DALLAS-After a flurry of activity earlier this summer, mortgage lenders have spent weeks sitting, waiting and worrying about the potential impact of the qualified residential mortgage (QRM) rule.
The proposed rule would require, among other provisions, a 20 percent cash down payment on a purchase mortgage and no 60-day delinquencies for potential borrowers on any debt in the past 24 months. The QRM rule is part of a larger effort to address abuses in the mortgage process, including requiring lenders and securitizers to retain 5 percent of risk after securitization.
After the proposal met with enormous resistance from a number of sectors, the comment period on QRM was extended to Aug. 1 from June 10. David Motley, president of CU Members Mortgage, said the process is now in the hands of financial regulators.
"As I understand it, the rule must be adopted unanimously by all of these different regulators, so if one drops out then substantial changes would have to be made to the rule," Motley said. "We have not heard from regulators what QRM will look like, or if there's even going to be a QRM. Maybe all of these comments are opening their eyes a little bit."
The original intent of the rule-which came out of the far-reaching Dodd-Frank Act-was to ensure the issuers of mortgage-backed securities had an incentive to protect the investors who buy such securities. QRMs require risk retention, as the issuer of the security and the lender each has to retain some of the risk of a loan that is not classified as a "qualified" mortgage. But Congress left it up to regulators to define "qualified," which resulted in several onerous restrictions.
"We would like to see QRM definition dropped altogether, and just have the QM definition that has more flexibility," he said. "QM has some problems, also, but it does not have maximum loan-to-value restrictions and prescriptive debt-to-income limits."
According to Motley, QM in a nutshell says a borrower must demonstrate the ability to repay. There has been some disagreement around safe harbor provisions that bar future claims by a borrower that the lender did not follow the rules, and rebuttable presumption, which deals with litigation in a foreclosure claim. The rebuttable presumption structure raises the possibility of more lawsuits and greater costs, he noted.
Knocking Out 70 Percent
The "good thing about QRM," Motley continued, is if lenders follow all the prescriptive limits, it is in essence a safe harbor and the lenders would be largely protected from lawsuits. "But the restrictions on QRMs are so restrictive they knock out 70 percent of the population," he asserted, citing limits that state no more than 28 percent of a borrower's gross monthly income can be applied to housing payments, and no more than 36 percent of gross monthly income can be applied to any recurring debt. "This will have a disparate impact on minorities and protected classes. QRM, as written, is just too damn restrictive."
The comment period was extended for nearly two full months, "and now we have not heard a word since, so I assume they are still reading all the comments," Motley assessed. "With all the public outcry, from lenders to consumer groups to Realtors, Congress is backtracking and saying they never meant for such prescriptive limits. I think they did mean for it to be prescriptive, but they didn't realize the consequences of their action."
Although the official comment period has closed, Motley said credit unions can do what CU Members Mortgage is doing: have continuing discussions with legislators and attempt to convince lawmakers they should weigh in with regulators and get them to loosen the "prescriptive standards" of QRM.
Why is this so important? Motley cited the example of someone who is attempting to refinance his house after QRM rules are put into place. Although the borrower originally made a 20 percent down payment at purchase time, due to market declines his house is worth less than he paid for it. In this scenario, if the loan-to-value ratio is 82 to 18 percent, instead of the prescribed 80 to 20 percent, there would be a hefty financial penalty.
"Rates on QRM loans are expected to be the lowest because they are the least risky, but someone who is just 2 percent off on the value of the house might face a rate up to 300 basis points higher," Motley explained. "Instead of getting a mortgage at 4 percent, that person might have to pay 7 percent. Is that fair?"
Similarly, if the hypothetical borrower took out a small loan that pushes his debt ratio to 38 percent instead of 36 percent, he would get hammered on his mortgage rate even though most lenders today would be happy to lend to someone at 38 percent
What is needed, said Motley, are prudent and flexible standards that protect lenders. "But these highly prescriptive numbers do not need to be put in place that govern all loans," he declared. "These types of knee jerk responses are bad. We need to take time and get it right, not just throw something out there to make it look like Congress is tough on crime."
