Why Should You Care About the New “Qualified Residential Mortgage?”
If you’ve bought or refinanced a home recently, work or have friends or family who work in the real estate or mortgage industry, or have read or watched the news lately, I’m sure you’ve heard about the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Before we get into some of the specifics regarding the Act, who else finds it curious that its two chief sponsors, Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA), both have well publicized, scandalous pasts, and now seek to prevent a repetition of the housing market collapse of 2008 that they both gained from either politically or financially? In any case, there is an obscure provision in the Act called the “qualified residential mortgage,” or QRM. What is a QRM? Well, the answer to that question may play a big role in determining who can get a new mortgage, and at what cost.
If you have re-read or replayed the pertinent news clips over the past several years, you know one of the major factors that caused the housing market collapse was that big banks and financial institutions made mortgages they were able to securitize and sell to Wall Street firms or to FNMA or FHLMC direct, thereby eliminating potential and lingering risk.
Over time, prudent underwriting standards became lax, and many of these same securitizations were stuffed with risky Alt-A and Subprime loan programs, which were offered to borrowers with little or no money down, limited previous credit histories, and based less upon the fundamentals of whether the borrowers could actually pay their mortgage.
As if that was not enough, most of these securities were rated AAA by the insurance companies, because widespread defaults were unimaginable at the time. As we all know now, defaults rose sharply and there were devastating and substantial losses to everyone who invested in, or came into contact with them.
This is where the proposed rule required under section 941 of the Dodd-Frank Act comes into play. Among its goals to discourage lenders from making irresponsible loans, Dodd-Frank imposed a draconian requirement that financial institutions keep 5 percent “skin in the game” of the risk on their books, even when they sold off the loans.
Also, in order to qualify as a QRM, loans would be required to have 20 percent down payment if lenders want to securitize the loan without retaining a stake. Refinance transactions would not qualify as a QRM unless the new loan was for no more than 75 percent of the value of the property, or 70 percent if the borrower wanted to take cash-out.
There are concerns that the regulators’ proposal requires an unnecessarily large down payment for borrowers to meet the definition of a QRM, and in fact the banks had asked the regulators to allow borrowers with smaller down payments to receive qualified loans if they took out mortgage insurance, but the regulators rejected that idea. Let’s not forget that mortgage insurance exists because Congress requires it on loans with a down payment of less than 20 percent that are bought by FNMA and FHLMC. Loans backed by government agencies including FHA, VA, and USDA were already exempt from the risk-retention requirements.
While no-doubt well intentioned, their proposed rules could very well have negative consequences that further constrict lending at a time when, in reality, the housing market needs more people to buy homes. The new QRM will create a significant gap between those who can afford a 20 percent down payment and those who cannot. Interest rates would most certainly increase for those not putting down at least 20 percent. Furthermore, limiting the ability of potential buyers to purchase could impact the sale of distressed properties, which are putting downward pressure on the real estate market as it is. The clearance of this inventory is important to the stabilization of the housing market as a whole.
In spite of these new restrictive government regulations that affect lending and qualifying for a mortgage, be assured that Mann Mortgage continues to serve its community and clients with a wide range of mortgage products, including those with minimal or no down payment options. If you hope to refinance or make a new home purchase but are concerned by reports of these restrictive measures affecting the lending and real estate industry, please contact me or one of my loan officers. We are readily available to explain these and other recent changes in our marketplace, and will work diligently with you to overcome any obstacles that could prevent achieving your goal of home ownership. – Aloha, Scott W. Farley