The new regulations would require mortgage originators to retain capital reserves equal to 5% of all but the safest mortgages. The mortgages that are exempt from the risk retention guidelines are termed “qualified residential mortgages” or QRMs. In order to qualify as a QRM, there must be a down payment of at least 20%. Additionally, anyone who has ever had a 60 day delinquency in their credit history will not qualify for a QRM. FHA loans will be exempt from the QRM rules, and Fannie Mae and Freddie Mac mortgages may also be exempt so long as these agencies are in government conservatorship.
As we’ve discussed in the past, there could be a number of side effects for borrowers, among them increased mortgage rates for anyone who doesn’t qualify for a QRM. Another one of the side effects could be that the FHA Mortgage Share could increase significantly as these loans are exempt from the QRM rule.
Sheila Bair, Chairman of the FDIC, spoke at an FDIC board meeting today and addressed the proposed rule. She said:
“In thinking about the impact of this proposed rule, we need to keep in mind the following facts:
First, the QRM requirements will not define the entire mortgage market, but only that segment that is exempt from risk retention. Lenders can – and will – find ways to provide credit on more flexible terms, but only if they then comply with the risk retention rules.
Second, what matters to underserved borrowers is not just the volume of credit that is available, but also the quality of that credit. More than half of the subprime loans made in 2006 and 2007 that were securitized ended up in default, which hurt both borrowers and investors and triggered the financial crisis. By aligning the interests of borrowers, securitizers and investors, our new rules will help to avoid these outcomes and keep default rates at much lower levels. They will also help avoid another securitization-fed housing bubble which made home prices unaffordable for many LMI borrowers.
Finally, the private securitization market, which created more than $1 trillion in mortgage credit annually in its peak years of 2005 and 2006, has virtually ceased to exist in the wake of the crisis. Issuance in 2009 and 2010 was just 5 percent of peak levels. This market needs strong rules that assure investors that the process is not rigged against them. The intent of this rulemaking is not to kill private mortgage securitization – the financial crisis has already done that. Our intent is to restore sound practices in lending, securitization and loan servicing, and bring this market back better than before.”
The majority of homeowners with mortgages in this country would be unable to refinance into a QRM due to a lack of home equity. Additionally, the vast number of people who have gone through foreclosure or have even been two months delinquent would be unable to get a QRM. All of these people will likely pay increased mortgage rates if they were to refinance or get a new mortgage. I totally understand the reasoning behind the QRM. It also strikes me as being a classic case of closing the barn door after the horse has escaped. What are your thoughts on the proposed rule? Let me know in the comments section below.
- DealBook: F.D.I.C. Advances New Rules for Mortgage Securities (dealbook.nytimes.com)
- FDIC proposes exemption for mortgage securities (sfgate.com)
- Real Estate: Feds move on home mortgage rules (summitcountyvoice.com)
- Mortgage-Lending Rules Unveiled (online.wsj.com)
- FDIC’s plan for ‘skin-in-the-game’ loans (marketwatch.com)
- UPDATE 4-U.S. regulators define “safe” home loan (reuters.com)
- Regulators to Set Rules on Mortgage Securities (nytimes.com)
- New Rules for Home-Loan Brokers, by Amy Hoak, WSJ.com (oregonrealestateroundtable.com)
- Senators object to new regulations for housing finance (dailykos.com)
- How Many Borrowers Qualify for New ‘Safe’ Mortgage Rules? (blogs.wsj.com)