Ability to Repay, Risk-Retention Standards, and Mortgage Credit Access – Darryl E. Getter, Specialist in Financial Economics, June 5, 2012
The ability to repay and risk-retention standards, while designed to curtail the pre-crisis proliferation of risky lending practices, are likely to simultaneously reduce access to mortgage credit. Although ability-to-repay standards would encourage consistent underwriting at all times, some borrowers that benefit from lender flexibility during more favorable macroeconomic conditions are likely to face increased difficulty obtaining mortgage loans. Lenders may be reluctant to originate loans that are not in compliance with the ability-to-repay standards if this exposes them to increased legal risks. Likewise, risk-retention standards that translate into more stringent qualification requirements for borrowers are likely to increase barriers to homeownership for both creditworthy and disadvantaged borrowers. The 112th Congress is overseeing the rulemaking stemming from the Dodd-Frank Act. This report examines the developments associated with the implementation of mortgage lending reforms. After summarizing the proposed ability to repay and risk-retention standards, a description of risky underwriting practices that occurred prior to the mortgage crisis is presented, followed by a discussion of possible effects on mortgage credit accessibility.”
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