Defining a Safe Mortgage: Has It Gone Too Far?
How the "qualified residential mortgage" could change home buying as we know it
A little-known regulation sparked by the 2008 housing meltdown has the potential to fundamentally change the landscape of the housing and mortgage markets, further tightening the stranglehold on credit availability and deepening the housing market downturn.
Known as the qualified residential mortgage (QRM), this draft rule currently being debated by regulators could require prospective homebuyers to have at least a 20 percent down payment and face more stringent debt-to-income ratio standards to qualify for mortgages with the best interest rates. Opponents call the draft rule too narrow and say the tough requirements could severely restrict credit access to a broad swath of prospective homebuyers, effectively shrinking the pool of potential buyers needed to soak up the excess supply of homes in the struggling U.S. housing market.
"Real estate is 20 percent of the GDP, and you would do tremendous harm to real estate in this country," says
The QRM rules and other regulations outlined in the controversial Dodd-Frank financial reform legislation are designed to better align the cost and risk for loan originators and compel higher lending standards by requiring lenders to keep at least 5 percent of the risk of loans issued on their books -- "skin in the game," as it's called -- even if they repackage and sell the loan. That requirement is waived, however, for loans meeting QRM standards.
Contributing to the real-estate meltdown were financial institutions that made mortgage loans and promptly sold them to
But as lawmakers and regulators sort through the wreckage of the housing bubble and attempt to come up with preventative measures against a repeat event, some experts say they're going too far in trying to define a safe mortgage. "The definition of a qualified residential mortgage (QRM) is likely to make borrowing both more difficult and more expensive for consumers," said
Only 20 percent of the loans originated between 1997 and 2009 would qualify for QRM status today, according to research by Standard and Poor's, and only 30 percent of first-time homebuyers put down more than 10 percent in 2010, Findlay says. That would potentially leave the other 70 to 80 percent of borrowers to face steeper down-payment requirements and higher interest rates -- as much as 3 percent above current rates, according to a JPMorgan estimate. There's also concern that lenders, deterred by the 5 percent risk-retention rule, may focus only on issuing QRM loans, further restricting the availability of credit for prospective homebuyers and driving down demand for homes. That's not good news for a housing market swollen with vacant homes, foreclosures, and distressed properties.
With the housing market still struggling, the stakes are high when it comes to housing-finance regulations. A motley crew of regulators and policymakers tasked with fixing the housing market recently extended the comment period for the proposed risk-retention and QRM rule to
Despite concern about the potential long-term impacts of QRM, some experts say the short-term effects will be limited. That's because loans originated by
Although some see the projected 80 percent of borrowers who won't qualify for QRM loans as a hindrance to the housing-market recovery, others argue that QRM standards could trigger the rebirth of the nearly non-existent private-label mortgage market. If a narrow QRM definition prevails, that leaves a sizable market share for private lenders to go after. "The Fed has said, 'Don't look at the QRM market -- it's 20 percent of the market. You can make QRM loans, but we'd rather you focused on the 80 percent of the market that needs to be served privately," says
But in this odd economic recovery improvement will be gradual, meaning a revival of the mortgage market could still be many years away. "That's where the crux of the argument is," Gumbinger says. "Is it an enhancement of the marketplace? Does it foster a willingness of the part of lender to go after these non-QRM private mortgage originations? Or does it completely shut down the marketplace for non-QRMs [with] lenders only focus[ing] on making [loans] that qualify."
While experts don't expect to see a finale for the housing market drama for quite some time, most agree that efforts like QRM and risk-retention rules for lenders are a step in the right direction. Americans can only hope for a happy ending.
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