The Post’s View

A Dodd-Frank capitulation on mortgage down payments

ENACTED THREE years ago, the Dodd-Frank financial reform law remains a work in progress, as federal bank regulators attempt to convert its broad mandates into operational rules. Alas, special-interest groups are busily bending the rule-making process to their advantage. Case in point: the recent announcement of a proposed regulation that would weaken Dodd-Frank’s main mechanism for avoiding another meltdown in the mortgage-backed-security market.

To the bill’s authors, a key cause of the financial crisis was that Wall Street packaged and sold securities backed by subprime, “no-doc” and other questionable mortgages. Not having to retain any of the default risk themselves, the banks fobbed off the bonds onto investors and went off in search of more loans, any loans, to package and sell. Dodd-Frank tried to discourage this business model by requiring future mortgage securitizers to put their own capital at risk — except when they package lower-risk “qualified” loans. The legislation’s co-author, former Rep. Barney Frank (D-Mass.), said this was his bill’s “most important” provision.

Washington Post Editorials

Editorials represent the views of The Washington Post as an institution, as determined through debate among members of the editorial board. News reporters and editors never contribute to editorial board discussions, and editorial board members don’t have any role in news coverage.

Read more

Latest Editorials

James Clapper’s bad blackout

James Clapper’s bad blackout

His counterproductive gag order.

The absurd delay of Keystone

The absurd delay of Keystone

The benefits of the pipeline extension far outweigh any concern.

A better inspector general for D.C

A better inspector general for D.C

Charles Willoughby’s retirement offers hope for a reinvigorated office.

Two years ago, federal banking regulators proposed to require a 20 percent down payment as one of the criteria of qualified loans. This was consistent with the intent of Dodd-Frank, and with the economic literature, much of which identifies low equity as a reliable predictor of homeowner default. But the requirement was quite inconsistent with the interests of a wide range of lobbies — from real estate agents to low-income-housing advocates — which protested that the rule would unduly limit access to credit and kill the housing recovery. The groups swarmed the regulators; hundreds of members of Congress from both parties wrote in support of them. And so, in the dog days of August this year, the regulators backed down, offering a revised rule that requires no down payment at all.

The new proposal, modeled on a parallel regulation promulgated by the Consumer Financial Protection Bureau, is not entirely toothless. It would discourage the securitization of negative amortization, “interest-only” and other sketchy products, as well as any mortgages that exceed a 43 percent debt-to-income ratio. These standards, supporters say, would sufficiently reduce risk but would not unduly squeeze credit access, especially for traditionally disadvantaged groups and first-time home-buyers.

The real-world impact of the regulators’ capitulation is limited, at least in the short term, since there’s little private-sector securitization; government, in the form of Fannie Mae, Freddie Mac and the Federal Housing Administration, still dominates. But this turn of events is important, and discouraging, as a demonstration of the housing lobby’s power to shape the post-government future.

To the regulators’ credit, they are still holding out the possibility of reinstating a down-payment requirement in the final rule, due by 2014. We hope they’ll persist. No doubt there is a trade-off between credit risk-reduction and credit availability, as the housing lobby argues — indeed, as it always argues. Yet recent history would seem to suggest erring on the side of safety. If the U.S. housing market suffered from anything before the crisis, it was excessive liquidity, and Dodd-Frank was supposed to remedy that.

 
Read what others are saying