Industry, Lawmakers Faceoff with Regulators on QRM's Default Impact
By: Carrie Bay
The debate over what constitutes a “Qualified Residential Mortgage” (QRM) is heating up, with a pivotal argument centered around whether or not the proposed QRM stipulations will actually lower the risk of default.
In one corner you have the handful of regulators charged with putting the definition of QRM into the rule book, and in the other corner you have just about everybody else, with consumer advocates joining mortgage bankers in a rare showing, and congressional lawmakers standing firmly alongside them.
The Dodd-Frank Reform Act requires lenders to retain 5 percent of the credit risk associated with a mortgage packaged and sold to secondary market investors if the loan does not qualify as a QRM.
It’s a provision intended to address the “skin in the game” argument to prevent the excessive risk taking and lax underwriting that many pundits say sent the mortgage and financial markets into a tailspin and has led to a flood of delinquencies and foreclosures.
The draft rule proposed by federal banking regulators sets the bar for a QRM as one with a 20 percent down payment and a maximum loan-to-value (LTV) ratio of 80 percent for purchase mortgages (with no junior liens), a maximum LTV ratio of 75 percent on rate and term refinance loans, and 70 percent LTV for cash-out refinance loans.
Regulators have explained they are framing the definition based on characteristics that reduce the likelihood of default, citing loan performance data from various market sources, including Fannie Mae and Freddie Mac.
But a coalition of 44 consumer organizations, civil rights groups, lenders, real estate professionals, urban leaders,
and insurers – including the American Bankers Association, National Urban League, and U.S. Conference of Mayors – have spoken out in one voice saying high down payment requirements don’t have a significant impact of the probability of default.
After analyzing loan performance data from CoreLogic, the coalition concluded that an increase in the down payment requirement from 5 percent to 20 percent lowers default rates by about three-quarters of one percentage point on average.
The group – which has taken the name the Coalition for Sensible Housing Policy – says the QRM rule ignores compelling data that demonstrate sound underwriting and product features, like documentation of income and type of mortgage, have a larger impact on reducing default rates than high down payments.
The white paper released by the coalition also maintains that existing homeowners trying to refinance – in many cases borrowers who are struggling to keep up with their current payments – will be denied a new, more sustainable loan because of the proposed QRM rules.
The report notes that sharp declines in home prices in recent years mean that more than half of mortgage borrowers have less than 25 percent equity in their homes – the standard that will be required to get a QRM-eligible refinance mortgage.
The Coalition for Sensible Housing Policy is calling on federal regulators to “go back to the drawing board” on the QRM definition.
The group has been joined by more than 300 members of Congress in their protest against regulators’ proposed QRM standards.
Sen. Johnny Isakson (R-Georgia) said federal banking regulators “did not follow our legislative intent and instead are promulgating a rule that would restrict access” to affordable mortgages and homeownership.
“We don’t have a down payment problem in this country, but rather an underwriting problem,” Isakson said. “I strongly urge regulators to rework their overly rigid down payment requirement for QRM. If left as is, it would make recovery in the housing market almost impossible.”
Federal regulators have extended the comment period for the proposed QRM rule until August 1.
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