Bipartisan Group Says QRM Would Keep Millions From Dream of Homeownership

Even more legislators are advocating that the qualified residential mortgage (QRM) requirements be reworked.

The proposed QRM rule is a risk retention rule required under the Dodd-Frank reforms that is intended to ensure that lenders have “skin in the game”.  It would require loan originators to retain risk equal to 5 percent of all but the safest mortgage loans.  The loans that would be exempt from the risk retention requirements would have a minimum down payment of 20 percent or more, and the borrowers would have to have debt-to income requirements less than 28 percent (on the front end) and 36 percent (on the back end).  Also exempt from QRM requirements are mortgage that are backed by government agencies such as the VA, USDA, and FHA.  Also excluded are loans backed by Fannie Mae or Freddie Mac – and yes, that is a loophole large enough to drive an aircraft carrier through when you consider the percentage of loans that are backed by the government explicitly or implicitly – but that is a discussion for a different day.

Many in the housing/mortgage industry as well as in Congress believe that these new regulations would be overly restrictive.  Earlier in June, a bipartisan group of 38 Senators wrote a letter to federal regulators requesting that the QRM rule be modified so as not to destabilize the housing market which is already on the precipice.  An additional 280 members of the House of Representatives have also signed the letter.

Now this group is joined by the “Coalition for Sensible Housing Policy”.  This group includes a diverse range of lobbying groups, ranging from the NAACP, to the Mortgage Banker’s Association, to the National Urban League, to the American Bankers Association, among others.  I cannot imagine too many issues where all these groups would line up on the same side.

Congressman Brad Sherman remarked in a press conference today:

“The Qualified Residential Mortgage definition regulators have proposed is so restrictive it threatens to cut off millions of otherwise eligible consumers from the dream of owning a home, and will drive the bulk of real estate lending in this country to the largest institutions that enjoy the lowest cost of capital. That’s why Congressman Campbell and I persuaded over 280 of our House colleagues to sign a letter to regulators opposing the rule as it has been drafted.”

Senator Kay Hagen, one of the authors of the letter commented in a news conference today:

“The strict, inflexible restrictions proposed by banking regulators could put home ownership out of reach for many creditworthy American families. The proposed rule runs counter to the commonsense, bipartisan provision that Senators Landrieu, Isakson and I included in the Dodd-Frank Act last year. This misinterpretation of our intent could unnecessarily slow the housing market’s recovery and prevent well-qualified, middle class families from securing an affordable mortgage. We are urging regulators to go back to the drafting table.”

I think there is a common sense solution to implementing QRM, and that is to phase it in over a period of time, possibly ten or more years (when the housing market is hopefully healthier).  In this way, we could move slowly to a point where we had very sound underwriting standards, but enacted them in such as way so as not to kill off the housing market.

The comment period for the QRM regulation was recently extended to August 1st, so the public has more time to weigh in on the proposed changes.