Pinto: CFPB creates “Bizarro World” of home mortgage rules

Edward Pinto

Edward Pinto

AEI Resident Fellow Edward Pinto, a former executive vice president and chief credit officer for Fannie Mae, said that the CFPB is creating a “Bizarro World of home finance.”

“In this world a loan with little or no money down, a FICO credit score of 580 and a total debt-to-income-ratio of over 50 percent is defined as a prime loan, even though it has a nearly 30 percent likelihood of ending in foreclosure,” Pinto said, according to Real Clear Markets. “Like the bond salesman in Bizarro World, this sets up for failure working-class families thriving to achieve the American dream. In the real world a prime loan with 20 percent down, a FICO score of 720 (the average score of all individuals in the U.S.), and a 40 percent debt ratio has a 1.5 percent chance of foreclosure.”

Dodd-Frank was enacted after the financial crisis with the purpose of “promot[ing] the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices,” Real Clear Markets reports.

Pinto said that the legislation, as was intended with the 1992 legislation aimed at preventing taxpayer-funded bailouts of Fannie Mae and Freddie Mac, will have a similar outcome.

“This is not the first time Congress has attempted to legislate the availability of ‘affordable mortgage credit,’” Pinto said, according to Real Clear Markets. “Recall Fannie Mae and Freddie Mac’s affordable lending mandates, the Department of Housing and Urban Development’s National Homeownership Strategy with its goal of doing away with down payments, and the Community Reinvestment Act with its ‘flexible’ underwriting. This increase in leverage allowed HUD to trumpet a self-described ‘revolution in affordable lending,’ ignoring the resulting in boom in home prices, thereby making them unaffordable.”

Pinto said that under the CFPB’s new rules, borrower qualifications and loan risk have little to do with prime loans, adding that “irresponsible loans setting families up to fail are called qualified.”

“In the real world a prime borrower puts sufficient money down so as to have skin-in-the-game and demonstrates willingness and ability to pay,” Pinto said, Real Clear Markets reports. “In Bizarro World the government does not price for risk; instead credit is allocated by government agencies based on political goals…In the real world lenders allocate credit by charging borrowers different interest rates based on risk, and protect their shareholders by operating at safe levels of leverage…In the Bizarro World of Dodd-Frank Act, borrowers are deemed incapable of making a responsible decision and all financial institutions are presumed evil.”

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