10/12/2012 10:40 am ET Updated Dec 12, 2012

Why Is It So Hard to Get a Mortgage?

It is a common question among U.S. consumers who were denied a home loan or who have been required to provide lenders with everything but a blood sample in order to qualify for a loan. The housing market is beginning to show signs of recovery, but why isn't the mortgage market starting to bounce back as well?

The answer lies within lending regulations, which have become much more stringent in recent years. Lenders are fearful of loan buy-backs (meaning they have to essentially 'buy back' any loan defaults) and thus has resulted in strict lending requirements for borrowers. Of course, Fannie Mae, Freddie Mac and the Federal Housing Finance Agency have their own standards, but lenders and loan originators abide by their own restricted set of qualifications in order to reduce the chance of having to buy back delinquent mortgages.

In the Presidential debate on October 3, Republican nominee Mitt Romney brought up the qualified mortgage provision of the Dodd-Frank bill, which essentially forces lenders to pay stiff penalties if a borrower defaults on the loan and the lender failed to provide 'sufficient evidence' that the borrower had the ability to repay it. In theory, this seems like a reasonable regulation, but the issue at-hand is that the definition of a "qualified mortgage" has yet to be determined (delayed until January 2013). Because of the loose and incomplete definition, lenders are hesitant to lend to borrowers and investors are reluctant to invest, creating tight lending conditions and hampering a robust housing market recovery.

To go one step further, regulators are also finalizing the definition of Qualified Residential Mortgage (QRM) which applies to all securitized loans and deals with the exception to the 5 percent risk retention requirement in Dodd-Frank. To clarify, lenders would need to retain up to 5 percent of the originated loan balance for loans that do not qualify as a QRM and consequently would increase rates for consumers to cover the costs. Loans that meet the QRM criteria would be considered exempt from risk retention. The criteria are still yet to be finalized by the six federal financial institution regulators.

Regulations pertaining to the housing and lending industries are a necessity, but so are clearly defined standards and requirements. For a healthy housing market and a vibrant mortgage industry, we need regulations to resolve disputes between loan originators and regulators, encourage compliance for borrowers and lenders and provide stability to allow for secondary market investment.