When Governor Romney brought up the seemingly obscure issue of "qualified mortgages" during the first presidential debate, it underscored the importance of this forthcoming regulatory definition.

The Dodd-Frank Act's provisions for QMs and Qualified Residential Mortgages attempt to force a nice, neat public policy solution on the market to address a multitude of sins committed during the housing boom. But as we approach the Jan. 21 deadline for a definition of QM, pinning down a set of attributes increasingly looks harder than perhaps the drafters of Dodd-Frank envisioned.

The CFPB is in the awkward position of having to make a tradeoff between protecting consumers from contemptible lending practices and limiting their availability to mortgage credit. In the end, with regulators' hands tied by legislation, whatever the CFPB decides to do is likely to be a suboptimal solution for the mortgage industry.

The QM provisions attempt to ensure that borrowers are not put into homes they cannot afford by offering some measure of legal protection to lenders that properly assess the ability to repay. The mortgage industry has been squarely behind establishing a rule providing a high degree of legal protection in the form of a safe harbor from being sued if a loan meets the QM standards. But if those standards are set too narrowly, the fear is that mortgage credit will be artificially restricted.

This critical public policy dilemma hinges on defining what is meant by a borrower's ability to repay the mortgage obligation...

For the full BankThink piece see "How to Loosen the 'Qualified Mortgage' Straitjacket"