Like Obamacare for Mortgages: Consumer Financial Protection Bureau (CFPB) Sets New Rules for 2014

There’s a quote in Tolstoy’s War & Peace that ought to be a modern proverb: “Writing laws is easy; it’s governing that’s difficult.”

Our government seems to conflate these two notions. It may be that our politicians think if one law is good, more laws must be better. It may be they think that, since Congress exists to pass laws, the more they pass the better they must be doing. Last year, the news media reported, quite ominously, that the 2012 Congress was the most “unproductive” in a generation, passing fewer laws than any Congress in memory.

Something compels them to seek quantity over quality. What this something is, I can’t be sure. And though it’s tempting on Halloween to explore, in a cheap-thrill-seeking sort of way, the dark and twisted corridors of the Congressional mind, what we find may just be too unnerving. What ghastly ghouls reside in the depths that produced both the Affordable Care Act and Dodd-Frank?

The Affordable Care Act—colloquially, pejoratively, and henceforth referred to as Obamacare—has been in the news lately, so offers a good illustrative example to which we can compare Dodd-Frank. Like Obamacare, Dodd-Frank is a massive, complex, convoluted piece of legislation; it creates its own rules and regulations, then establishes new agencies and bureaus to write their own new rules and regulations ad infinitum; and it uses legislative fiat to distort the market to achieve government-desired goals that are fiscally and economically unsustainable.

This past week’s most prominent news story was the deluge of policy cancelation notices being sent out by insurers to their customers. Individuals who were a) already insured, b) happy their insurance, and c) told ‘if they liked their insurance they could keep it’ (stop me if you heard that one), suddenly discovered a) they weren’t, b) too bad, and c) they couldn’t.

Obamacare established minimum policy requirements that their prior plans didn’t satisfy, so they were forced into more comprehensive and drastically more expensive plans. These plans are “more comprehensive” in the same way that a young male’s new policy covering mammograms and maternity care are “more comprehensive.” In fact, that’s precisely how the new policy mechanism works: Forcing young, healthy people to pay premiums on services they’ll never use, to cover the subsidized premiums of older, sicker patients that insurance companies are now forced to cover at the same rates as young, healthy individuals.

In a similar way, Dodd-Frank establishes standards and requirements for everything from checking accounts to mortgage products. If you’re wondering why your free checking account disappeared, why your bank keeps trying to charge $25 just for having a debit card, and why your mortgage application was so much more complex and redundant than the last time you purchased of refinanced—for those and more, Dodd-Frank is responsible.

Two new rules, currently being drafted by the Consumer Financial Protection Bureau, are the Ability-to-Repay and Qualified Mortgage Standard. These rules establish new standards, such as a 3% origination fee cap and maximum 43% DTI ratio, on new mortgages. If an originator is found to violate these rules, they can be held liable if the borrower ends up defaulting on their loan.

Some people may not see the benefit in their mortgage’s origination fee being capped at 3% or their DTI being capped at 43%. Some people don’t mind paying higher origination fees for higher-quality service or more versatile mortgage products. Some people can comfortably tolerate a DTI ratio over 43%. Just as some young men can comfortably tolerate insurance policies that don’t offer maternity care. These are personal considerations that should be handled by individuals—not by computer algorithms aggregating and analyzing nationwide datasets.

The danger here, for both Obamacare and Dodd-Frank, goes far beyond merely inconveniencing individuals. When government policy is imprudently directed toward certain goals, and select agencies and entities are given excessive power and influence over the economy, severe consequences can be expected.

Consider Fannie Mae’s and Freddie Mac’s role in the housing collapse and financial crisis of 2007-2008. Fannie and Freddie were created in the 1930s to facilitate homeownership among Americans. Their directive was expanded in the 2000s to offer mortgage products for lower income Americans by loosening their lending standards. This, in turn, created a base of under-qualified borrowers who ultimately defaulted on their mortgages, turned banks’ holdings of mortgage-backed securities toxic, and contributed to the subsequent financial crisis.

Without Fannie and Freddie, the pool of MBSs could never have grown large enough to put our economy in peril; without the government’s directive that Fannie and Freddie ignore prudent lending practices and begin lending to increasingly risky borrowers, the integrity of those MBSs would never have been compromised.

However, without Freddie and Fannie, homeownership in America would look very different than it presently does. The 30 year, fixed mortgage would not exist; indeed, long-term, fixed financing is virtually non-existent anywhere else in the world. The availability of such financing should be seriously discussed. In Jay’s October 26th show, he called the 30 year mortgage one of the last true government scams. I tend to agree. In honor of Halloween, here is something truly scary: a 30 year amortization schedule for a $200,000 loan at a historically-generous 5%:

The PrincipleThe Scream


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