Critics point out that the new lending rules are being introduced into a home finance market that is barely functioning as it is. Loan originations have dropped to an annual rate of about $500 billion a year from $1.5 trillion before the housing collapse, according to industry data.
Mortgages are already eight times as difficult to get now than they were in the years prior to the housing collapse, the Mortgage Bankers Association says. The MBA estimates that loan originations will drop 10 percent this year, even before the new rules take effect in 2014.
How, then, is the housing market recovering? Half of all housing sales are made with cash, according to a new Goldman Sachs report, compared with just 20 percent before the housing collapse. Those are not necessarily wealthy people who can afford to buy homes without financing help. Some cash deals result from foreclosure eliminations.
Federal agencies now hold the tab for 90 percent of outstanding home loans, in large part because the government's role expanded under the federal bank bailout. But the government-sponsored entities like Fannie Mae and Freddie Mac are gradually reducing loan purchases, hoping the private sector eventually picks up the slack. The new rules also add restrictions such as fee caps and paperwork for lenders, and some may be discouraged from re-entering a market with new costs and legal risks.
The CFPB says it will monitor the housing market to see if credit has been restricted too much by the new rules. Both congressional critics and Federal Reserve members say they will do the same, since the Washington policymakers are worried about putting more stress on a fragile housing market so critical to the overall economy.
"It could turn lending into a cut-and-dried question about income," says Charles Dawson, a housing finance policy specialist for the National Association of Realtors. "But there are a lot of other things underwriters can consider in what makes a good loan."
The CFPB acknowledges that "there many instances in which consumers can afford a debt-to-income loan above 43 percent." Moreover, it says banks "initially" may be reluctant to lend because of uncertainty over how to implement the rules. But it argues that it is carrying out its Dodd-Frank legal mandate by providing "bright lines for creditors who wish to make qualified loans."
The new credit restrictions aimed at cleaning up debt problems come at a time when consumers are doing a better job than ever in repaying their debt, according to S&P/Experian. Its monthly consumer credit measure shows overall debt defaults at or near all-time lows in a "healthy" credit environment.
[See: 50 Smart Money Moves to Make Now.]
In a vastly changed landscape, banks are skimpy and consumers frugal. That leads some critics to ask if the consumer agency is "still fighting the last war." They fear the "bright lines" that the consumer agency is using to guide risk-averse lenders may be too harsh for the consumers the agency is supposed to help. The result could be more expensive, harder-to-arrange loans for consumers, or outright rejections for qualified borrowers. With interest rates rising, the uncertainty is compounded for borrowers and lenders. In such an environment, default could leap, and that could threaten a repeat of the last crisis.
"The pendulum has swung from way too crazy to too conservative now," says CoreLogic's Khater. "That's human nature. The rules are aimed at protecting consumers from hurting themselves. Now that there is a hard-and-fast rule being used in place of traditional underwriting standards, ironically, the market will not be deciding [who is creditworthy]. No one knows what the impact will be."