The definition of what or will not constitute a qualified residential mortgage may be the most important and least appreciated or understood financial regulation facing credit unions this year.
That is part of the message that CUNA Mutual Mortgage Insurance and CUNA have been trying to drive home to CUs as the comment period on the proposed definition comes to a close on August.
Created by the financial reform law, qualifying residential mortgages will be mortgage loans from which issuers of mortgage-backed securities will not need to retain 5% of their original balance to help guarantee their soundness. This, politicians and regulators hope, will lead mortgage lenders to make greater numbers of sound mortgage loans and increase the cost of making the sorts of complex or opaque mortgage loans that contributed to the housing mortgage crisis in 2008.
The QRM regulation discussion has not been seen as a broadly credit union issue because credit unions will not be subject, directly, to the QRM rules since they by and large do not issue mortgage-backed securities. Additionally, the NCUA is not one of the agencies formally involved in the QRM definition debate. Those agencies are the Federal Reserve, the Comptroller of the Currency, the Securities and Exchange Commission, the FDIC and the Federal Housing Finance Agency, the regulator over Fannie Mae and Freddie Mac.
But CUNA Mutual and CUNA executives argued strongly in a July 18 webinar about the QRM debate that credit unions should care passionately about how QRMs are defined and should weigh in on the discussion among the regulators.
QRMs are a credit union issue because they could significantly change the secondary market for mortgages that many credit unions sell into, the executives argued. This could wind up essentially dictating to credit unions and other smaller mortgage issuers the type of mortgage loans that they can offer their borrowers and whether they will be able to tailor those mortgages to meet their member's particular circumstances, the executives contended.
The QRM proposal that regulators are currently discussing includes a requirement that purchase money borrowers must make at least a 20% down payment that they must provide themselves and could not be a gift.
Further, the rule is very tight on eligibility rules. To qualify for a QRM, a borrower could not be more than 30 days late on any loan nor have been more than 60 days late on any loan in the previous two years. In addition, homeowners whose equity in their property had slid would also not be eligible for refinancing into a QRM, which it is widely expected will carry significantly lower interest rates.
The executives on the call stressed that credit unions overall support the notion of having mortgages that are designated as the most safe and rewarding those mortgages with a lighter regulatory and lending burden. But they argued that regulators had overstepped the intention of Congress in the proposed rule, noting that Congress had not put any down payment requirements into the legislation.
“Congress did not include any down payment requirement because they understood that a higher down payment does not guarantee a safer mortgage loan,” said Mary Dunn, deputy general counsel for CUNA. Instead, she argued that credit unions already understand that sound underwriting is what makes for the best mortgage loans.
The 20% down payment requirement would not only keep many credit union members from being able to qualify for a mortgage loan, the other QRM requirements would also prevent credit unions from working with members to craft mortgage loans that more closely mirrored their circumstances, while remaining sound loans, she explained.
The executives also said CUs should care about potential structural changes that the QRM could bring to the secondary mortgage market.
“I think it’s very important for credit unions thinking about QRM to think about it in terms of a secondary mortgage market without a Fannie or Freddie,” said Joel Luebkeman, director of product development for CUNA Mutual Group Mortgage Insurance.
Luebkeman pointed out that while the eventual fates of Fannie Mae and Freddie Mac have yet to be decided, it is certain that they will be remarkably different than they are today and, in their absence, qualifying residential mortgages may wind up playing a very important role – essentially becoming, in effect, the new “conforming” loan for sale in the secondary market.
Given everything that is at stake in the QRM regulation, Dunn expressed some mystification about why more credit unions have not yet expressed their thoughts on the proposed rule.
“I think credit union people have so much to do running their CUs that they rely on us to express their concerns to regulators,” Dunn said. “In addition, I think the QRM rule was overshadowed a bit by interchange and that has kept more CUs from commenting,” adding that the proposed rule's complexity has not helped.