed ability to repay requirements when the loans have safe features and underwriting approaches.

These rules stabilized the mortgage market and dramatically reduced defaults and foreclosures.

None of this is to say that the rules governing the mortgage market are perfect or that they cannot be improved. For example, the Consumer Financial Protection Bureau should ease requirements to facilitate streamlined refinancing when a borrower who has demonstrated their ability to make their monthly payments wants to refinance to a lower rate.

As regulators review Dodd-Frank, it is important to maintain its core requirements that lenders verify borrowers’ ability to repay, that the market operate with transparency, and that borrowers understand what they are agreeing to before they sign.

These safeguards promote the affordable and sustainable homeownership our nation needs while protecting families from seeing their biggest financial asset turn into their biggest financial catastrophe.

Mike Calhoun is president at the Center for Responsible Lending.

Let’s not revive the predatory mortgages Barney Frank eliminated

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