Will a “qualified” mortgage be a counter-productive mortgage?by Tim Manni
The Dodd-Frank financial reform bill aims to, among many other things, define what a “qualified” mortgage that’s guaranteed by a federal entity, such as Fannie Mae and Freddie Mac, should look like. Dodd-Frank’s goal is to create a mortgage with terms and conditions that will fare well into the future — a loan that has the least-likely chance of turning sour.
Yet the markets have already begun to stir with anxiety as they wait for the actual makeup of this “qualified residential mortgage” to be released. According to Mortgage News Daily, the FDIC could provide us with their definition by next week.
At this point, many market observers have at least a decent idea of the QRM’s DNA. So far, the most-commonly agreed upon feature is the mandated 20 percent down payment.
However, with a housing market so deeply mired in negative equity, some experts are already warning that this down payment stipulation, designed to protect, many only wind up damaging our fragile housing and mortgage markets even more.
From Mortgage Servicing News, 03/14/2011, ”Negative Equity Data Show QRM Will Mostly Affect Hardest Hit Markets”:
The QRM’s 20% downpayment feature that serves that goal and is supported by lenders and securitizers may “adversely affect” the overall housing market since “the majority of homebuyers are repeat buyers who use current equity as the bulk of their” asset value.
Data show by yearend 2010 the aggregate volume of negative equity reached $750 billion of which $450 billion includes borrowers who are upside down by over 50%. These billions of dollars, which could have translated into new home purchasing power, are unavailable and represent a financial burden that Mark Fleming, chief economist at CoreLogic, describes as captivity for millions of borrowers.
And the QRM adds another long-term challenge.
By the end of the fourth quarter of 2010, 11.1 million homeowners, or 23.1% of all residential properties with a mortgage, were in negative equity, up from 10.8 million, or 22.5% in the third quarter. An additional 2.4 million borrowers had less than 5% equity, defined as near-negative equity by the end of the fourth quarter in times when home prices continue to drop.
CoreLogic warns that that risk is higher even in states with lower proportions of borrowers with 80% LTV or less “because repeat buyers will not have sufficient down payments to buy new homes with QRMs.”
HSH.com’s VP Keith Gumbinger has discussed quite a bit the idea that uncertainty is the markets’ biggest enemy and has been for quite some time. Yet if this definition of the QRM is released by the FDIC as discussed, we could get some much needed clarity in terms of how the mortgage market might shape up down the road:
Glen Corso, managing director of the Community Mortgage Banking Project (CMBP), said the FDIC meeting announcement implies a substantial amount work on the QRM is complete and all of the regulators have signed off on the proposal. Corso said it appears that the FDIC will move first on the rule, and “we expect that the other agencies — OCC, the Fed, HUD, SEC and the FHFA — will be approving the rule in the days following the FDIC’s action.”
While the old saying goes “More is lost by indecision than no decision,” I wonder is this QRM definition would be better left unsaid…