In a significant shift from their policies during the early- and mid-2000s, regulators are now waxing conservative.
According to proposed guidelines released yesterday, only the safest loans will qualify as qualified residential mortgages (QRMs)—the key to an exemption to the risk retention rule in Title IX of the Dodd Frank Act. According to the act, banks will be required to retain 5% of the risk in mortgage-backed securities, unless the security is backed by a government-sponsored enterprise (GSE) or made up entirely of loans conforming to the definition of a qualified residential mortgage.
The definition of a QRM was left up to regulators and government agencies to provide. The first draft appeared yesterday in a joint release from the Treasury, Federal Reserve System, FDIC, SEC, FHFA, and HUD. And the hurdles are high.
In order to obtain this new gold standard in the mortgage industry, home buyers would have to produce at least a 20% down payment, have full documentation of income and assets, and meet stringent debt-to-income standards. Any borrower who has been 60 days delinquent on any loan, including car and credit card loans, within the last two years would be disqualified.
Refinance loans could not exceed 75% of the property’s value, and that percentage would be reduced to 70% if the borrower was able to take out cash from the refinance deal.
Needless to say, banks and the NAHB are balking.
In a conference call this afternoon discussing the matter, Barry Rutenberg, first vice chairman at the NAHB, argued that the 20% down-payment requirement “would disproportionately harm first-time home buyers, who have limited wealth and on average account for 40% of home buying activity. … Borrowers who can’t afford to put 20% down on a home and who are unable to obtain FHA financing will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists.”
Referencing median house prices in the U.S., Mike Calhoun, president of the Center for Responsible Lending and a participant on the call, argued that after closing costs and fees, borrowers of a $172,000 home would need to bring $43,000 to the table to meet the 20% down-payment requirement. At current income and savings rates, such an amount would take the average U.S. household 14 years to save up.
“This would disqualify about 5 million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year,” Rutenberg added.
Conservative mortgages of the type the QRM is now defining are nothing new. Such products have been around since long before the boom and bust, as have more flexible products. And its not as though the somewhat riskier mortgages are going to go away.
Indeed, in a press release about the proposed rules, FDIC Chairman Sheila Bair stated that “QRM is the exception, not the rule.” She expects the ultra-safe mortgages “will be a small slice of the market.”
And at a time when the government is trying to reduce its involvement in the mortgage-making business, Keith Gumbinger, vice president at financial publisher HSH Associates, suggests that the very narrow definition of a QRM could be an attempt to push for a larger private mortgage market.
Emphasizing that the proposal is not a hard rule yet, Gumbinger doesn’t think this is the time to panic. “This is not a settled issue by any means,” he told Builder in an interview today. “There are literally 174 questions in the 233-page document. This is just a proposal. They’re waiting for feedback.”
The agencies have given a response time of 60 days for comments, which they say they will then take into consideration before a final rule is hammered out. The final rule will come within 180 days of the close of public commentary. The new regulations will then have a roll-out period that could go on for up to 18 months.
However, that doesn’t mean there won’t be consequences in the mean time.
"The overhang of impending regulation of course creates distortion in the market, if not more than a wait-and-see mentality as to whether to get into or expand a business line or even offer a given mortgage product." Gumbinger wrote in a follow-up email to Builder. "If there's one thing necessary to help rebuild the mortgage market, it's regulatory clarity."
Calhoun is also concerned that with this new gold standard for what constitutes a safe mortgage, Fannie Mae, Freddie Mac, and the FHA will soon be encouraged to follow suit with more conservative lending requirements. “The short-term impact will be that it will set the standard. It only makes sense that if you declare that this is a safe mortgage, it will be the only thing people will want to attach taxpayer dollars to,” he warns.
While Gumbinger sees plenty of back and forth and plenty of room for modifications before a final standard is produced, he doesn’t see it becoming far more liberal. “No matter what the definition is that they come up with, it’s going to be necessarily restrictive,” he says. “Looking at that document, what they have specified is a traditional definition of what a risk-free mortgage definitely is. This old standby standard is one that produces the least amount of risk.”
Claire Easley is senior editor, online, at Builder.