he battle over what sorts of mortgages will eventually qualify as qualified residential mortgages got bumped up a notch last month when a mid-year Realtors meeting came out strongly against the current proposed definition.
QRMs will be mortgages for which banks and other mortgage backed security issuers will not have retain part of the risk on their books when the loan is sold. The motive behind the idea, which was included in the Dodd-Frank Act, was to make sure the organization issuing the security had a stake in the mortgage's performance.
Those attending the National Association of Realtors mid-year legislative meetings said they supported that overall goal but argued that the regulations defining QRMs were far too strict.
"The theme of this legislation was skin in the game," said Phillip Schulman, a partner at the K&L Gates law firm. "Congress came up with the QRM concept to ensure that banks were only putting up safe loans for securitization. Sounds good, but in practice, it’s a problem. Regulators have now come up with very draconian and narrow parameters for what constitutes a QRM."
Specifically, the Realtors objected to the requirement that most QRM borrowers will have to make a 20% down payment.
"As the leading advocate for housing and home ownership, NAR firmly believes Congress intended to create a broad QRM exemption–strong evidence shows that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk and not high down payments," said Ron Phipps, president of the NAR and broker-president of Phipps Realty in Warwick, R.I. "Saving the necessary down payment has always been the principal obstacle to buyers seeking to purchase their first home. Proposals that require high down payments will only drive more borrowers to FHA, increase costs for borrowers by raising interest rates and fees and effectively price many eligible borrowers out of the housing market."
NAR presented research that showed 60% of recent homebuyers made less than a 20% down payment, and it would take 14 years for a typical person to save up a 20% down payment to buy a median-priced home.
NAR wants federal regulators to honor what they said is congressional intent by crafting a QRM exemption that includes a wide variety of traditionally safe, well- underwritten products such as 30-, 15-, and 10-year fixed-rate loans; 7-1 and 5-1 adjustable rate mortgages; and loans with down payments in the range of 5% to 20% with mortgage insurance, where required, and with other features found in low-risk loans such as no prepayment penalties or balloon payments, the association argued.
"The definition of QRM is important because it will determine the types of mortgages that will generally be available to borrowers in the future," said Phipps. "Borrowers with less than 20% down will have to choose between higher fees and rates today, up to three percentage points more, or a 9-14 year delay while they save up the necessary down payment. Realtors are working hard to make sure that this doesn’t happen."