Groucho Marx once declared that he would never belong to a club that included him as a member. When it comes to the "qualifying residential mortgage" exception, I feel the opposite way: if I can't be a member, then the exception shouldn't exist.
In theory, the QRM is designed to allow lenders to sell off 100% of a loan that meets super-safe underwriting criteria, rather than assuming at least 5% of the credit risk for any other type of loan that they want to securitize. Regulators have said that criteria should include a 20% downpayment, and debt-to-income restrictions equaling 28% on the front end, and 36% on the back end.
Banking groups and consumer advocates joined forces this week to argue that criteria was just too tough, and would include only a small slice of the market. Even before they made their stance public, John Carney, a blogger at CNBC, and Felix Salmon, a blogger at Reuters, were criticizing them, contending that it was a push to return to the bad old days before the crisis, when nobody retained any risk.
Both Carney and Salmon make great points, but the so-called "Home Ownership Mob" also has a good argument. The QRM rules are incredibly narrow. How do I know? I've bought a house twice during the past decade, and neither time would I qualify. Why do you care? Because I'm as safe as safe gets when it comes to lending credit. If I don't qualify, I'm not sure who does.
I have a FICO score higher than 800, I pay off every credit card in the month it's owed, and, as my family can attest, I'm cheap when it comes to new purchases. I will go out of my way to avoid buying a $10 CD I desperately want because it might be on sale for $5 months later. So why don't I qualify for a QRM loan? The first time I bought a house, I didn't have enough cash for a 20% downpayment. The second time, I bought a slightly bigger house than I could — on paper — afford. While I put down 20% that time, the payment technically violated the debt-to-income limitations, despite the fact that I could prove to you or anyone else how I could, in fact, afford to buy the house.
If the risk retention standard had been in place, would that have stopped me from getting a home loan? No, of course not. Despite some industry propaganda, someone would have given me a mortgage. Would I have paid more for it, however? Yes, absolutely. Salmon posits that QRM loans might actually be more expensive than normal loans, or that it may only equal $1 a month, but few others would agree.
According to an economist at a banking regulator, I would likely pay between 15 to 40 basis points more on my loan. At best, that's $50 a month on my loan, but potentially as much as $120 more — all despite the fact my loan presents virtually no risk to the lender ( With 20% down, I could easily sell my house for more than my mortgage value).
But the situation could be worse. According to statistics from Mark Zandi, the chief economist and co-founder of Moody's Economy.com, I could pay between 75 to 100 basis points more. That's roughly between $240 to $320 more a month. Over the entire life of the loan, at best I end up paying $18,000 more. At worst, I pay $115,200 more.
Wow. You see why I'm bothered by this? Why should I pay more than someone else — even if it's a little more — when my credit risk is close to zero? And that's inherently the problem about having a government-mandated "exception" to the risk retention rules at all.
According to regulators, the idea behind QRM was to create "bullet-proof" loans that were the exception, not the norm. But Americans hate the idea of an "exceptional" class. While I understand that someone may get a better rate on their mortgage based on a host of different credit criteria, those decisions are largely invisible from me and have to do with different lenders' policies. What bothers me here is that the government is creating this super-class, and I'm not a part of it.
Much like Charlie Sheen, Americans want to be seen as "winning," and the QRM will soon become the new win. If it annoys me that I can't get into that class, it's bound to upset others. Eventually, the pressure to widen the QRM to include a larger share of prime mortgages will build until Congress or regulators comply. Either that, or Congress eliminates the exception altogether. Of the two options, I prefer the second. A government-created super-class of borrowers is bound to have a disruptive impact on the mortgage market, no matter how you slice it. Better to force everyone to maintain skin-in-the-game and go from there.
But never mind my experience — what do you think? Would you qualify for a QRM loan? If not, doesn't it bother you?