Opposition to QRM proposal picks up steam

Rule would not require 20% down payments, say regulators

The campaign to shoot down a proposal by federal regulators that lenders be required to retain at least 5 percent of the risk on mortgages they securitize when borrowers make down payments of less than 20 percent continues to pick up steam.

A coalition of consumer organizations, civil rights groups, lenders, real estate professionals and insurers coordinated with lawmakers today in bringing pressure to bear on regulators, releasing a white paper and joint letters from members of the House and Senate who have taken issue with the proposal.

Six federal agencies — the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Department of Housing and Urban Development, Securities and Exchange Commission, Federal Housing Finance Agency — are in the process of implementing risk retention policies mandated in the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law last year.

Some provisions of the sweeping legislation were intended to address problems created when loans are bundled into mortgage-backed securities and sold to investors.

Although the loan securitization process keeps money flowing into mortgage lending and helps make borrowing more affordable, critics say it also insulated loan originators from losses and encouraged risky underwriting practices during the boom.

Requiring that lenders retain a 5 percent stake in all but the safest loans they securitize gives them "skin in the game" and encourages prudent underwriting, backers of the concept say.

At issue is how regulators will define low-risk loans that will be exempt from the 5 percent risk retention requirement — so-called "qualified residential mortgages," or QRMs.

The Dodd-Frank bill made no specific reference to down payments, instructing federal regulators to draw up a QRM definition using criteria such as loan type, verification of the borrower’s ability to repay, full documentation, and mitigating factors like mortgage insurance.

In March, regulators proposed that only mortgages in which borrowers put at least 20 percent down be considered QRMs. The proposal would also trigger risk retention requirements on mortgages when front-end debt-to-income ratios exceed 28 percent, and back-end ratios exceed 36 percent.

That proposal sparked an outcry from not only the lending industry, but consumer organizations and civil rights groups who said it would raise the cost of borrowing for middle-class and minority homebuyers if they could not afford to make a 20 percent down payment.

"It’s unusual to see the Service Employees International Union, the AFL-CIO, NAACP, National Council of La Raza, the National Association of Consumer Advocates, and the National Consumer Law Center march arm in arm in solidarity with bankers, homebuilders, mortgage lenders, real estate agents and brokers, title companies and mortgage insurers," Inman News columnist Ken Harney wrote of the alliance that’s organized against the QRM proposal.

Dubbed the Coalition for Sensible Housing Policy, the opposition now includes 44 consumer organizations, civil rights groups, lenders and real estate professionals, including the National Association of Realtors and the Mortgage Bankers Association.

Today, the coalition released a white paper outlining its issues with the proposed QRM definition, claiming high down payment requirements aren’t necessary for creditworthy borrowers, and that they will put homeownership out of reach for many.

House and Senate lawmakers released joint letters criticizing the proposal as too narrow, and particularly harmful to first-time and minority homebuyers.

At a press conference organized by the coalition and attended by several lawmakers, former Realtor and longtime NAR ally Senator Johnny Isakson, R-Ga., said he was "thoroughly disappointed" that regulators did not follow what he said was Congress’ legislative intent in passing the Dodd-Frank bill.

"We don’t have a down payment problem in this country, but rather an underwriting problem," Isakson said. "I strongly urge regulators to rework their overly rigid down payment requirement for QRM. If left as is, it would make recovery in the housing market almost impossible."

Fears overblown?

Although regulators have extended the comment period for the QRM proposal from June 10 to Aug. 1, they have defended its intent and dismissed some fears about its impacts as overblown.

The proposed QRM definition would not require that borrowers put 20 percent down — only that lenders retain 5 percent of the risk when securitizing loans with smaller down payments. The question then becomes whether loans that don’t qualify as QRM will be significantly more costly or harder to obtain than those that do.

The risk retention rules would apply to "private label" mortgage-backed securities (MBS) not backed by Fannie Mae, Freddie Mac and Ginnie Mae. Private-label MBS — the main source of funding for subprime lenders during the boom — have been shunned by investors but are expected to re-emerge if the government winds down Fannie and Freddie.

When the QRM definition was first proposed, NAR warned that borrowers seeking non-QRM loans might pay higher fees and interest rates, totaling 3 percentage points or more.

NAR’s manager of regional economics, Ken Fears, later estimated that the difference in pricing between QRM and non-QRM loans might be as high as 2.25 percent. Last week, Fears published his latest analysis, which estimated non-QRM loans will carry rates 0.8 to 1.85 percent higher than QRM loans.

In his prepared testimony at an April 14 Congressional hearing, FDIC General Counsel Michael Krimminger said that an analysis of historical private MBS deals showed risk retention of 3 percent to 5 percent was the norm. If the market was already demanding 3 percent risk retention, the proposed rule would raise the cost of funding non-QRM loans by only 0.1 percent, the FDIC’s analysis showed.

Krimminger said that regulators envisioned that most mortgage loans — about 80 percent — would not be classified as QRMs, which would help keep down the cost of non-QRM loans.

QRM loans "will be a small slice of the market," he said, and that will ensure that non-QRM loans will be cost effective for low- and moderate-income borrowers because they will constitute the majority of securitizations, ensuring "a vibrant and liquid secondary market."

"The QRM exemption is meant to be just that — an exemption from the regular rules," Krimminger said. The FDIC’s analysis of historical loan data "showed a significant relationship between higher loan-to-value ratios and increased risk of default."

Outgoing FDIC Chairwoman Sheila Bair has a simple solution for ending the QRM debate: get rid of the QRM altogether, and apply the 5 percent risk retention requirement to all securitized mortgages.

That was the original proposal in the Dodd-Frank bill, Bair said in addressing the Council on Foreign Relations this month, American Banker reported.

"At the last minute, some in the industry got the QRM exception into the bill that basically tells the regulators to define what is the gold standard of mortgages," Bair said. "We did that and now there’s this huge pushback on it, with the thinking being this is going to become the new normal, not just a small exception."


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