“I see the states, across this big nation. I see the laws made in Washington, D.C.
I think of the ones I consider my favorites. I think of the people that are working for me.”
– Lyrics from Talking Heads’ “Don’t Worry About the Government”

The real estate financing paradigm shift is becoming clearer with the now front-burner onset of proposed “Qualified Residential Mortgage” (QRM) requirements, a key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year.

 

FDIC’s Rules of Engagement
The QRM rules of the road, or more accurately, the rules of engagement, have been left up to the regulatory bureaucracy in Washington, DC. The regulators (FDIC, HUD, FHFA, SEC, Federal Reserve and Comptroller of the Currency) have issued their proposed guidelines. A 20% down payment is the threshold that the regulators are proposing for the QRM. Further, they are proposing that an interest rate reduction refinance application reflect at least 25% equity in the house value to qualify, and a so-called “Cash-out” refi and second home refinance reflect at least 30% equity in the property based upon appraised value.

FDIC Chairperson Sheila Bair states in a March 29, 2011 press release:

“In thinking about the impact of this proposed rule, we need to keep in mind the following facts:

  • First, the QRM requirements will not define the entire mortgage market, but only that segment that is exempt from risk retention. Lenders can – and will – find ways to provide credit on more flexible terms, but only if they then comply with the risk retention rules.
  • Second, what matters to underserved borrowers is not just the volume of credit that is available, but also the quality of that credit. More than half of the subprime loans made in 2006 and 2007 that were securitized ended up in default, which hurt both borrowers and investors and triggered the financial crisis. By aligning the interests of borrowers, securitizers and investors, our new rules will help to avoid these outcomes and keep default rates at much lower levels. They will also help avoid another securitization-fed housing bubble which made home prices unaffordable for many LMI borrowers.
  • Finally, the private securitization market, which created more than $1 trillion in mortgage credit annually in its peak years of 2005 and 2006, has virtually ceased to exist in the wake of the crisis. Issuance in 2009 and 2010 was just 5 percent of peak levels. This market needs strong rules that assure investors that the process is not rigged against them. The intent of this rulemaking is not to kill private mortgage securitization – the financial crisis has already done that. Our intent is to restore sound practices in lending, securitization and loan servicing, and bring this market back better than before.” (emphasis added)

Industry Responses to Proposed QRM Rule
Note:
 June 10th is the final response date for the 60-day public comment period before the agencies make a final decision.

Trade Associations’ White paper: “Proposed QRM Harms Creditworthy Borrowers And Housing Recovery” headlines the recent white paper issued by a group of trade association members, led by the National Association of Home Builders; the National Association of Realtors and the Center for Responsible Lending, critiquing this FDIC announcement. This industry white paper underscores the negative impact of the strict QRM rules:

“In the midst of a very fragile housing recovery, the government is throwing a devastating, unnecessary and very expensive wrench into the American dream. First time homebuyers will have to choose between higher rates today or a 9-14 year delay while they save up the necessary down payment. And 25 million current homeowners would be locked out of lower refinancing rates because they lack the required 25 percent equity in their homes.”

“High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates. The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.”
White paper available online: click here

ALTA: The Title Insurance Industry’s own national trade association, American Land Title Association, issued a March 30th press release: “The federal government’s attempt to promote high quality mortgage loans through its “qualified residential mortgages” will erode collateral underwriting standards and drastically affect access to affordable loans for creditworthy Americans. By proposing an artificially narrow QRM and requiring a minimum 20 percent down payment, millions of creditworthy borrowers will only be eligible for mortgages with higher interest rates and fees and without the protections against risky loan features,” as stated by Kurt Pfotenhauer, CEO, ALTA.

“Central to facilitating a housing and economic recovery is ensuring access to conventional mortgage credit for all qualified buyers and refinancers, including low- and moderate-income households, minority families, and first-time buyers, while preserving high quality, empirically sound underwriting and product standards. The QRM will shape the future of the mortgage market by determining the types of mortgages commonly available to borrowers. The Dodd-Frank law exempts FHA and VA loans from the risk retention requirement and the proposed risk retention rules will not apply to Fannie Mae and Freddie Mac while they remain in conservatorship. This proposal will move a substantial amount of business from the private sector to the government driving more borrowers to the FHA. It could also mean further consolidation among lenders, thus disrupting competition in the mortgage industry.” (emphasis added)

ALTA’s March 30th press release (QRM response) online: click here

Conclusion: I don’t know about you, but I’m dusting off my old copy the movie “Network” (tip of the hat to late great Sidney Lumet, director, who just passed away). I am about to have a Howard Beale moment: “I’m mad as hell, and I’m not going to take it anymore.”

If you are mad about the proposed QRM rule and would like to participate in voicing your comments to the regulators, please contact me.richard@titlevillage.com

“Well we know where we’re goin’. But we don’t know where we’ve been . . .
And the future is certain. Give us time to work it out.”
– Lyrics from Talking Heads, “Road to Nowhere”

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