By MABÉL GUZMÁN
An issue of great concern to Realtors is being fought as the National Association of Realtors, along with state and local Realtor associations and some homeowners, is challenging proposed risk-retention rules relating to so-called "qualified residential mortgages" (QRMs).
The QRM proposal is an element of the Dodd-Frank Wall Street Reform and Consumer Protection Act that passed last year.
Dodd-Frank requires financial institutions that securitize mortgage loans to retain at least 5 percent of the credit risk for non-QRM loans, and exempts from the risk-retention requirements those securities backed exclusively by QRMs.
Those loans that are classified as QRMs would require:
1. An 80 percent loan-to-value ratio, which requires a 20 percent down payment.
2. Limiting mortgage payments to 28 percent of gross income and limiting all debt to 36 percent.
3. No credit score is required, but a mortgage loan would qualify as a QRM only if the borrower is not 30 or more days past due on any debt obligation.
4. Borrowers cannot have been 60 or more days past due on any debt obligation within the last 24 months.
5. Within the preceding 36 months, borrowers cannot have been through bankruptcy, been foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a federal or state judgment for collection of unpaid debt.
With this level of underwriting and features, a QRM should produce a lower level of default, which would lower the cost of securitizing these mortgages and provide a market incentive for wide origination of these loans.
Currently, borrowers who use government-sponsored enterprise (GSE) loans will not be subject to these requirements, so QRM loans are expected to be the exception rather than the norm. But the field is changing daily.
There is another hitch that Realtors and their clients should be concerned about: The proposed QRM definitions could serve as a precursor for not only what future mortgage products will look like in the private market, but also for what the future Fannie Mae and Freddie Mac — as well as Federal Housing Administration — products will require.
This situation has profound implications for residential real estate. For example, if borrowers have to save 20 percent of cost to purchase their first home, a study by the Center for Responsible Lending concludes it would take a family with a $50,000 yearly income 14 years to save for an average median $174,000 home.
Sellers would be impacted as well, due to results including delays due to new regulatory hoops that prospective buyers must leap through, potentially fewer qualified purchasers, guaranteed longer sales times, and potentially further price reductions.
Who else is impacted on the transaction side of the business? We all are. Realtors, lenders, attorneys, title companies, inspectors, builders and more. Everyone connected to the business of real estate.
We are working through a tough cycle. This proposal not only makes things tougher — it would throw a real blow to the housing industry.
The fight is not over. The National Association of Realtors is engaged in this issue as it goes through the rule-making process, and is attempting to strip out these proposals with the help of Congress. I encourage you to reach out to your elected representatives and ask them to remove the QRM provision from the act. Visit Realtor.org to learn more and read a white paper on this issue.
As of this writing, NAR and its coalition partners have gathered the support of 44 U.S. senators who recently wrote to regulators expressing their intent on QRM, and opposing the imposition of a sizable down payment; 282 U.S. House members signed a similar letter.
The members of Congress who have signed on to the Realtor letter understand that Realtors have long supported strong underwriting standards. They also understand that, with QRM, Realtors are warning Congress that the lending industry and regulators have overcorrected in response to past abuses.
Protecting consumers and encouraging responsible lending can be accomplished. NAR has made significant proposals in recent weeks that illustrate this point.
There is much at stake for real estate professionals and their clients as the nation’s economic recovery continues, should QRM stay as proposed. In Illinois, my home state, the Illinois Association of Realtors studied the economic impact of a home purchase.
It found that each transaction generates $28,000 into the local economy. Using the association’s 2010 housing numbers, there were 103,000 transactions involving single-family homes and condos in Illinois. Under QRM, the state is at risk to lose a sizable portion of $1.3 billion from its economy.
I understand the argument of requiring banks and buyers to have skin in the game. What is at risk is more than skin for the economy if QRM comes to fruition and expands its rules onto Fannie, Freddie and FHA products. We will lose a chance at a timely recovery of the real estate economy.
Mabél Guzmán is vice president of business development and sales for Envision Real Estate and 2010-11 president of the Chicago Association of Realtors.