New mortgage rules could further hinder today’s lending activity, according to a report from the American Action Forum.
While this may come as unwelcome news to many, the tightening lending standards are seen by some as necessary regulations to prevent mortgage delinquencies and lawsuits. No matter which side of the argument you are inclined to take, it’s important to understand these pending rules and the possible implications associated with them.
A report from the American Action Forum (AAF), a center-right think tank dedicated to promoting government reform, provides insight into the potential impact of three mortgage regulations that could go into effect in 2013.
The three regulations are as follows:
- Higher bank capital standards under the Basel III agreement (a global standard that regulates bank capital adequacy, stress testing and market liquidity risk, scheduled to be introduced from 2013 until 2018.)
- The “qualified mortgage” rule regulating ability to repay standards, which is part of the Dodd Frank financial overhaul law.
- The “qualified residential mortgage” rule which sets standards on governing loans that are issued as securities.
The AAF report states that these new rules could “raise the cost of borrowing for millions of home buyers and tighten access to credit beyond pre-boom standards, a period of much more responsible lending than in the lead-up to the housing crisis.”
Douglas Holtz-Eakin, president of AAF, warns that these new regulation standards could make the current tight lending conditions permanent.
Nick Timiraos of WSJ writes,
“While no one is arguing for a return to the lax standards that prevailed during the housing bubble, Mr. Holtz-Eakin said he’s surprised that more policy makers haven’t focused on the potential impact on the housing market should regulation enshrine banks’ current defensive position when it comes to making mortgages.”
The AAF’s argument appears to be rooted in the possibility of a financial domino effect, in which tight lending practices could lead to several unfavorable economic conditions. When conducting their research, Mr. Holtz-Eakin and co-authors of the report used 2001 lending standards as a baseline for more normal lending standards. The report indicates that if the current tight lending practices are not moderated to the 2001 baseline level, there would be approximately 14% to 20% fewer loans originated over the next three years. The AAF estimates that this decline could lead to a 9% to 13% reduction in total home sales. The decline in home sales could then, in turn, reduce housing starts by 1.01 million through 2015, which could also lead to a 1.1 percentage point loss in GDP growth.
It should be noted that the information in the AAF report reflects one group’s opinion and does not necessarily represent the opinion of the author or site manager.
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