“Right now, overlapping regulations keep responsible young families from buying their first home,” Obama said in his Feb. 12 State of the Union address. “What’s holding us back? Let’s streamline the process, and help our economy grow.”
The president was speaking broadly about a variety of rules that may be hampering credit availability, according to a White House aide who spoke on condition of anonymity because the deliberations were not public.
Still, bankers and real estate agents who are angling for changes to a proposed regulation requiring lenders to keep a stake in risky loans say they hope Obama’s comments will help their cause.
At issue is the so-called qualified residential mortgage rule, which six banking regulators including the Federal Deposit Insurance Corp. and the Federal Reserve are aiming to complete this year. The regulators drew protests in 2011 when they released a preliminary draft requiring lenders to keep a stake in mortgages with downpayments of less than 20% and those issued to borrowers spending more than 36% of their income on debt.
Bankers and consumer groups said such a requirement would shut creditworthy borrowers out of the market. The rule will fundamentally reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.
Now, industry participants and some lawmakers are pressing for the regulators to align the QRM rule with another regulation with a similar name that is also aimed at preventing risky home lending: the qualified mortgage, or QM, rule. That guidance, issued by the Consumer Financial Protection Bureau in January, offers legal protections to banks that issue loans to borrowers spending no more than 43% of their income on debt.
Housing industry participants want the regulators writing QRM to drop the downpayment requirement and raise borrowers’ allowable debt load to 43%, essentially setting the same requirements in both the QM and QRM rules.
“The industry, consumers, and legislators on Capitol Hill are all saying QRM should equal QM,” said Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors. “A revised QRM definition should track the QM to ensure that all qualified borrowers have access to affordable and safe mortgage credit without a stringent downpayment requirement.”
The concept has drawn support from lawmakers. Senator Bob Corker, a Tennessee Republican, is drafting a bill that would merge the two rules. He’ll offer the measure only if regulators don’t act on their own, said Laura Herzog, Corker’s communications director.
Meanwhile, a bipartisan group of senators who drafted the language requiring the QRM rule in the 2010 Dodd-Frank Act wrote a letter to regulators yesterday urging them to drop a strict downpayment requirement.
“Our intent as the drafters of this provision was, and remains, clear: to incent the origination of well-underwritten mortgages with traditional terms,” Georgia Republican Johnny Isakson and Democrats Mary Landrieu of Louisiana and Kay Hagan of North Carolina said in the letter. “We intentionally omitted a specific downpayment requirement and never contemplated the rigid 20% or 10% as discussed in the March 2011 notice of proposed rulemaking.”
It will probably be months before regulators, also including the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, come out with the QRM rule. Nonetheless, they are working on it now and are examining the QM rule, Comptroller of the Currency Thomas Curry said at an event yesterday in Washington.
“Now that QM is on the table, it gives us an impetus to move full-speed ahead on QRM and risk-retention rules,” Curry said.
Not everyone in the housing industry favors merging the two rules. Private mortgage insurers, which protect lenders against defaults on loans with downpayments below 20%, stand to gain if the QRM rule allows its downpayment limit to be waived in some cases when the borrowers buy their coverage.
Regulators should also keep in mind that the purpose of the two rules is different, said Mark Goldhaber, of Goldhaber Policy Services LLC, a mortgage industry consulting firm based in North Carolina, and a former senior vice president at mortgage insurer Genworth Financial Inc.
“The purpose of QRM is to set a standard by which you have measurable results of what a prime mortgage looks like for securitization,” Goldhaber said in an interview. “That’s a very different intention than QM, which is a consumer-facing provision.”
A study released this week by mortgage data provider CoreLogic Inc. found that only half of home loans issued in 2010 met the requirements of the QM rule. If the QRM rule had been in effect with a downpayment requirement of 10%, only 40% of loans would have qualified, the study found.
Groups including the Mortgage Bankers Association have been warning about the impact of rulemaking in an already tight market. Borrowers whose loans closed in 2012 had an average credit score of 748, which would place them in the top 37% of Americans, according to Ellie Mae, a Pleasanton, Calif., company that provides software for the mortgage industry. Those buyers made downpayments averaging 21%. The interest rate on a 30-year fixed-rate mortgage averaged 3.9% in 2012, Ellie Mae said.