Call it a tale of two mortgage markets: While federal financial regulators’ qualified residential mortgage (QRM) proposals for the home loan market have been the target of scathing attacks by housing, lending, and consumer groups since they were issued at the end of March, the agencies’ proposals for the commercial mortgage–backed securities (CMBS) market have generated relatively little heat.
John Courson, outgoing president and CEO of the Mortgage Bankers Association, says his group is “gratified” by the flexibility that regulators built into the CMBS rules. But he complains about “the rigid and highly prescriptive” standards envisioned for the home mortgage sector.
Courson’s critique was mild compared with that of other major housing lobbies. For example, Jerry Howard, CEO of the National Association of Home Builders, sees the proposals in nearly existential terms. “Homebuilding is in a state of paralysis,” he said in an interview, “and [the QRM proposal] will keep it there,” rather than helping housing recover and create jobs. Howard accused the regulators of “ignoring clear congressional intent”—even “nullification”—by devising a rule so tough that it will depress sales of new and existing houses and lower property values. Richard Dorfman, managing director of the Securities Industry and Financial Markets Association, said the QRM rules as drafted could make “mortgage credit unaffordable.”
What exactly is this regulatory hot potato called QRM? And why does it have so many proponents of homeownership so upset? Here’s a quick overview: Last year’s Dodd-Frank financial reform legislation required banking, securities, and housing regulators to come up with a gold standard for home mortgage pools in securitizations that would signify low risk for lenders and investors. Loans that did not meet the agencies’ key tests for minimal risk would be designated “nonqualifying.” For these loans, originators and sponsors of mortgage-backed securitizations would need to put some of their own “skin in the game” into reserve—5 percent of loan principal balances—so that they could bear at least part of the risk of loss in the event of delinquencies.
Under the new system, nonqualifying loans would come with extra costs to originators, who presumably would pass them along to borrowers in the form of higher interest rates—anywhere from 75 basis points upwards, according to industry estimates. The Dodd-Frank law spelled out general features that regulators consider in devising their low-risk QRM:
- Mandatory full documentation of income and assets;
- Possible use of mortgage insurance and other credit enhancements;
- Avoidance of features historically linked to high default rates, such as negative amortization and balloon payments; and
- The capacity of borrowers to repay the mortgage, i.e., their creditworthiness and household debt loads.
After months of negotiations, six federal agencies—the Federal Reserve, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Comptroller of the Currency—produced 300-plus pages of proposed rules. The following are their key criteria for home mortgages to meet the QRM standard:
- Minimum downpayments of 20 percent for purchases and 30 percent for refinancings;
- Maximum permissible debt-to-income ratios of 28/36—no more than 28 percent of monthly gross income can go for mortgage-related debt, and no more than 36 percent for all household debt payments; and
- No 60-day delinquencies in the 24 months preceding application.
Sheila Bair, chairman of the FDIC, defends the admittedly high bars set for consumers. “The QRM is the exception,” she says, “not the rule, and as such, I believe should be narrowly drawn.”
Critics erupted immediately. The National Association of Realtors joined with the Center for Responsible Lending and the Consumer Federation of America, denouncing the proposed 20 percent downpayment requirement as an insurmountable barrier for the vast majority of homebuyers. Other groups charged that the rule would hurt minority consumers disproportionately, and send tidal waves of buyers to the Federal Housing Administration (FHA)—something the Obama administration said in its budget message that it wants to avoid. (The Dodd-Frank law exempted the FHA from the QRM rule altogether. It did not exempt Fannie Mae and Freddie Mac, which account for a combined 50 percent–plus of market volume, but the agencies’ proposal exempted them for as long as they remain under federal conservatorship.)
The QRM rule is open for public comment through June 10. Then the regulators are expected to adopt a final version to take effect no later than July 2012. The outlook in the meantime: stormy. If the agencies retain their concept of an ultrarestrictive definition—especially the minimum 20 percent down and tough debt ratio standards—Congress is likely to intervene. In fact, that is precisely the war scenario that major real estate, mortgage insurance, and homebuilding groups are gearing up to fight—and win—well in advance of July 2012.
