The ongoing Qualified Residential Mortgage (QRM) debate may have been born under the maxim that those who forget the past are condemned to repeat it. One of the key takeaways of the 2008 mortgage collapse was the need for better underwriting. The collapse was precipitated by the practice of lenders and brokers making mortgage loans regardless of whether borrowers could repay them. They earned their fees from writing the loans and then selling them to underwriters, who included them in mortgage-backed securities. Homeowners, lenders and investors lost billions and the housing market has yet to recover.
To discourage excessive risk-taking, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires securitizers to “retain an economic interest in a portion of the credit risk for residential mortgages that they use to collateralize asset-backed securities.” Legislators in turn created an exemption for QRMs, which are considered less risky.
However, under narrowly-defined rules drafted by regulators, the proposed QRM exemption would require a 20 percent down payment, along with proposed debt-to-income ratios and credit standards that critics contend would discourage creditworthy borrowers. It would take a typical American family 14 years to save for a 20 percent down payment, according to a white paper issued by The National Association of Realtors(NAR), the Center for Responsible Lending (CRL), the Mortgage Bankers Association (MBA), the National Association of Home Builders (NAHB), the Community Banking Mortgage Project and theMortgage Insurance Companies of America (MICA).
“By imposing excessively high down payment standards regulators are denying missions of responsible borrowers access to the lowest rate loans with the safest loan features,” the report stated. “The only beneficiaries of the proposed QRM definition are those consumers with higher incomes who can afford to make large down payments or who already have ample equity in their homes.”
Further, other observers are raising concerns that “if most mortgages are QRM, that means lenders do not have to retain any risk in loans they sell to secondary market, raising questions about the purpose of a risk-retention requirement in the first place,” American Banker reported.