And what is QRM anyway?
QRM is short for Qualified Residential Mortgages. Under proposed new federal regulations, loans that meet the QRM guidelines would be exempt from the Dodd-Frank risk retention requirement that a bank must retain 5 % of the risk when they securitize mortgages.
Banks would, of course, prefer to avoid retaining 5% of the risk, but since they do want to make loans, they are also opposed to the QRM guidelines.
These guidelines include 20% down payment, stringent debt-to-income ratios, and rigid credit standards.
Organizations such as NAR (National association of REALTORS®) contend that the new regulations would prevent millions of hard-working, creditworthy consumers from owning a home.
Why? According to NAR figures, it would take a family on a median income more than a decade to save the 20% down payment required for a QRM mortgage. However, if the economy turns around and prices begin to rise, that magic 20% could remain forever “just out of reach.”
Non-QRM mortgages (the ones that required banks to keep 5% of the risk) would be subject to higher rates and fees – which many believe would also put home ownership out of the reach of many aspiring home owners.
Regulators believe that the higher down payment requirement would reduce the risk of default. However, NAR and others in the Coalition for Sensible Housing Policy say that the true key to safe lending is sound underwriting and documentation – not the size of the down payment.
By way of illustration, they point to Federal Housing Administration and Veterans Administration loans. These both have low down payment requirements and relatively low default rates.
Ron Phipps, President of NAR, believes the proposed rule should be withdrawn and revised. Then it should be published for comment. A regulation calling for lending standards that ensures a borrower’s ability to repay and avoids product features such as teaser rates and balloon payments would do far more to lower the risk on mortgage loans.
Before swinging the pendulum too far toward preventing home ownership, regulators should step back and remember that it wasn’t sensible lending practices that caused this crisis. It was nonsensical lending practices that encouraged home purchases by consumers with no ability to repay the loans.
The Coalition for Sensible Housing Policy includes 46 organizations representing housing, consumer advocacy, and banking. Of these groups, the National Association of REALTORS® is the largest, representing 1.1 million members.
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