Tags: Pozen | mortgage | exemption | crisis

Harvard's Pozen: Mortgage Exemptions in Dodd-Frank Could Spark Housing Crisis

By    |   Friday, 13 September 2013 09:28 AM

The Dodd-Frank financial regulation law includes exemptions related to mortgages that risk sparking another housing crisis, says Robert Pozen, a senior lecturer at Harvard Business School.

"Before the financial crisis, banks or brokers would often originate home mortgages and immediately sell them to a large financial institution, which would package them as mortgage-backed securities for investors," Pozen writes in The Wall Street Journal.

"With 'no skin in the game,' the originators had little incentive to determine whether the borrower was likely to default."

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To correct that, the Dodd-Frank Act generally requires mortgage originators to maintain 5 percent of the credit risk on the mortgages they issue, rather than dumping all the risk on mortgage-bond investors.

"However, exemptions built into the law — as interpreted by rules proposed on Aug. 28 — would eliminate this requirement for most home mortgages," Pozen says.

The main exemption applies to lenders of mortgages that are insured by the government. These loans are backed 100 percent by the government, meaning banks will have little incentive to make sure borrowers can really afford the mortgage. And mortgage originators that sell their loans to Freddie Mac and Fannie Mae are exempt from retaining any risk of loss.

"The proposed rules would also allow low down payments, although they are the best predictors of mortgage defaults."

That's not a formula for a healthy housing market, Pozen notes. Indeed, "this is a good way to create another mortgage crisis," he writes.

To be sure, one factor is constraining mortgage activity now — higher interest rates. Freddie Mac reported that the 30-year fixed mortgage rate averaged 4.57 percent in the week ended Thursday, close to a two-year high.

So it's no wonder that the Mortgage Bankers Association index of mortgage application activity plunged 13.5 percent in the week ended Sept. 6 to its lowest level since November 2008.

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The Dodd-Frank financial regulation law includes exemptions related to mortgages that risk sparking another housing crisis, says Robert Pozen, a senior lecturer at Harvard Business School.
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Friday, 13 September 2013 09:28 AM
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