There is a question swirling inside the Beltway, the answer to which could dramatically impact the ability of qualified borrowers to buy or refinance their homes. It also could have long-term implications for the housing market and the broader economy. It's this: What is a qualified residential mortgage?
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires regulators to craft the definition as they create rules for financial services companies to retain a 5% interest in mortgages that are packaged into securities. The regulators must establish a category of QRMs that would be exempt from the risk-retention rules.
Sen. Mary Landrieu, one of the bipartisan amendment's sponsors, remarked that the QRM exemption was included in Dodd-Frank in order to "eliminate the excessive risk-taking we saw in the home mortgage market between 2004 and 2007, without raising interest rates for those homebuyers who have maintained good credit, document their income and assets, and finance their home the old-fashioned way."
Exempting certain types of less-risky, well-understood, soundly underwritten mortgages is essential to making those types of loans affordable and available for homebuyers. By identifying the types of mortgages that would be exempt from risk-retention requirements, regulators will actually encourage lenders to make these types of lower-risk loans to qualified borrowers.
Loans that are fully documented, have a reasonable debt-to-income ratio and lower loan-to-value ratios (or contain mortgage insurance), are the bread-and-butter loans that allowed generations of American families to achieve long-term sustainable homeownership. These loans should qualify for the exemption.
Loans that fall outside the QRM definition, those on which lenders could be required to retain a share of the risk, will not be offered by many lenders — and will be more expensive for borrowers. They will still have a role in the marketplace for those who want them. But borrowers will be forced to pay a premium to secure those types of mortgages.
Increasing the cost or limiting the availability of too many mortgages, which would be the result of too narrow a QRM definition, would work against our efforts to stabilize the housing market.
But don't take this to mean there shouldn't be any definition at all for a QRM. Indeed, clearly defined parameters will help lenders that are seeking to understand the rules of the road. Moreover, the QRM's defining criteria should be built on a foundation of objective analysis showing how each criterion reduces the riskiness of a loan.
Loans with features that were misused or misunderstood — negative amortization, no documentation, stated income — these products should not be included in the QRM and should require lenders to hold a piece if they are securitized.
Requirements in the definition also should be flexible, rather than specific federal mandates. This preserves lenders' ability to address the needs of particular borrowers who can clearly repay their loans but who may not meet some of the criteria. For example, borrowers who cannot put 20% down should be allowed to qualify for the QRM, but only if they have mortgage insurance or some other credit enhancement.
Hardwiring one-size-fits-all underwriting guidelines into a federal rulemaking will have long-term impacts on the mortgage market.
Underwriting is an art, not a science. Accordingly, while the new rule should be clearly defined from the start, it should allow for some flexibility and lender discretion within these well-defined criteria.
