What in the world is a QRM and why does it matter to the typical home buyer?
With the 2010 Dodd – Frank bill the U.S. Congress attempted to establish a vehicle to require mortgage generating banks to retain a portion of the securitized loans (loans that are bundled together and sold to investors) that they generate. Simplistically speaking the theory is that if you require the banks to retain say 5% of the loans that they securitize they will be more diligent in assuring that they originate quality loans to quality borrowers thus reducing the likelihood of default. By Congress’s definition exempt from this 5% “skin in the game” rule are FHA loans and Qualified Residential Mortgages or QRMs the definition of which was left up to the country’s six banking regulators.
Discussion to date suggests that a QRM would be defined as a loan based on 80% loan to value, or 20% down-payment, made to a borrower with a minimum FICO score of 690 whose ratio of income to mortgage payment and overall debt is no more than 28% and 36% respectively. While on the surface one might accept that that does in fact describe a qualified borrower and loan the concern is what such a definition does to the mortgage market as a whole.
Banks that are forced to assume additional risk and maintain additional reserves will do what banks always do and that is they will pass the cost of the risk on to the borrower in the form of higher rates and expenses or will raise the bar for qualifying to the point where the only real options are as a QRM or a FHA borrower. Playing out this scenario one can easily project that FHA down payment and qualification requirements would necessarily be raised to manage an already larger than ever intended market share.
With available statistics suggesting that 80+% of first time home buyers put down less than 20% this scenario does not bode well for maintaining the affordability factor so important in that market segment and as we well know, as goes the first time buyers so goes the market. The National Association of Realtors has and is following these developments very carefully and is advising both the regulatory agencies and Congress itself as to what it is sees as the impact of such actions. We will keep you posted…