New proposed risk-retention rules, required as part of the Dodd-Frank financial reform were released today by the FDIC, according to a report from Fox News.
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:
- 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.
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Zoey
May 16, 2011 @ 6:05 pm
I think imposing the QRM requirements will limit the majority of the lending to the already huge entities (Wells, BofA, Chase etc.).
It may also force the housing prices down further to allow for the 20% downpayment.
Could also force the closure or merger of private mortgage insurers.
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Richard Teran
May 19, 2011 @ 11:03 am
Create a crisis.
Make a solution that drives business into government hands.
We get to see it in action.
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Rick Stanley
June 15, 2011 @ 11:06 am
Again, this is an example of unintended consequenses. If our leaders were Required to read the bill before voting on it, things such as this would not happen. The line ” closing the barn door after the horses have left” is very real. Currently in the mortgage industry, we have reverted back to underwriting as it was in the 70′s and 80′s. EVERYTHING now must be documented and verified. Requiring higher down payments is the wrong way to go. Real wages have not risen in over 30 years, and prices have increased to apoint that most Americans are doing their best just to keep their heads above water. QRM will severly depress housing prices. If 20% down is required, very few Americans will be able to afford this, and have a life. If they really wanted to underwrite correctly, and know what the real repayment capabilities are, banks should underwrite to net income not gross income. Include average utility information on the property. Include cell phone bills in qualification. This would give a clearer picture of the real ability of the borrower to repay. Government intervention and rule making is always a knee jerk reation to a crises that they always create. If the Glass Segal act would not have been repealed in 1999, this would not have happened. If congress would not have pressured the banks to lend to people that everybody in the lending industry knew would never repay the loans, this would not have happened. Thank Barney Frank for this collaspe. It is because of the his insistance that “underserved” people be allowed to get a loan because he felt it was a right of every American to own a home regardless of their ability to repay. Also the fact that his significant other was the CEO of Fannie Mae who made Millions of dollars because of this action. This is why subprime loans were invented so the banks could comply with the community reinvestment act. Our so called leaders only do things to serve themselves, and legislate to get reelected. They will not do what is right for the country. They will only do what is right for them and the people who contribute large sums of money to their campaigns. It is time for sweeping change in Washington. Not only in people but culture. The whole thing is a big scam on the American public and now we are paying for it and will for many many decades.
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snjmom Reply:
July 18th, 2011 at 10:32 am
While I agree on the underwriting points and the Glass-Steagall note, it wasn’t CRA loans that created the problem. Flippers and investors with interest only loans and ridiculous ARM adjustments were the majority of the foreclosure issue till the markets finally balked and the resulting economic tsunami rolled through and wiped out regular, live in the home till it’s paid off people. The industry itself chose to lend to folks that would never repay the loan because they thought for an insane moment that housing prices can only go up.
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Brandon Polka
June 22, 2011 @ 10:42 am
Feels good to get it out, yes? In all seriousness, I agree with the majority of what you said. Cell phone bills…not so much, but I do agree 100% w/ the net income comment. Perhaps lenders should adapt something similar to the VA lending guidelines; have some sort of residual income requirement which takes into consideration net income & utilities. If that were to work, some of the current guidelines would need to be relaxed, such as allowing slightly higher (than 45%) DTI ratios. This would help balance it out & provide a much clearer picture on “true” affordability.
Also…regarding congress being exempt from reading before voting…can someone tell me why they’re exempt from reading the bills they vote on? I’ve never understood this. But why should I; I’m sure it was originally introduced by a congressman/woman & probably passed unanimously. Well, that’s my $0.02.
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Rick
August 23, 2011 @ 11:41 am
None of this matters if FNMA or FHLMC are exempt, and, if they survive or are reconstituted. That is the big question: If there is no federal conventional secondary mortgage market, there will be no mortgage originations of significant magnitude in the U.S.
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