CFPB Contemplating Blanket Safe Harbor for “Qualified Mortgages”

President Barack Obama shakes hands with former Ohio Attorney General Richard Cordray during a presser to announce the nomination of Cordray as head of the Consumer Financial Protection Bureau on July 18, 2011

Photograph by Mark Wilson/Getty Images

Mortgage lending is extremely profitable right now, which in a simplistic model should lead to a huge expansion of loan volumes. Instead, though banks are very eager to lend to a certain segment of the population there’s a lot of reluctance to lend to marginal candidates. There are several reasons for this, but it’s perfectly plausible that fear that it will be harder-than-ideal, logistically speaking, to foreclose on a delinquent borrower is holding things back to some extent.

And that’s why the Consumer Financial Protection Bureau seems to be heading toward promulgation of a rule that will create blanket immunity to counter-foreclosure litigation for some set of “qualified mortgages.”

I saw this story via an outraged David Dayen who says “CFPB’s credibility is on the line if they give in on this unnecessary safe harbor rule.”

The whole episode highlights, I think, some of the limits of the intellectual approach surrounding the CFPB. The push for immunity turns out to be a bipartisan cause in part because the biggest winners here wouldn’t be the dread megabanks—it’d be smaller banks with less capacity to navigate and manipulate the legal system. Megabanks have mega-power, but smaller banks are much more diffuse and local business owners can always get the ear of their House member. But more broadly, the tradeoff here is more-or-less real. Banks most certainly will be more eager to lend if it’s easier to foreclose, and less eager to lend if it’s harder to foreclose. The idea of a society with less mortgage lending and less mortgage debt seems okay to me. You’d just want to pair it with measures to reduce the federal policy bias toward homeownership and reduce the local biases against manufactured houses and multifamily rental apartments in zoning policy.

But if you don’t want to go down that road, you’re inevitably pushed back down the road of bubble era mortgage finance. If national policy is going to be based on the idea of promoting homeownership for as many people as possible, then you need to promote relatively lax lending standards and that means this kind of measure. In the scheme of things the QM rule strikes me as a fairly small concession, but it is a telling one. Do we want well-protected consumers and relatively tight credit standards, or do we want to promote promiscuous lending by limiting lenders’ downside losses if things go badly?