QRM still a long way off, but many fearing its impact alreadyby Tim Manni
Yesterday, several federal entities released a 233-page document which proposed a definition for what a “qualified residential mortgage” should consist of and then opened it up to comment. By no means is this document a concrete outline of what the QRM will eventually look like. The agencies are seeking comments and inputs on a host of mortgage-market issues — everything from asset-backed securities to risk retention. All told, the massive document contains some 174 questions that the Fed is seeking input on concerning the makeup of this QRM (should it include higher LTVs or higher debt ratios; should the influence of MI apply, etc.).
That said, and as I mentioned last week, many firmly believe (and fear) that a 20 percent down-payment requirement will be instituted for borrowers seeking a QRM. That factor in itself has many fearing the arrival of the QRM and warning what that mandate alone could do to an already-fragile housing market.
It should come as no big surprise that two of the groups lobbying against the 20 percent down requirement the hardest are the Realtors and the home builders. Granted, their business models revolve around buyer activity, but a slow down for them means added restrictions and complications for you (the homebuyer or refinancer):
“By mandating a 20 percent down payment on qualified residential mortgages, the Administration and federal regulators are excluding those without huge cash reserves – which constitutes most first-time home buyers and many middle-class households – from a chance to buy a home,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. “Just do the math. First-time home buyers historically average 40 percent of home-buying activity. It would take an average family 12 years to scrape together a 20 percent down payment. This plan is nothing short of an assault on homeownership that could have a long-lasting negative impact on housing for generations to come.”
Beyond a possible 20 percent down-payment requirement (the Wall Street Journal also notes that a 10 percent down payment rule could be set with an accompanying mortgage insurance policy), the other major change expected to coincide with the QRM, is new risk-retention requirements for entities that securitize mortgages:
The Dodd-Frank financial-overhaul law passed last summer required banks and other firms that issue mortgage-backed securities to keep a 5% piece of the loans that they bundle and sell as securities.
Risk retention is likely to raise costs for banks, and consequently, for borrowers—because banks must hold more capital in reserve. Prompted by concerns that these new rules might raise costs for even “plain vanilla” loans that weren’t at the root of the mortgage bust, Congress created an exemption. Anything that regulators deemed to be a “qualified residential mortgage,” or QRM, would be exempt from those rules.
What’s the bottom line in all of this seemingly technical talk? If costs for mortgage lenders are going to rise (risk retention), they are going to rise for consumers. Also, if the QRM, which was developed with good intentions (prevent another subprime mortgage market from forming), mandates a down payment of 20 percent (that’s $40,000 on a $200,000 loan), saving for a home is going to take a lot longer.
For more on the changes coming to the mortgage market, be sure to read our article “The 2011 mortgage market swirl.”